Moving towards an economic recovery
26 Feb 2022
After two years of uncertainties brought on by the unexpected arrival of the Covid-19 pandemic, the worst might finally be over for Malaysia’s economy as the nation gradually shifts its gear back to a recovery mode.
With vaccines now more readily available worldwide since early last year, most economies have registered steady growth as consumers and businesses return to life as usual, backed by the relaxation of Covid-19 curbs, the reopening of international borders as well as the resumption of most – if not all – industries and business sectors.
After facing the worst recession since the Global Financial Crisis (GFC) in 2020, Malaysia too have started to show improvements in its economic growth.
According to the Ministry of Finance (MoF), Malaysia’s gross domestic product (GDP) grew by 3.6 per cent in the fourth quarter of 2021 (4Q21), compared to a 3.4 per cent contraction during the same period last year. Its monthly GDP growth returned to positive territory in 4Q21 with its GDP retaining its recovery momentum of 2.6 per cent in December, following an encouraging growth of 5.4 per cent in November, and 2.7 per cent in October 2021.
Overall, Malaysia’s GDP performance in 2021 showed signs of improvement, with a 3.1 per cent increase compared to a contraction of 5.6 per cent in 2020.
“The economy’s commendable performance in 4Q21 was accompanied by labour market improvements as the unemployment rate fell to 4.2 per cent, and manufacturing sales increased by 15.5 per cent in the month of December.
“Throughout the quarter, external trade reached an all-time high, with the country’s total trade in 2021 exceeding the RM2 trillion mark, an increase of 24.8 per cent on an annual basis, the fastest growth since 1994.
“This is attributed to a robust global economic activity, especially among our major trading partners. Moreover, our foreign direct investment (FDI) recorded a net inflow of RM24.7 billion in 4Q21, bringing the total FDI in 2021 to more than RM50 billion, which is higher than the levels seen during the pre-pandemic years,” Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said.
Bank Negara Malaysia (BNM) noted that growth was supported mainly by an improvement in domestic demand as economic activity normalised following the easing of containment measures under the National Recovery Plan (NRP).
“All economic sectors recorded an improvement in the 4Q21. The services sector turned around to expand by 3.2 per cent. Consumer-related activities continued to recover amid the reopening of the economy. This was reflected in the higher spending observed within the retail and recreational subsectors. “The finance and insurance sub-sector also continued to grow, driven mainly by higher net insurance premiums.
“Growth in the information and communication sub-sector provided further support amid continued demand for data communications services, particularly for e-commerce and e-payment activities,” it said.
Generally, Malaysia’s 4Q GDP growth of 3.1 per cent came within consensus’ expectations but fell slightly below analysts’ expectations.
In a report, the research team at MIDF Amanah Investment Bank Bhd (MIDF Research) pointed out that the whole year was also lower than its estimate of 3.7 per cent due to the lower-than-expected 4Q21 growth.
Nevertheless, it opined, “The rapid administration of the National Covid-19 Immunisation programme (PICK) and the implementation of the National Recovery Plan accelerated the reopening of the economic sectors.
“In addition, growth last year was also supported by the robust external demand coupled with the recovery in domestic consumption activities boosted by the easing of the Covid-19 curbs, the loosened monetary policy and the various fiscal measures.
“From the expenditure side, most of the growth stemmed from the recovery in private consumption and investment activities as well as stronger expansion in government spending. On the supply side, the rebound in the manufacturing, services and mining sectors contributed to the expansion in the economy.”
Meanwhile, the research team at Maybank Investment Bank Bhd (Maybank IB Research) observed that Malaysia’s economic recovery during 2021 was uneven and underwhelming.
“Analysis of quarterly real GDP path during what we termed as the ‘Pandemicrisis’ episode of 2019-2021 showed a W-shape path reflecting the impact of the ins-and-outs of lockdowns and restrictions in 2020 to 2021, compared with the U-shape path during the Asian Financial Crisis episode (1997-1999) and the V-shape path during the Global Financial Crisis episode (2008 to 2010),” it said.
Despite the uneven recovery in 2021, Maybank IB Research said it is confident of Malaysia’s economic growth in 2022.
It expected firmer growth in 2022 on the sustained economic re-opening as well as on the back of broad based expansions in all economic sectors and in domestic and net external demand.
“Key assumption for better traction and stronger momentum in economic growth this year is sustained opening of the economy – as opposed to the ins-and-outs of lockdowns and restrictions in 2020-2021 – with the adoption of ‘Living with Covid-19’ strategy and the transition from the pandemic phase to the endemic stage of Covid-19. This is enabled by mass immunisation,” it said.
“Consequently, and despite the recent rise in Covid-19 cases and hospitalisations amid the spread of the Omicron variant, mass vaccinations has led to the containment in Covid-19’s deaths – and hence case fatality rate, ICU patients and patients on ventilations, in turn suggesting stronger immunity.
“An otherwise stretched healthcare system would have raised the risk of another round of lockdown and/or restrictions,” it added.
Stabilising Malaysia’s financial system in 2022
Malaysia’s financial conditions have also improved during the year due to the reopening of the economy and the resumption of businesses.
According to BNM, during the quarter, investor sentiments in the bond market were affected by fresh concerns surrounding the economic impact of the Omicron variant, persistently high inflation in several economies as well as faster-than-expected tightening in global liquidity conditions.
However, it pointed out that global and domestic bond yields increased, as MGS yields rose across the curve with the three-year, five-year and 10-year yields rising by 33.4, 21.7 and 19.8 basis points, respectively by the end of quarter.
Aside from that, BNM noted that the ringgit appreciated and the FBM KLCI rose following the easing of domestic Covid-19 containment measures amid the acceleration of Covid-19 vaccine booster inoculations.
In the foreign exchange market, the ringgit appreciated by 0.3 per cent against the US dollar, in line with the movement of regional currencies, while higher commodity prices also provided support towards the ringgit during the quarter.
“The FBM KLCI closed marginally higher at 1,567.5 points (up 1.9 per cent) as at end-December 2021 (end-September: 1,537.8 points), owing to positive performance during the quarter for plantation (up 3.5 per cent), financial services (up 2.4 per cent) and technology (up two per cent) stocks,” it said.
As for the banking system, BNM noted that liquidity remained sufficient at both the institutional and system-wide levels to facilitate financial intermediation activity.
“The outstanding liquidity placed with the bank was higher in the fourth quarter amidst increased liquidity injection operations to meet banks’ precautionary demand for liquidity buffers approaching the year-end.
“At the institutional level, almost all banks maintained surplus liquidity positions with the bank as at end-December 2021,” it explained.
For 2022, the research team at Kenanga Investment Bank Bhd (Kenanga Research) believe that BNM would likely maintain its status quo on policy rates to support the current ongoing domestic economic recovery.
“Due to the ongoing surge in Omicron infections and rising uncertainties, the BNM is expected to remain cautious and leave the overnight policy rate at 1.75 per cent at least until the end of 1H22.
“Despite major central banks hawkish pivot, the BNM will not withdraw its policy support prematurely and will continue to provide support to the economy as the inflation rate is still under control and the economy is still struggling to reach its pre-pandemic level,” it opined.
Concurring this view, Maybank IB Research believe the central bank would likely maintain its policy rate before introducing a possible hike by the end of the year as the economy begins to normalise.
“BNM outlined the several conditions for normalising/tightening monetary policy, principally in relations to raising the OPR from current record low of 1.75 per cent per annum that is sustained periods of steady improvement of economic performance amid narrowing output gap; sustainable private consumption and private investment growth driven by fundamentals without over-reliance on policy supports; stronger labour market underpinned by rising incomes,” it explained.
“BNM has kept OPR at 1.75 per cent per annum since July 2020. The return of inflation from deflation amid wild swings in monthly inflation is tempered by the much more subdued core inflation as the uneven and under-whelming recovery thus far resulted in continued slacks in the economy that mitigates the risks of demand-pull and wage-driven inflation.
“The lingering/prolonged negative output gap – which we expect to persist in 1H22 – and the subdued core inflation in Malaysia are in sharp contrast to Singapore’s faster narrowing negative output gap – which we estimated to have turned to a small positive in 4Q21 – and surging core inflation which prompted the Monetary Authority of Singapore’s (MAS) policy tightening at the October 2021 review and the unscheduled review in January 2022,” it added.
It also pointed out that there is the sub-optimal labour market conditions as per overall and youth unemployment rates as well as under-employment rate that are still elevated relative to the pre-pandemic levels, and the indications of no imminent wage-inflation risk as per the trends in the private sector annual salary increment as well as wages and salaries in the manufacturing and services sectors.
BNM may want to assess the job market impact from the expiry of Wage Subsidy Programme (WSP) that totalled RM20.177 billion as of January 17 benefitting 357,468 employers and retaining the jobs for 2,592,064 million local workers.
“Consequently, the policy responses to inflation and cost of living issue thus far are essentially ‘price administration/control and supply side measures’ rather than interest rate hike(s) by the central bank.
“The government announced in January 2022 a string of measures, including a RM680 million to stabilise prices and ensure supplies of items such as cooking oil, general flour, liquefied petroleum gas, allowing short term (December 2021 to February 2022) importation of frozen whole chicken from Thailand, China and Brazil, and maintaining base electricity tariffs for all electricity users in Peninsular Malaysia from February 1, 2022 until end 2024.
“These are in top of the continuation of fuel price subsidies for RON95 petrol and diesel that has been in place since February 2021.
“Therefore, we maintain our view of OPR staying at 1.75 per cent for much of 2022 prior to a 25bps hike to two per cent in 4Q22 as growth takes hold and monetary policy bias shifts gear from ‘accommodation’ to ‘normalisation’,” Maybank IB Research opined.
Reopening of borders a boon for Malaysia’s trade
WITH global economies slowly returning back to normal and countries worldwide have begun to reopen their borders, Malaysia recorded an improvement in its trade industry.
In 4Q21, despite the prolonged nationwide restrictive measures in 2021, Malaysia’s current account balance remains in surplus.
“The 4Q21 current account surplus registered at RM15.2 billion, the highest in 2021. The widening surplus mainly supported by robust exports activity which saw goods surplus touched a new record high at RM51.8 billion.
“Services account remained in double-digit deficit since the start of pandemic, which the main dragger was travel segment. On top of that, primary income recorded a larger deficit close to RM20 billion amid continuous weakening in direct and portfolio investments.
“Secondary income stayed in deficit of RM1.4 billion in the final quarter. As for the whole 2021, current account surplus to GDP ratio stood at 3.5 per cent (2020: 4.2 per cent). Even though goods surplus improved to nine-year high at 11 per cent but deficit ratios of services, primary and secondary income widened to negative four per cent (record low), negative three per cent (seven-year low) and negative 0.6 per cent (2020: negative 0.2 per cent),” MIDF Research said.
Looking ahead, the research team said with the reopening of domestic economic activities and more leeways given to fully vaccinated, it expected the travel segment to record a smaller deficit in 2022.
On the other hand, it expected mixed prospects for Malaysia’s investment flows.
It noted that financial account registered smaller net outflows of RM2.2 billion during the quarter (3Q20: up RM22.8 billion), among others due to RM14 billion outflows recorded in other investment account.
Porfolio investment rebounded from RM4.3 billion net outflows to RM2.8 billion net inflows in 4Q21. Direct investment account continued recording net inflows as a result of increased FDI inflows.
“Moving forward, we expect investment flows into Malaysia to improve gradually amid reopening of economic activities, sustainable economic growth and stable inflationary pressure.
“Nevertheless, tightening monetary policy in developed markets and instability in domestic politics are among downside risks on Malaysia’s investment trajectory,” it said.
All in, MIDF Research believe that international borders for Malaysia would likely be fully reopened from 1H22 onwards.
It said, while the National Recovery Council has recommended the government to fully reopen international borders on March 1, 2022, it does not foresee the borders to reopen fully in 1H22 as MOH forecasted daily infection case to peak at 22,000 by end of March 2022 and vaccine roll-out for chidred age five to 11 just started in February 2022 which may take at least 1.5 month to be fully-vaccinated.
“Hence, we foresee June 1, 2022 shall be the earliest date for Malaysia to reopen its international borders amid flattening curve of daily infection rate and higher two-dose vaccination rate as well as booster’s recipients.
“As for 2022, we forecast services account deficit to GDP ratio to improved from a decline of four pre cent in 2021 to a decline of 3.6 per cent. Travel segment to record smaller deficit size, -0.8 per cent this year,” it said.
“The sustained surplus will be supported by continued expansion in exports of goods driven by manufactured goods and commodity-related products.
“As more domestic economic activities reopened, we expect import growth to record higher than export growth this year, 5.1 per cent compared with 4.5 per cent.
“On services account, we foresee a smaller deficit in the trade of services, thanks to gradual reopening of international borders whereas demand for foreign services from the trade-oriented and construction sectors to expand modestly,” it added.
Malaysia’s road to recovery in 2022
For the year ahead, analysts are generally more optimistic and confident of Malaysia’s growth momentum despite the emergence of the Omicron variant.
In a report, the research team at Public Investment Bank Bhd (PublicInvest) opined that the worst is over for Malaysia thanks to the government’s resolve to protect Malaysians through massive Covid-19 vaccination.
“The decision to do away with full lockdown is also lauded as targeted lockdown will ensure minimal disruptions to social and economic activities – paving the way for output to recover and growth to reach potential.
“Massive government efforts to boost output via job creation, various incentives and special initiatives will underpin a rebound in economic activity which is set to reach a 12-year high,” it said.
It also pointed out that favourable external conditions, thanks to full economic openings in major economies, will give Malaysia’s growth momentum the added push.
“Growth trajectory will also be driven by the lag impact of massive fiscal stimulus spending and supported by the still-accommodative interest rate environment.
“The strong push will come from the bold decision to fully reopen our international borders which will be key to revive the tourism sector which have borne the brunt of the crisis since the last two years.
“The move will also address labour shortages in various sector such as agriculture, manufacturing and services, a catalyst that will boost productivity and output,” it said.
Nevertheless, it still cautioned that Malaysia’s growth momentum is still susceptible to several downside risks however given persistent threat from Variant-of-Concern – VoC (such as the Omicron).
“Other risk factor could also come from policy surprises in major economies and the US-China Trade Talk which could take place in 2022.
“Raw materials shortages and supply chain disruption remain a worry in 2022. The 15th General Election which must be called in less than two years is also a concern as it may distract our recovery efforts,” it noted.
Meanwhile, Maybank IB Research highlighted that Malaysia’s progress in reopening the economy is further enhanced by the government’s plan to fully open the country’s international borders on March 1, 2022, which among others will remove the mandatory quarantines of inbound travellers.
“Where the government is being strict and on “tightening” mode, as far as Covid 19 policy is concerned, is actually on the criteria for full vaccination status which is all senior citizens aged 60 years and above as well as recipients aged 18 years and above of full dose of Sinovac Covid 19 vaccine need to take booster shots before March 1, 2022 to maintain complete vaccination status.
“Sustained economic opening in 2022, supported by measures like the planned international borders re opening, will help services sector that have been struggling to recover last two years to rebound and catch up with manufacturing that have returned to the immediate pre Covid 19 level in terms of GDP levels, thus broadens economic growth,” the research team said.
Consumption related services sector is also expected to be lifted by pent up demand/spending by consumers following the economic opening and amid “excess individual savings” situation over the past two years that is largely driven by a total of around RM150 billion in cash handouts, financial assistances and the withdrawals from Employees Provident Fund (RM101 billion from the i-Lestari, i-Sinar, and i-Citra schemes), hence the outlook of stronger 2022 growth in real private consumption.
“There is also the projected improvement in job market conditions as per the forecast of lower unemployment rate of four per cent in 2022 after a ‘sticky’ 2020 2021 (2021: 4.6 per cent; 2020: 4.5 per cent),” Maybank IB Research said.
For 2022, BNM opined that the domestic economy is expected to remain on its recovery path, supported by the continued expansion in global demand and higher private sector expenditure given improving labour market conditions and on-going policy support.
The continuation of major investment projects in both private and public sectors will also support growth.
Governor Tan Sri Nor Shamsiah explained, “Malaysia is well-positioned to continue benefitting from the expansion in global economic and trade activities.
“The acceleration of the Covid-19 booster vaccination programme and vaccination of children above five years old, coupled with sufficient capacity in the healthcare system, would improve domestic economic activities, thus strengthening the recovery momentum.”
However, it also warned that the balance of risks remains tilted to the downside, mainly from development surrounding Covid-19, both globally and domestically.
“Average headline inflation for 2022 is likely to remain moderate as the base effect from fuel inflation dissipates.
“Core inflation is expected to edge upwards as economic activity normalises amid the environment of high input costs.
“Nevertheless, core inflation is expected to be modest, with upside risk contained by the continued slack in the economy and labour market.
“The outlook, however, continues to be subject to global commodity price developments amid risks from prolonged supply-related disruptions,” it added.
Source: The Borneo Post