2021 GDP may be revised down

BNM might slash OPR to 1.5% on dim prospect of large-scale fiscal help, says economist


THE government may opt to revise its GDP forecast downwards for the year following another round of Movement Control Order (MCO) in selected states effective today, along with the King’s declaration for a state of emergency that is expected to end on Aug 1.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the MCO in five most affected states and the Federal Territories (FTs), as well as the state of emergency for the country could potentially impede the previously anticipated economic recovery.

He added that the restrictions and provisions during the period would add up to the uncertainties caused by the Covid-19 pandemic which has reduced the duration for forecasts to be maintained.

“I think the government would want to revise it lower to reflect the current reality. The situations have been so fluid and therefore, the lifespan for economic forecasts have become shorter,” he told The Malaysian Reserve yesterday.

Mohd Afzanizam said the MCO, which is enforced in five states and the FTs may not be as severe as the first round of nationwide MCO in March last year as key sectors are still allowed to operate although subject to strict standard operating procedures.

The five states are Selangor, Sabah, Melaka, Johor and Penang, while the FTs include Labuan, Putrajaya and Kuala Lumpur.

Meanwhile, Pahang, Perak Negri Sembilan, Kedah, Terengganu and Kelantan will be placed under Conditional MCO (CMCO), while Perlis and Sarawak will observe the Recovery MCO.

Mohd Afzanizam added that tourism-related sectors, aviation, as well as the food and beverage industry will have to bear the brunt of the MCO and therefore, any form of financial assistance provided by the government would be targeted.

The culmination of recent events and the possibility for the MCO to be extended beyond its stipulated 14-day period are likely to pressure the country’s first quarter (1Q) economic growth, as well as putting downside risks on OCBC Bank (M) Bhd’s GDP forecast for the year, said its economist Wellian Wiranto in a note yesterday.

“Indeed, we see the risk that the economy will shrink on both a sequential and year-on-year (YoY) basis in 1Q, with growth rates of -0.6% quarter-on-quarter and -0.1% YoY respectively. For the year as a whole, the growth rate now is likely to be at 5.7% YoY in our new baseline thinking.

The bank previously forecast the country to record a GDP of 6% in 2021, lower than the government’s forecast of between 6.5% and 7.5%, and latest 6.8% consensus.

He said Bank Negara Malaysia (BNM) might also slash the Overnight Policy Rate (OPR) in the upcoming Monetary Policy Committee (MPC) meeting on Jan 20, 2021, to 1.5% as there is a “dim prospect” of large-scale fiscal help.

Welian added that the central bank may also reduce the OPR further to 1.25% in March.

“Even though the emergency powers allow the government to potentially issue ordinances to temporarily supplant existing laws, including the one concerning the recently approved budget, the government may remain reluctant to undertake a ‘bazooka’-type fiscal largesse, given the external constraints imposed by the market,” he said.

He said the Dec 4 downgrade by Fitch Ratings Inc serves as a reminder of the limits of fiscal space that Malaysia may run into, especially given its relatively high stock of government debt.

BNM had maintained the OPR at 1.75% since the MPC meeting in July last year, after slashing the rate four times since January last year as pre-emptive measures against Covid-19.

Meanwhile, a thematic report by MIDF Research yesterday stated that the different phases of movement restrictions enforced in the country could bring down the GDP growth by up to 0.8 percentage point (ppt).

“In other words, it will result in a slower increase in Malaysia’s economic growth this year at 6.2% YoY (versus our current projection of 7% YoY). Cumulatively, all states and FTs affected by the MCO and CMCO contribute almost 90% of Malaysia’s GDP.

“Even though the movement restrictions are dubbed as MCO, it is perceived to be less strict than the first one we had last year, especially with more essential economic sectors, such as manufacturing, construction, and trading and distribution allowed to operate,” the report stated.

According to the research firm, the situation is, however, different from the first time the MCO was enforced last year as businesses and the public are more prepared, especially with the anticipated vaccines that will be rolled out soon.

Malaysia is expected to receive the Pfizer vaccine for Phase 1 by the end of February this year.

“We maintain our expectation that the vaccine will be widely available by the second half of the year,” the report noted.

In a separate report, MIDF Research said Covid-19 has stifled domestic demand last year as consumers reduced spending due to the lingering uncertainty caused by the pandemic.

“We foresee the private consumption and services sector to decline by -3.4% YoY and -4.5% YoY respectively for 2020.

“Meanwhile, we anticipate both the private consumption and services sector to rebound in 2021 to +7.3% YoY and +6.7% YoY respectively, which are subject to several downside risks, particularly the MCO 2.0 which is estimated to drag down GDP up to 0.8ppt,” the report stated.

Read our earlier report

Economic target out of reach if CMCO continues