KUALA LUMPUR (April 6): Moody’s Investors Service has projected that Malaysia’s gross domestic product (GDP) will expand 6% this year and continue at the same pace in 2023 following the normalisation of activities in key economic sectors and the reopening of borders, as well as continued strong export demand.

But a 6% expansion is more reflective of an economic recovery rather than robust growth, said Moody’s assistant vice-president and analyst Nishad Majmudar at a press briefing.

Noting that the rating agency’s forecast is within the government’s official forecast of a 5.5% to 6.5% growth this year, he listed a combination of factors expected to support the economic recovery.

“The first is the reopening of borders, which would support the services sector or tourism-related services.

“Secondly, the high vaccination rate in the country and the government’s comfort with Covid-19 as endemic would support growth — as this would support greater social mobility, greater private consumption and that will over time kick in a new private investment cycle in the country,” he said.

Despite weaker growth in some key export markets such as the European Union, which accounts for about 10% of Malaysia’s exports, Nishad said demand remains strong and could be maintained over the next one to two years, especially for the electronics, oil and gas and medical devices segments.

“Overall, [a GDP growth of] 6% reflects more of a recovery rather than a robust growth picture but nevertheless, Malaysia, compared to other sovereigns in APAC (Asia-Pacific), is in a fairly positive position for recovery this year,” he said.

On whether the Russia-Ukraine conflict will impact Malaysia’s credit profile, he said the impact is largely expected to be neutral and that the rating agency had noted positive shocks to trade from the conflict, which would support Malaysia’s exports and balance of payments.

Nishad expects the fuel subsidy bill to increase based on comments made by Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz. He pointed out that RON95 and diesel prices had been constant since 2021 despite an increase in international crude oil prices.

The rise in subsidy costs could be offset by higher petroleum sales tax revenue, he said, which would support Moody’s neutral credit outlook.

He said positive rerating catalysts for Malaysia include a significant improvement in fiscal consolidation prospects through measures broadening the current narrow revenue base and further enhancements of the institutional framework that raise governance standards and result in policy credibility and effectiveness.

Downgrade triggers, on the other hand, include further weakening in the government’s debt and debt affordability metrics, a sharp rise in contingent liabilities, as well as volatile politics that undermine the credibility and effectiveness of institutions, threatening the stability of capital flows and investment.

However, Nishad said the “political noise” had not affected key institutions such as the Ministry of Finance, Bank Negara Malaysia and the Securities Commission Malaysia, although the uncertainty around the timing of the 15th general election and the current relatively thin majority in Parliament had constrained the reform process.

“I think if elections were to come soon, we could potentially see a more volatile political environment — a little bit more political noise — but overall, this would not affect the functioning of some of these key institutions.

“Looking ahead, a more stable election outcome that does survive a full five-year term would create certainty in a policy environment and could improve the prospects of some of the reforms that we do think are credit-positive, like GST (goods and services tax) reintroduction, subsidy reform and the passing of the Fiscal Responsibility Act,” he said.