HSBC: M’sia braces for tougher days ahead but status quo likely on OPR

WITH some degree of movement restrictions appear likely to curtail the spread of the COVID-19 pandemic, mobility and consumer spending may soften further in the coming weeks, significantly derailing the pace of Malaysia’s economic recovery in 2Q 2021.

Considering such scenario, the expectations of policymakers for growth to rebound by 6% to 7.5% (HSBC: 5.7%) appear excessively optimistic given the clear deterioration in consumer mobility, according to HSBC Global Research.

“But it would also be a mistake to turn too pessimistic,” chief economist (ASEAN) Joseph Incalcaterra pointed out in an economic report.

“Activity in Malaysia’s manufacturing and export sectors continues to roar in line with our expectation that export growth would accelerate due to soaring demand for Malaysia’s semiconductor exports, thanks in part to a large share of automotive chip production coupled with higher commodity export volumes.”

The research house further expects exports which rose 31% year-on-year (yoy) in March – driven by a 47.1% increase in electronics exports – to be sustained.

The assessment comes amid uncertainties that Malaysia appears to be in the midst of a worrying fourth wave of COVID-19 infections with daily new cases now exceeding 3,000 and hospital occupancy rates around Kuala Lumpur being alarmingly high.

Even amid new variants been detected in most states, the Government has expressed its intention not to reinstate broad-based lockdowns as imposed earlier this year.

The Health Ministry has forecast that cases may soon rise to 5,000 a day – close to the peak witnessed in January – within a month without a change in resident behaviour.

Despite downside risks to Bank Negara Malaysia’s (BNM) growth forecast, there is a high bar for further monetary policy accommodation, according to HSBC Global Research.

“BNM can count on manufacturing growth to provide support to the economy and employment, while the Government has secured enough vaccine doses to enable the country to achieve some form of herd immunity by end-2021 despite supply challenges and signs of vaccine hesitancy in the short term,” reckoned the research house.

“Moreover, headline inflation is likely to continue rising in 2021 due to base effects and higher energy prices.”

While BNM can look through this volatility, it nonetheless reduces the likelihood of further easing as the real policy rate buffer evaporates The central bank also remains focused on elevated household debt growth, and can rely on still-expansionary fiscal policy to provide targeted support to the economy.

“We expect BNM to keep the overnight policy rate (OPR) at 1.75% on May 6 (coming Thursday) and forecast the start of a gradual normalisation cycle by end-2022 at the earliest,” added HSBC Global Research. – May 3, 2021

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