Friday 29 Mar 2024
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KUALA LUMPUR (July 5): Maybank Investment Bank Bhd (Maybank IB) cut its 2021 gross domestic product (GDP) growth forecast for Malaysia to 4.2% from 5.1% previously, owing to the Covid-19 pandemic-induced lockdown. However, it expects Bank Negara Malaysia (BNM) to keep the overnight policy rate (OPR) at the current level of 1.75% for the rest of the year.

“As far as the GDP forecast is concerned, taking into account the impact from this, the ins and outs of tighter restrictions and lockdowns, we have basically trimmed this year's forecast from the previous 5.1% to 4.2%,” Maybank IB chief economist Suhaimi Ilias said today during a virtual briefing on "Maybank IB's Malaysia 2H 2021 Outlook".

Suhami said the cut in the GDP growth forecast mainly reflects a lower growth forecast for the non-manufacturing sectors on the supply side of the economy as well as a downgrade for the private expenditure component of aggregate demand.

Under the latest forecast, growth projections for all sectors except for the manufacturing sector were revised lower. The growth estimate for services was downgraded to 4.2% (from 5.1%), while those of the mining sector and agriculture sector were lowered to 1.3% and 0.5% — from previous estimates of 3.2% and 1.8% respectively.

Meanwhile, domestic demand is expected to soften further to 4.7% from the earlier estimate of 6% after accounting for lower growth projections for private consumption and private investment at 3.9% (from 5.9%) and 4.1% (from 6.3%).

Nonetheless, Suhaimi said the research house bumped up the forecast for the manufacturing sector as well as external trade to be in line with the global economic recovery.

“We also raised our forecast for public consumption in view of the additional economic stimulus package, enhanced direct fiscal injection and, at the same time, we are maintaining the outlook for a double-digit rebound in public investment,” he added.

OPR to stay put at 1.75% in 2021

Despite the downside risk to growth this year, Maybank IB expects the OPR to be maintained at 1.75% this year before rising 25 basis points (bps) to 2% in 2022.

Having said that, Suhami warned that uncertainty surrounding the Covid-19 pandemic may prompt the central bank to cut the rate in September this year.

“One thing that can actually result in a situation where BNM may have to consider cutting interest rates is that the current lockdown is going to be longer than what we are pricing in at the moment, [when] we should be out from Phase 1 of the National Recovery Plan (NRP) by this month given the rate of the share of the population being fully vaccinated is fast approaching to the 10% threshold and the implementation of the enhanced movement control order (EMCO) in Selangor and Kuala Lumpur to bring down the total [daily] number of [Covid-19] cases to below the 4,000 level.

“But if that is not going to happen, then I think that is a potential trigger for BNM to consider cutting rates in the following meeting, particularly I believe, in September unless BNM has a very clear view that we are not going to be out of this MCO or Phase 1 of the NRP anytime this month,” Suhaimi explained.

Malaysia faces credit rating downgrade risk

In regard to Malaysia’s sovereign ratings, Suhami viewed that the risk of a downgrade remains, particularly by the Standard and Poor's (S&P).

“Even though they have reaffirmed our current rating, they also maintained the negative outlook. But what has happened so far is in line with our fixed income research’s view that we will experience or is experiencing mixed ratings by the three large rating agencies.

“Previously, Fitch downgraded us already by one notch, but shifted the rating outlook from negative to stable. Moody’s has maintained the rating and stable outlook, while S&P has maintained its rating but also the negative rating outlook,” he noted.

Suhaimi also pointed out key metrics that could influence the ratings. “Number one is the increase in net government debt that is certainly more than 4% because of the stimulus package. Another is the debt servicing cost as a percentage of revenue has already exceeded 15%. I think right now, it's probably more like 17% as a result of the increasing debt ceiling,” he said.

Edited ByJenny Ng
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