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Economy needs job, trade and open borders to grow more sustainably

Economy needs job, trade and open borders to grow more sustainably

20 May 2021

Another round of fiscal stimulus package by the government is anticipated due to the impact of the Covid-19 pandemic, despite the country’s debt-to-GDP ratio for the first quarter of 2021 (1Q21) having breached its ceiling of 60%.

Malaysia Rating Corp Bhd (MARC) head of economic research Firdaos Rosli said Putrajaya’s debt had reached 64% of GDP in the first three months of the year due to the pandemic.

“Debt-to-GDP ratio has surpassed the statutory debt ceiling of 60% as of 1Q21, as a result of both the expansion of debt due to the pandemic and contraction in terms of GDP over the last one year.

“We expect the government to announce another round of fiscal stimulus following the third Movement Control Order (MCO) and it may be done in the next couple of weeks,” he said during the virtual MARC Malaysian Bond & Sukuk Conference yesterday.

MARC projects headline inflation to moderate to below 3% by year-end after rising to over 4.5% in 2Q21 due to the low base effect.

After recording a dip in GDP in 2Q20 which came in at -17.1%, mainly due to the implementation of the first MCO, Firdaos said Malaysia will record a strong rebound in economic growth as seen from other crisis events in the past.

He said Malaysia’s diversified economy was able to rebound after it suffered from the Asean Financial Crisis (AFC) in 1998 and the Global Financial Crisis in 2009.

“The real GDP growth in different cycles over the past crises also show a similar V-shaped recovery.

“The Malaysian economy may not take long to cover compared to the AFC as the current crisis is non-financial and non-export driven recession,” he said.

For 1Q21, the country’s GDP contracted by 0.5% year-on-year (YoY), a smaller contraction despite being in the negative territory for the fourth consecutive quarter.

In 3Q20, the economy contracted by 2.7% before contracting a further 3.4% in 4Q20. Malaysia’s full-year economy tanked by 5.6% YoY in 2020 compared to 4.4% YoY growth in 2019.

Although Malaysia is on its way to recovery, Firdaos said a strong rebound may not be “meaningful” as international borders remain closed and higher unemployment.

On a YoY basis, both tourist arrivals and receipts went into free fall by 83% and 85% respectively.

“The unemployment rate spiked from 3.3% to 5.3% from February 2020 to May 2020, the highest since 1993. Without the right policies in place, it would take years to regain around 300,000 job losses due to MCO 1.0,” he said.

Demand deposits of consumers have risen which gives the impression consumers are holding on to their money as the pandemic enters its second year.

“This is what most economists call the paradox of thrift where during a crisis, if investments do not equal savings or rather savings do not equal to investments, then there is more likely to be a slowdown in growth,” said Firdaos, adding that private consumption will also trend sideways for as long as the unemployment rate remain elevated.

He added the government should push for different incentives moving forward to raise the competitive advantage of Malaysia as a destination for foreign direct investment.

He added that the government could look into trade agreements it had participated in but has yet to ratify, such as the Regional Comprehensive Economic Partnership, to partly help improve its attraction.

Source: The Malaysian Reserve

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