AmBank Research cuts 2021 GDP forecast to 4%-4.5%

The revision is due to weak economic indicators resulting from the pandemic


AMBANK Research expects Malaysia’s GDP for 2021 to grow at around 4%-4.5% compared to its previous growth forecast of 5.5%-6% due to weak economic indicators resulting from the Covid-19 pandemic crisis.

Its chief economist and head of research Dr Anthony Dass noted that the recent lockdown that has extended into July with some states under the Enhanced Movement Control Order (EMCO) has dented his initial growth projection.

The additional countercyclical stimulus measures of RM150 billion would further undermine the country’s strained fiscal and debt settings.

“Higher fiscal deficits in 2020 and this year, alongside a more muted near-term economic recovery, will keep the government’s net indebtedness well above the current 60% debt ceiling.

“Coupled with the downward revision to economic growth, a further upwards revision to the public debt ceiling is on the cards,” he wrote in a report yesterday

The heightened political uncertainty compounds the challenges Putrajaya would face as it rapidly consolidates its finances over the next two to three years.

Dass expects pressure on Malaysia’s ratings could emerge over the next 12 to 24 months if the economy suffers a deeper or more prolonged downturn than expected, or if a weaker commitment to fiscal consolidation is evident.

“Both situations could result in a faster accumulation of net general government debt. This could be indicated by a change in net general government debt surpassing 4% on a sustained basis, net indebtedness crossing 80% of GDP or interest paid by the general government exceeding 15% of revenue,” he opined.

Rating pressure by international rating agencies could intensify if political stability deteriorates to such that policymaking becomes materially less predictable, or if external position weakens to such an extent the economy’s gross external financing needs surpass its current account receipts plus usable reserves, he said.

The World Bank has lowered Malaysia’s GDP growth to 4.5% this year from 6% earlier amid a dramatic resurgence of the Covid-19 infections since mid-April.

The Socio-Economic Research Centre has maintained its 4% GDP growth projection for Malaysia’s economy this year despite the resurgence in Covid-19 cases.

AmBank Research expects a growth reduction in the second quarter of 2021 (2Q21) from the tightened MCO.

Dass expects the economy to start to recover at a gradual pace in 3Q21 from the cautious reopening that the government has indicated.

Some economic sectors will be allowed to operate with strict safety procedures. They will not be affected to the same extent as during the first MCO in 2Q20.

“The recovery will gain pace as the national vaccination programme progresses and targets are met for a broader reopening of activities. These will provide some buffer to the ratings downgrade stress,” he said.

Looking at the next 12 to 24 months, if the economy expands at a credible rate of 5% to 6% and the policy environment becomes more conducive to credible fiscal consolidation, this will produce a stronger fiscal performance than expected.

Dass said it will lead to a quicker stabilisation of government finances and hence will even open the door for an upwards re-rating.

“Further enhancements to the institutional framework to raise governance standards and better policy credibility and effectiveness, including in the management of public finances supported by potential growth, would be credit positive,” he added.

All things considered; it will not significantly alter the view that the economy remains vulnerable. A future rating downgrade by any of the international rating agencies, he noted, could still happen, more so, with the increasing possibility of a further upward revision in the current public debt ceiling of 60%.

The revision could be mitigated by a healthy external position, monetary policy flexibility and sustainable economic growth.

Upward pressure on the ratings would emerge if fiscal consolidation improves significantly, particularly through measures that broaden the current narrow revenue base, pointing to a sustained decline in the government debt burden and improvement in debt affordability.