M’sia’s economy to chart a positive turnaround in 2021

KUCHING: Malaysia’s gross domestic product (GDP) growth is projected to chart a positive turnaround in 2021 on a broadbased improvement across demand components and sectors, and partly due to a low base effect, analysts forecast in a recent report.

Kenanga Investment Bank Bhd’s research team highlighted that 2021 marks a pivotal point in the global economy, after grappling with the unprecedented Covid-19 pandemic throughout the preceding year.

It believed that the transition towards normalcy would be underpinned by, and contingent upon, a wider rollout of Covid19 vaccine, the ensuing gradual reopening of international borders possibly in the 2H21, the restoration of global supply chain and a further acceleration in high technology adoption.

“Given the global setting and as the nation enters into the first year of the 12th Malaysia Plan (12MP) slated to be tabled in March, we remain cautiously optimistic that the Malaysian economy could mark a modest recovery, primarily supported by the largest national budget on record, providing added boost to domestic demand,” it opined.

It forecast Malaysia’s 2021 GDP would likely rebound sharply to 6.1 per cent (compared with a decline of 5.1 per cent in 2020 forecast), lifted by fiscal and monetary policy, pent-up demand, the start of vaccine rollout in February and a low base effect.

“Improvement at the external front will also support the domestic economy via higher export receipts. Consequently, the current account balance is projected to narrow to 2.5 per cent of GDP in 2021 (2020 forecast: 3.5 per cent) as imports would also pick up, reflecting an improvement in domestic demand,” it added.

On a quarterly basis, Kenanga Research believed that the economy is expected to expand in the first quarter of 2021 by 3.9 per cent compared with a decline of 1.7 per cent, on broadbased improvements across components and sectors.

“Despite surging Covid-19 cases, the adverse effect would be less severe than in the same period of last year as the current containment measures are relatively less stringent,” it said.

“We will likely see a further improvement in the economy from the 2Q21 onwards as uncertainty fades, with greater clarity on the efficacy of the vaccine.

“Combined with the lower base a year ago, we expect GDP growth to expand sharply to 10.3 per cent in the 2Q21, bringing the average growth for the 1H21 to 6.8 per cent, before moderating slightly to 5.5 per cent in 2H21,” the research team said.

On Malaysia’s fiscal policy stance, Kenanga Research said it is expected to remain expansionary as reflected by the expenditures planned under the Budget 2021, though it is constrained by the high deficit as a result of below-average revenue growth.

“We expect the government to prioritise and speed up spending on value-added projects that will improve productivity, provide higher multiplier impact and generate employment. Meanwhile, the five-year 12MP, which is expected to be tabled in March, would further imprint a clearer policy direction to the economy in the medium-term,” it added.

Given the global setting and as the nation enters into the first year of the 12MP slated to be tabled in March, we remain cautiously optimistic that the Malaysian economy could mark a modest recovery, primarily supported by the largest national budget on record, providing added boost to domestic demand. Kenanga Research

Nonetheless, given the expected improvement in tax revenue and oil price, it projected the fiscal deficit to narrow to 5.6 per cent (Ministry of Finance: 5.4 per cent) in 2021 (2020F KIBB: 6.3 per cent; MoF: 6.0 per cent).

“This translates into a slight easing in government debt to a range of 57 to 59 per cent of GDP in 2021 (2020F: 62.2 per cent), slightly below its new statutory limit of 60 per cent,” it added.

As for the ringgit’s outlook, Kenanga Research expected the ringgit’s performance to improve in 2021.

“In the near term, the US dollarringgit is seen heading below the major psychological threshold of 4.00 and settle at around 3.95 by end-2021 on the back of a weaker dollar dynamics,” it explained.

“The rally in the ringgit in 4Q20 has more to do with US dollar weakness rather than positive drivers for the ringgit itself. To note, ringgit soared to its highest level since June 2018 on the last trading day of 2020 after the US dollar index (DXY) slipped to below the 90.0-mark, its weakest level in more than two years.

“In 2021, the ringgit upside would continue to be supported by the persistent weakness in the US dollar on the back of President (Joe) Biden’s potentially progressive policies, international rollout of the Covid-19 vaccines, less favourable US interest rates, a more stable US-China relationship and US Fed’s massive bond-buying programme,” it said.

Nevertheless, it cautioned that a potential general election in the 1H21, a possible fall in the global commodity prices and the unabated spread of the Covid-19 infections might weigh on what could be a steadier economic recovery, capping the ringgit upside.

This year, the research team also believe that the flow of foreign funds into the capital market would likely to resume this year as the hunt for yield is seen to encourage a push towards riskier assets, as most investors increasingly shun away from traditional safe havens (high quality sovereign bonds led by US Treasuries, FX reserve currencies and etc).

However, it said, the global spread of Covid-19 mutation and its impact on the vaccine might spell trouble for the anticipated vaccine-driven economic recovery. This could bring about a reversal in investors’ sentiment and put pressure on emerging market assets, dimming hopes of a quick recovery in the capital market.

Despite its optimism on this year’s economic performance, Kenanga Research cautioned that headwinds against a sustained economic recovery in 2021 remain, arising from Malaysia’s persistent political uncertainty, potentially renewed US-China trade tensions and a worsening local Covid-19 situation.

“Political uncertainty, brought about by the sudden change of government in March and made evident by volatile events such as the tabling of Budget 2021 and the Perak Menteri Besar’s no confidence vote, weighed on investors’ sentiment throughout the year. Till December last year, it marked 17 consecutive months of net foreign selling of Malaysian equities.

“Emphasising political risk and the potential impact to the economy, Fitch Ratings downgraded Malaysia’s Sovereign Credit Rating from ‘A-’ to ‘BBB+’, citing political instability as a key factor in the decision.

“The government’s razor-thin majority in the parliament and the possibility of a snap general election, only reaffirms that political uncertainty will remain a downside risk in 2021,” it said.

It also pointed out that despite a general expectation that USChina relations would stabilise as President Donald Trump leaves office, there is a chance that the incoming President Biden might reassert terms of trade pressure on China.

Local Covid-19 infections have also been on the rise since the Sabah state election in September, with daily new cases breaching the 2,000 mark on a regularly basis since the beginning of this year, with the highest number of cases recorded on Thursday at more than 3,000.

“Since September last year, several Conditional Movement Control Orders (CMCO) have been reinstated in parts of the country and the nationwide Recovery MCO (RMCO) was recently extended to 31st March 2021.

“Should the local Covid-19 condition substantially worsen before vaccines are adequately distributed, there is a risk that tougher restrictions may be implemented and extended, which would weigh heavily on economic growth prospects,” it warned.

All in, Kenanga Research said key points to watch would be a steady rate of recovery in global trade and an almost broad conviction by central banks to keep rates low and the liquidity spigots to remain open for an extended time frame.