by ASILA JALIL / pic by TMR FILE

MALAYSIA’S economy is projected to see a turnaround and record a marginal growth in the fourth quarter this year (4Q20), bringing the full-year GDP contraction to -3.5%.

UOB Global Economics and Market Research highlighted that public spending and fiscal support will alleviate the contraction in GDP by year-end.

“Public spending and fiscal support (with direct fiscal spending of RM45 billion) are estimated to cushion the GDP by three percentage points this year.

“Going into 2021, a low base effect, alongside the soon-to-be-tabled Budget 2021 in early November and 12th Malaysia Plan (12MP) in January 2021, is expected to lend support for a higher growth of 5.5% (Bank Negara Malaysia [BNM] forecast: +5.5% to +8%) in 2021,” it said in a report titled “Quarterly Global Outlook 4Q 2020 — A new beginning or Deja Vu” recently.

BNM’s decision to maintain the Overnight Policy Rate (OPR) at 1.75% after a cumulative 125-basis-point cut over four meetings since January reflects its positive outlook on the recovering economy.

The firm stated that the central bank’s recent move to leave the policy rate unchanged implies no further rate cuts will take place in the current juncture.

The OPR is also expected to stay at 1.75% until at least mid-2021, UOB noted. Deflation risks are expected to ease further as the domestic economy recovers and commodity prices stabilise.

The Singapore-based bank projects Malaysia’s full-year inflation to average -0.5% (BNM forecast: -0.5% to +0.5%) in 2020 before rising fast to 2.1% (BNM forecast: 1% to 3%) in 2021.

“Global oil and commodity prices remain the wildcards that could affect cost pressures. However, underlying inflation is expected to remain subdued, owing to spare capacity,” it added.

The firm believes that the ringgit is poised to continue its modest gains backed by stable crude oil prices above US$40 (RM166.80) per barrel over the coming few quarters.

Although Malaysia has raised its public debt ceiling to 60% of GDP and projected a fiscal deficit of 6% of GDP this year, this has not derailed the gains in ringgit, UOB added.

Broad US dollar weakness following a shift in the US Federal Reserve’s monetary policy approach, coupled with firm yuan and stable oil prices, should provide underlying support to the ringgit, UOB stated.

“On the macro end, signs of economic recovery and signals from the central bank for interest-rate pause are additional positive factors.

“Our ringgit/US dollar point forecasts are 4.12 for 4Q20, 4.08 for 1Q21, and 4.05 for both 2Q21 and 3Q21,” it said.