World Bank slashes GDP growth outlook for M’sia
Projection for 2020 cut to -0.1% on slower momentum, Covid-19
PETALING JAYA: The World Bank Group has significantly lowered its 2020 gross domestic growth (GDP) growth projection for Malaysia to -0.1% from 4.5%, incorporating the slower growth momentum from the second half of 2019, as well as growing uncertainty over the duration and overall impact of the Covid-19 outbreak.
In 2019, GDP growth stood at 4.3%. Malaysia’s economy expanded at a much slower pace in the second half of 2019, growing at 4.4% in the third quarter and decelerating further to 3.6% in the fourth quarter.
In its East Asia and Pacific Economic Update April 2020 report yesterday, the World Bank said its estimate has a large degree of uncertainty, conditional upon the rapid developments of the outbreak domestically and globally, and the subsequent policy responses.
Net exports and investments are expected to experience a larger contraction in 2020, while private consumption is expected to grow at a much slower pace, from 7.6% in 2019 to 1.6% in 2020.
Government expenditure is expected to increase on various measures, including the economic stimulus package and other key expenditures and initiatives to mitigate the economic and health impact of the outbreak, but the bulk of stimulus activities are expected to be off-budget in nature.
Private consumption is projected to grow at only 1.6%, as more significant employment and income losses are expected among the bottom 40% and even the middle 40%.
“Effective economic relief for those affected will depend on both means-tested social assistance such as Bantuan Prihatin Nasional and the ongoing Bantuan Sara Hidup program and employment-based social insurance such as Employees Provident Fund (EPF) and Employee Insurance System,” said the World Bank.
The government has announced two economic stimulus packages totalling an injection of RM250 billion into the economy.
Among the measures announced are a temporary cash transfer programme of RM10 billion, a salary subsidy package of RM5.9 billion, as well as the reduction of the minimum workers’ contribution to the EPF.
Also, Bank Negara Malaysia has preemptively reduced its policy rate and lowered the statutory reserve requirement ratio to ensure adequate levels of liquidity in the banking system. In addition, special loan funds have also been established and several large banks have also announced moratoriums on loan repayments.
Meanwhile, the World Bank noted the large degree of uncertainty over the outcome of the outbreak presents a major downside risk to the economy, as an uncontained or further deterioration of the outbreak would result in more severe or prolonged restrictions on overall economic activities, posing a further drag on growth into 2021.
“Moreover, uncertainty over the country’s political stability following the recent change in the ruling coalition and the government’s ability to manage the outbreak could pose further downside risks to growth,” it said, adding that the other major challenge is the limited fiscal policy space to respond to the crisis.
“While the recently announced stimulus package could help to mitigate the immediate impact of the outbreak, a deeper economic policy response would be needed should the health crisis deepen and result in a longer duration of economic disruption,” it elaborated.
In a separate statement, Fitch Solutions echoed the sentiment, saying that the government only putting up 10% of the stimulus in both packages announced highlights the financial constraints it faces.
“We wish to stress the risk that will come with any additional stimulus packages that Malaysia might be forced to implement to deal with the economic shock of the Covid19 pandemic, as these are likely to rely on the same funding strategies of drawing on pension savings and use the private banking sector to absorb the economic shock.
“We reiterate that while this can avert a short-term worsening of the fiscal balance, it has long-term consequences for social security. Furthermore, repeatedly relying on banks to absorb the economic shock would eventually harm the stability of the financial sector,” it said.