Covid-19 to have longest lingering effect on Malaysian economy, says MIDF

By Xavier Kong

MIDF Research believed the Covid-19 outbreak will linger the most, citing expectations of supply disruptions coming from lockdowns in China and Europe.

“Demand is also expected to weaken due to the quarantine, either official or self-imposed. Nevertheless, the containment strategy is thought to still be the best strategy to fight the Covid-19 pandemic,” said MIDF, adding that the outbreak will suppress global demand as well.

The research house viewed that global demand will grow in the first half of 2020, but at a weak pace due to the fear effects of the virus. The easing monetary policy and stimulus packages adopted by most economies mainly benefit domestic-oriented sectors as well.

“However, we expect 2H2020 to see a rebound in global demand if Covid-19 subsides and signs of recovery increase,” added MIDF.

In terms of the Malaysian economy, the research house sees it continuing to expand this year, but at a moderated pace of 3.5% compared to the 4.3% of 2019 due to the headwinds of Covid-19, slowing global demand, threat of protectionism, recession fears, global financial instability, commodity prices, inflationary pressure and the labour market.

MIDF also expected household spending to be supported by low inflationary pressure, a stable labour market, Overnight Policy Rate cuts, and the rakyat-centric measures from the government’s stimulus package.

“However, household expenditures are likely to be affected by the ongoing Covid-19 as Malaysia enters the second wave of the outbreak. As fears increase, consumers may choose to stay away from shopping malls and put their vacation plans on hold, reducing their economic activities. This could render the stimulus to be less meaningful than intended. This will lessen spending and eventually contribute less to overall economic growth,” said MIDF.

This leads to the expectation that private consumption will grow at a softer pace of 7% in 2020 compared to 2019’s 7.6%, with the services sector also experiencing a slowdown to 5.2% from 2019’s 6.1%, dragged down by weak tourism activities.

Still, the research house expected the effects of Covid-19 fears to wane in 2H2020, given the improving recovery rate while the death rate remains below 5%.

“In addition, we opine that the economic activities in China are recovering, predicated on the latest container throughput movements. In our view, the fear effects in the US and EU may prolong until the end of 1H2020 and begin to subside in June 2020,” said MIDF.

Plummeting oil prices will not last

With regards to the oil price war between the world’s biggest producers, MIDF believed that the low oil price environment now, which resulted from Saudi Arabia’s retaliation against Russia’s decision to opt out of production cuts, will not be prolonged.

However, this will result in commodity prices remaining shallow, when placed alongside the pressures of Covid-19. At the current price level, MIDF expected the government’s coffers to be affected as well.

Still, the opening of the Petronas Floating Liquefied Natural Gas-2 project in 2Q2020 is expected to cushion some of the impact to the overall performance of the mining sector, though MIDF predicted that the sector would contract further.

At the same time, the research house was of the view that a potential oil production cut is inevitable in the near term, as the “fear that is currently permeating the oil and gas industry across the world has brought forward the need for a swift and timely action to bring some form of stability back to the oil price.”

“Much of this stems from the fact that the oil price is currently unsustainable for long-term production as the cost of producing a barrel of oil typically ranges between US$30 and US$40 per barrel. We also understand that this cost runs higher for US shale oil producers which typically require oil prices to be at least US$48 to US$ 54 per barrel to break even,” said MIDF.

The research house forecasted crude oil price to average US$ 51 per barrel and crude palm oil prices to average RM2,450, with the projected higher price of CPO due to supply concerns as Indonesia plans to shift part of its palm oil production for domestic usage, while demand from India and China remain as strong as ever.

Political bickering kills the bull

Prior to the second wave of Covid-19 in Malaysia, domestic politics saw uncertainty, due to the resignation of the 7th Prime Minister, Tun Dr Mahathir Mohamad, with the events connected to that thus ending the longest bull run record of the FBM KLCI, according to MIDF.

“While it appears that the political situation in Malaysia continues to be on tenterhooks, we believe it has stabilised for now. Moreover, Malaysia is now appearing to be more concerned about containing the Covid-19 outbreak,” it added. – March 16, 2020

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