KUALA LUMPUR, March 18 — Malaysia’s economy is expected to recover for the remainder of 2021, with inflation and the current account balance normalising over the medium term.
The International Monetary Fund (IMF), in its latest Country Report, said the country’s growth is projected to rebound to 6.5 per cent in 2021, driven by a strong recovery in the manufacturing and construction sectors, and the impact of the vaccination rollout in February.
“The recovery would be uneven across sectors, with persistent weakness in high-contact industries. On the demand side, government spending and a recovery in both domestic and external demand would underpin growth,” the IMF said.
The current account surplus would decline to 3.0 per cent of gross domestic product (GDP), as demand for pandemic-related equipment recedes and the rebound in domestic demand raises imports.
It also said the travel balance deficit would persist as international travel restrictions continue through the first half (H1) of 2021.
Inflation would recover to 2.0 per cent as electricity tariff rebates expire and energy prices rise.
“Over the medium-term growth would converge to 5.0 per cent, inflation stabilises at 2.0 per cent, and the current account surplus return to its downward pre-pandemic path,” it said.
Meanwhile, the IMF said the intensification of the pandemic or the realisation of other risks could derail the recovery.
The current wave could be protracted or could be followed by another severe wave, prompting the authorities to lengthen the duration of the movement control order (MCO).
“This would intensify the supply-side constraints on economic activity, and further dampen domestic demand. In this case, the recovery in 2021 would be significantly weaker.
“Also on the downside, Malaysia’s highly open economy is vulnerable to escalating trade actions and weaker-than-expected trading partner growth,” the IMF said.
Domestically, fiscal risks from contingent liabilities could materialise while domestic policy uncertainty could dampen business confidence and investment.
Faster-than-expected deployment of Covid-19 vaccines represents an upside risk, it said.
Malaysia’s external position in 2020 is assessed to be stronger than warranted by fundamentals and desired policies, the IMF said, adding that the assessment takes into account the transitory nature of pandemic-related shocks.
Although the current account surplus helps reassure investors, it nevertheless represents a gap of 3.6 per cent of GDP that cannot be fully explained by Malaysia’s fundamentals and desired policies and is partly driven by relatively lower spending on social safety nets in Malaysia.
Going forward, the IMF said policies, which strengthen social safety nets and continue to encourage private investment, can help facilitate external rebalancing.
On external debt, it said Malaysia’s external debt remains high but manageable.
External debt increased to 67.5 per cent of GDP by end-September 2020 (63.4 per cent in 2019), partly driven by higher non-resident holdings of ringgit-denominated debt instruments.
The share of external debt denominated in foreign currency stands at about two-thirds of the total, which is low relative to peers.
“Gross official reserves are adequate (US$107.6 billion at end-December 2020), at 126 per cent of the Assessing Reserve Adequacy (ARA) metric for a floating exchange rate regime.
“When adjusted for net forward positions, reserves are at 117 per cent of the metric,” it added.
— Bernama
