GDP to contract 3.5% this year

The drag on the domestic GDP would come from the negative performance of exports


AFFIN Hwang Capital expects Malaysia’s GDP to contract by 3.5% this year, taking into account the state of the global supply chain which hasn’t been able to grip a full recovery from the Covid-19 pandemic.

Its chief economist and head of research Alan Tan said judging from Malaysia’s recent export performance, the local economy will likely be in negative territory until year-end.

“The negative contraction in GDP will be the sharpest in the second quarter this year. In fact, it could contract by 9% judging from the weak exports in recent months,” he said during a virtual press briefing yesterday.

Malaysia’s exports plunged 25.5% year-on-year (YoY) in May, a sharper contraction compared to the 23.8% YoY drop in April, indicating the global supply chain disruption could remain for at least another two quarters.

“We are looking at a 3.5% contraction this year and expect the economy to recover to 4% (growth) next year,” Tan said.

The drag on the domestic GDP would come from the negative performance of exports, which are projected to shrink 8.8% this year before recovering with a 6% jump in 2021.

Meanwhile, the investment bank expects Bank Negara Malaysia (BNM) to keep the Overnight Policy Rate (OPR) unchanged until the country enters positive growth territory in 2021.

“We believe BNM will likely hold the rate at 2% to provide support to the domestic economy and expect it to begin raising the rate in the second half of 2021 by 25 basis points (bps) as we see some normalisation in recovery,” Tan said.

The central bank has cut the OPR by 100bps so far this year, with the latest being a 50bps reduction in May. Its next decision on the benchmark lending rate is due on July 7.

While the government intends to reduce the country’s fiscal deficit to less than 4% in a few years, Tan said the upcoming national budget will likely centre on expanding the economy as opposed to cutting back on national spending.

“We still have to be expansionary in the coming budget (despite) the intention of bringing down the fiscal deficit to 4%, which could not be done immediately,” he said.

“It is important to provide support to the economy through expansionary measures and development expenditure, similarly, providing cash assistance to households to help domestic demand.”

He added that with the focus of reviving the economy, the government is unlikely to reintroduce the Goods and Services Tax (GST) as suggested by certain quarters.

However, there is a possibility of switching back to GST once the Malaysian economy stabilises, as this would boost national coffers and provide a better mix of direct and indirect tax revenue.

“It is still possible down the road as according to the country’s current tax profile, it is still reliant on indirect taxation in terms of generating revenue for the government.

“After the abolishment of GST, the contribution from indirect taxation has dropped and to have a better balance, maybe there is a need to rethink and reintroduce the consumption tax,” Tan said.

If the tax is indeed re-implemented, it should be done at a “revenue-neutral” rate and complemented with certain compensations such as cash assistance in order to gain public acceptance, he added.

The GST was introduced in April 2015 at a rate of 6%, before being zero-rated in June 2018, after the Pakatan Harapan administration took over. It was then replaced by the Sales and Service Tax, which came into effect from September 2018.