KUALA LUMPUR – Malaysia’s economy may be a mixed bag in 2022, mainly stemming from the impact of the new Omicron variant and domestic political noise, economists predict.
Despite being kept on the back foot with slow 5G adoption, poor economic recovery, and the floods, AmBank Group chief economist Anthony Dass told The Vibes that Malaysia, being an open economy that depends on exports, is forecast to improve this year.
“Improving global trade and global growth would provide necessary support.
“Besides, domestic activities are expected to pick up from the stimulus measures, high vaccination rate, opening of the economy, firm commodity prices, and improving consumer and business confidence,” he said.
However, Dass, who is also a member of the Economic Action Council Secretariat, pointed out that the downside risks to the economy remain.
The culmination of major events such as the Covid-19 pandemic, political uncertainty, and the massive floods that have hit multiple parts of Malaysia, as well as the risk of natural disasters could lead to some damaging impact on foreign and domestic investments, he explained.
Omicron’s impact, Dass said, derails the global and Malaysian economy, along with local political disquiet and rising inflation affecting the cost of living.
“The other risks are also caused by China – our major trading partner – which hit the buffers and turned nasty. A crisis in emerging markets (is among risks posed), as debt levels in US dollar borrowings are high, especially if the US dollar appreciates against these countries’ currencies, with a financial crash resulting in contagion effect,” the senior economist said.
Buckle up! Markets set for a ‘bumpy ride’
Dass also predicted a “bumpy ride” for Malaysia’s financial markets in the face of soaring inflationary pressure, rising interest rates, and ongoing disruption to international supply chains caused by the Omicron variant.
He observed that Omicron’s emergence had raised the prospect of a “stagflation” start to the new year, with weaker levels of economic growth despite intensifying price pressures in already stretched supply chains.
“Stagflation” is a situation where an economy undergoes a simultaneous increase in inflation and stagnation of economic output.
We will be entering 2022 with uncertainty and a very heavy shoulder. Hence, the market is expected to be influenced by external events besides domestic ones. That would mean volatility is expected in January. And investors should, at the very least, be prepared for more volatility in 2022.
“If the pandemic eases in 2022 as hoped, central banks are expected to raise interest rates, or cut back on their multitrillion-dollar quantitative easing bond-buying stimulus programmes to try to rein in inflation.
“Like many major central banks, BNM (Bank Negara Malaysia) is expected to raise interest rates in the second half of 2022.”
Economics professor Geoffrey Williams from the Malaysia University of Science and Technology also shared the same sentiment, saying the economic outlook for Malaysia this year is highly dependent on the new Covid-19 variant.
Williams said the central forecast is that while the variant would not impact the country too badly, recovery would be hampered.
The academic pointed out that there has been a lot of structural damage to the economy with many firms closing.
Malaysians have less pent-up consumption because of job losses and EPF (Employees’ Provident Fund) withdrawals, and so, we would see slower growth around 3% or so this year. This is our central forecast with perhaps a 60% chance of this.
“Nonetheless, our central forecast is that Omicron will not be too bad and things will improve, but much more slower than the over-optimistic estimates of the World Bank or Bank Negara Malaysia.”
Previously, Finance Minister Datuk Seri Tengku Zafrul Tengku Abdul Aziz in the Budget 2022 speech said the country’s economic growth for this year is projected to expand between 5.5% and 6.5% based on strong fundamentals and a diversified economic base.
However, Tengku Zafrul said this performance also depends on other factors, including the success of our pandemic response, the effectiveness of the country’s vaccination programmes, and the robustness of the global economy and trade prospects.
Williams expects inflation to normalise around 2% and unemployment to stabilise around 4% to 4.5%, but foresees that there will be a significant level of under-employment, which has become structural.
We also need to see private investment improve. The recovery rates will be slower, as businesses and markets have been badly damaged and will not spring back quickly but will need time to recover.”
He added that profitability will be slower to return to normal because businesses have accumulated debts and other costs which need to be serviced.
Therefore, financial markets such as Bursa Malaysia will take some time to recover the losses accrued in recent years.
Williams added that Malaysia is not a prime target for international investors at the moment, with a reputation tarnished by scandals in governance and political instability.
Disallow further EPF withdrawals
Williams also warned against further withdrawals of EPF savings, either due to Covid-19-related lockdowns or the floods that have affected tens of thousands of people, as it would wipe out any remaining savings for millions of people and exacerbate long-term structural problems in pensions.
The professor explained that EPF is not intended for such a purpose, adding that most EPF accounts are depleted.
It shows again a complete absence of social protection policies. It will damage investor sentiment, because it confirms the impression that the EPF can be raided to deal with policy failure.”
Elaborating further on the matter, he said so far, EPF has funded withdrawals from cash or overseas equities, not local equities on Bursa Malaysia.
However, if the withdrawals continue, the retirement fund may need to adjust local equity holdings, which could affect the stock market very badly.
Williams added that EPF has pointed out that its funds are held by a smaller group of members now, with higher savings.
This group might be shocked by further withdrawals from the EPF or the selling of local shares in Bursa Malaysia, which might threaten their annual dividend outlook.
“This could cause a mass withdrawal of funds. Around RM250 million is eligible for withdrawal for certain groups. Therefore, this must be avoided.”
Govt’s poor flood crisis management may drive away investors
Meanwhile, Sunway University economics professor Yeah Kim Leng said the recent floods that hit the nation at the tail end of 2021 have adversely affected the manufacturing sector and may drive business owners to relocate their operations to other countries.
“Over the longer term, we will see businesses reassessing flood risks. They may relocate their operations, hopefully within the country.
If they relocate to other countries, Malaysia will lose its attractiveness to foreign investors.
“When new investors assess the locations for investment purposes, they will have to take into consideration the extent of the flood risk and the impact of climate change.”
Moving forward, Yeah said it is important for the government to learn from its failures in managing the recent flood disaster.
He added that this should be a wake-up call for Putrajaya, where the government must mobilise its agencies to ensure that the standard operating procedures in place are activated.
Institutional response, most importantly on the three levels – federal, state and district – is very lacking. The lack of clear lines of authority and responsibility of what we have seen in the passing of the buck have led to paralysis.
“There are lessons we have to take on board to create a response system and the mobilisation of resources that can quickly deal with such disasters in a rapid manner.
“As of now, confidence among the people has been severely battered.” – The Vibes, January 1, 2022
