KUALA LUMPUR (April 5): The World Bank has lowered its Malaysia gross domestic product (GDP) growth forecast for 2022 to 5.5%, from 5.8% previously.

Speaking at the bank's April 2022 East Asia and Pacific virtual media briefing on Tuesday (April 5), World Bank senior country economist Shakira Teh Sharifuddin said the downward revision was largely caused by the unfolding developments surrounding the Ukraine crisis.

“While we expect recovery to take place this year, the balance of risk remains tilted to the downside, which is why 5.5% is a slight downward revision from our earlier forecast. But it's still in line with the consensus [forecast] including the central bank’s projection.

“So there are several reasons for driving downward downside risks to growth. First is, of course, the current conflict in Ukraine definitely creates a lot of uncertainty and a lot of spillovers or cascading effects to other things,” she stressed.

According to her, the conflict in Ukraine will also dampen global economic prospects as it brings economic uncertainties. As global growth slows, so will demand, weighing most on export-oriented economies, including Malaysia, Shakira added.

“I think there's a lot of uncertainty and how the current (Ukraine) conflict will play out and affect the global growth in general. In particular for Malaysia is of course growth in advanced economies, given that they are our largest trading partners,” she explained.  

Shakira also warned that food and fuel price hikes arising from a prolonged conflict in Ukraine will also weigh on the Malaysian economy’s growth prospects.

“The situation is a bit sort of a mixed bag when it comes to the fuel prices. I think, at least in the very, very short term, the jump in fuel prices would have some positive spillovers for Malaysia in terms of government revenue and then the ability to continue with fuel subsidy support. But going forward if [fuel prices continues to] escalate, it will [put] some pressure on inflation and food prices as well.

“Asia, in general, we consume rice and not necessarily wheat, but we are already seeing some of the impact domestically. So we have seen a couple of announcements by bread producers about how prices for their products will increase. There will definitely be a substitution impact to rice which will bring rice prices higher,” she added.

Nonetheless, Shakira said the World Bank projected Malaysia’s inflation to remain modest at around 2% to 3% this year.  

Apart from slower-than-expected global growth risk, other major downside risks to watch out for that are arising from the Ukraine crisis are worsening of supply chain disruptions as well as emergence of more severe Covid-19 variants.

“Any news or emerging Covid-19 [variants] which are more severe would probably have a negative impact on growth as well... At this current juncture, it remains a small risk, but it's definitely a risk that we want to consider at this current point,” she noted.

On a positive note, she also expects the resumption of more economic sectors, including the reopening of borders, to be a major catalyst to boost the local economy's prospects.

“Domestically, in terms of private consumption, it will definitely benefit from the reopening of the economy. We think the recent measures announced by the government, including the Employees Provident Fund (EPF) withdrawal [facility] as well as the announcement of minimum wage hike, would also bring some positive spillovers on private consumption. Indeed, private consumption is expected to be the main driver for growth this year.

“We also expect investments to improve given there is a little bit of clarity, at least domestically, of where things are going to be. Also, externally, we expect the external sector will continue to lend support [to the economy], particularly in the electric and electronic goods and medical and rubber gloves segments,” she added.

In a World Bank report released on Tuesday, it said shocks emanating from the war in Ukraine and the sanctions on Russia are disrupting the supply of commodities, increasing financial stress, and dampening global growth.

“Countries in the region that are large importers of fuel — like Mongolia and Thailand — and food — like the Pacific Islands — are seeing a decline in real incomes. Countries with large debt — like Lao People’s Democratic Republic and Mongolia — and high dependence on exports — like Malaysia and Vietnam — are susceptible to global financial and growth shocks,” according to the World Bank’s East Asia and Pacific Economic Update April 2022 titled “Braving the Storm”.

The GDP for the East Asia and Pacific region is expected to expand 5% this year, but this could slow to 4% if global conditions worsen and national policy responses are weaker. This is down from an earlier projection of 5.4% in October last year.

Meanwhile, the World Bank said the war, financial tightening and China's slowdown are likely to magnify existing post-Covid-19 difficulties.

“Struggling regional firms, more than 50% of which reported payment arrears in 2021, will be hit by new supply and demand shocks. Households, many of which fell back into poverty during the pandemic, will see real incomes shrink even further as prices soar.

“Indebted governments, which have seen their debt as a share of GDP increase by 10 percentage points since 2019, will struggle to provide economic support. Increased inflation, at least 1 percentage point above previous expectations due to the oil price shock alone, will shrink room for monetary easing,” the bank said in a statement.

According to East Asia and Pacific chief economist Aaditya Mattoo, the succession of shocks means that the people, whose economic suffering is increasing, will be confronted by the shrinking financial capacity of their governments to provide help.

“A combination of fiscal, financial and trade reforms could mitigate risks, revive growth and reduce poverty,” he noted.