● GDP contraction widened in the 4Q20 (-3.4% YoY; 3Q20: -2.6%), underperforming expectations (consensus: -3.1%; KIBB: -2.5%)

• Seasonally adjusted QoQ (-0.3%; 3Q20: 18.2%): slipped back into a declining mode, reflecting the negative spillovers from the implementation of the Conditional Movement Control Order (CMCO) in highrisk states and the reinstatement of inter-district and inter-state travel ban beginning 14th October.
• 2020 (-5.6%; 2019: 4.3%): came in below forecast ( MoF: -4.5%; consensus: -5.5%; KIBB: -5.3%), marking the steepest fall since the Asian Financial Crisis (1998: -7.4%), but still comparatively better than some regional peers (SG, TH, PH).

● The slowdown was primarily attributed to the domestic demand, specifically private consumption and public investment

• Domestic demand (-4.4%; 3Q20: -3.3%):
  • Public spending (-5.4%; 3Q20: -1.6%): the fall steepened on a broad-based moderation in public investment (-19.8%; 3Q20: -18.6%) and consumption (2.7%; 3Q20: 6.9%), reflecting lower capital outlays by the general government and public corporations amid subdued demand conditions.
  • Private spending (-4.1%; 3Q20: -3.6%): consumption activities (-3.4%; 3Q20: -2.1%) were hindered by the tightened COVID-19 restrictions, which have consequently exerted pressure on the labour market conditions, with the unemployment rate rising to 4.8% (3Q20: 4.7%) and private sector wages falling by -3.4% (3Q20: -2.6%). This has masked a continued recovery in investment (- 7.0%; 3Q20: -9.3%), particularly in the exportoriented sectors.
• Net exports (12.4%; 3Q20: 21.9%): eased as imports (7.2%) grew at a faster pace relative to exports (4.2%) on a QoQ basis
  • Exports (-1.8%; 3Q20: -4.7%): recorded the smallest drop in four quarters, lifted by a surge in shipments of rubber gloves (184.1%; 3Q20: 125.9%) and a double-digit expansion in electrical and electronics (E&E) exports (13.8%; 3Q20: 16.0%), along with higher demand from Singapore and Japan.
  • Imports (-3.3%; 3Q20: -7.8%): the drop lessened on improved retained imports performance, specifically in the intermediate goods segment (-7.2%; 3Q20: 13.5%) in line with the robust manufacturing activities.

● Sector-wise, growth moderation was observed across the board, led by the services and mining activities

• Services (-4.9%; 3Q20: -4.0%): growth deceleration was steered by activities which rely on consumers’ mobility and proximity, such as transport & storage, food & beverage and retail trade. These were partly offset by a softer decline in the wholesale trade.
• Mining (-10.6%; 3Q20: -6.8%): the worsened performance mirrored a weaker oil & natural gas production due to the closure of several oil & gas facilities for maintenance purposes.
• Manufacturing (3.0%; 3Q20: 3.3%): growth slowed solely on a negative flip in the production of vegetable and animal oils & fats due to the shortage of labour in the plantation sector following the freeze on foreign workers recruitment. Nevertheless, the manufacturing expansion persisted, supported by the semiconductor upcycle.
• Construction (-13.9%; 3Q20: -12.4%): dragged by project delays, mainly in the civil engineering segment, due to labour shortages and COVID-related shutdown of sites.
• Agriculture (-0.7%; 3Q20: -0.5%): declined marginally as palm oil production was weighed by labour shortages and adverse weather conditions.

● We revise 1Q21 and 2021 GDP forecasts higher to - 1.3% and 4.5% from -2.2% and 3.9%, respectively

• Mainly due to the lower-than-expected base in 2020 and the recent relaxation of MCO restrictions, whereby most retails sector have been allowed to reopen on 10th February, with dine-in permitted despite the strict standard operating procedures (SOPs).
• While growth is expected to remain pressured in the 1Q21 due to the MCO2.0 (13th Jan - 18th Feb), we expect the economy to track a firmer recovery path in the 2Q21 onwards, underscored by the rollout of COVID-19 vaccine by the end of February and the extended fiscal measures. Consequently, consumer sentiment is expected to improve in a gradual manner, providing support to domestic demand. In addition, public investment is forecasted to rise on the continuation of mega infrastructure projects (e.g. ECRL, MRT2, JENDELA). On the external front, the technology upcycle, persistent demand for COVID-related supplies (e.g. rubber gloves) and rising global oil price are expected to buoy investment and exports growth.
• Our forecast is subject to multiple downside risks including the unabated surge in COVID-19 infections locally and abroad, slower-than-expected deployment of vaccine, elevated domestic political uncertainty and renewed geopolitical tensions (e.g. US-CN, USIran).

● BNM to maintain status quo on policy rate

• Against the aforementioned growth prospect and the BNM governor’s emphasis on the greater effectiveness of targeted measures, we expect the BNM to keep the policy rate unchanged at 1.75%.
• Nonetheless, should the COVID-19 situation take a turn for the worse, leading to further tightening of the lockdown measures, we believe that the BNM has ample room to cut the policy rate by another 25 to 50 basis points.

Source: Kenanga Research - 15 Feb 2021