The BNM Annual Report reaffirms a strong economic rebound in 2021 with a growth projection of 6.0%–7.5%. Growth would be supported by domestic activities as well as improved external demand beside low base. Our GDP projection for 2021 has been revised to 5.5%–6.0% (previous: 5.2% -5.9%)

Meanwhile, BNM has revised upwards the headline inflation to 2.5%–4.0% on the back of higher pressure emanating from the cost or supply side. Expectations are that 2Q2021 inflation could hit as high as 5.0%. We have revised our inflation projection to 3.0%–3.5% (previously 1.8%–2.1%)

Despite a higher inflation outlook in 2Q2021, we are of the view that BNM will not reprice the current 1.75% OPR. Much of the inflation pressure comes from the cost or supply side and lesser from the demand side. With the economy recovering, wages remain a challenge, beside job market. On that note, and looking ahead in terms of the inflation outlook in 2H2021, we believe the OPR will remain intact at 1.75%. Any upwards adjustment will more likely take place in 1Q2022.

A. GDP to rebound 6.0% to 7.5% in 2021

• Domestic economy is expected to rebound between 6.0% and 7.5% in 2021, after contracting by 5.6% in 2020 – the lowest since 1998. BNM’s forecast showed a wider growth outlook compared with Budget 2021 of 6.5% to 7.5% (AmBank: 5.5% to 6.0%). For 2012, the nominal GDP is projected to grow at 9.8% from -6.3% in 2020.

• Economic rebound is supported by: (1) better global growth and trade outlook; (2) firm commodity prices; (3) pick-up in global semiconductors; (4) benefits from the stimulus measures introduced during the pandemic; (5) better management of Covid-19 pandemic; (6) vaccination; and (7) improving business and consumer sentiments.

• Domestic demand is expected to grow by 7.4% (-5.7% in 2020) supported by private spending. This will be aided by private consumption (+8% in 2021 from -4.3% in 2020) benefitting from the stimulus measures, improved sentiments, more stable income and job market, vaccine rollout, pent-up demand from excess savings, less stringent mobility restrictions and targeted financial measures like the i-Lestari & i-Sinar withdrawals, cash transfers and tax relief.

• Besides, private investment should grow by 5.4% (-11.9% in 2020) supported by stronger external demand, ongoing large infrastructure projects i.e. transport-related projects and approved investment projects in 2020.

• The fast-growing digital environment and the commencement of MyDigital is expected to provide the necessary lift to private investment. The adoption of e-commerce activities will continue to cushion the subdued physical spending activities due to social distancing and movement restrictions. It will help buffer the shortfall from the discretionary items i.e. leisure-related spending.

• A key growth area in 2021 will be public investment, projected to expand by 15.2% (-21.4% in 2020). Budget 2021, various stimulus measures, digital infrastructure and connectivity; and continuation of large-scale infrastructure projects will provide the necessary uplift for investment and growth. Public consumption would strengthen by 4.4% (4.1% in 2020) from the Covid-19-related expenditure.

• On the trade front, the economy will benefit from E&E (tech upcycle) and non-E&E segments (gloves, personal protective equipment, consumer-related products as well as construction-related products (iron and steel and manufacturing of metals). Besides, commodities will contribute positively from a recovery in mineral exports with higher crude oil and natural gas prices as well as CPO.

• Imports would grow around 9.1% (-6.3% in 2020). Recovery in intermediate imports following higher manufactured exports and capital imports from stronger investments activities will be the main drivers. Consumption imports will be primarily driven by imported food & beverages.

• The recovery trajectory, however, will still depend on several factors such as: (1) the extent and duration of the Covid- 19 pandemic; (2) the speed of the vaccine rollout; (3) the extent of external spillovers; (4) sector-specific developments; and (5) the degree of improvement in labour market conditions.

B. Growth expected to fire in all cylinders

• The services sector is expected to grow 6.6% (-5.5% in 2020) led by the ICT, finance and insurance sub-sectors following the demand recovery for digital solutions in e-commerce and e-payment. But the reimposition of the MCO 2.0 early 2021 will weigh on wholesale and retail trade activities. Border closures, which are expected to remain, will impact tourism-related industries, thus having some knock-on effects on F&B and accommodation and air travel.

• Manufacturing would rebound sharply by 8.8% (-2.6% in 2020) driven by the E&E and improved global value chain. The pandemic has accelerated structural shifts towards digitalization, spurring demand for telecommunications, cloud computing and medical device products. Primary-related clusters would benefit from the higher production of refined petroleum and petrochemicals from the large petrochemical facilities in Johor. Consumer-related clusters should improve in line with the recovery in consumption activity, as most consumer industries and their supply chains are expected to operate at the normal levels while observing the SOPs.

• Recovery in palm oil production should boost the agriculture sector with a growth of 4.2% (-2.2% in 2020). Slightly higher-than-average rainfall in the beginning of 2021 due to the La Nina phenomenon is a catalyst in boosting oil palm yields. Higher natural rubber prices will ramp up tapping activities while continued growth in household spending will support the strong expansion in livestock production.

• Mining would rebound by 3.1% (-10.0% in 2020) albeit planned maintenance closures in the 1H2021 due to the continued voluntary supply adjustments by Petronas. The offsetting support to growth is expected to materialize in 2H2020 as the commencement of new gas fields along with the ramp-up of the PFLNG2 facility in East Malaysia will lead to higher production of natural gas.

• Construction is projected to grow by 13.4%, led by a resumption of activities across all subsectors i.e. the civil engineering segment is likely to recover in line with the ramp-up of construction activity in large infrastructure projects such as the ECRL, MRT2, and Pan Borneo Highway. Given the less restrictive containment measures, this sector would enjoy higher operating capacity that will allow the projects to stay on track or even ahead of schedule.

• According to BNM, the ECRL project is now ahead of schedule. It plans to hit 30% completion by end-2021 from 20% at end-2020. Launches of affordable housing projects in the past years will continue to support activities in the residential sub-sector. Growth in the special trade sub-sector should strengthen further with the support from solar power projects, Jalinan Digital Negara (Jendela), small-scale projects under the 2021 Budget and Pemerkasa measures. Completion of large commercial projects is likely to weigh on growth in the non-residential sub-sector.

C. Higher inflation in 2Q2021 is transitory

• BNM has revised the inflation outlook to 2.5%–4.0% from 1–3% previously for 2021 (2020: -1.2%). It is higher than the government’s forecast of 2.5%. Higher inflation is due to low-base effect, higher global oil prices, higher fresh food prices, risk of global supply lines being disrupted, and the lapse in the effects from the tiered electricity tariff rebate. However, the pass-through of higher crude oil prices is capped as the government reintroduced the fuel price ceiling for RON95 and diesel at RM2.05/litre and RM2.15/litre, respectively.

• Accordingly, we have revised our inflation projection to 3.0%–3.5% from previously 1.8%–2.1%. and we concur with BNM that the inflation trajectory could hit a peak of 5% in 2Q2021 before moderating thereafter. Core inflation is expected to average between 0.5% and 1.5% (2020: +1.1%) amid the continued excess capacity in the economy.

• Despite a higher inflation outlook in 2Q2021, we are of the view that BNM will not reprice the current 1.75% OPR. Much of the inflation pressure comes from the cost or supply side and lesser from the demand side. With the economy recovering, wages remain a challenge, beside job market. On that note, plus looking ahead in terms of the inflation outlook in 2H2021, we believe the OPR will remain intact at 1.75%. Any upwards adjustment will more likely take place in 1Q2022.

D. Current account surplus sustained

• BNM projected the current account balance will remain in surplus but lower at 2.5%–3.5% of GDP, (2020: 4.4% of GDP). This follows the healthier gross exports and gross imports at 8.2% (2020: -1.4%) and 9.1% (2020: -6.3%), respectively which will leave a relatively wider trade surplus of RM192.2 billion in 2021 (2020: +RM184.8 billion).

• The sustained current account surplus will continue to alleviate some pressure on the MYR which has weakened by 3.5% YTD to 4.15. The services account is expected to record a wider deficit due to lower travel receipts. In contrast, payments for professional and technical services would rise as investment activity recovers. The income account is projected to register a larger deficit from higher FDI income payment accrued to foreign investors as manufacturing improves. The secondary income account is expected to record a larger deficit due to outward remittances by foreign workers and the large base effect from the settlement received related to a wholly-owned subsidiary of Ministry of Finance (Incorporated) in 3Q2020.

E. Household debt hits record high but remains manageable

• Household debt hit an all-time high, up 5.5% y/y to RM1.3 trillion or 93.3% of GDP in 2020 (82.9% in 2019 or 5.5% y/y). The higher debt accumulation came from car, housing and personal loans segments. But the household financial assets continued to outperform household debt. It grew 7.3% y/y to RM2.9 trillion or 205.3% of GDP as at 2020 from 190.2% in 2019.

• The debt service capacity of most households has been stable, thanks to existing financial buffers and relief measures. Overall, both outstanding household financial assets to debt and liquid financial assets to debt remained broadly steady at 2.2 and 1.5 times, respectively in 2020. (2019: 2.2 and 1.4 times to debt).

• However, there is some risk lingering among borrowers earning less than RM3,000 monthly with low financial buffers and substantially higher leverage. Besides, borrowers earning less than RM5,000 monthly has started to show some signs of distress based on banks’ observation of household profiles seeking repayment assistance. These segments are expected face challenges in 2021 due to the uneven recovery in the labour market.

• Meanwhile, household loans in stage 2 (loans that exhibited deterioration in credit risk, for which banks are required to set aside provision based on lifetime expected credit losses) have increased to 7.3% in end-2020 from 5.6% in June 2020, reflecting increased credit risk among household borrowers.

• With that, the household asset quality is expected to deteriorate in 2021 but the credit losses materializing are projected to be within the banks’ buffer.

F. Challenges among SMEs remain

• While many companies have returned to near-full operational capacity, several companies in more severely affected industries such as hotels and restaurants have experienced further depletion of their financial buffers amid a persistent decline in revenue.

• The non-financial corporate debt-to-GDP ratio rose 110% due to a weaker GDP print in 2020 (2019: 99.4%). Nonetheless, the repayment assistance helped contained any notable increase in defaults.

• The share of firms at risk moderated slightly to 31.8% of listed corporates but remains at an elevated level (2Q2020: 32.9%; 5-year average: 21.7%). The improvement masked the uneven impact of the crisis on different business sectors, particularly in the hotel and restaurant segments.

• Looking ahead, leading indicators from banks are pointing to expectations of continued weakness in business conditions. The share of business loans with increased credit risk rose to 15.7% in 2020 from 14.1% in 1H2020, particularly for firms highly exposed to the pandemic. However, the strong capitalization of the banking system is able to absorb potential shocks and support economic recovery.

• Meanwhile, the impact on SMEs was more pronounced and disproportionate due to their limited financial buffer and narrower profit margins. A survey conducted by BNM highlighted that SMEs were less optimistic on survival prospects, particularly the smaller-sized SMEs due to pre-existing limitations in the financial and human capital, and slower adoption of new technologies. Still, the repayment assistance as well as improving economic activity will continue to help alleviate cash flow issues and contain the default rate among businesses.

G. Risks in property market remain elevated

• Risks in the residential property remains well contained. However, non-residential property continued to face considerable challenges in particular among the hotels and shopping malls segment due to the exposure to Covid-19. Meanwhile, the growing work-from-home (WFH) trend is encouraging businesses to downsize office space – weighing on occupancy and rental growth of office space.

Source: AmInvest Research - 1 Apr 2021