Where is the Malaysian economy heading for the rest of 2020?
By Ranjit Singh |   |  Featured, Mainstream

By Ranjit Singh

THE Malaysian economy had shocked economists and observers when it registered a growth of 3.6% for 4Q19 which was way below the consensus expectation of 4.2%. Bank Negara Malaysia (BNM) governor Datuk Nor Shamsiah Yunus had attributed the tepid performance to supply disruption in commodities and a lethargic global economy which had a telling effect on exports in 2019. It was the weakest growth since the Global Financial Crisis of 2009.

 What will be in store for the economy for the rest of 2020? The challenges that lie ahead are not out of the norm but effective policing by the government could avert the economy from feeling the full brunt of a slowdown.

 For one, the effects of the Covid-19 outbreak will adversely affect certain sectors, namely tourism, aviation and retail. Shamsiah had said Malaysia’s economy was well diversified and this would enable it to cushion the slowdown in the economy from the virus outbreak.

However, of greater concern were the effects on China where the virus had originated. To date, Covid-19 has claimed more than 1,000 lives. China had pledged to provide a stimulus package to its economy to lessen the impact from the outbreak. The country is expected to register GDP growth of 5% to 5.5%  for 2020, and this would be its slowest growth in 30 years.

China commands one-third of global trade and its slowdown would severely affect an open economy such as Malaysia. China also contributes significantly to Malaysia in terms of tourism revenue and one of the sectors which will be hit hardest will be tourism from the outbreak of the Covid-19 virus.

As a policy response, Finance Minister Lim Guan Eng had announced that the government would introduce an economic stimulus package to ensure that risks to the economy from the outbreak of the virus can be minimised. The package is expected to be implemented by early March.

 As Shamsiah had said, the direction of the Malaysian economy could very well be decided by the efficacy of the economic stimulus package. It has been forecast that BNM may cut the Overnight Policy Rate (OPR) in its March meeting as a monetary response to the slowing economy and part of the stimulus package. The last time BNM cut rates was on Jan 22, where it reduced the OPR by 25 basis points to 2.75%.

 The saving grace of Malaysia’s GDP growth in 2019 was domestic spending and statistics indicate almost all of the growth recorded came from private consumption. In 2020, consumption is expected to provide a respite to the economy from the challenges it faces from many fronts. Consumption accounts for about 59% of the overall economy.

This year may also see some impetus from public investment as the government had been somewhat holding back on spending in 2019. This may spur economic growth this year. The government has adequate room to manoeuvre monetarily as the inflation rate remains benign at around 1.4%.

 The writing on the wall, for now, is how the economy performs will depend on the severity of the impact of the Covid-19 virus outbreak. The government should not employ all its tools at once to combat the negative effect of the pandemic and it should carefully assess the impact to choose the appropriate response.

In the absence of a crystal ball, it is difficult to assess the severity of the Covid-19 outbreak. It could last for 1Q20 or spill over to the second quarter but the economy is well diversified and should be able to handle the impact from the outbreak.

However, the recipe in navigating the economy successfully would very much depend on the policy responses from the government. It should not be myopic in crafting its economic stimulus package and should take a holistic stand.

The economy should be able to register a 4% growth in 2020 but the downside risk is if the Covid-19 virus outbreak becomes more severe than anticipated. Then the growth could dip below 4%. – Feb 14, 2020

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