Malaysia is well-positioned for a strong vaccine-led recovery but …

REGARDLESS of the disruption brought about by a renewed spike in COVID-19 cases since late 2020, the Malaysian economy is expected to rebound strongly this year and in 2022 as it rides on a vaccine-led global recovery.

Growth would be underpinned by supportive domestic policies, a diversified economy, and a resilient banking system.

This is according to the 2020 Annual Consultation Report on Malaysia published by the ASEAN+3 Macroeconomic Research Office (AMRO) today.

The report was prepared based on AMRO’s annual consultation visit to Malaysia in late 2020, and data and information available up to March 19.

To recap, the Malaysian economy contracted by 5.6% in 2020, reflecting the steepest recession on record in the second quarter as a nationwide lockdown was imposed to contain the spread of COVID-19.

In 2021, the economy is expected to rebound by 5.6% owing to a low base and a strong pick-up in global demand induced by vaccination programmes.

International travel and tourism activities are expected to gain traction in 2022 as COVID-19 vaccinations reach herd immunity in Malaysia and abroad, lifting Malaysia’s growth to 6.2%.

“However, the outlook is clouded by the uncertain trajectory of the pandemic as vaccine development and deployment race against virus mutations,” AMRO pointed out.

“Moreover, the damage to businesses and the labour market suggests that the economy may not return to its pre-pandemic output trend in the near term.”

With regard to the Malaysian banking system, AMRO said it is in a strong position to manage increased credit risks and facilitate continued credit expansion.

“Stress-testing exercises by AMRO and Bank Negara Malaysia (NNM) indicate that banks have ample room to absorb loan impairments given their strong capital buffers,” noted AMRO.

“As the economic outlook and extent of loan impairments after the expiry of the debt repayment assistance scheme remain uncertain, frequent stress-testing of the financial institutions is strongly recommended to guard against unforeseen risks.”

Moving forward, AMRO reminded that contagion risks from overseas should also be closely monitored, given the large presence of foreign banks and extensive overseas operations of the domestic banks.

It also highlighted that the enlarged debt burden as a result of the sizeable fiscal stimulus underscores the importance of restoring fiscal buffers once the economic recovery is firmly on track.

“Tax reforms are essential to enable a faster reduction of the fiscal deficit and guide the government debt back to the pre‑pandemic statutory limit over the medium term,” reckoned AMRO.

“However, revenue measures, including the reinstatement of the goods and services tax (GST), should be implemented in a measured way to avoid a cliff effect.” – May 4, 2021


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