KUALA LUMPUR (Nov 11): Malaysian Rating Corp Bhd (MARC) said on Thursday that it expects data for the Malaysian economy for the third quarter of 2021 (3Q21) to show a trough with the gross domestic product (GDP) projected to contract at 3.7% year-on-year (y-o-y). Bank Negara Malaysia (BNM) will announce the 3Q21 GDP data on Friday.
MARC said in a note that 3Q21 domestic demand was depressed due to the nationwide lockdown and concerns about the pandemic, offsetting robust export performance.
Based on data compiled by Google Mobility, it noted that the brunt of lockdown on the economy was evident in the steep decline in retail and recreation footfall to the lowest level since the first Movement Control Order (MCO 1.0) imposed in March-May 2020.
Consequently, retail sales suffered a contraction of 8.1% and 7.5% y-o-y in July and August, it added.
It also noted the manufacturing Purchasing Managers' Index reading was below 50 throughout 3Q21, indicating a deterioration in conditions for the industrial sector.
However, MARC said exports remained in the positive territory, as the monthly export data for August and September 2021 recorded double-digit growth of 18.4% and 24.7% y-o-y.
It also said a rally in the prices of crude oil and crude palm oil (CPO) lent some support to the export growth.
Meanwhile, MARC expects a rebound in 4Q21 following a relaxation in the mobility restrictions as vaccination rates are approaching the requirement to achieve herd immunity.
"We believe that the pent-up demand and sustained export growth will be the main growth drivers in 4Q21 since all states, except Kelantan and Sarawak, are now in Phase 4 of the National Recovery Plan," it said.
It also expects the economy to gain a better recovery momentum in 4Q21 and, subsequently, experience expansion in 2022.
It opined that the uptrend in global demand will support the growth and increase private sector expenditure against the backdrop of continuous expansionary fiscal measures.
Nevertheless, it said weaker-than-expected economic performance among Malaysia's largest trading partners, supply chain disruptions and another wave of Covid-19 containment measures will pose downside risks to Malaysia's growth outlook.
MARC also expects BNM to maintain the overnight policy rate (OPR) at the current level before normalising interest rates after mid-2022.
The alternative scenario is that the OPR would be raised earlier if the US Federal Reserve and other regional central banks unexpectedly embark on monetary policy normalisation, it said.
According to MARC, this probable scenario would help curb capital from flowing out and ringgit from weakening, but post-Covid-19 recovery may be incomplete.
"Additionally, the recent monetary policy statement (MPS) signals no imminent changes to monetary policy. We hope the following MPS will provide more hints on how BNM would tackle interest-rate normalisation in the coming year," it said.
Last week, BNM said it decided to hold the OPR steady at 1.75% — a record low level since May 2020.
MARC said the latest policy rate decision is in parallel with its expectation.
It also concurred with BNM's view that the underlying inflation will remain muted to an average below 1% due to spare capacity in the near term.