MALAYSIA and Singapore recently tweaked their economic forecasts for 2021. The difference is that while Malaysia slashed its target to 3% to 4%, the neighbouring city-state has upgraded its growth forecast for the year to 6% to 7%.
One may wonder how one country is doing better economically than the other, when both neighbouring countries have been affected by the spread of the delta variant of Covid-19 this year.
The fact is, Singapore had better control of virus transmissions, armed with an early rollout of vaccines and one of the best vaccination rates in the world. This, to a large extent, has helped to support its economic recovery.
Malaysia, on the other hand, had to undergo consecutive movement restriction orders since January as it struggled to bring down the Covid-19 cases. Such restrictive measures have not just weakened the domestic economy, but also dampened business confidence and consumer’s ability to spend.
Fortunately, the government has been able to ramp up vaccinations over the past few months and this has paved the way for the easing of restrictions in all states.
After some hiccups earlier, the country is making some good progress as more states transition into phases two, three and four of the National Recovery Plan (NRP), enabling the reopening of additional economic sectors.
However, just when Malaysians thought the worst was over, the domestic political landscape turned murkier and the Tan Sri Muhyiddin Yassin administration fell amid a “rebellion” from some fellow MPs in the same Perikatan Nasional or PN coalition.
The political shenanigans have cast some doubts on Malaysia’s growth trajectory, raising questions on whether the targets of its economic recovery plan can be achieved without delays.
While the government’s machinery is still running, untimely changes in the top leadership will trigger unwarranted execution risks.
With politics taking centre stage, policy formation and rollouts are all at risk.
This includes the process of crafting Budget 2022, which is supposed to be tabled on Oct 29.
The budget document will be keenly watched by many quarters, considering that it could act as an indirect “fiscal stimulus” to prop up the still-fragile domestic economy.
Another key policy statement that was to be rolled out is the 12th Malaysia Plan (12MP).
The 12MP is expected to be aligned with the Shared Prosperity Vision 2030 initiative encompassing three dimensions, namely, economic empowerment, environmental sustainability and social re-engineering.
The five-year policy was supposed to be tabled in Parliament last year, but has been postponed due to changes in the government and the economic landscape.
Former Prime Minister Muhyiddin had said that the 12MP, seen as the key “manifesto” of the PN government, would be tabled on Sept 20.
However, with about one month to go and a new government yet to take office, there is doubt on whether the deadline could be extended once again.
Speaking with StarBizWeek, former deputy secretary-general of the Treasury Tan Sri Ramon Navaratnam (pic below) says the change in government would have some adverse impact on the policy documents such as Budget 2022 and 12MP.
“Civil servants are not enabled by the system to design policy as compared to elected officials to come up with policy directions in line with what the government wants.
“The elected officials in the ministries provide leadership, which is necessary to guide and finalise any new policy or reform,” he says.
Centre for Market Education (CME) chief executive officer Carmelo Ferlito (pic below) also expects further delays in the 12MP.
However, he believes that there will be a certain urgency in tabling Budget 2022.
“It seems now that things are moving faster than expected,” according to him.
Centre for Market Education CEO Dr Carmelo Ferlito.
In contrast, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie (pic below) thinks the new government is unlikely to delay the tabling of the 12MP and Budget 2022 in the coming 14th Parliament sitting.
He says the market and investors are waiting for the 12MP in charting Malaysia’s next five years of national economic development plan.
“As for the preparation of Budget 2022, the government must take quick and decisive action to restore confidence, supporting people and businesses and stimulate investment,” adds Lee.
Lee: New government is unlikely to delay the tabling of the 12MP.
In addition to these, the NRP may also be hit by execution risks with the change in government, especially if relevant ministers are also changed.
Introduced under the Muhyiddin administration, the NRP is designed to lower the national Covid-19 cases, reduce the burden on the national healthcare system and subsequently, put the economy back on track towards growth.
Making progress
If everything goes as planned under the NRP, Bank Negara said on Aug 13 that all states are expected to transition to phase three by October and phase four by November.
By now, it looks quite certain that the PN coalition will again form the government, under a different leadership.
Nevertheless, all eyes are on whether the next government will exactly follow its predecessor’s efforts.
Hence, it begs the question of whether Malaysia’s economic recovery will be impacted.
The country had just returned to positive economic growth in the second quarter (Q2) of 2021, following four consecutive quarters of contraction.
The economy expanded 16.1% year-on-year (y-o-y) in Q2 of 2021, surpassing market expectations.
The double-digit gross domestic product (GDP) growth was achieved largely due to the low base from the significant decline in activity during Q2 of 2020.
Further support also came from the continued robust export performance and the improvement in domestic demand.
However, on a seasonally adjusted quarter-on-quarter basis, GDP declined by 2% in Q2 of 2021.
It is also worth noting that the monthly GDP growth in June fell back into negative territory, posting the worst growth in 13 months at negative 4.4%.
This was due to the lockdown announced by the government, beginning June 1.
According to Bank Negara governor Datuk Nor Shamsiah Mohd Yunus, while the Covid-19 containment measures weighed on growth, greater adaptability to restrictions and ongoing policy support have partly mitigated the impact.
Placement rate
“Growth is expected to trough in Q3 of 2021 before improving in Q4 of 2021, in line with strong external demand conditions and easing of containment measures,” she said during a virtual briefing on Aug 13.
Overall, for the full year of 2021, Bank Negara has downgraded its growth forecast from 6% to 7.5%, to a range of 3% to 4%.
Following this, Moody’s Analytics says that Malaysia’s road to recovery is a “protracted one” and that the country lacks the ammunition to go into a third month of lockdown in August.
“Our preliminary estimate for September-quarter yearly GDP growth reflects a downwardly revised view of economic conditions.
“We forecast full-year GDP of 4.7% in 2021, but in light of the fluid Covid-19 situation in Malaysia, the annual GDP forecast will likely be subjected to further downward revision in September,” it says.
Fitch Solutions, the research unit of Fitch Rating, also drastically slashed Malaysia’s 2021 economic growth forecast to 0% from 4.9% previously.
“The domestic demand outlook has darkened considerably, and we now expect private consumption to do worse than in 2020, while investment will likely only show a marginal improvement.
Unemployment rate
“With net exports also likely to prove a slight detractor from headline growth due to external demand woes arising from Asia’s struggle with Covid-19 in general, government consumption is now the only source of support for the economy in 2021,” it said.
SERC’s Lee, however, thinks that Fitch Solutions’ forecast is unlikely to happen.
“To achieve the Fitch Solutions’ estimated zero growth this year, this implies a contraction of 6.8% y-o-y in the second half of 2021 (H2 of 2021) compared to 7.2% in H1 of 2021.
“It is estimated that Malaysia’s economic output growth will range between -1% and 1% y-o-y in H2 of 2021, taking the full-year growth estimate to 3% to 4%.
Lee expects the Malaysian economy to register either a very subdued growth or contract by at least 4% y-o-y in Q3, mainly to reflect the continuation of deep economic scarring effects from the restricted movement restrictions.
“The H2 of 2021, especially Q3 (July-September) will be the deciding quarter to ascertain whether we can achieve Bank Negara’s GDP growth estimate of 3% to 4%.
“Underpinning this inflection quarter is the proportion of the population vaccinated to reach at least 50% to 60% or higher by September would mean more reopening of economic and social sectors with higher manpower capacity,” he says.
As for the ringgit, Lee predicts the currency to remain on a weakening bias in H2 of 2021, weighed down by the prolonged pandemic impact on the economy and the lingering political uncertainties.
“Despite enjoying good trade surplus from the buoyant exports, higher crude oil and palm oil prices to support the demand of the ringgit, capital outflows from foreign investors in the equity market amid offsetting by net purchase of domestic bonds, as well as cautious long-term capital inflows would weaken the support for the ringgit,” according to him.
Returning to pre-pandemic levels
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid says the economy in H2 of 2021 would be “more or less” on par with the 2019 or pre-pandemic levels.
GDP real
“Economic policies, be it from fiscal and monetary, both have to be supportive to ensure more lively economic activities once we reach herd immunity, perhaps by the end of the year,” according to him.
Looking ahead, Mohd Afzanizam says the main focus is on the reopening of the economy.
In reference to an earlier statement by the Entrepreneur Development and Cooperatives Ministry, he says that about 580,000 micro, small and medium enterprises are at risk of failing by October.
“We have seen states like Labuan recording lower numbers of new cases as the number of fully vaccinated people reached more than 60%.
“This will be the critical factor for managing the business and consumer sentiments as their perception on the state of the economy will influence their economic decision such as investment and consumption,” states Mohd Afzanizam.
Malaysia has set its eyes on vaccinating all adults in the country against Covid-19 by October this year.
Originally, the country’s target was that 80% of the population would receive a complete dose by Q1 of 2022.
While Covid-19 could likely be endemic, vaccinating the population remains key in safeguarding Malaysians and reopening the economy.
For the economy to return to pre-pandemic levels, CME’s Ferlito says it depends on the strategy that the government will decide to implement.
“When are the movement restrictions going to be lifted, both in terms of domestic and international mobility?
“What are we going to do with the current strategy in fiscal and monetary policies, which are fuelling inflation and planting the seed for a post-Covid-19 economic crisis?
“Without clear answers and a 180-degree turn in strategy, we cannot expect the economy to be back on track soon,” he says.
Meanwhile, Navaratnam says that the reopening of the economy is merely a short-term solution for Malaysia.
For a longer term solution, Navaratnam urges the new government to undertake structural reforms to rebuild the confidence of investors and the overall population.
“The foreign direct investment (FDI) into the country has been declining and Malaysia now sees more competition, including from Vietnam and Indonesia.
“When the country’s leadership is not strong or purposeful, policies regarding FDI and investment would not be attractive to investors.
“When the FDI is affected, the country will not see the creation of adequate quality jobs as the population increases,” he says.
Moving forward, Navaratnam says that Malaysia should set Singapore as its benchmark, in order to improve its competitiveness as a high-quality business and investment hub in the region.