Fresh restrictions set to impact on economic recovery in Malaysia

The renewed lockdown means monetary policy may have to do more of the heavy lifting to revive the economy. PHOTO: REUTERS

KUALA LUMPUR - Fresh Covid-19 restrictions announced by the Malaysian government this week is likely to have an impact on the country's projected economic recovery for 2021.

A new round of a strict partial lockdown, officially known as a Movement Control Order, was reimposed, beginning Wednesday (Jan 13), in five states and three federal territories - all of which are economic hubs in Malaysia. The move came as infections continued to soar.

Analysts now expect the fiscal deficit to widen and for economic growth to be somewhat less than that estimated by the government late last year.

The MCO is expected to cost the economy RM750 million (S$246 million) a day, the English-language daily, The Star, quoting CGS-CIMB Equities Research, reported. It also said that every two weeks of restrictions could shave 0.7 per cent off its initial projection of 7.5 per cent growth in Gross Domestic Product (GDP) for 2021.

The Finance Ministry said late last year that GDP could contract by 4.5 per cent for 2020 before recovering to grow between 6.5 per cent to 7.5 per cent in 2021.

Analysts have a less rosy outlook.

A stricter lockdown lasting a month might shave more than 1 per cent off an initially projected 7.5 per cent growth for 2021, Standard Chartered Global Research's economic outlook report released on Thursday (Jan 14) said. It forecast a 5.8 per cent contraction for 2020.

Both CGS-CIMB Equities Research and Standard Chartered were optimistic about an economic recovery with the arrival of Covid-19 vaccines towards the second half of this year.

Bank Islam chief economist Afzanizam Abdul Rashid said the MCO would have an impact on the government's coffers. "This would mean that GDP growth in 2021 will be much slower than the original forecast," he told The Straits Times.

The government expects the fiscal deficit to hit 6 per cent of GDP in 2020, 2.8 per cent more than projected in pre-pandemic days. The Finance Ministry has also set a target of 5.4 per cent of GDP for the fiscal deficit this year.

Even though the current MCO does not apply nationwide, it is in force in states that are the biggest contributors to the Malaysian economy - such as the capital Kuala Lumpur, Selangor, the richest state, and Penang as well as Johor.

The first round of the MCO, an almost full lockdown which lasted for almost three months between March and June 2020, cost the Malaysian economy RM2.4 billion a day, according to estimates.

Much of the country later came under the less strict Conditional MCO - mostly involving travel restrictions - and this reportedly cost the economy RM280 million a day between October and December last year.

Malaysia reopened much of its economy, beginning Dec 7, precipitating a further rise in daily Covid-19 cases. The country registered a record 3,337 new infections on Thursday, a day after the MCO was imposed. It now has over 34,000 active cases in total, a figure exceeding the bed capacity for Covid-19 patients at public hospitals.

A state of emergency was declared on Tuesday to deal with the worsening situation. It will remain in effect until August 1.

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