KUALA LUMPUR: Malaysian Rating Corporation Bhd (MARC) expects the economy to gain a better recovery momentum in 4Q2021 and, subsequently, experience expansion in 2022.

       In its statement on Thursday, the rating agency expected a rebound in 4Q following a relaxation in the mobility restrictions as vaccination rates are approaching the requirement to achieve herd immunity.

       “We believe that the pent-up demand and sustained export growth will be the main growth drivers in 4Q since all states, except Kelantan and Sarawak, are now in Phase 4 of the National Recovery Plan (NRP).

       MARC pointed an upward trend in global demand will support the growth and increase private sector expenditure against the backdrop of continuous expansionary fiscal measures.

       “Nevertheless, weaker-than-expected economic performance among Malaysia’s largest trading partners, supply chain disruptions and another wave of Covid-19 containment measures will pose downside risks to Malaysia’s growth outlook,” it said.

       On the 3Q, it projects the Malaysian economy to experience a trough in 3Q, with GDP contracting by 3.7% year-on-year (y-o-y).

       It cited domestic demand was depressed due to the nationwide lockdown and concerns about the pandemic, offsetting robust export performance.

       During 3Q, the brunt of lockdown on the economy was evident in the steep decline in retail and recreation footfall to the lowest level since the first Movement Control Order (MCO 1.0) imposed in March-May 2020, based on data compiled by Google Mobility.

       Consequently, retail sales contracted 8.1% and 7.5% y-o-y in July and August. The manufacturing Purchasing Managers Index (PMI) reading was below 50 throughout 3Q2021, indicating a deterioration in conditions for the industrial sector.

       Exports will remain in the positive territory. The monthly export data in August and September 2021 recorded double-digit growth of 18.4% and 24.7% y-o-y. A rally in the prices of crude oil and crude palm oil (CPO) has lent some support to the export growth.

       Meanwhile, MARC also pointed out in the final Monetary Policy Statement (MPS) for the year 2021, Bank Negara Malaysia decided to hold the overnight policy rate (OPR) steady at 1.75%, the same record low level since May 2020.

       “The latest policy rate decision is in parallel with our expectations. The central bank continues its accommodative monetary policy stance primarily to support economic recovery momentum.

       Based on the latest MPS assessment, the global and domestic economic outlook was largely unchanged from the previous assessment. The resurgence of positive Covid-19 cases in Malaysia prompted the government to reimpose tighter containment measures in June 2021 to curb further spreading.

       Consequently, the “Total Lockdown” hammered recovery in 3Q2021 as the pandemic peaked in August.

       The number of positive Covid-19 cases has been on a downtrend since the later part of August, and the economy is now in line with the NRP.

       Bank Negara had reassured the economy will likely recover after the weak 3Q GDP performance.

       The central bank also took note of the rising global inflation due to stronger global demand, supply chain disruptions, higher commodity prices and shortages of labour.

       It maintained an inflation projection in the range of between 2.0% and 3.0% for 2021, which is in line with our expectation of 2.7%.

       “We concur with BNM’s view that the underlying inflation will remain muted to average below 1.0% due to spare capacity in the near term.

       “Going forward, we expect Bank Negara to maintain the OPR at the current level before normalising interest rates after mid-2022. The alternative scenario is that the OPR would be raised earlier if the US Federal Reserve and other regional central banks unexpectedly embark on monetary policy normalisation.

       “This probable scenario would help curb capital from flowing out and ringgit from weakening, but post-Covid recovery may be incomplete. Additionally, the recent MPS signals no imminent changes to monetary policy.

       “We hope the following MPS will provide more hints on how Bank Negara would tackle interest-rate normalisation in the coming year,” MARC said.