KUALA LUMPUR: Malaysian rating Corporation Bhd (MARC) has lowered its GDP growth forecast to 3.9% on-year, which is lower than its previous review of 5.1% due to the contraction in private consumption following the strict lockdown measures.
In its report on Wednesday, MARC said its earlier January 2021 GDP growth forecast for Malaysia was 6.4%.
“Since then, back-to-back mobility restrictions have prompted us to shave off our earlier forecast to 3.9% y-o-y for 2021, which is even lower than the previous review of 5.1%.
“This implies that the economy will perform 2% below the pre-pandemic level this year. Moving forward, Malaysia’s growth outlook is solely dependent on how stringent mobility restrictions are, ” it said.
MARC said private consumption, the main driver of economic growth, will be hard hit in the near term due to the strict lockdown measures which include the closure of non-essential services.
“The ominous labour market has deeply impacted consumer confidence. Notably, the unemployment rate could see an uptick in the coming months and remain elevated for the rest of the year.
“Spending by low-income households, which experienced higher job and income losses, will likely remain below pre-pandemic levels for a more extended period, especially when stimulus support expires, ” it said.
MARC said businesses have been grappling with persistent supply chain disruptions and falling domestic demand since MCO 1.0. The MCO 1.0 was enforced in mid-March last year.
The rating agency pointed out the challenging business operating environment would push firms to delay or even cancel their investment decisions.
“It does not help that some quality foreign direct investments (FDI) bypassed Malaysia and instead made a beeline towards our regional neighbours. Ongoing political uncertainties, in addition to the pandemic, have shaken FDI confidence.
“Given the significant revenue shortfalls and rising expenditures to finance various stimulus packages, the fiscal deficit will likely breach the current target set by the government of 6.0% of GDP in 2021.
“Instead, we anticipate the fiscal deficit to come in at 6.3% of GDP. We believe that more fiscal support could still be forthcoming, albeit in smaller sizes amid the increasingly constrained fiscal space, until the recovery path is clear, ” it said.
MARC said due to the deteriorating economic and fiscal metrics, it sees a higher risk of a rating downgrade by another international credit rating agency; S&P’s A- rating on Malaysia has a negative outlook.
Having said that, a sovereign rating downgrade may not necessarily translate into lower overall economic sentiment/confidence per se throughout a historically low interest rate environment.
MARC said as the current monetary stance remains adequately accommodative, it opines that Bank Negara Malaysia (BNM) will continue to retain the overnight policy rate (OPR) at a historical low of 1.75%.
In any case, monetary policy is a blunt policy tool. Rigorous fiscal policy is more plausible than monetary policy during a low interest rate environment.
Expansionary fiscal policy remains the primary vehicle to boost and accelerate economic growth. The resumption of economic activities is the only silver bullet that will improve the country’s economic performance in the remaining months of the year.