KUALA LUMPUR: Malaysia's economy is undergoing a strong but uneven recovery following the nationwide lockdown in March and April, according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO).
The regional macroeconomic surveillance organisation said the country's economic recovery momentum has been weakened by the ongoing resurgence of Covid-19 infections in the final quarter of 2020, However, proactive and calibrated policies were helping to protect the welfare of vulnerable groups and revitaliSe the economy.
The finding was discussed after its virtual annual consultation with the Malaysian authorities from November 16 to December 4, 2020.
The AMRO team was led by lead economist Dr Sumio Ishikawa, AMRO director Toshinori Doi and chief economist Dr Hoe Ee Khor all participated in the policy meetings.
The discussions focused on Malaysia's response to the ongoing health and economic crisis, and the policy considerations necessary to forge a lasting recovery going forward.
"We expect the Malaysian economy to contract by 5.5 per cent in 2020, and to recover strongly by 7.0 per cent next year," said Ishikawa.
He said Malaysia is in a strong position to ride a vaccine-led global economic recovery, given ample domestic savings, a diversified economy and resilient banking system.
The local economy rebounded strongly in the third quarter following a sharp contraction in the second quarter, as production caught up with backlogs and pent-up demand.
AMRO said households and businesses remain supportive of economic activity, notwithstanding mobility restrictions heading into the final quarter.
Further, the recently passed 2021 Budget extended the economic stimulus measures into 2021 in a bid to strengthen the recovery and lay the foundations for a resilient economy.
The budget would make provision for continued cash transfers to lower-income groups, tax reliefs, and job retention and hiring incentives schemes, while enhancing healthcare services, including the procurement of Covid-19 vaccines.
These measures were complemented by a slew of off-budget initiatives, which included targeted loan repayment assistance schemes, reduced pension contributions and limited withdrawals, and concessionary credit facilities to small and medium-sized enterprises.
AMRO said proactive and concerted efforts to encourage domestic and foreign investments were welcomed as they would contribute toward a more productive and diversified economy emerging out of the pandemic.
These include ramping up investments in transport infrastructure and broadband services, and the roll-out of investment incentives in high-value manufacturing and service activities.
Such initiatives would be complemented by grants to upskill labour and increased spending in the education sector.
Meanwhile, AMRO said the aggressive loosening of monetary conditions has been crucial in maintaining orderly financing conditions.
Unless the recovery falters, it would be prudent to maintain the current policy rate of 1.75 per cent, which is already at a record low.
"Malaysia's external position remains strong, supported by the continued surplus in the current account and buoyant foreign direct investment inflows," said AMRO.
The resumption of foreign capital inflows since the US dollar funding stress in March, particularly to the debt market from May through October, had also reinforced Bank Negara Malaysia's reserves buffer and the overall external position.
"Adjustments to the foreign exchange policy in late 2016 have contributed to lower capital flow volatility during the recent stress episode."
In particular, it said the tightened enforcement against offshore ringgit trading and development of the onshore hedging market led to capital inflows, which were more stable and less speculative in nature.
AMRO was encouraged by the recent enhancements to the scheme—the flexibility extended to index-tracking non-resident investors to trade foreign exchange forwards without an underlying investment, albeit on a limited basis, as well as ringgit-denominated non-deliverable interest rate swaps (NDIRS) with onshore banks.
Sustaining efforts to improve the trading flexibility of participants should support the deepening of the onshore hedging market and enhance the flexibility of the ringgit exchange rate.
"With ample liquidity and capital buffers, the banking system is in a strong position to manage increased credit risks and facilitate the continued flow of credit to the economy."
However, AMRO said the economic outlook and the extent of loan impairments remain uncertain.
Against this backdrop, it said increasing the frequency of liquidity and credit stress-testing exercises of the financial institutions are strongly encouraged to identify risk points early on.
Regulators should also closely monitor domestic banks' overseas operations to mitigate the risk of contagion.
The rising debt burden, as a result of the sizeable fiscal stimulus, underscores the importance to restore fiscal buffers over the medium term.
AMRO said Malaysia's fiscal deficit is targeted to decline from 6.0 per cent of gross domestic product (GDP) in 2020 to about 4.0 per cent by 2023, facilitated by a gradual exit from the stimulus measures and by enhancing fiscal revenue.
"Reforms to broaden the tax base would be necessary to lower the deficit and guide the government debt back to the pre-pandemic statutory limit of 55 per cent of GDP by 2023."
Consideration should also be given to the reinstatement of the goods and services tax, perhaps at an initial rate of less than 6 per cent, in 2022.
Looking ahead, AMRO said sustaining the policy momentum to safeguard people's welfare and revitalise the economy, raise productivity, and restore fiscal buffers would support a dynamic and inclusive economy in the post-pandemic new normal.
"Further complementing the sound macroeconomic policies with a broad-based sustainability agenda would enhance economic resilience as Malaysia advances from an upper-middle-income to a high-income nation," it added.