Moody’s pegs Malaysia’s 2022 GDP growth at 6%

PETALING JAYA: Malaysia’s economic growth this year is expected to come in at 6%, driven by the opening of borders supporting tourism-related services, high vaccination rate and the government’s comfort with the transition of Covid-19 to endemic status that are combining to support recovery, according to Moody’s Investor Services.

“Over time, we expect this will support greater social mobility growth and private consumption which will kick in a new private investment cycle in the country,” its sovereign risk group and credit strategist & research’s assistant vice president & analyst Nishad Majmudar told the press during a virtual briefing yesterday.

He said the projection is due to the base effects of 2021 which saw weaker growth because of the lockdown that led to the closure of the services sector, weaker domestic consumption and private investment activities.

On the flip side, the agency sees the ongoing Russia-Ukraine conflict as one of the downside risks which sees the impact to the Malaysian economy to be neutral but the situation poses a threat to global growth. The analyst pointed out the agency has already marked down its forecasts for a number of G20 economies, mostly those in Europe but also some in Asia Pacific, Japan, Korea and China due to the conflict.

Another downside risk that Moody’s has identified is the possibility of a surge in inflation that would cause Bank Negara Malaysia (BNM) to react more quickly in terms of policy rate normalisation.

“Currently, our sovereign team’s assumption is that BNM will start to tighten policy in the second half of this year given some of the labour market slack and easing core inflation pressures that we’ve seen. They could rein that forward potentially,” Nishad elaborated.

He stated that it has not discounted the risk of a new Covid-19 variant emerging which could cause another round of border closures or social distancing measures domestically. However, he noted it is not a base case given the government has indicated its interest in keeping the economy open and treating Covid-19 as endemic.

Moody’s final downside risk for Malaysia is the moderating growth in China, as it has revised the gross domestic product growth forecast for the world’s second largest economy marginally to 5.2% in 2022 and 5.1% next year.

“With the domestic lockdown in China and some of the potential supply chain issues, that may affect some countries importing inputs from China such as Malaysia that could also result in weaker manufacturing growth,” said the analyst.

On the subject of Malaysia’s political situation, Nishad said the agency’s assessment found the political noise has not affected the function of key economic institutions, such as the Finance Ministry, BNM and the securities regulator.

“However, we think the uncertainty surrounding the election timing and the relatively thin majority in Parliament have constrained the fiscal reform process and made it difficult for any of the three governments that we’ve seen in the past four years to focus on some of these reforms.”

Should the elections come sooner, Nishad said, it could potentially see a more volatile political environment and noise but overall would not affect the functioning of these key institutions.

In the case of a more stable election outcome where the incoming government could survive the full five-year term, he opined that it would usher in a certainty and a policy environment that could improve the prospects of some the reforms it deem positive namely; goods and services tax reintroduction, subsidy reforms and the passage of the fiscal responsibility act.

The analyst explained that the agency’s view is focused on how the politics affect the economic institutions and its perspective found there has been no significant impact that is relevant to the credit profile at this point.

“But if we were to see that the volatile politics lead to fiscal slippage that is beyond our baseline forecast, that in turn, could affect investor sentiment- capital flows and even foreign direct investment flows. This is something we see as relevant to the credit profile and a potential downside risk.”