SUMMARY

● The global economic growth is expected to pick up in 4Q21, supported by the resumption of economic activities amid the progress of the COVID-19 vaccination rate and the relaxation of movement restrictions. This will be further supported by the ongoing stimulus measures among major economies and the release of pent-up demand.

● Major central banks are expected to continue raising policy rates and tapering asset purchasing as advanced economies register relatively strong recoveries and prolonged high inflation.

● US Treasury yields are expected to rise significantly, as the Fed starts tapering its bond purchases and as the US continues to chart a strong economic recovery. We project the 10Y UST yield to reach 1.80% by year-end.

● Brent crude oil prices are expected to remain elevated in the 4Q21 in tandem with the global economic recovery theme as demand is expected to improve while output restraint persists. Hence, we have revised the average Brent crude oil price forecast to range between USD65.0-70.0/bbl in 2021 (2020: USD43.0/bbl) from USD65.0/bbl.

● Despite the recovery optimism, the ongoing negative impacts of the COVID-19 pandemic and the current inequitable vaccine distribution poses a significant risk to global growth.

● As most restrictions on social and economic activities will gradually ease once 90.0% adults are fully-jabbed, we expect the government to unveil the new National Recovery Plan (NRP) standard operating procedures (SOPs) as early as the first week of October.

● In line with the gradual economic reopening and as Malaysia shifts to the endemic phase, GDP growth is expected to rebound by 2.8% in the 4Q21 (3Q21F: -1.4%) on broad-based improvement across sectors and components. The recovery is expected to resume from 3Q21 and going into 4Q21 with QoQ growth projected at 3.0% and 6.2%, respectively.

● Nonetheless, the 2H21 GDP growth is expected to be lower at 0.7%, compared to 7.1% growth in 1H21, largely reflecting the impact of movement restrictions in the 3Q21. This brings the 2021 GDP forecast lower at 3.5% - 4.0% (point forecast: 3.7%) from earlier forecast of 5.0% - 6.0% (point forecast: 5.5%; BNM: 6.0% - 7.5%; 2020: -5.6%).

● With a more stable economic outlook and a synchronous global growth, our preliminary forecast shows GDP growth would expand by 5.5% - 6.0% (point forecast: 5.7%) in 2022.

● Fiscal deficit is forecast at 6.3% (MoF: 6.5%-7.0%; 2020: 6.2%) on the expectation of higher revenue contribution from the oil and gas sector along with the solid export activities. Likewise, we retain the federal government debt to GDP ratio at 64.5% (2020: 62.2%), but statutory debt is expected to hit the 60.0% limit.

● Amid continued economic uncertainty, strong USD dynamics and optimism surrounding the reopening of the domestic economy, the ringgit is expected to see-saw between gains and losses in the 4Q21. By the end of 2021, the USDMYR is projected to strengthen slightly at around the 4.18 level (2022F: 4.10).

● Foreign fund inflows into the domestic bond market will likely sustain going forward backed by a relative stability on the political front, further easing of lockdown restrictions, and the attractive yield differentials of local bonds. We project the 10Y MGS yield to rise to 3.60% by year-end.

● BNM is expected to keep the overnight policy rate (OPR) unchanged at 1.75% for the remainder of the year, as the local COVID-19 condition improves and lockdown measures continue to be relaxed.

● External and domestic downside risks remain, nonetheless, arising from the potential emergence of vaccine-resistant COVID-19 variants, China’s Evergrande debt overhang situation, and Malaysia’s COVID-19 uncertainty.

Source: Kenanga Research - 1 Oct 2021