The pandemic has battered economies across the world, with Bank Negara Malaysia projecting in August that the Malaysian economy would suffer a contraction of 3.5% to 5.5% this year, a revision on its previous forecast of a 2% to 0.5% dip for the year.
While Malaysia’s growth has averaged around 5% between 2005 and 2019, two economists from international rating agencies said Malaysia could meet its 8% target for next year if the right conditions were in place.
Steven Cochrane, chief Asia Pacific economist at Moody’s Analytics told FMT that “8% is a bit optimistic but within an achievable range. We are forecasting 7% growth for 2021.”
Apart from weak global oil prices, other challenges in achieving this 8% target included the slow recovery of the travel and hospitality industry as well as the political power struggle which “threatens to derail focus” on the third wave of Covid-19 cases.
Vishrut Rana, Asia Pacific economist at S&P Global Ratings, expects a 5% dip in this year’s GDP before a recovery to 8.4% in 2021.
“One significant factor that supports our 2021 growth rate forecast is ‘base effects’, or more normal activity resuming (in 2021) that did not take place this year,” he told FMT, predicting that households will resume their normal spending patterns next year after being curtailed by the movement control order (MCO).
Crucially, Cochrane and Rana both stressed that their predictions were based on the assumption that Covid-19 vaccines would be available for the masses by the middle of next year – which would then see the economy progressively reopen.
Finance Minister Tengku Zafrul Aziz also highlighted the importance of a Covid-19 vaccine when he said Malaysia’s economy was projected to grow by up to 8% in 2021.
Speaking at a summit in Kuala Lumpur earlier this week, Tengku Zafrul warned that the pandemic remained a threat to the country’s future growth as long as a vaccine was not commercially available.
Suhaimi Ilias, chief economist at Maybank Investment Bank, noted that Tengku Zafrul’s projection was on the upper end of Bank Negara Malaysia’s (BNM) forecast of 5.5% and 8% for GDP growth in 2021 which it announced in August.
“Our forecast is slightly more conservative at 5.1% growth,” he told FMT.
The general prevailing assumption was that a shallower recession in 2H 2020 — after the slump in 1H 2020 — would set the stage for a rebound in 2021, with political uncertainty and instability the major risks to achieving this goal.
Among the other challenges in achieving the 8% projection include limited policy room for further large fiscal stimulus; “scarring effects” from the pandemic — such as a prolonged high unemployment rate, debt defaults and insolvencies — as well as a rise in inequality and poverty.
The Malaysian economy contracted by 17.1% in Q2 2020 year-on-year due to the decline in domestic demand during the MCO, the economy’s worst slump since the height of the Asian financial crisis in 1998 (-11.2% in Q4 2020).
Hoe Ee Khor, chief economist at the Asean+3 Macroeconomic Research Office in Singapore, said that GDP growth of within 7% to 8% would be “a reasonable projection” in 2021.
Malaysia’s macro fundamentals were relatively strong and were supported by substantial domestic savings. These factors, in addition to the government’s policy responses, put the economy in a position to rebound strongly in 2021,” he said.
However, Hoe said the extent of the rebound would depend on how much production and service capacity could ride the recovery in global demand next year given the damage to businesses’ balance sheets due to the domestic and global movement curbs this year.
“At this point, we feel that the initiatives to support pandemic-affected businesses would be sufficient to restore Malaysia’s production capacity close to pre-pandemic levels next year,” he said.
CLICK HERE FOR THE LATEST DATA ON THE COVID-19 SITUATION IN MALAYSIA