This article first appeared in The Edge Malaysia Weekly on August 16, 2021 - August 22, 2021

BANK Negara Malaysia expects the country’s economy to rebound at only 3% to 4% in 2021, the slowest pace of post-crisis rebound since the recession in 1985, reflecting the severity of measures reimposed in June to contain Covid-19 and uncertainties arising from the battle against new variants.

The central bank’s revised growth outlook assumes that all economic sectors in the country will reopen by November this year, with all states successfully transitioning to Phase 4 of the National Recovery Plan (NRP) and the majority of the population fully vaccinated by year-end. Recovery would be swifter if most people were fully vaccinated by end-October and containment measures could be relaxed by September. The government is shoring up the national vaccination drive to have at least half of the country’s adult population vaccinated by end-August and attain herd immunity by October.

While a downward revision from the previous official forecast of 6% to 7.5% to around 4% had already been forewarned and is thus expected, it is worth noting that the upper end of the new forecast is below the latest forecasts by international bodies such as the International Monetary Fund (4.7%), World Bank (4.5%) and Organisation for Economic Co-operation and Development (OECD) (4.3%).

The 3% lower end of the new 2021 forecast affirms the need for continued monetary accommodation and renews talk on the need for additional fiscal support in the coming weeks and months to prop up growth.

Last Friday evening, Prime Minister Tan Sri Muhyiddin Yassin — who is set to face a confidence vote in parliament by Sept 7 — called for bipartisan support for the country’s recovery plan and announced plans to seek parliament approval to raise the ceiling for the special Covid-19 fund to RM110 billion from RM65 billion, allowing more debt to be taken to fund operating expenses.

As it is, the worsening virus conditions and the “shut and open” stricter containment measures continue to weigh on business activities and consumer discretionary spending”, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre.

“[The 3% lower end] is not a surprise, given the considerable uncertainties on the timing of a full economic reopening under the fourth phase of the NRP amid the accelerated pace of vaccination.” Lee was among the earliest to forecast 4% GDP growth for 2021.

Malaysia’s GDP contracted 5.6% last year when a nationwide lockdown was first imposed after Covid-19 infections rose and vaccines were still unavailable.

In the last two recessions that the country saw, the rebound was steep in the year following an economic crisis. In the 2007/08 US subprime crisis, Malaysia’s economy felt the impact in 2009 when it contracted 1.5%, but grew as much as 7.4% when it rebounded in 2010.

During the 1997/98 Asian financial crisis, Malaysia’s economy contracted 7.4% in 1998 but rebounded sharply by recording a growth of 6.1% in 1999. In 1986, the economy grew only 1.2% after contracting 1% during the 1985 crisis.

In a virtual press conference last Friday, Bank Negara Malaysia governor Datuk Nor Shamsiah Mohd Yunus said the nationwide Full Movement Control Order (FMCO), which was implemented in June, is expected to have a cumulative impact of five percentage points to 2021 growth, or an average of RM400 million to RM500 million in daily real output losses.

“With 7.1% growth recorded in the first half of the year and given the Covid-19-related developments since June, we are looking at a more moderate growth in the second half of the year, especially in the third quarter,” she says.

Third-quarter growth will be challenging, owing to the reimposition of the Enhanced MCO (EMCO) for two weeks in most parts of the Klang Valley in July, as well as the prolonged Phase 1 in several states that are important contributors to the country’s GDP.

Factors that will continue to support growth in 2H2021 include allowing essential economic sectors to continue to operate under Phase 1 of the NRP, improving external demand and rapid vaccination progress in the country, on top of continued investment in large infrastructure projects such as the MRT2, LRT3 and East Coast Rail Link.

Nor Shamsiah said GDP growth could rise above 4% if the hoped for scenario of a national transitioning to Phase 4 takes place to allow for stronger recovery that would, in turn, spur consumer and business confidence.

On the flipside, slower recovery would take place if tight containment measures have to be prolonged and the majority of the population is fully vaccinated only in early 2022. Downside risks would also stem from policy uncertainties and vaccines having a lower efficacy rate in the face of new virus strains, putting continued pressure on the healthcare system as well as slower recovery in the labour market.

For now, Nor Shamsiah says growth is expected to happen gradually in the fourth quarter and improve going into 2022, backed by the reopening of most economic sectors and positive spillover from continued improvement in external demand from major trading partners. Firm commodity prices and the implementation of infrastructure projects with a high multiplier impact would also aid recovery.

In a statement last Friday, Finance Minister Tengku Datuk Seri Zafrul Aziz says efforts are underway to strengthen the strategic levers of the nation in moving towards the reform stage, including making the annual budgeting process more transparent and inclusive.

“The government’s current priority is to protect lives from the threat of Covid-19 and ensure the country’s economic growth prospects remain strong in the medium to longer term, guided by the NRP and underpinned by principles of prudent financial management. The government will continue to respond strategically, proactively and decisively in this challenging Covid-19 environment while minimising permanent economic repercussions from the crisis,” he says.

For the record, Malaysia’s economy grew 16.1% year on year in 2Q2021 on the back of improvement in domestic demand and continued robust exports performance. Growth was aided by policy support and a low base in 2Q2020, when the economy contracted 17.5%.

Most sectors recorded growth in 2Q2021, with the construction sector seeing the fastest pace of 40.3%, after contracting 44.5% a year ago and 10.4% in 1Q2021. The manufacturing sector also grew faster in 2Q2021 at 26.6%, versus 6.6% in 1Q2021. The agriculture sector contracted 1.5% in 2Q2021, from 0.2% growth in 1Q2021.

Headline inflation rose sharply in 2Q2021 to 4.1%, owing largely to transitory factors, says Bank Negara. The elevated inflation came largely from the base effect of low domestic retail fuel price in 2020, as well as the lapse in the effect from the tiered electricity tariff rebate.

Headline inflation is expected to average between 2% and 3% versus the earlier forecast of between 2.5% and 4%.

“The revision takes into account that headline inflation is expected to average close to the lower bound of the previous forecast range,” says Nor Shamsiah.

More importantly, the trajectory of headline inflation remains unchanged, she adds, noting that headline inflation is still expected to moderate in 2H2021 as the base effect from fuel prices dissipates.

With the pandemic prolonged, a frequently raised question is whether the loan moratorium will continue after December. Under the Pemulih stimulus package, the government has once again extended a six-month moratorium for all loans from July.

With the reopening of the economy, the central bank expects the repayment assistance to be more targeted, as financial needs and circumstances will differ from borrower to borrower.

“We do recognise there will be borrowers who will continue to face challenges in repayment of loans when the current moratorium is lifted, even with the reopening of the economy. For such borrowers, there are avenues available to help them manage their debt,” Nor Shamsiah says.

Her advice is for borrowers to discuss the options available with their banks, including extending the moratorium. Borrowers can also seek assistance from the Malaysian Credit Counselling and Debt Management Agency (AKPK), especially those who have loans from multiple banks.

“I must stress that it is important for borrowers to take early steps,” she says.

The governor reiterated why, despite urgent requests, interest accrued during the loan moratorium period cannot be waived by the banks.

“Interest accrued from a loan moratorium is to cover the funding cost of banks, including the payment of interest on deposits and interest on borrowings to fund the loans. The interest charged on loans is what constitutes normal interest that borrowers committed to pay when they took up the loans. For banks to waive it would cause significant long-term consequences.

To give some perspective, interest income accounts for 80% of banks’ revenue. Total individual and SME (small and medium enterprise) loans make up about RM1.4 trillion, or 73% of total banking sector loans,” she says.

As such, waiving accrued interest could give rise to serious ramifications, including banks choosing to pull out lending to conserve capital buffers, especially since higher credit losses are expected. That, in turn, would affect the credit ratings of banks. A downgrade could happen if future earnings capacity is weakened, making it more expensive for banks to raise future capital. In the end, the higher cost would be passed on to borrowers.

“The confidence in banks will be affected and will trigger liquidity stress. Depositors will have concerns about the safety of deposits and this will also jeopardise depositors’ interest when earnings of the bank are affected,” she elaborates.

Asked to comment on the impact of ongoing political manoeuvrings on the economy, the governor spoke about the importance of policy certainty.

“It is important that all of us do our part in managing the crisis. Any country will benefit from political stability,” she adds.

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