M’sia GDP revised

World Bank sees larger contraction for domestic economy

KUALA LUMPUR: With over 90% countries globally expected to be hit by recession in 2020 as a result of the Covid-19- induced crisis, the latest move by the world’s two leading economic institutions to downgrade Malaysia’s growth forecast yet again comes as no surprise.

After posting its slowest expansion in over a decade for the first quarter of 2020, the country seems to be headed for its worst quarterly slump since the Asian Financial Crisis in 1998.

This is mainly due to the 47-day movement control order (MCO) that began in March, which forced most businesses to shut down that grounded the economy.

The World Bank, which described Malaysia’s near-term outlook as “unusually uncertain,” said in its latest Malaysian Economic Monitor report that its baseline projections show a pronounced output contraction of around 10% in the second quarter.the last time the domestic economy declined by more than 10% was in the final quarter of 1998, when growth plunged by 11.2% year-on-year.

For the first quarter of this year, Malaysia narrowly escaped a contraction with a growth of 0.7%. As for the full year 2020, the World Bank forecasts the Malaysian economy to decline by 3.1%

Earlier in April, the bank lowered its gross domestic product (GDP) growth forecast from 4.5% to a negative 0.1%.

Richard Record, the World Bank’s lead economist for Malaysia, said the contraction reflects a broad-based decline in private sector activity. Speaking during a virtual briefing yesterday, he pointed out that decline in net exports and gross fixed capital formation are likely to drag growth down in 2020.

The International Monetary Fund (IMF), on the other hand, also downgraded its 2020 GDP growth forecast for Malaysia to negative 3.8%.

In April, the economic watchdog revised its forecast to negative 1.7%, down from 4.5% earlier.

“First-quarter GDP was generally worse than expected (the few exceptions include, for example, Chile, China, India, Malaysia, and Thailand, among emerging markets, and Australia, Germany, and Japan, among advanced economies).

“High frequency indicators point to a more severe contraction in the second quarter, except in China, where most of the country had reopened by early April, ” the IMF said in its June 2020 World Economic Outlook Update report.

However, despite the subdued economic outlook for Malaysia and the rest of the world, not all is doom and gloom.

With businesses ramping up their operations since the end of the MCO in May, the World Bank foresees a partial economic recovery in the second half of 2020 as the outbreak eases and mobility restrictions are lifted. It also expects the economy to rebound in 2020, with a growth of 6.9%.

Record said that the government’s response has helped to blunt the impact of the crisis post Covid-19, although key gaps remain.

“Policies in the near term should focus on protecting the most vulnerable, and in the medium term on preparing the economy for recovery in a ‘new normal’ environment.

“The pandemic provides a window of opportunity for Malaysia to enhance its social protection system,” he said.

Record also stated that there has been a distinct narrowing of fiscal space.

This was mainly due to the projected increases in expenditure following the four economic stimulus packages that will see direct government injection of Rm45bil, as well as the downward pressures on revenue since oil-related and tax revenues are projected to decline.

As a result, the fiscal deficit could widen to as high as 7% of GDP if measures to reduce non-core spending or to raise additional nontax revenue are not adopted, according to him.

“Policies in the near term should focus on protecting the most vulnerable, and in the medium term on preparing the economy for recovery in a ‘new normal’ environment.” Richard Record

“The government’s options to finance additional fiscal measures are constrained by statutory limits, which can only be lifted through legislative amendments,” Record said, referring to the 55% self-imposed administrative debt-to-gdp threshold.

Earlier this week, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz has said that the country’s debt level could hit the statutory limit of 55% by the end of the year, from 52% currently.

Economists who spoke to Starbiz earlier expect the debt-to-gdp limit to be breached this year, given the higher government expenses.

Wellian Wiranto, OCBC Bank economist, said the country’s debtTO-GDP ratio could likely inch closer to 56% by year-end.

Meanwhile, Ambank Group chief economist and member of the Economic Action Council secretariat Anthony Dass said the debt-toGDP ratio could hit around 57% to 59%.

In ensuring that the government has enough funds to finance its stimulus packages, Record said it can re-prioritise its existing spending commitments that have been budgeted earlier, for more immediate use.

However, he acknowledged that the room to re-prioritise spending is limited.

“The second option is to look at non-tax revenue. Malaysia is fortunate to have wealth in the corporate sector (higher dividends from the government-linked companies) as temporary stop-gap measures in the time of need.

“The third is to explore some of the legislative options to create a little bit more fiscal headroom, ” he said.

Responding to a question by Starbiz on whether there is need for further cut in overnight policy rate to lower borrowing costs and to spur new loan applications, Record said that it depends on the pace of economic recovery.

“We are probably okay if we see a return to growth, especially by the fourth quarter of this year.

“But, if the crisis turns out to be deeper than expected or if we see further weakness on the external side, then there should be further considerations on the measures for the fiscal and monetary sides to support the economy,” he said.