Most of the economies still need continuous support for fiscal and monetary policy this year

by HARIZAH KAMEL / pic by TMR FILE

ASIAN economies, including Malaysia, should put consolidation on hold this year due to the persisting fragile recovery from the Covid-19 pandemic impact, Asian Development Bank (ADB) director of macroeconomic research Abdul Abiad said.

“Most of our economies still need continuous support for fiscal and monetary policy. Countries need to wait until the recovery is well-entrenched before starting consolidating,” he said during a webinar entitled “Asian Development Outlook (ADO) 2021 Update Launch” yesterday.

He said despite the increase in public debts in 2020, it remains below 60% of the GDP levels for most economies, which largely reflects the fact the many developing Asian economies were relatively prudent with their public finances in the years prior to the pandemic so they were able to use that space to respond to the pandemic.

According to ADB’s ADO 2021 Update September edition, fiscal and monetary policies continue to be supportive of economic recovery in developing Asia.

Fiscal policy will remain accommodative in several economies this year, with a general shift toward consolidation expected for 2022 and beyond.

ADB senior regional cooperation officer Dulce Zara said recovery is underway in South-East Asia but the spread of new variants, particularly the Delta variant, is slowing down the process in most economies.

“What’s important is that the trend is going down and it is because the governments are ramping up efforts to roll out their vaccination programmes,” she said.

On Malaysia’s economic prospects, ADB revised down the country’s GDP growth prospects to 4.7% from the forecast of 6% in April mainly due to Covid-19’s resurgence, causing the reimposition of nationwide containment measures and a lockdown, and continued political instability.

“The lower growth outlook is consistent with weaker growth prospects for the US and Japan, key markets for Malaysian exports. In June and July, the Manufacturing Purchasing Managers’ Index, electricity generation, and wholesale and retail trade — among other indicators — eased somewhat, pointing to weaker domestic economic activity,” it said.

GDP growth is expected to accelerate higher to 6.1% in 2022, contingent on the progress of the national Covid-19 vaccination campaign. But even if there is a robust recovery next year, growth will still be about 10% lower than its pre-pandemic trajectory.

In terms of monetary policy, Bank Negara Malaysia is likely to hold the policy rate at 1.75% until the end of 2021 because of upward pressure on prices. ADB said this stance is expected to cushion the impact of the pandemic and promote stable prices and sustainable economic recovery.

With inflation pressures stronger than previously anticipated, ADO 2021’s inflation forecast is raised to 2.5% from the earlier projection of 1.8%. For next year, stable oil prices, despite improving demand, and a stronger ringgit will likely temper inflation, with the rate forecast at 2.3%.

ADB noted that Malaysia’s vaccine rollout is raising hopes that while the resurgence of cases will peak in the third quarter (3Q), the number of people requiring critical care in the 4Q will significantly decline.

Meanwhile, fiscal policy will continue to support growth this year, as it did last year when the government injected a fiscal stimulus equivalent to 24% of GDP to support economic recovery from the pandemic.

However, several downside risks, both externally and domestically, could undermine Malaysia’s near-term prospects.

“Externally, a weaker global economic recovery, coupled with tapering in the US, could cause greater financial market volatility and trigger capital outflows.

“Domestically, Covid-19 mutations and weak political support for the new government could cause further uncertainty, undermine business confidence, and delay the passage of the 12th Malaysia Plan and reforms that are crucial for the economy to recover from the pandemic,” it added.