A crucial turning point

Malaysia's Finance Minister Tengku Zafrul speaks during an interview with Reuters in Putrajaya, Malaysia, April 5, 2021. REUTERS/Lim Huey Teng

PETALING JAYA: Malaysia’s growth target for 2021 will remain intact if the Covid-19 health crisis can be stabilised by the end of the third movement control order (MCO 3.0) early next month.

Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed concedes the current situation remains “dynamic and uncertain” due to the unexpected big surge in Covid-19 cases in the country in recent weeks.

“With tightened MCO 3.0 (effective May 25), we expect the situation to stabilise and that we would be able to flatten the curve in two weeks, ” Mustapa said.

“The gross domestic product (GDP) growth of 6% to 7.5% for 2021 would be achieved if the health crisis can be brought under control by the end of MCO 3.0, ” he added.

The MCO 3.0 is expected to end on June 7.

Mustapa said progress in Covid-19 vaccination rates in the country could have a positive impact on the country’s economy.

“If the vaccination rates in Malaysia goes according to schedule or can be accelerated and the Covid-19 situation is under control, there will be positive effects on the economy, ” he said during a virtual briefing on the country’s Economic Indicators: Leading, Coincident and Lagging Indexes for March 2021.

He noted that with Malaysia being an open economy, the country’s GDP growth would also be dependent on the recovery of the world economy, especially those of its trading partners. And with international borders still largely closed, the tourism sector would continue to weigh on the country’s economy.

Hence, Mustapa said, it was not easy to make an accurate prediction on the economy.

Nevertheless, the latest leading indicator (LI) suggested an encouraging economic outlook in the near future.

According to the Statistics Department, Malaysia’s LI in March 2021 showed a significant increase, with a double-digit growth of 17.3% year-on-year to 113.3 points.

This was the highest annual growth ever recorded, following a significant economic contraction in March 2020 due to stringent measures to contain the spread of Covid-19 in the country.

The LI is a predictive tool used to anticipate economic upturns and downturns in an average of four to six months ahead.

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin (pic below) said the performance of LI in March 2021 was influenced by strong growth in the number of housing units approved; real imports of other basic precious and other non-ferrous metals and the number of new companies registered.

“In March 2021, the LI, which indicates the ability in anticipating the economic direction in advance, pointed to a better economic prospect, ” Mohd Uzir said.

“Although uncertainty persists, an encouraging economic outlook is expected in the near future. This is in line with the anticipated promising signs of Malaysia’s merchandise trade performance as well as positive sentiment in the manufacturing sector, motor vehicles sub-sector and commodity prices, ” he added.

Mustapa said the good performance of the latest LI was in line with the GDP growth in March 2021 at 6%.

“If the government had decided to implement a total lockdown from May 25 to June 7 as happened during the MCO 1.0 period, this growth momentum would be affected, ” he said.

He noted that a total lockdown would cause the unemployment rate to rise sharply and the number of poor households increase.

The performance of small and large companies would also be negatively affected and the country’s fiscal position would be put in a more challenging state, he added.

“During my dealings with industry representatives, representatives of micro, small and medium enterprises (MSMEs) as well as hawker associations on May 22 and 23, most of them agreed with the government’s decision to implement MCO 3.0 with stricter measures, ” Mustapa said.

“The government needs to always balance between life and livelihood. The decision to implement MCO 3.0 with more stringent standard operating procedures (SOPs) was right, ” he added.

Over the weekend, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz (pic below) said the tightened MCO 3.0 could potentially have up to 1% impact on the GDP throughout the implementation period from May 12 to June 7.

“We are still studying the impact, although it is still too early to tell. We are estimating that during the whole period of MCO 3.0, the impact could be up to 1%. The exact numbers will be shared later when a proper analysis is done, ” he told a virtual press conference on Saturday.

With tighter SOPs being enforced under the one-month MCO 3.0, Tengku Zafrul said the estimated GDP growth could be lowered to about 5% to 6.5% for 2021, compared with the 6% to 7.5% forecast by Bank Negara earlier.

TA Research said downside risks remain including the possibility of further MCO extension beyond June 7 as well as slow progress in external demand.

“Should the MCO 3.0 extended by another 14 days or by end-June 2021, we predict a greater adverse impact to the second quarter GDP, ” the brokerage said.

It currently forecast the second quarter GDP to grow at 14.5%, compared with its previous forecast of 14.9%.

The GDP shrank a marginal 0.5% in the first quarter after contracting 3.4% in the fourth quarter of 2020.

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