BNM projected 2021 GDP to rebound by +6.0 to +7.5% YoY, point estimate of 7.0% YoY (2020: -5.6% YoY) on account of improvement in external demand, pick up in investment and production activities, as well as policy support. Inflation is expected to average higher at +2.5 to +4.0% YoY (2020: -1.2% YoY) due to higher global oil price expectations. Nevertheless, BNM noted that balance of risks remains tilted to the downside. For now, we maintain 2021 GDP forecast at +5.0% YoY and expect MPC to keep OPR unchanged at 1.75% for the year.

BRIEFING TAKEAWAYS

BNM projected GDP growth of +6.0 to +7.5% YoY (point estimate: 7.0% YoY) in 2021, slightly wider than MOF’s forecast range of +6.5 to +7.5% YoY (point estimate: 6.9% YoY). The wider forecast range on the lower-end reflects the downside risks to growth from (i) further containment measures, (ii) slower than expected vaccine rollout, (iii) commodity supply shocks and (iv) greater financial market volatility.

On the demand side, BNM expects growth to be anchored by private consumption (+8.0% YoY; 2020: -4.3% YoY), supported by easing of mobility restrictions and gradual improvement in sentiments amid vaccine rollout, particularly towards 2H21. Improvement in overall income and employment as well as targeted policy measures are also expected to drive consumption. Investment activity is also anticipated to rebound, with growth in public and private investment driven by better external demand and tech upcycle, as well as resumption of major infrastructure projects. Improvement in external demand will lift exports (+13.1% YoY; 2020: -8.8% YoY), while imports (+14.1% YoY; 2020: -8.3% YoY) are expected to be driven by higher investments in manufacturing sector and large-scale infrastructure projects, providing a boost to capital imports. On the supply side, BNM expects most industries to only record positive growth in 2Q21 onwards following MCO2.0 in 1Q21. Growth will be contributed by the services sector (+6.6% YoY; 2020: -5.5% YoY) following easing of mobility restrictions, although the closure of international borders will continue to affect tourism-related industries. This is followed by the manufacturing sector (+8.8% YoY; 2020: -2.6% YoY), driven by the acceleration towards digitalisation, generating higher demand for electronics. Resumption of transport infrastructure projects will lift growth in the construction sector (+13.4% YoY; 2020: -19.4% YoY), while BNM also expects commodity sectors to record positive growth. BNM expects current account to remain in surplus position, albeit lower at 2.5 to 3.5% of GDP (2020: 4.4% of GDP), owing to larger services deficit from lower travel receipts.

On inflation, they forecast an average of +2.5 to +4.0% YoY (2020: -1.2% YoY), reflecting low base effect and higher commodity prices. Nevertheless, underlying inflation is expected to be subdued, between +0.5 to +1.5% YoY (2020: +1.1% YoY).

BNM has also updated measures to its foreign exchange policy to provide greater flexibilities to businesses and a more conducive environment for foreign investment in Malaysia. We do not expect these measures to have a significant near-term impact on the ringgit, but opine they are a positive move to aid FDI inflows.

HLIB’s VIEW

While BNM forecast remains higher than our expectation, we also note that BNM opines their growth forecast has downside risks. A sustainable recovery would depend on a successful vaccination programme, which may be difficult to achieve in 2021 due to supply constraints. Consequently, we also maintain our expectation for BNM to retain the OPR at 1.75% in 2021 alongside our GDP forecast of 5.0%.

Source: Hong Leong Investment Bank Research - 1 Apr 2021