PETALING JAYA: The revival of domestic demand, expected rate hikes, efficacy of the fiscal policy, environmental, social and governance (ESG) adoption and the emergence of new Covid-19 variants are among the economic themes to be closely monitored that may determine Malaysia’s growth momentum this year.

       While most economists are in line with the government’s gross domestic product (GDP) forecasts of between 5.5% and 6.5% for 2022, they noted that certain economic themes may emerge that could impact this projection.

       The economy shrank 4.5% year-on-year (y-o-y) in the third quarter of 2021, which was markedly worse than the median forecast for a 1.3% contraction based on a Reuters survey of economists.

       Based on official estimates, the economy is anticipated to grow by 3% to 4% in 2021.

       According to Sunway University economics professor Yeah Kim Leng, a major economic theme for 2022 is centred on the revival of domestic demand.

       This mainly encompassed private consumption and investment to complement the nation’s exports that are expected to be sustained amid an expected moderation in global economic growth.

       The accompanying sub-themes include the quality and strength of the pick-up in capital investment, the efficacy of the fiscal boost from an expansionary budget and the continuation or resumption of major infrastructure projects, he noted.

       “The other major economic theme that is associated with the expansionary budget and disproportionate impact of the pandemic on the low-income groups and small and medium enterprises (SMEs),” Yeah said.

       “Besides the continuation of cash transfers to the eligible bottom 40 (B40) and middle 40 (M40) households, the economic themes would comprise programmes to boost job creation, enhance entrepreneurship and income generating opportunities.”

       Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said rising interest rates and costs of doing business and its impact on the cost of living may put pressure on the economy.

       He said the US Federal Reserve (Fed) is expected to be the frontrunner in raising interest rates at a fast clip and this could create the impression that other central banks may follow suit.

       Bank Negara has so far kept its key benchmark interest rate or the overnight policy rate (OPR) at a record low of 1.75%. Many economists expect a minimum 25-basis-point hike in the third quarter due to inflationary pressure.

       Afzanizam said the other themes to watch out for would be climate change and the adoption of ESG principles, as it would mean businesses need to spend their resources in order to align themselves with such requirements.

       “In some ways, there could be costs associated with such transition at a time when revenue remained highly uncertain.

       “Therefore, businesses would need to be more pragmatic and strategic in deploying their resources,” he said.

       Both Yeah and Afzanizam have forecast the country’s GDP to grow by 6% and 5.5% in 2022, respectively.

       Centre for Market Education CEO and Institute for Democracy and Economic Affairs (Ideas) senior fellow Carmelo Ferlito believes that external trade would remain key but a sound recovery needs to be built on private investments, as the latter are built on savings, which are still weak.

       He expects tax reforms such as the goods and service tax and the rationalisation of incentive schemes to play out this year as part of the economic themes.

       On the hurdles that could impact economic growth this year, Carmelo said besides the Omicron variant, the delay in opening the country’s borders and further supply chain constraints could add pressure.

       But he views inflation as the top most threat to the nation’s economy.

       “If the economic recovery accelerates, we can expect inflation to accelerate too.

       “This is due to the expansive fiscal and monetary policies that have been implemented in the attempt of ‘curing’ the diseases created with lockdowns. Unfortunately, those policies have consequences.

       “We also should not believe in the concept of ‘transitory’ inflation. If the supply chain that is to be blamed now will re-adjust, we can expect that part of inflation to slow down but not to reverse. So the current price increases are there to stay,” he added.

       Yeah said the avoidance of nationwide lockdown to control the spread of the Covid-19 Omicron or other new variants in Malaysia and elsewhere, especially its major trading partners, remains the key challenge facing the economy this year.

       Other major challenges that could surface in 2022 is a repeat of extreme weather events such as the recent floods, drought or other environmental disaster that could disrupt the smooth functioning of the economy.

       “On the economic front, commodity price spikes, persistent inflationary pressures and over-adjustments of interest rates in the United States, Europe and other countries grappling with high inflation could trigger financial market disruptions and affect capital flows to emerging markets, including Malaysia.

       “On the geopolitical front, an escalation in US-China trade or geopolitical stand-off could destabilise Malaysia’s large external sector while the general election that is widely expected to be held this year could potentially hold back investment activities, especially if policy and political uncertainties remain unresolved or ratchet up,” Yeah said.

       On another note, Afzanizam said amid the extremely fluid economic condition since the onslaught of the pandemic, businesses need to reinvent themselves and become more pragmatic in their operations.

       “Leveraging on digitalisation is certainly one of the prerequisites to stay ahead of the curve. For consumers, they need to be mindful about their finances as the cost of living remains elevated.

       “So financial literacy should be deemed as a life skill, given our past experience in dealing with the Covid-19 that has revealed how vulnerable we are to financial shocks when there is not enough savings,” he added.

       On the currency front, Yeah projects the ringgit to trade between RM4.05 and RM4.15 against the US dollar by year-end.

       He said the fluctuation in exchange rates between the currencies would likely be higher this year as financial markets adjust to the rate hike by the Fed, looming in March, as well as heightened uncertainties over the pace of tightening of rates and its impact on growth of the US and global economy.

       Afzanizam foresees the ringgit to end the year at RM4.09 against the greenback. “The ringgit looks constructive as commodity prices such as Brent crude are expected to stay elevated while OPR is anticipated to be higher in 2022,” he said.

       As at press time, the ringgit was hovering at RM4.18 against the US dollar.