Posted Date: July 8, 2020

The great economic fallout arising from the COVID-19 pandemic will lead to the deepest global output contraction since the Great Depression in the 1930s. Not surprisingly, the World Bank and the International Monetary Fund (IMF) project a contraction in real gross domestic product (GDP) by 5.2% and 4.9% for 2020. This will be followed by a relatively strong rebound in 2021.

Going forward, prospects of the global economy hinge on whether the pandemic leaves a lasting impact that could change the economy's long-term growth trajectory; investment decisions, the structure of global trade and supply chain linkages as well as the productivity of human capital.

Given the backdrop, MARC forecasts a contraction in Malaysia's real GDP of between 3.0% and 1.5% in 2020. Apart from being dented by the deterioration in external trade, Malaysia's growth pillar – private consumption – is set to moderate as consumer sentiment is affected by the rising unemployment rate which has recently surged to a 30-year high. Likewise, businesses have also been deeply affected as reflected by the persistent deterioration in business conditions in the last six consecutive quarters.

On the fiscal side, the decline in government revenue amid weaker growth prospects is exacerbated by a significant drop in global crude oil prices since late February this year. Given that oil-related revenue accounts for roughly 20% of government receipts over the past five years, we anticipate the decline in overall government revenue and the increase in expenditures to lead to a budget deficit of 6.0% to 6.5% of GDP in 2020.

Despite the sharp increase in budget deficits, MARC believes that extraordinary times call for extraordinary measures and larger budget deficits are justified to ensure businesses and consumers are well supported. The critical question, however, is whether the deficits and debt can be pared down within the targeted time frame.

Increasing budget deficits and government debt will weigh on Malaysia's sovereign credit rating. This is evidenced from the recent adjustments of Malaysia's sovereign credit rating outlook from "stable" to "negative" by two international credit rating agencies. Going forward, however, we believe that a quick and sustainable recovery in global crude oil prices and credible medium-term revenue-enhancing measures will relieve some of the pressure.

With headline inflation already in negative territory, real interest rates remain higher than historical norms. Notwithstanding this, MARC foresees a slim possibility of further Overnight Policy Rate (OPR) cuts in 2020 after BNM reduced it to a historical low of 1.75% on 7th July. We believe that further cuts in the OPR will add pressure on the banking sector's performance and result in banks becoming extra cautious in their lending activity. It will also not augur well for the ringgit, which on a year-to-date basis, has depreciated by 4.3% against the US dollar.

For 2021, MARC maintains its real GDP growth forecast of between 6.2% and 6.7% on account of the low base in 2020 as well as some recovery in private consumption and improvements in the external sector. We expect global trade recovery to push up Brent crude oil prices to an average of USD50-USD55 per barrel of oil in 2021. Studies have indicated that a USD1 increase in the price of Brent crude oil price will increase Malaysia's real GDP growth by about RM650 million and fiscal revenue by RM365 million.


Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my