UOB Malaysia expects Malaysian economy to contract 5.5% this year, rebound 6% next year

KUALA LUMPUR (Nov 30): UOB Malaysia expects the Malaysian economy to contract 5.5% this year, and rebound 6% in 2021.

Its senior economist Julia Goh said in a briefing her forecast was lower than the official forecast of -4.5% this year, and 6.5% to 7.5% next year, because the bank is taking a cautious stance on the efficacy of vaccines and the government's mega projects execution.

“We expect a recovery in 2021, but we are cautious given the lingering uncertainties surrounding the pandemic and the effectiveness of the vaccine. We think the recovery will continue into 2021, but we think the growth will be uneven,” she said.

Meanwhile, she estimates the economic cost of the recent Conditional Movement Control Order (CMCO) to be halved versus March to April lockdown, as a lot of economic sectors are still allowed to continue to operate during the CMCO.

“The economic cost of the CMCO this time is about RM17 billion to RM22 billion, compared to RM30 billion to RM45 billion during the enhanced movement control order (EMCO) in March to April,” she said.

However, she noted the spillover effect of the CMCO is consumers are more cautious on their spending, and the uncertainties of finances have also dragged consumer sentiment.

According to her, the silver linings for the economy are the projected recovery in external demand, fiscal stimulus support measures, and positive sentiment on the rollout of vaccines.

She also noted the key risk to watch next year is how global recovery pans out, the cost of the pandemic while Malaysia specific factors will be the next FTSE World Government Bond Index in March, upcoming sovereign review by international rating agencies, and domestic political events.  

“While the approval of the budget at policy stage is affirmative for investor confidence, lingering political uncertainty may [cause] some investors to stay on the side lines,” she said.

However, she also noted that the recent signing of Regional Comprehensive Economic Partnership (RCEP) is positive for foreign direct investment, because it signalled that the region is still open to free and fair competition as well as regional integration.

“I think this will facilitate more trades and investments coming into the region including Malaysia for the future,” she added.

Given that she is anticipating a recovery next year, Goh is projecting the overnight policy rate to stay unchanged (1.75%) throughout next year.

In terms of the ringgit performance, she is projecting the local currency to strengthen further to about 4.00 against the US dollar by the end of next year.

“I think the outlook for the ringgit is on the back of broad dollar weaknesses, also the Asia recovery story, particularly in China, which will lead Asian currencies including ringgit to strengthen further,” she said, adding that higher crude oil prices will also reinforce the positive sentiment towards ringgit.

She is anticipating commodity prices to trade higher in line with the global recovery, and forecasting Brent crude oil to stay between US$50 to US$60 in 2021.

For inflation, she is looking at -1% in 2020, and 2.1% in 2021.

Get the latest news @ www.EdgeProp.my

Click here for more property stories.