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PublicInvest Research

Author: PublicInvest   |   Latest post: Mon, 19 Apr 2021, 10:07 AM

 

Economic Update - Status Quo on OPR

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March Policy Decision

The Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) has left the overnight policy rate (OPR) status quo at its second policy meeting of the year, a move consistent with Emerging Market Economy (EME) peers like Turkey, India and Thailand, though with the exception of Indonesia. The decision to hold the policy status steady was driven, among others, by generous fiscal assistance following several COVID-19 fiscal stimulus programmes introduced till date (PRIHATIN, PRIHATIN+, PENJANA, KITA PRIHATIN, PERMAI) especially the wage subsidies and targeted assistance for the Small and Medium Enterprises (SMEs). Growth will also be aided by expansionary fiscal budget for 2021, with a 50% increase in Development Expenditure (DE), the highest by the government so far. Growth will be further boosted by the relaxation in the Employee Provident Fund’s (EPF) withdrawal scheme through the i-Sinar programme whereby contributors can tap up to 10% of their retirement funds.

Risks to growth may come from a resurgence in COVID-19 infections that could trigger containment measures to continue, though there are sufficient drivers to bolster the economy and keep the OPR steady in 1H21.

Malaysia’s engine of growth, at this junctutre, continues to recover though this is being tempered by the reversion to the Movement Control Order (MCO) recently. Economic impact from MCO 2.0 is expected to be contained thanks to the decision to allow several key sectors to remain open especially agriculture, construction and manufacturing. Adverse impact to output may come mostly from contact-sensitive industries (i.e.; retail, services) amid the need to flatten the curve of the pandemic again. The swift roll-out of the latest fiscal stimulus worth RM15bn (PERMAI) is expected to offset downside risks from the decision to partially-close the economy.

Policy Outlook: Cautious Prospects

We project a sharp rebound in output in 2021 to be driven by massive fiscal assistance that will be rolled out fully this year. Five fiscal stimulus programmes worth more than 20% of GDP will see output jump markedly, potentially pushing the economy to exceed pre-crisis levels. Growth will also be aided by accommodative interest rate environment which is expected to continue amid a rebound in inflation that will be driven more by global cost-push factors, especially oil. Other growth drivers may come from a projected drop in unemployment thanks to public-private initiatives that will see 500,000 new jobs created, if not more. The data dependent strategy by the central bank following the lag impact of stimulus spending and accommodative interest rate environment may push the OPR to be steady in the first half of the year.

Conclusion

Economic growth is expected to pick up in the second half of the year following the lag impact of expansionary fiscal and monetary strategy. Sentiment is also expected to improve thanks to the COVID-19 vaccination drive in which Malaysia aims to reach herd immunity by year-end, earlier than the previous target of 1Q22. This could trigger a rebound in output for contact-sensitive sectors like retail and services on top of sustained output generation by key sectors like manufacturing, construction and agriculture.

Downside risks may come however from hiccups in COVID-19 vaccination drive which may be affected by a low take up rate or shortages in vaccinesupply. A less-than-effective implementation of COVID-19 vaccination drive may delay recovery in the services sector amid the need to, among others, hold back from the opening of our borders and allow inter-state travel. The impending start of US-China trade talks is also a going concern especially when the US is expected to touch on a wide-array of sensitive issues like market access restriction for US companies (e.g.; cloud computing) and alleged forced labour in China which could potentially push the negotiation period to be a lengthy and uncomfortable one.

Source: PublicInvest Research - 5 Mar 2021

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