KUALA LUMPUR, 19 March 2020 – Standard Chartered (SC) global research team is lowering their 2020 GDP growth forecast as they expect a prolonged hit to local and external demand in Malaysia due to the coronavirus outbreak. They are of the opinion that there will be more rate cuts from Bank Negara Malaysia this year, which would bring the policy rate down to match the low of the global financial crisis period.
More monetary policy support should be forthcoming
Standard Chartered Malaysia lower their 2020 GDP growth forecast to 2.5% from 4.2% to reflect a greater hit to local and external demand from a more protracted outbreak. Their previous projections were based on a sharp – but brief – supply-chain disruption due to China’s restrictive coronavirus containment measures and the resulting temporary impact on local and external demand; for example, through reduced tourism.
However, they raise 2021 GDP growth forecast to 4.8% from 4.4% previously on a favourable base effect. While SC believes that supply chain disruptions in China should end with the return of the country’s productive capacity, the demand hit from the COVID-19 outbreak has now become broader, deeper and more protracted than their earlier envisaged.
Both domestic and external demand are affected
Even though domestic demand has increased in recent years as a percentage of GDP, Malaysia is still considered an open economy. As of 2019, its trade to GDP ratio was still c.120%, and according to the OECD TiVA database, c.43.5% of its GDP is driven by foreign demand.
With containment measures and infection numbers increasing globally, Malaysia has introduced strict containment measures for two weeks starting 18 March, and is poised to take a hit to external demand.
Domestically, the increase in infection cases and broad containment measures may affect local sentiment. The closure of non-essential services such as malls, wet markets, roadside stalls, restaurants (only takeaways and deliveries allowed) to contain the coronavirus spread will affect spending.
The 2-week restrictive measures, along with already dampened consumer sentiment, may result in consumption growth easing significantly from the +7.6% pace set in 2019.
Standard Chartered expect additional rate cuts
Given the widening spread of the coronavirus outbreak, Standard Chartered expect Bank Negara Malaysia (BNM) to cut the overnight policy rate by 25bps each in May and July. This would bring the policy rate to 2%, matching the low of the global financial crisis period.
The last monetary policy statement in March appeared to be more balanced than outright dovish, suggesting that the central bank is open for further easing, but in a dependent manner.
Since the last meeting, the COVID-19 situation has worsened globally. Other than the hit to demand sentiment, global and local containment measures may result in both demand and supply-side disruptions.
In addition, the sharp fall in global oil prices should depress inflationary pressures. The oil price collapse may also negatively affect growth. Malaysia exports oil, natural gas, and palm oil, among other commodities. They estimate that oil-related sectors account for c.12% of Malaysia’s GDP.
Near-term inflation does not feature as a risk currently. Due to the collapse in oil prices driving fuel prices down, they lower their 2020 inflation forecast to 0.8% from 1.9% previously. For 2021, they revise their CPI inflation forecast to 2.5% on a modest recovery in global oil prices. At such levels, Standard Chartered believe the central bank can provide a very accommodative environment.