KUALA LUMPUR: RAM Ratings expects Malaysia's economy to contract by 4% this year, exceeding its initial projection of -2.4% as the country is set to experience one of its worst recessions this year.
The rating agency said on Thursday this was mainly due to greater-than-expected industrial and labour market slack - the result of the various stages of the movement control order (MCO) endured by businesses and households that have crushed demand.
“Although estimated capacity utilisation of most essential industries has sustained at normal levels, export-oriented sectors have underperformed, plagued by synchronised supply and demand challenges, ” it said.
RAM said the non-essential sectors were still operating below normal capacity. With social distancing operating guidelines still in place, their recovery momentum appears lethargic.
“Any broad-based recovery is therefore unlikely this year, although some improvement is anticipated in 2H 2020.
“The most damaging aspect of the Covid-19 pandemic has been the sudden job losses, disproportionate particularly among the lower-income groups, ” it said.
RAM said in the next few months, employment prospects and private consumption growth will depend much on the ability of the non-essential and export-oriented sectors to rebound and improve their capacity slack. This is crucial as the various Covid-19 incentives and support schemes will end in the fourth quarter.
To date, policy responses have been timely and supportive, e.g. the recent tweaking of the bank loan moratorium.
“We expect Malaysia’s medium- to long-term economic recovery plan, to be unveiled in October, to incorporate a reform agenda to push developments in technology, labour market reforms and the promotion of attractive investment ecosystems for sustainable growth.
“With the current deflationary environment and a substantially lower risk of disruptive fund outflows, there is ample room for Bank Negara Malaysia to further ease monetary policy, if necessary.
“We maintain our stance that the overnight policy rate is likely to be cut again by 25 bps to 1.50% before the end of this year, ” RAM said.
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