Malaysia’s Economy Sees Worst Year Since 1998 Asian Crisis

MIDF Research is positive on the banking sector with its improving net interest margin (NIM), stronger loans growth and possible writebacks. - Bloomberg pic.

By Anisah Shukry, Bloomberg

Malaysia’s economic contraction quickened again in the fourth quarter, as a fresh virus wave late in 2020 helped drive the economy to its worst annual showing since the Asian financial crisis.

Gross domestic product shrank 3.4% in the fourth quarter from a year earlier, its third straight contraction and a deeper decline than the -3.1% figure analysts surveyed by Bloomberg were expecting. The economy contracted 5.6% for all of 2020, its worst performance since 1998 and below the government’s projection of -3.5% to -5.5%.

The data are “an undoubtedly downbeat print to end the year of 2020 on a challenging note,” said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp in Singapore. With difficulties continuing into the early part of this year, “the market would inadvertently see today’s GDP data as one big signal that Bank Negara Malaysia may have to ease in March rather than wait for any more ‘confirmatory’ data.”

Central bank governor Nor Shamsiah Mohd Yunus said Thursday that monetary policy remains appropriate and accommodative after the bank cut its policy rate by 125 basis points last year to fight the recession. Still, she added, the central bank has room to provide further support to the economy if needed.

With the market only open for a half-day ahead of the Lunar New Year holiday, Malaysia’s benchmark stock index gained 0.2% at Thursday’s close. The ringgit was up 0.05% at 4.0423 to the dollar as of 2:55 p.m.

Loosening Curbs

The worst may be over — at least for now — as Malaysia allowed the retail sector to resume operations Wednesday, following a month-long lockdown that’s estimated to have cost the economy 700 million ringgit ($173 million) a day.

The government said it would gradually reopen the economy even as the country remains under a state of emergency, seeking a balance that will protect lives while ensuring that economic activity continues.

The loosened restrictions came into effect after health officials estimated daily virus cases peaked at the end of January. The nation added 2,764 new cases Tuesday — the smallest number since Jan. 11 — and Health Director-General Noor Hisham Abdullah said infections may show a downward trend by the time the lockdown is slated to end Feb. 18. The tally rose to 3,288 cases Wednesday.

What Bloomberg Economics Says…

“A return to positive year-on-year growth is likely in 2Q 2021, partly due to the low base of comparison. Fresh signals from Bank Negara Malaysia suggest the central bank is inclined to leave policy unchanged in the near term. We don’t expect any rate cuts this year — especially with oil prices continuing to climb.”

— Tamara Mast Henderson, Asean economist

Click here to read the full note

The government last month unveiled a 15 billion ringgit package to help the economy weather the impact from the recent surge in Covid cases. The plan, which includes cash support to the poor, tax breaks and wage subsidies, will be funded through a reallocation of existing funds and not via fresh spending.

Fourth-quarter Slowdown

So far, however, 2021 is off to a slow start with most of the country under lockdown.

The second wave of infections “will see the economy shrink much more sharply this quarter,” Alex Holmes, an Asia economist at Capital Economics, wrote in a note after the GDP release. Even if the lockdown isn’t extended beyond next week, “high infections mean social distancing will remain a drag for months to come.”

Other points from the briefing:

  • The fourth-quarter figure compares with the third quarter’s revised 2.6% year-on-year contraction. The economy shrank 0.3% in the October-December period from the previous three months on a seasonally adjusted basis, compared to an 18.2% gain in the previous quarter
  • The full-year contraction was slightly better than the 5.8% contraction that private analysts were expecting
  • Headline inflation averaged -1.2% in 2020, mainly reflecting weak oil prices. For 2021, it’s expected to average higher, Nor Shamsiah said

The governor declined to give a fresh estimate for 2021 GDP — which the central bank previously forecast at 6.5%-7.5% growth — saying it will be addressed next month.

“Despite the recent deterioration in activity, we believe Malaysia is relatively well positioned for a recovery,” said Joseph Incalcaterra, chief Asean economist at HSBC Holdings Plc in Hong Kong, who expects the central bank to cut rates at its March meeting.

“A strong degree of fiscal support in 2020 prevented a sharp deterioration in the labor market,” he said, while “an advantageous mix of semiconductor, machinery, and commodity production should translate into robust export growth in 2021.”

— With assistance by Chester Yung, Clarissa Batino, and Tien Hin Chan

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