GDP to grow at 5.6% with downside risks amid lockdown


THE two-week lockdown to contain the spread of the Covid-19 pandemic will pose a downside risk for the country’s economic health, said Moody’s Analytics.

The research agency stated that the lockdown is expected to disproportionately impact domestic demand, particularly household consumption, given only essential services are allowed to be in operation.

For 2021, Moody’s Analytics said its baseline forecast put the country’s economic growth at 5.6% expansion.

“Malaysia’s economic recovery will be dented by the latest rise in Covid-19 infections, triggering a two-week lockdown from June 1 to June 14, with only essential services allowed to operate.

“Before the latest lockdown, the government pinned GDP growth at 6% to 7.5% in 2021. But there will be downward revisions announced in the coming weeks.

“Our baseline forecast assumes a 5.6% expansion in 2021, but there is added downside risk and heightened uncertainty,” it said in a research note yesterday.

One of the main concerns is how the extent of the lockdown will impact Malaysia’s manufacturing activities and exports as they will be limited by capacity constraints introduced during the movement restriction.

“Malaysia’s daily injections have averaged between 7,000 and 8,000 since late May. This is Malaysia’s second, but most severe, wave with the first wave in January reporting daily infections averaging just over 2,500.

“Malaysia’s economy navigated Covid-19 in 2020 relatively well compared to its South-East Asian neighbours. Daily infections stayed below the 1,000-mark through the first nine months of the year,” said Moody’s Analytics.

The strict two-week lockdown has seen Malaysia’s Government Stringency Index rise to its highest level throughout the pandemic, which is the highest among Asian economies that have been grappling with their own localisation, said the research agency.

It noted that mobility data from Apple and Google Trends show a sharp drop from late May in driving routes, retail and recreation, and at transit stations. This will show up in a sharp fall in domestic trade from late May at least through to mid-June.

Manufacturing plants are only allowed to operate at 60% capacity during the lockdown, which will restrict production and exports until mid-June.

Malaysia’s exports have been powering ahead thanks to strong global consumer technology demand. Electrical and electronics exports account for around 40% of merchandise exports, it said.

In aiming for economic recovery, Moody’s Analytics expects the government’s fiscal stimulus should do the heavy lifting and guide the economy through this latest lockdown.

Putrajaya introduced a new stimulus package worth RM40 billion, equivalent to 2.7% of GDP to cushion the blow from the full lockdown. The package includes measures to increase healthcare capacity, and cash injections to singles and households earning less than RM5,000 per month.

The government will give those impacted by the lockdown an option to freeze loan repayments for three months or have instalments for six months. Government estimates suggest this will benefit over five million borrowers.

The research agency projects a 25-basis-point rate cut in the third quarter at 70%, bringing the policy rate to 1.5%.

“The government is running out of fiscal space against the rising debt obligations.

“Prior to the latest stimulus package, the government estimated the fiscal deficit would hit 6% in 2021, unchanged from the deficit in 2020 and the largest since the financial crisis in 2009.

“Bank Negara Malaysia has limited room to flex monetary muscle after substantial easing in 2020,” Moody’s Analytics said.