• Malaysia’s real GDP growth target has been revised slightly lower to range between 6% to 7.5% (-5.6% in 2020) compared to the earlier projection of 6.5% to 7.5%.
• BNM expects economic growth to be supported in 2021 by less stringent mobility restrictions, targeted policy stimulus measures as well as possible smooth rollout of the COVID-19 vaccines to provide some lift to consumer sentiments and spending.
• We are maintaining our full-year 2021 GDP growth forecast at 6%, as compared to -5.6% for 2020.

Domestic Demand Will Continue to be a Key Driver of Growth in 2021

With expectations that economic growth will remain well supported by domestic demand this year (especially from private consumption) and the low base effect in 2020, Bank Negara Malaysia (BNM) narrowed only slightly the country’s real GDP growth target to range between 6.0% to 7.5% for 2021, as against the government's earlier projection of between 6.5% to 7.5%. Taking the computations at mid-point, calculated based on GDP forecast at constant price, BNM expects the country’s underlying real GDP growth to grow at 7.0% projected for 2021, nearer to the higher end of its range of between 6.0% to 7.5%. Our GDP forecast of 6.0% for 2021 is at the lower end of BNM’s forecast range, where the main difference is BNM’s stronger growth forecast on domestic demand, projected to expand by 7.4% in 2021, against Affin’s 6.3%. BNM is optimistic that private consumption growth will be supported by improvement in overall income and employment, as well as relatively less stringent mobility restrictions compared to 2020, together with support from targeted policy measures and acceleration in online shopping. We also concur that upside risk from higher pent-up demand in private consumption due to possible faster-than-expected rollout of vaccines and lifting of containment measures cannot be discounted, especially in 2H21.

We believe BNM’s positive headline GDP growth forecast of between 6.0% to 7.5% for 2021 is based on less stringent local, and more targeted approach in, containment measures from 2Q21 onwards, especially with the enforcement of the Movement Control Order (MCO) in selected districts and states in the early part of 2021 now turning into Conditional Movement Control Order (CMCO) and Recovery MCO. The optimism is also based on expectations of a smooth rollout of the COVID-19 vaccines, which will provide some lift to consumer sentiments and spending, together with policy measures remaining in place, which include the extension of measures introduced in 2020, the 2021 Budget, as well as the PERMAI and PEMERKASA assistance packages, which will likely add close to 2 to 3 percentage points (ppt) to GDP growth. BNM also projected higher exports growth in 2021 due to broader recovery in global demand, which will sustain domestic production, investment, and export activity, with export-oriented industries supported by intra-regional trade and the global technology upcycle.

We expect sustained healthy demand for Malaysia’s E&E products to bolster export growth in the months ahead. This is in tandem with the upward revision of the global semiconductor sales by the Semiconductor Industry Association (SIA) to 10.9% yoy in 2021 or US$488.3bn (8.4% or US$469.4bn previously) from 6.8% or US$440.4bn in 2020. Nevertheless, we also concur with BNM that risks to Malaysia’s economic growth are still tilted to the downside. The downside risks include the possible resurgence of Covid-19 cases and slower-than-expected rollout of vaccine or ineffectiveness of vaccines, as well as domestic commodity production shocks. Similarly, BNM cautioned that the increase in economic uncertainty on both the global and domestic fronts could lead to larger financial market volatility which may trigger a tightening of financial market conditions. BNM’s GDP growth projection for 2021 is based on the assumptions such as price of global crude oil of between US$52 to US$62/barrel (US$43/barrel in 2020) and price of LNG to average RM1,380 to RM1,480 per tonne (RM1,170/tonne in 2020). Meanwhile, the CPO price is expected to average RM2,800 to RM3,000 per tonne compared to RM2,768/tonne in 2020, with higher global GDP growth forecast and inflation in the range of 2.5 to 4.0% for 2021 (-1.2% in 2020).

Private Consumption to be An Anchor of Growth in 2021

On domestic demand, following a contraction of -5.7% in 2020, growth in domestic demand is projected to rebound by 7.4% in 2021, where it will remain as the key driver of economic growth especially from private sector expenditure. In line with BNM’s assessment on the domestic economy, growth in private consumption will continue to be the anchor of the GDP growth in 2021. BNM expects growth in private consumption to expand strongly by 8% in 2021 (-4.3% in 2020) bolstered by the gradual increase in overall income and employment growth as well as easing of mobility restrictions compared to 2020. In addition, policy measures will also support household spending such as EPF i-Sinar, and i-Lestari, Bantuan Prihatin Nasional, Bantuan Prihatin Rakyat, Bantuan Kehilangan Pendapatan, tax relief and incentives as well as the Targeted Repayment Assistance.

Private Investment Projected to Rebound by 5.4% in 2021

BNM projects growth in private investment to expand by 5.4% in 2021 from the decline of 11.9% in 2020 amid improvement in external demand on the back of the roll-out of vaccines on a wider scale. BNM is also optimistic that progress of ongoing large projects particularly in the civil engineering sub-sector and sustained investment plans especially in the manufacturing sector will also boost private investment growth in 2021. This has been reflected in the continued investment approvals in the manufacturing of E&E, petroleum products and metal products. Furthermore, growth in private investment is also expected to be supported by Budget 2021 measures like investment incentives, tax allowances and the implementation of key projects to bolster the expansion of the digital economy under the Malaysia Digital Economy Blueprint (MyDigital).

Private Investment Projected to Rebound by 5.4% in 2021

BNM projects growth in private investment to expand by 5.4% in 2021 from the decline of 11.9% in 2020 amid improvement in external demand on the back of the roll-out of vaccines on a wider scale. BNM is also optimistic that progress of ongoing large projects particularly in the civil engineering sub-sector and sustained investment plans especially in the manufacturing sector will also boost private investment growth in 2021. This has been reflected in the continued investment approvals in the manufacturing of E&E, petroleum products and metal products. Furthermore, growth in private investment is also expected to be supported by Budget 2021 measures like investment incentives, tax allowances and the implementation of key projects to bolster the expansion of the digital economy under the Malaysia Digital Economy Blueprint (MyDigital).

Public Investment to be Led by Progress of Large-scale Projects

BNM expects public consumption growth to expand further by 4.4% in 2021 from 4.1% in 2020, amid an ongoing rise in Federal Government spending, mainly due to Covid-19 related expenditure which includes procurement of vaccines and logistics spending. Meanwhile, growth in public investment is projected to rise sharply by 15.2% in 2021 (-21.4% in 2020) led by increases in spending of General Government and public corporations on the back of increased progress of large-scale projects like ECRL, MRT2 and Pan Borneo Highway. BNM also highlighted that with less strict containment measures in 1Q21 and the expected pickup in activity from 2Q21 onwards, most infrastructure projects are expected to be on track or ahead of schedule. In addition, growth in public investment will also be underpinned by investment to advance digital infrastructure and connectivity as well as the implementation of small-scale projects which were announced in Budget 2021 and PEMERKASA package.

Robust Growth in Manufacturing Sector Expected in 2021

On the supply side, growth in the manufacturing sector is projected to improve due to the structural shifts towards digitalisation, instigating demand for medical devices, telecommunications and cloud computing. Malaysian E&E sector is expected to benefit as they are well integrated in the global value chains. BNM is projecting a robust growth in the manufacturing sector of 8.8% for 2021 compared to -2.6% in 2020.

Stronger Growth in Agriculture and Mining Activity Expected in 2021

In the agriculture sector, BNM is expecting the sector to register a growth of 4.2% in 2021, a turnaround following a contraction of 2.2% in 2020, supported mainly by projection of higher palm-oil output on the back of the recovery in palm-oil yields. In addition, tapping industries will be supported by higher natural rubber prices, and a strong expansion in livestock production will be supported by continued growth in household spending. For mining activity, BNM anticipates the sector to turn around and rebound from its contraction of 10.0% in 2020 to register an expansion of 3.1% in 2021, especially a stronger pick-up in the second half of the year. The operationalisation of new gas fields in East Malaysia will lead to higher production of natural gas.

Services Sector Will Benefit From Demand for Digital Solutions

In the services sector, BNM is projecting growth to rebound by 6.6% in 2021 compared to -5.5% in 2020, supported by the recovery in information and communication as well as finance and insurance sub-sectors. This is due to the anticipated increase of e-commerce and e-payments, which will lead to the increase in demand for digital solutions. However, some of the slowdown is expected to continue from the impact on the tourism sector amid travel bans and quarantines, which are expected to drag on tourism-related sectors, especially hotels, retail trade, food and beverage and transport services.

Current account surplus to remain in surplus but narrow slightly in 2021

On the current account balance, BNM expects the surplus position to narrow to a range of between 2.5-3.5% of GDP in 2021 (4.4% of GDP in 2020), where the country’s goods exports are anticipated to increase at a faster pace compared to imports, while also bolstered from higher commodity prices. As such, the goods account is projected to widen to RM161.7bn in 2021 from RM139.1bn in 2020. Meanwhile, BNM noted that the secondary income account is poised to post a larger deficit of RM18.1bn from a deficit of RM2.8bn in 2020 amid larger outward remittances by foreign workers amid the improvement in economic activity as well as the large base effect from the settlement received related to a wholly-owned subsidiary of the Minister of Finance in 3Q2020. However, wider deficits in the services and primary accounts may weigh on the current account surplus. We believe the services account will be dragged by lower travel receipts with borders likely to remain closed while primary income will be see a wider deficit due to higher FDI income payments compared to possible increase in income accrued to Malaysian firms investing abroad.

Fiscal deficit to be wider at 6% of GDP in 2021 but lower than 6.2% in 2020

In tandem with recent announcement by the Finance Minister, the country’s fiscal deficit position is expected to rise to 6% of GDP from its earlier estimate of 5.4% of GDP, following the announcement of the PEMERKASA stimulus package.

Inflation to average higher in 2021 but dependent on oil and commodity prices

In terms of inflation, BNM anticipates inflation to average higher by between 2.5% to 4.0% in 2021 (-1.2% in 2020), due to a lower base and temporary spike in 2Q21 from an anticipated rise in global oil prices as well as the diminishing base effect from the tiered electricity tariff rebate which was introduced in April 2020. Although headline inflation is expected to temporarily spike in 2Q21 amid the low base effect from domestic oil prices, inflation will moderate as the base effect dissipates in 2H21. Meanwhile, core-inflation is projected to average between 0.5% and 1.5% in 2021 from 1.1% in 2020, where the negative output gap in 2021 due to sustained weakness in selected industries will lead to muted underlying inflation.

Monetary policy will remain accommodative and focus on sustainable growth

BNM revised higher the inflation target due mainly to temporary cost-push factors such as the expected increase in global oil prices. According to BNM, the country’s potential output growth is estimated to have moderated to 3.3% in 2020 (4.8% in 2019 and 4.9% average for 2011-2019 periods), due to contraction in investment activity, as firms undertake less investments in productive capital (e.g., machinery & equipment and ICT), while a decline in labour force participation is also expected to adversely affect the TFP. The decline in real GDP growth of -5.6% in 2020 was significantly below the potential output growth of 3.3%, where the output gap turned negative. Going into 2021, the output gap is projected to remain negative, with expectations of only a gradual improvement in the output gap.

BNM likely to hold policy rates unchanged at 1.75% for the rest of 2021

As the domestic economy improves only gradually towards the maximum level of output (or production capacity), we believe the expected immediate pick-up in economic activities will not generate significant demand-pull inflationary pressure. With manageable inflation going forward, we expect the stance of the country’s monetary policy to be accommodative and supportive of domestic demand. As a result, we believe BNM will likely maintain its policy rate at 1.75% throughout 2021, and likely wait until early 2022 to gauge the state of the Malaysian economy, before deciding on the direction of domestic policy rates. BNM noted in its annual report that decisions on monetary policy going forward will be data-driven, owing to the fastevolving conditions and ongoing uncertainties. Furthermore, BNM highlighted that the “MPC will be mindful to avoid a premature withdrawal of policy support” and “will continue to closely monitor the emergence of signs of a more entrenched and sustainable economic recovery in the period ahead while remaining vigilant against a build-up of financial imbalances”.

BNM to Provide Flexibilities to Businesses on Forex Measures

BNM noted further liberalisation of foreign exchange policy (FEP) and providing greater flexibilities to businesses on forex measures (such as removal of export conversion rule, where BNM no longer required resident exporters to convert their export proceeds into ringgit). BNM also guided flexibility for resident exporters to extend the period of repatriation of export proceeds by more than six months under exceptional circumstances (but approval is required), as the six-month rule is still in place. Despite the relaxation and the steps taken by BNM on the treatment of export proceeds, we believe the country’s foreign exchange reserves will remain steady, supported by economic fundamentals and strong current account surplus, which can provide a safeguard against any weakness in Ringgit. BNM is projecting the current account surplus to remain high at RM44.3bn or a range of between 2.5 – 3.5% of GDP in 2021 (4.4% of GDP in 2020), supported by goods exports outpacing that of imports as well as higher commodity prices. Going forward, we are projecting the Ringgit to remain relatively stable and trade at an average of RM4.15-4.20/USD as at end-2021 (RM4.01 as at end 2020).

Source: Affin Hwang Research - 1 Apr 2021