Covid-19 spike, MCO 2.0 will not derail recovery

The economy is expected to register a GDP growth of 7.5% this year, following a contraction of 5.8% last year


THE third wave of Covid-19 infections and the reintroduction of movement restrictions will lead to a challenging economic recovery, but it will not derail the anticipated GDP projection in the country this year.

Standard Chartered plc chief economist of Asean and South Asia Edward Lee said the reimposition of Movement Control Order (MCO) in five states and the Federal Territories will not have a disruptive impact on growth. However, some downsides are expected.

Lee forecasts the economy to register a GDP growth of 7.5% this year, following a contraction of 5.8% last year.

“I do not think this latest round of MCO is totally unexpected, and the effect it has on the economy will be a lot less than the second quarter of 2020 (2Q20).

“The restrictions are a lot more targeted, either geographically or on sectoral basis. We are also not having a global synchronise lockdown and the promise of the vaccine rollout is still there,” he said in the virtual media briefing of Standard Chartered’s 2021 economic outlook yesterday.

Malaysia’s GDP contracted 17.1% in 2Q20 mainly due to the nationwide MCO enforced in mid-March last year to curb the spread of the virus.

Lee also opined that Bank Negara Malaysia (BNM) will maintain the Overnight Policy Rate (OPR) at 1.75% in its upcoming Monetary Policy Committee meeting on Jan 20.

He said the central bank has been clear with its views that the economy cannot keep relying on debt to overcome a crisis.

“It is too early to cut the rates when the overall environment does not allow anyone to take advantage of the low-interest rates.

“BNM can probably conserve it and see how the momentum goes a few months down the road,” he said.

The central bank has maintained the OPR at 1.75% since July last year after slashing the rate four times totalling to 125 basis points since January 2020 as preemptive measures against Covid-19.

Standard Chartered head of Asean and South Asia foreign-exchange research Divya Devesh said the MCO and emergency declaration will not lead to immediate outflows as foreign investors would adopt a “wait-and-see” approach on the Malaysian market.

“Malaysia actually still offers meaningful yields, not just in nominal terms but also in real terms. In fact, across Asia at this point, if you look at current inflation versus nominal 10-year yield and look at the differences, Malaysia offers the highest across the region.

“From that perspective, I do not subscribe to the views that we are going to see sharp outflows or rather any outflows as I think investors might want to wait and watch and see how it develops,” he said.

He foresees the ringgit to trad at RM3.95 against the US dollar by mid-year before approaching RM3.90 by end of the year.

The local unit is viewed to be a key beneficiary of improvement in global trade, higher commodity prices and a stronger Chinese yuan.