IN times of economic uncertainties where waves of disruption may delay the journey to recovery, Bank Negara’s guiding beacon provides the much needed light in navigating through uncharted waters.
Indeed, the central bank’s 2021 projections took on a cautiously optimistic tone but that is all the market needed to kick off the second quarter of the year on a more positive note as it moves forward from the gross domestic product (GDP) contraction of 5.6% in 2020.
The re-imposition of the movement control order (MCO) on Jan 13 may likely trigger another quarter of contraction or in Bank Negara’s words, a “slight drag on growth” – it will probably be the last as expectations are pointing towards an economic recovery, coupled with the low base last year.
The central bank projects a domestic economic rebound from the second quarter onwards, with a return to the pre-pandemic levels of 2019 by mid-2021.
Kenanga Research also forecasts that the momentum will turn positive year-on-year (y-o-y) this quarter and beyond that, which will see both the third and fourth quarters registering y-o-y and sequential growths.
While Bank Negara expected the growth in 2021 to be between 6% and 7.5%, it is conservative enough not to fan too much optimism, stressing that risks are tilted towards the downside, which stems from the unpredictable nature of Covid-19 and how quickly Malaysia can achieve herd immunity.
During the virtual media briefing on the publication of the central bank’s annual report on Wednesday, governor Datuk Nor Shamsiah Mohd Yunus also made an appeal to the general public to register for the Covid-19 vaccination, saying that everyone has a role to play to Covid-proof the economy.
She said Malaysia is also poised to benefit from the rebound in growth of key trade partners particularly China, the United States and the eurozone as their economies account for 40% of Malaysia’s exports.
The manufacturing sector will be the main beneficiary here which, in turn, lends further support to the labour market, as around 70% of the manufacturing employment in Malaysia are in export-oriented industries like electrical and electronics (E&E) and refined petroleum and chemicals.
“A key driver to the improvement in exports and manufacturing activity is the global tech upcycle where Covid-19 has accelerated structural shift towards digitalisation.
“This is largely driven by widespread work-from-home arrangements, which spurred greater demand for IT infrastructure, cloud computing and smartphones.
“Being a key player in the E&E global value chain with an established base of key firms, Malaysia is poised to benefit from these trends, ” she said.
Gross exports and imports are expected to rebound to 8.2% and 9.1%, respectively, which will see a wider trade surplus of RM192.2bil as compared to RM184.8bil in 2020.
The current account balance is projected to remain in surplus, albeit at a lower rate of 2.5% to 3.5% of the GDP, against 4.4% recorded last year.
In terms of inflation, the headline figure is expected to spike to 5% in the second quarter but Nor Shamsiah stressed that this is only temporary, as the spike is driven by the lower base of domestic RON95 fuel prices last year, which averaged at RM1.37 per litre, while the key assumption for the second quarter this year is for it to remain at a ceiling of RM2.05 per litre.
The headline inflation is expected to moderate thereafter, with forecasts pointing at 2.5% to 4%.
Core inflation is expected to average between 0.5% and 1.5% amid continued spare capacity in the economy.
Despite the higher inflation outlook, the central bank assessed that wage pressures are not excessive and longer-term inflation expectations are anchored and does not warrant a monetary policy response to manage the supply-driven inflation.
The regulator is of the opinion that even with the historical-low overnight policy rate (OPR) of 1.75%, the monetary policy space remains adequate to provide additional support to the economy if needed.
Reading between the lines, CGS-CIMB Research expects Bank Negara to maintain the OPR at 1.75% this year.
But as the output gap narrows and labour market metrics recover in 2022, it believes that the argument in favour of monetary policy normalisation could become more compelling.
AmBank Research also feels that the OPR will remain intact and any upward adjustments will more likely happen in the first quarter next year.
But if infections see a significant rise again, which may lead to the re-imposition of a national movement restriction, which would weaken the pace of economic recovery, Kenanga Research believes Bank Negara still has room to cut the OPR by at least 25 basis points (bps).
On the financial stability front, it can be deduced that the central bank is comfortable with the resilience of the financial institutions to support Malaysia’s economic recovery and their ability to weather macroeconomic and financial shocks, should they be far more severe than what was seen last year.
The provisions, as pointed out by deputy governor Jessica Chew, rose 14.6%, close to RM9bil year-on-year in 2020, as banks frontloaded their loan losses in anticipation of some deterioration ahead.
Of the increase, some 40% was due to the application of management overlays where banks applied their judgements to increase provisions preemptively.
Industry players of the financial sector were placed under extreme stress tests where Bank Negara explored two hypothetical scenarios – a significantly weaker recovery path and an L-shaped recovery with the GDP recording negative growth in 2021 and remain below pre-pandemic levels even by the end of 2022.
The latter is a scenario that presents an economic contraction worse than what was seen during the Asian Financial Crisis with sharper dips and slower returns to pre-crisis levels.
In both situations, the regulator found that the capital levels of both banks and insurance sectors remain comfortably above the regulatory minimum.
Amid all the positive expectations for the economy as it heals from the pandemic, Bank Negara remains cognisant that the storm may not have bid its final farewell just yet.
And it is in this scenario that the central bank believes it is timely for Malaysia to embark on reforms that emphasise on innovation-led growth which it calls the 3Ds – accelerate digitalisation, rethink downstreaming and reduce distortion – to reset the country towards a higher quality growth.
As the economic growth becomes more entrenched, it views the rebuilding of the overall policy space including monetary, financial and fiscal buffers as a necessity to ensure Malaysia has adequate room to manoeuvre if the economy faces another shock.