KUCHING: With the further easing of restrictions and the recent reopening of its international borders, Malaysia has finally entered its endemic stage.
Despite the ongoing macro uncertainties, the economy is expected to stage a more concrete recovery compared with previous years, plagued by uncertainties brought on by the pandemic.
”For Malaysia, the pace of economic recovery is projected to gather further momentum amid the reopening of the economy and international borders. While we are not yet out of the woods, we are better prepared now.
“The better Covid-19 management and higher vaccination rates will help mitigate the adverse impact from future resurgences and thus protect our healthcare system from being overwhelmed.
“With these factors in mind, we expect less disruption to economic activity and spending in the event of resurgences.
“As an open economy, Malaysia will continue to benefit from the expansion in global demand, which would support both investment activity and the labour market.
“Overall, for 2022, growth is expected to expand between 5.3 and 6.3 per cent,” Bank Negara Malaysia (BNM) Governor Tan Sri Nor Shamsiah Mohd Yunus said in BNM’s recently released Annual Report.
For the Malaysian economy, BNM expects recovery to gain momentum in 2022 underpinned by several factors including continued expansion in external demand, full uplifting of containment measures, reopening of international borders, and further improvement in labour market conditions.
In addition, the implementation of investment projects and targeted policy measures will provide further support to economic activity and aggregate demand.
“Developments surrounding Covid-19 remain key in influencing Malaysia’s growth trajectory in 2022, particularly in the shift towards a more calibrated and proportionate approach to managing the domestic epidemic situation.
“After enduring the Covid-19 pandemic for two years, the government, businesses, and healthcare system are now more adept at managing the spread of the virus.
“Under the National Covid-19 Immunisation Programme, Malaysia has achieved high vaccination rates and swiftly rolled out booster doses, which has helped to lower hospitalisations and severity of infections,” it said.
It also pointed out that the promising recent discoveries of antiviral drugs and treatments for severe Covid-19 cases would also contribute to lowering hospitalisations and deaths due to infections going forward.
“Therefore, where capacity of the national healthcare system remains sufficient, the government has reaffirmed its position to avoid impositions of nationwide lockdowns and strict containment measures.”
Echoing this sentiment, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said, it believed the recovery in the domestic economic activities will continue as both consumers and businesses will increase their spending in view of a better outlook.
“In addition, Malaysia will benefit on the external front due to solid global demand coupled with soaring commodity prices,” it added.
“Malaysia will shift into the endemic phase in the second quarter of 2022 (2Q22), specifically on April 1, 2022. International borders reopening is among the significant catalysts in the second quarter onwards.
“We believe Malaysia is very unlikely to face a nationwide lockdown this year. Looking at Malaysia’s Covid-19 trends, close to 80 per cent of the population already received two doses of vaccines, while almost 50 per cent of the population received their booster jabs.
“Even with the arrival of Omicron-variant, confirmed new daily cases reached its peak in early March 2022 and started to trend lower.
“The stress on the public health system was generally manageable, with the hospitalisation rate already on a declining trend and ICU rate plateaued at 35 to 38 per cent in March 2022.
“Thanks to high vaccination rate, Malaysia’s hospitalisation and ICU rates are relatively lower during the Omicron-variant period as compared to the Delta-variant period last year,” it said.
On the external front, the research team noted that the pace of growth for both exports and imports in January to February 2022 has been stronger than projected.
“As a result, we revise our growth projection higher for both exports and imports to 7.8 and 9.6 per cent, respectively, for 2022. After strong growth last year, we opine that the growth rate will moderate this year due to the diminishing low-base effect.
“Overall, we expect growing foreign demand for E&E and commodities, especially palm oil and oil & gas, will support expansion in exports in the coming months.
“gIn addition, Malaysia stands to benefit from high commodity prices and further economic reopening in Malaysia and other countries,” it said.
However, it cautioned that the risks of prolonged supply chain disruptions following the reimposition of lockdown in China and the war in Ukraine could constrain global production and trade activity.
“gMoreover, the outlook for external demand could also be weighed down by elevated inflation given the high prices of energy and other commodities,” it added.
Nevertheless, according to BNM, domestic-specific factors, such as higher production from new manufacturing and mining facilities, expansion in existing facilities, and continued progress of large infrastructure projects, are expected to drive the recovery in overall economic activity.
“The reopening of international borders and resumption in international travel activity would lend further support to the rebound in consumer-facing and tourism-related sectors,” it said.
A stronger recovery in private sector expenditure is also expected to be the main driver of growth amid the full lifting of containment measures.
”Private consumption is expected to record a growth of 9.0 per cent (2021: 1.9 per cent), as household spending will be primarily supported by recovery in income and employment.
“Consumer confidence is also expected to improve as vaccinations progress and containment measures are fully eased, leading to some materialisation of pent-up demand. Nevertheless, this is contingent upon the developments in the domestic epidemic situation,” BNM said.
“Importantly, policy support for households and businesses remains in place to facilitate the recovery momentum, albeit more targeted in nature, to assist vulnerable segments that were significantly affected by Covid-19.
“Support from the 2022 Budget measures from various cash transfers, targeted wage subsidies, and targeted loan repayment assistance will continue to provide further impetus to the economic recovery.
“Allocations for the Bantuan Keluarga Malaysia, EPF-related measures and tax reliefs will also provide some support to household spending,” BNM highlighted.
For businesses, vulnerable sectors such as tourism-related industries and agriculture would benefit from the wage subsidy programme and numerous targeted grants, it added.
Despite the growing optimism on Malaysia’s economic recovery, BNM cautioned that given the rapidly-evolving macroeconomic environment, risks to the domestic growth projection remain tilted to the downside.
“Downside risks stem mainly from the developments surrounding Covid-19, such as the emergence of severe and vaccine-resistant VOCs which could lead to potential reimpositions of broad-based containment measures.
“Other domestic factors that could affect the recovery path include slower-than-expected rollout of public infrastructure projects, more persistent labour shortages and supply chain disruptions, as well as higher-than-expected inflation which would reduce disposable income and adversely affect consumer sentiments.
“On the external front, worsening supply chain disruptions and heightened volatility leading to disorderly financial conditions could significantly affect Malaysia’s growth and trade outlook.
“Additionally, prolonged and further escalation of the geopolitical tensions, particularly the military conflict in Ukraine, represents a key risk to the Malaysian economy as well, emanating from its impact to global growth and trade, prices, and financial market volatility.
“Conversely, factors which pose upside risks to the growth outlook emanate from higher-than-expected global growth and stronger-than-expected improvement in tourism-related sectors amid the reopening of borders,” it said.
Domestic spending on the mend with easing of restrictions
Domestic demand is expected to continue be the main anchor of growth for the local economy.
On the demand side, growth in 2022 is expected to improve, underpinned by the continued recovery in private sector expenditure while private consumption is expected to expand by nine per cent in 2022, BNM stated.
“This is anchored in the continued improvement in labour market conditions. In addition, the absence of strict containment measures would provide a lift to household spending.
“The rise in online spending since the onset of the pandemic in 2020 is expected to continue and will further spur private consumption.
“The materialisation of some pent-up demand for selected discretionary items which were previously restricted due to the imposition of containment measures is also expected to provide some support to overall spending.
“These include discretionary spending on restaurants, hotels and recreational activities.
“The strength of the pent-up demand, however, is subject to the path of the epidemic situation in Malaysia,” it added.
According to a report by the research team at Kenanga Investment Bank Bhd (Kenanga Research), based on the Malaysian Institute of Economic Research (MIER) Consumer Index, consumer sentiment is seen as rising as restrictions have eased, fuelled further by the re-assurance from the accelerated vaccines roll-out and booster shots.
“The National Recovery Phase in mid-September 2021, was a welcome boost to our Consumer Stock Universe as earnings surged 97 per cent q-o-q and 42 per cent y-o-y partly coming from a low base effect,” it noted.
However, it pointed out that global and domestic economic momentum saw rising economic challenges – rising input and logistics costs as supply tries to cope with rising demand.
“New geo-political tensions stoked further inflationary pressures as energy prices surged. Global economic indicators showed that input prices are likely to remain elevated, in fact even rising in the coming months which will pose risks to earnings, indicating that pre-pandemic level margins is still a long way off,” it said.
Nevertheless, Kenanga Research highlighted: “We are positive on robust top-lines ahead with economic activities accelerating as we move farther into the endemic phase.
“Input prices will be at elevated levels as global economic recovery accelerates which give rise to a variety of challenges – inflation risks arising from rising input prices coupled with higher freight costs as supply tries to cope with rising demand and upsurge in labor costs arising from shortage and the implementation of the minimum wage.
‘With raw materials prices seen to rise by 10-20 per cent in 2022, it is expected that producers will pass the rising costs to consumers but unlikley at a quantum enough to offset elevated inputs prices.”
The MIER Consument Sentiment Index has showed improved sentiments since mid-September 2021 as the national Recovery Phase took effect.
Driven by the reopening of the economy and pent-up demand, this improved sentiment looks likely to hold ahead. More so with BNM pledging to keep interest rates at an accommodative level to support the nascent economic recovery.
Meanwhile, MIDF Research pointed out that Malaysia’s labour market has improved further as employment increased 2.9 per cent y-o-y in January 2022, the biggest gain since June 2021.
”As overall economic activities stay in recovery mode, total unemployed persons fell further by -13 per cent y-o-y in January 2022, the largest contraction rate ever recorded.
“Jobless rate remained at pandemic low of 4.2 per cent. Resumption of domestic spending and continuous upbeat momentum of external demand, as well as elevated commodity prices, were among key supportive factors for the recovery in labour market.
“In addition, we expect smoother labour market recovery in 2H22 as Malaysia’s international borders to fully reopen on April 1, 2022. Hence, we shall see the return of non-citizen employment this year after more than 100K foreign workers left the job market during the pandemic years,” it said.
“Looking ahead, we view Malaysia’s labour market to continue on steady recovery pace as indicated by the steady pick-up in job-to-vacancy rate which hit a new record high at 47.1 per cent in December 2021.
“Apart from international borders reopening, Malaysia’s solid macro fundamentals are set to support the overall economic growth as well as labour market in 2022,” MIDF Research projected.
As such, Malaysia’s consumer spending is expected to be on a strong footing underpinned by steady recovery in labour market, broadly stable inflationary pressure and fiscal incentives.
”On top of that, the government has given the permission for extra EPF withdrawals up to RM10,000 which will be disbursed in Apr-22 onwards. In the same month, international borders will reopen and we shall see gradual return of foreign tourists to Malaysia.
“We believe services sector, such as retail trade and hotel & accommodation industry will benefit the most with these current developments, recovering stronger after almost two-years of limited activities,” it said.
Nevertheless, it cautioned that for industry players in the consumer sector, rising raw material prices could be a key challenge.
”We note that the rising raw material prices, freight charges, uncertainties with Covid-19 pandemic, as well as the Russia-Ukraine war will continue to be a key risk factor for the sector.
“The prices of wheat, corn and soybean increased significantly from February due to supply disruption concerns related to the war.
“Moving forward, we believe that the rising prices of raw commodity goods will impact the profit margin of companies in the sector. As such, some of the consumer staple companies have started to pass the higher costs gradually to the consumers since last year to reduce the margin pressure.
“However, we think this would only be conducted marginally and in stages to ensure the companies retain its market shares due to high competition and pricing control mechanism for staple food items such as eggs and chicken.”
The high prices of basic necessities and consumer goods could also affect the purchasing power of households, which would lead price sensitive consumers to switch to affordable options.
“This was evident in the latest Consumer Sentiment Index (CSI) data by Malaysian Institute of Economic Research (MIER) for 4Q21 which showed that the index fell below the optimum 100-point threshold level after rising in the earlier quarters.
“This was due to the uncertain job market then as well as concern about the rising prices.
“However, according to the recent labour market data for January 2022, employment increased by 2.9 per cent y-o-y, recording an eight-month high employment growth.
“With this encouraging labour market data coupled with lower jobless rate, we expect the CSI will improve in the next quarter with the transition to endemic stage.”
Business sentiments on an upward trend
Besides improvement in consumer sentiments, the business environment is also expected to benefit from the reopening of borders and the easing of restrictions.
According to a joint survey by Federation of Malaysian Manufacturers (FMM) and Malaysian Institute of Economic Research (MIER), heading into 2022, growing external demand is expected to bolster recovery in the manufacturing sector amid continuing domestic and external headwinds.
”All forward-looking indicators are back in the black with readings above the threshold level of optimism, portending that the near-term prognosis for the manufacturing sector is positive.
“The latest expected business activity index soared to 122 from 60 previously, implying that business activity is expected to gain further momentum in the next six months. 39 per cent of the respondents believed that business activity will pick up soon, up from 15 per cent in the prior period.
“Only 17 per cent were pessimistic in this aspect, which is in sharp contrast to the 55 per cent who replied similarly in the previous survey,” FMM said in a report.
“The indexes for expected local and export sales also improved considerably from the prior survey. At 113 and 111, respectively, it shows that expectations among respondents on their sales outlook are looking up in the coming months, both locally and globally. 33 per cent of those who sell locally and 33 per cent of those who export are optimistic of higher sales soon, up from 10 per cent and 18 per cent in the prior survey, respectively.
“The latest expected indexes for production and capacity utilisation rose to 122 and 117, respectively, from 62 and 60 previously, suggesting that higher production and capacity are in the pipeline in anticipation of better demand in the months ahead. 41 per cent and 37 per cent of the respondents are planning to step up their production and capacities soon, respectively, up from 17 per cent and 15 per cent previously,” it added.
Recruitment is also expected to beef up in early 2022, FMM said.
It noted that 34 per cent surveyed companies are planning to expand their workforce soon, while 13 per cent are contemplating downsizing, compared to 12 per cent and 25 per cent previously, respectively
Meanwhile, it noted that the expected index for cost of production rose to an all-time high of 179, an implication that production cost is set for another increase in 1H22, as envisaged by 81 per cent of the respondents.
Another increase was observed for the expected index for capital expenditure. At 125, the index this time has gained 44 points from the preceding survey, a connotation that a rise in capex is imminent in the coming months as well. 39 per cent of the respondents will likely increase their capex soon, up from 18 per cent previously.
”Insofar as their own business recovery is concerned, 61 per cent are confident of this eventuality in 2022, while 30 per cent were unsure about it. Only 9 per cent were pessimistic.
“Among those who responded positively, 35 per cent believed that their businesses will recover to pre-Covid levels in 2022, while 32 per cent are even optimistic that their recovery will be better than pre-Covid levels. 33 per cent are reportedly still at Covid levels but they are expecting their businesses to recover to pre-Covid levels, or better, from 2H2022 to March 2023.
“24 per cent believed their recovery to be in 4Q22, while 22 per cent and 21 per cent are looking at 1Q23 and 3Q22, respectively.”
In a separate report, according to a RAM Holdings Bhd-CTOS Data Systems Sdn Bhd joint Business Confidence Index (BCI) Survey for 1Q22, Malaysia’s business sentiments are optimistic but a full recovery is still uncertain.
It pointed out that SMEs and micro enterprises still trail behind corporates on the path to recovery.
Although Malaysia’s transition into an endemic phase and the reopening of borders in coming months may boost prospects, firms would have to contend with rising costs and labour shortages that will eat into margins.
Banks need to keep small and medium enterprises (SMEs) adequately funded during the recovery phase. Policymakers should continue to engage with vulnerable firms and address specific needs to ensure a uniform and faster recovery from the pandemic,” both companies said in a joint press statement.
It highlighted that 75 per cent of which are SMEs and micro enterprises, may be interpreted as cautious optimism as many firms continue to report significant challenges in the near term.
Around 55 per cent of firms surveyed have yet to recover to pre-Covid levels, particularly for business services sector (62 per cent) and smaller SMEs and micro firms (60 per cent).
Most of these firms foresee full recovery only from 2023. In contrast, only 12 per cent of respondents, mainly from larger corporate firms, said business has surpassed pre-pandemic levels.
Large corporates likely benefited from the sharp rebound in export sales last year on the back of robust external demand.
”The road to full recovery is currently challenged by rising costs, which was cited by 62 per cent of surveyed firms, making it the biggest concern this quarter. Higher raw material input cost is the most felt by surveyed firms, particularly manufacturing firms, while staffing cost was the next pain point,” it added.
Nevertheless, it highlighted that surveyed firms were most bullish about sales and hiring outlook, seen in the respective sub-indices rising to 60.2 and 60.7.
”The share of firms citing economic weakness as a significant challenge dropped to 50 per cent from more than 80 per cent in the same period last year.
”Most firms surveyed nonetheless expect capacity slack to persist, implying demand has not fully normalised as the pandemic may have irrevocably changed consumption habits,” it said
Malaysia in need of structural reform
For Malaysia to emerge stronger and more resilient, it is important to maintain focus and prioritise on the key areas of structural reforms.
According to the World Bank, Malaysia needs an underlying structural economic transformation to increase productivity growth, according to the World Bank.
East Asia and Pacific regional vice president Manuela V Ferro highlighted that while the country has done relatively well compared to its regional peers, it has lagged its global aspirational peers that have nearly three times the productivity levels.
”Further, there are significant variations in productivity levels among firms within Malaysia. The pandemic has further exacerbated these differences,” she was quoted as saying by Bernama.
In recent years, spending on research and development (R&D) activities in Malaysia has decreased after a steady increase until 2016 while gross public expenditure on R&D has dropped from 1.4 per cent of gross domestic product (GDP) in 2016 to one per cent of GDP in 2018.
”This falls short of Malaysia’s envisaged goal of 2.0 per cent of GDP and the Organisation for Economic Co-operation and Development (OECD) average of 2.6 per cent.”
The World Bank also found that Malaysian firms are also less likely to spend on R&D compared to their regional peers.
”Our engagement with the government has provided us opportunities to look at relevant policy areas to assist in charting a path forward.
”One aspect of this which we focus on in our recent work relates to increasing small and medium enterprises’ (SMEs) contribution to Malaysia’s economic growth,” Ferro said.
Based on analysis undertaken in the ‘SME Programme Review’, the World Bank said Malaysia could consider realigning its public support for SMEs to not only enable a private sector-led recovery from the pandemic but also support firm-level innovation.
Another World Bank study titled ‘Assessment of the Malaysian Start-Up Financing Ecosystem’ revealed that Malaysia’s venture capital activities are relatively low compared to the region, in relation to its level of economic development.
”Thus funding activities are performing below potential, affecting investible deal flow down the line. We also find that public support is concentrated on the more advanced stages of innovative activities, calling for a possible need to rebalance this to earlier and hence the riskier stages of the innovation cycle,” she added.
The World Bank recommended the government to enhance evidence-based policymaking for SME development by increasing monitoring and evaluation of government programmes and coordination among agencies, to recalibrate SME programmes to support needs on digitalisation and skills upgrading, and to rebalance the policy mix towards the ideation stage with programmes that crowd in private investments.
Meanwhile, BNM recommended that the shift towards higher quality investments is essential and must be done in tandem with the development of a future-ready workforce, acceleration of social protection reforms, and rapid adoption of automation and digitalisation.
”The continued push to adopt the Environmental, Social and Governance (ESG) agenda is also critical, particularly to ensure Malaysia remains globally competitive, whilst building a more sustainable and resilient future.
“It is commendable that the Government has initiated efforts on these fronts, particularly in the Twelfth Malaysia Plan (12th MP) and 2022 Budget.
“We welcome these efforts and see strong potential to accelerate the implementation of these reforms in the immediate horizon,” it said.
“As Malaysia continues to respond and recover from the effects of the pandemic, it is vital to nudge the process of creative destruction as businesses seek to pivot and reconfigure in these post-pandemic times.
“The existing approach of adopting blanket measures could potentially result in a loss of future growth in years to come. Such risks could become imminent if we do not stay focused and expedite our efforts on these reforms,” it highlighted.
In carrying out structural reforms, BNM acknowledges the realities confronting domestic policymakers. The challenge lies in balancing the need to continue providing policy support amid an uneven economic recovery, and rebuild policy buffers, while expediting structural reforms that require strong commitments from all stakeholders.
Given this, Malaysia urgently needs a comprehensive roadmap on the prioritisation, sequencing and execution of reforms that cuts across both public and private sectors.
The bank’s role in supporting these structural reforms is to ensure that the financial system can facilitate the intermediation needs of transformation, which has been reflected in the recently announced Financial Sector Blueprint 2022-2026,” it said.