KUALA LUMPUR: A two-week lockdown from June 1-14 may dent Malaysia's economic recovery amid the latest rise in Covid-19 infections, according to Moody's Analytics.
Its senior APAC economist Katrina Ell and associate economist Dave Chia said the lockdown could add downside risk and heightened uncertainty.
Moody's Analytics's baseline forecast assumed a 5.6 per cent gross domestic productexpansion for Malaysia this year.
However, Ell and Chia said the lockdown would disproportionately impact domestic demand, particularly household consumption given that only essential services were allowed to be in operation."
Moody's Analytics said a key concern was how much manufacturing and exports would be adversely impacted by limited capacity constraints introduced during the lockdown.
Prior to the latest lockdown, the government pinned GDP growth at 6.0-7.5 per cent in 2021.
However, Moody's Analytics said there would be downward revisions announced in the coming weeks.
The firm said the strict two-week lockdown had seen Malaysia's Government Stringency Index rise to its highest level throughout the pandemic.
The index was also the highest among Asian economies grappling with their own localised infection outbreaks.
Moody's Analytics said Malaysia's daily infections had averaged between 7,000 to 8,000 since late May. This was Malaysia's second, but most severe, wave.
The first wave hit in January with daily infections averaging just over 2,500.
Moody's Analytics said Malaysia's economy had navigated Covid-19 in 2020 relatively well compared with many of its Southeast Asian neighbours with daily infections stayed below the 1,000 mark through the first nine months of the year.
Mobility data from Apple and Google Trends showed a sharp drop from late May in driving routes, retail and recreation, and at transit stations.
Moody's Analytics said this would show up in a sharp fall in domestic trade from late May at least through to mid-June.
"Manufacturing plants are only allowed to operate at 60 per cent capacity during the lockdown, which will restrict production and exports until mid-June."
However, Malaysia's exports had been powering ahead thanks to higher commodity prices (crude oil, palm oil and copper) coupled with strong consumer tech demand.
"Electrical and electronic exports account for around 40 per cent of merchandise exports. The tech industry is the largest single contributor to Malaysia's export earnings. Exports are an important driver of the broader economy, accounting for almost 70 per cent of GDP."
Moody's Analytics said Malaysia's vaccination programme began in March and had proceeded slowly with only 3.6 per cent of the population being fully vaccinated.
The government aims to achieve herd resistance by the end of 2021.
"However, given the slow vaccination pace, we expect the March quarter of 2022 to be a more realistic target."
Moody's Analytics said fiscal stimulus should do the heavy lifting that guides the economy through the latest lockdown.
The government's recently introduced a new stimulus package worth RM40 billion, equivalent to 2.7 per cent of GDP to cushion the blow from the full lockdown.
The package included measures to increase healthcare capacity, cash injections to singles and households earning less than RM5,000 per month.
Moody's Analytics said the government was running out of fiscal space against rising debt obligations.
Prior to the latest stimulus package, the government estimated the fiscal deficit would hit 6.0 per cent in 2021, unchanged from the deficit in 2020 and the largest since the financial crisis in 2009.
Bank Negara Malaysia has also limited room to flex monetary muscle after substantial easing in 2020.
"We put odds of a 25-basis point rate cut in the third quarter at 70 per cent, bringing the policy rate to 1.5 per cent. It is a potentially risky move with some chance of igniting capital outflows given higher US yields," it added.