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Bright spots to lift domestic economy

Bright spots to lift domestic economy

04 Jan 2021

GDP likely to grow between 6% and 7%

While the global economy is on the road to recovery with the availability of Covid-19 vaccines, there are pertinent issues which may dampen its growth and put a strain on the Malaysian economy.

However, economists are upbeat that the domestic economy is poised for growth as there are bright spots that could lift the economy. They are projecting a gross domestic product (GDP) growth of anywhere in the region of 6% to 7.3%.

Geo political risk from the tensions between the United States and China resurfacing, the efficacy of Covid-19 vaccines in preventing the disease, and uncertainty closer to home as well as fiscal imbalances are some of the factors that may impact the local economy, according to the economists.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid told Starbiz that the relationship between the United States and China would continue to hog the limelight.

“We know that China has been very consistent in the quest to become technological prowess and the outcome was very visible via their global presence, especially in the areas of 5G technology.

“And given that digitalisation will be at the forefront in every country’s growth strategy, this could be a source for potential friction between the two superpowers. Geopolitical risks are something which is unavoidable but it has to be managed so as not to put a dampener on the global economy,” he said.

Ambank Group chief economist Anthony Dass said the short and long-term political and geopolitical risks would outline how Covid-19 would exacerbate pre-existing domestic tensions in many countries, adding that the outcome would depend on availability of the vaccine.

As Malaysia is an open economy, he said conflicts in the Middle East, the political crisis in Europe and the unfolding issues post the US presidential election may see some impact on the world economy.

With the 4th Industrial Revolution, Dass said information technologies would dramatically change labour models in a wide range of industries in 2021, especially due to improvements in the fields of automation and artificial intelligence.

The challenge, he said, would be acute for emerging markets where governments that can’t quickly evolve their social contracts to meet middle class expectations would see spiraling social instability.

Dass said on the domestic side, the year 2021 would also shed light on how global rating agencies would view Malaysia in relation to its status on the FTSE Russell Bond index (WGBI), inflows of foreign direct investments (FDIS) and rate of implementation of policies and domestic political scenario.

FTSE Russell in October last year kept Malaysia in its negative watchlist at its annual review of its flagship World Government Bond Index (WGBI).

On Dec 4 last year, Fitch Ratings downgraded its ratings on Malaysia to BBB+ from A- on the back of the negative impact of the Covid19 pandemic on the country’s fiscal position as well as the ongoing political situation.

Afzanizam said uncertainty arising as to when the 15th general election would be held and the government’s efforts to restore fiscal imbalances would be closely watched by investors.

Issues like the possibility to reinstate the goods and services tax and subsidy reforms could potentially be on the public radar, he noted.

He said this may cause some form of anxiety among the public as cost of living is expected to be in the spotlight again following the expected rise in fuel prices.

“The forecast numbers for GDP are very fluid at the current juncture. Although the governments in various jurisdictions have allowed the emergency use of Covid-19 vaccine, the logistic issues remain.

“What we know is that the economic stimuli from both fiscal and monetary are huge. If the reopening of the economy happens as planned, the country should be able to record a decent recovery next year,” Afzanizam said.

In the third quarter, the GDP improved with a slower contraction of 2.7% year-onyear (y-o-y) versus a 17.1% y-o-y contraction in the second quarter.

The Finance Ministry is projecting a GDP growth of 6.5% to 7.5% in 2021 as it predicts the economy to shrink by 4.5% year-on-year in 2020 due to the adverse effects of the pandemic.

Amid the headwinds and geo political issues, economists are still bullish on the domestic economy. The external sector appears to be forthcoming, especially in the technology sector, Afzanizam said.

The World Semiconductor Trade Statistics (WSTS) has projected that the global semiconductor sales would accelerate to 8.4% in 2021 from an estimated 5.1% growth this year.

Judging from this, Afzanizam said this would benefit Malaysia’s electrical and electronics (E&E) exports which in turn would give a further boost to the domestic manufacturing sector.

He said the government’s all-time high development expenditure of Rm69bil should also be able to resuscitate the construction sector.

“If the reopening of the economy proceeded as planned, we should be able to see a respectable growth trajectory next year,” he noted.

Juwai IQI chief economist Shan Saeed said there are key drivers for Malaysia’s growth. Oil prices are expected to go north ie: US$50 to US$65 per barrel in 2021 which would be a boon to the country.

He noted that with the Chinese investments flowing back to Malaysia, Covid-19 coming under control, acceleration of technologydriven initiatives, higher palm oil prices stabilising above RM3,000 to RM3,500 per tonne and rolling out of infrastructure projects would spur the domestic economy next year.

Source: The Star