World Bank cuts Malaysia 2020 GDP target to -0.1%

This article first appeared in The Edge Financial Daily, on April 1, 2020.

Record says net exports and investments in Malaysia are expected to experience a larger contraction in 2020. (The Edge file photo)

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KUALA LUMPUR: The World Bank is projecting a negative economic growth for Malaysia this year amid the Covid-19 crisis, but said the country is likely to recover in the fourth quarter (4Q) of the year before bouncing back into smoother momentum in 2021.

Citing the growing uncertainty over the duration and overall impact of the outbreak, the bank cut its 2020 gross domestic product (GDP) target for Malaysia to -0.1%, a significant drop from its earlier target of 4.5%.

The marked reduction, it said, incorporates the slower growth momentum from the second half of 2019, but more significantly, it reflects the impact of the pandemic under a scenario where the current large-scale disruption of economic activities would extend for most of the year, before a partial recovery towards year-end.

World Bank lead economist Dr Richard Record said net exports and investments in Malaysia are expected to experience a larger contraction in 2020, while private consumption is expected to grow at a much slower pace, from 7.6% in 2019 to 1.6% in 2020.

“We project for net exports to decline by 3.9% this year. This reflects a mixture of the direct impact from the crisis that [has] affected supply chains across the network,” Record told a conference call with media reporters yesterday following the release of the World Bank’s “East Asia and Pacific Economic Update April 2020” report.

He said growth in 2021 will depend on how long the Covid-19 pandemic plays out.

“Our baseline scenario is that we will see the beginning of recovery in 4Q2020, which will result in a bounce-back in 2021. Our baseline projection is for a 6.4% GDP growth in Malaysia in 2021. On a lower-case scenario, if we have a prolonged pandemic and slower growth as a result, we would see a growth of 4.1% of GDP in 2021 of which Malaysia would only see full swing recovery in 2022,” he said.

On Putrajaya’s stimulus package, the World Bank said while it could help to mitigate the immediate impact of the pandemic, a deeper economic policy response would be needed should the health crisis deepen and result in a longer duration of economic disruption.

“More targeted fiscal policy interventions would be needed to help mitigate the impact of the crisis on vulnerable households and businesses, as well as increase public health capacity. This is further complicated by the plunge in commodity prices, which would put additional strain on fiscal space and in turn may increase the burden on monetary policy as a key policy tool,” the bank said in the report.

Nevertheless, Record said Malaysia has the framework for a response and it is taking advantage of the existing institutions and mechanisms.

“Frankly, this is the best way to get resources out as quickly as possible to those who need it, vulnerable households and smaller firms [that] do not have the cash flow to sustain themselves and employment over the crisis period. If the crisis is prolonged then the mechanism can be scaled up further to ensure Malaysians are protected and that the economy is in enough shape to bounce back as quickly as possible,” he said.

World Bank country manager Dr Firas Raad added that the report provides six main policy recommendations for countries in the region to act quickly in mitigating the impact of the pandemic, including urgently boosting healthcare capacity and easing access to credit for households to ease hardship and smooth consumption.

“To retain the production of essential supplies for domestic consumers, several countries have imposed restrictions on exports of medical products. Economics and recent experience show that these measures ultimately hurt all countries, particularly the more fragile. Therefore, trade policy must stay open,” he added.

The World Bank has also sharply downgraded the growth outlook for the region in 2020. Growth in the developing East Asia-Pacific region is projected to slow to 2.1% in the baseline and to a negative 0.5 in the lower-case scenario, from an estimated 5.8% in 2019.