Economy remain on growth path despite risks

The growth revision also takes into account the impact of flash floods since December and the surge of Covid-19 cases


THE impact of the war between Ukraine and Russia coupled with the Omicron variant is likely to be mild on the Malaysian economy.

In a research note, Kenanga Research stated that the economy is expected to gain further momentum as Malaysia gradually transitions towards an endemic phase.

The firm still maintained its cautiously optimistic outlook due to heightened external pressure brought by Russia’s invasion of Ukraine.

“The crisis is expected to weigh on investment and global trade activity via demand and supply chain disruption. Though Malaysia’s economic exposure and trade linkages with Russia and Ukraine are minimal to say the least, the indirect and second round effects could still weigh on the economic recovery momentum.

“At this juncture, we believe any adverse economic impact arising from the Russia-Ukraine war would still be manageable and relatively moderate on domestic growth. Hence, we revise our 2022 GDP growth projection to 5%-5.5% (2021: 3.1%) from 5.5%-6% to reflect the adverse effect of the rising external risk and uncertainty,” it said.

The growth revision also takes into account the impact of flash floods that have hit several states in the peninsula since December and the surge of Covid-19 cases.

Nevertheless, the firm noted that the growth will be supported by continued robust recovery of the services sector driven by a wider vaccination rate, booster population, reopening of borders and expansion in the mining and agriculture sector amid higher commodity prices.

Given the risk to the domestic economy is still manageable, Kenanga maintained its view that Bank Negara Malaysia may maintain an accommodative monetary policy stance until at least the third quarter of 2022 (3Q22) to prop up the domestic economy which is gradually transitioning towards endemicity.

It added that higher crude oil prices would be slightly positive for the overall government fiscal balance sheet.

“While there are no official figures on how much the federal government allocated specifically for the fuel subsidies, we estimated around RM10 billion to RM12 billion for fuel subsidy alone. With current surging crude oil prices, we believe that the subsidy for fuel will increase to between RM18 billion and RM20 billion, which would partially offset the net gain from higher oil prices.

“Coupled with an expected rise in non-oil income tax revenue and a manageable increase in subsidies the net impact is projected to reduce the 2022 fiscal deficit to 5.8% of GDP (2021F: -6.5%) from our initial forecast of 6.1%,” it said.

RHB Research maintained its GDP growth forecast for Malaysia in 2022 at 5.5%.

Group chief economist and head of market research Dr Sailesh K Jha stated the firm believed 1Q22 economic performance will be a soft patch in economic activity, with the February and March IP data points likely to weaken further.

“As a result, we expect the pace of labour market improvements to slow in 1Q22 relative to 2H21. We maintain our end-1Q22 US dollar/ ringgit forecast of 4.30.

“The momentum of retail sales on a month-on-month (mom) basis will probably slow in February and March while in January the momentum potentially picked up on the back of Chinese New year spending seasonal effects,” he said in a note.

He added supply chain bottlenecks in shipments to Asia ex-Japan are worsening as economies reopen in the region.

Due to this, the transport of capital goods to Malaysia and replacement capital spending is likely to be restrained in 1H22.

“We are noticing from our proprietary hard data that port container levels as of mid-February are showing signs of a slowdown in the major port of Klang. Lack of containers in the Eastern hemisphere and logistics issues due to Covid-19 in countries producing these goods are some of the reasons why activity at the Port Klang is showing early signs of slowing.

“Our port container low activity index, which tabulates the percentage of locations from the total that are experiencing low levels of activity at each point in time, is rising. Hence, the conclusion is that major supply chain disruptions are underway at ports in Malaysia and is likely to restrain overall investment spending in 1H22. Sectors such as autos and electrical and electronic goods (which rely on imports of parts and components) could face significant limitations to raising output,” he wrote in his report.