Spillovers from the global slowdown and our pandemic containment measures will result in large output losses, says BNM

by NG MIN SHEN & ASILA JALIL/ pic by MUHD AMIN NAHARUL

A RECESSION seems imminent with Malaysia’s GDP may shrink to a low of -2% in 2020 due to the economic impact of the Covid-19 pandemic, Bank Negara Malaysia (BNM) warned.

It said the global economy is projected to register a negative growth in 2020 due to the significant economic repercussions arising from the virus, while Malaysia’s Movement Control Order (MCO) will dampen domestic economic activity.

“We project Malaysia’s GDP for 2020 to be between 0.5% and -2%. In the first half of this year (1H20), spillovers from the global slowdown and our pandemic containment measures will result in large output losses,” BNM governor Datuk Nor Shamsiah Mohd Yunus (picture) said in a virtual press conference last Friday.

“This will take a toll on the economy, but it is necessary to keep the pandemic at bay. At the end of the day, the preservation of life is paramount,” she said.

Malaysia’s GDP grew 4.3% in 2019, the lowest since the global financial crisis, mainly due to commodity supply shocks and slow public investment activity.

The central bank’s estimate is even bleaker than the World Bank’s, which recently slashed its growth projection for Malaysia to -0.1% in 2020 from 4.5% previously.

“We are mindful that the situation surrounding Covid-19 is highly fluid and the situation is constantly shifting. The GDP forecast is our best estimate based on what we know today. Great uncertainty remains,” Nor Shamsiah added.

The International Monetary Fund is expecting the global economy to undergo a recession in 2020 that’s at least as damaging as the global financial crisis, though recovery will come in 2021.

Malaysia will also be affected by volatility in oil prices and continued commodity supply disruptions, as the drought last year will affect oil palm yields and maintenance works will hamper production in a number of oil and gas facilities.

According to BNM assistant governor Marzunisham Omar, oil prices are expected to range between US$25 (RM109) and US$35 per barrel this year, During the MCO period, the domestic economy will be operating at around 45% of its capacity. The labour market is expected to be considerably weaker as well.

“We expect the unemployment rate to increase to 4%. Our unemployment rate was 3.7% during the global financial crisis and 3.2% during the Asian financial crisis in 1998,” Marzunisham said.

Headline inflation is seen to average between -1.5% and 0.5% in 2020 (2019: 0.7%), reflecting significantly lower global oil and commodity prices.

On a brighter note, growth prospects are expected to improve towards year-end, in line with projected global demand recovery, continued support from policy measures, recovery in commodities supplies and higher public sector spending, BNM said in its 2019 Economic and Monetary Policy Review.

The RM250 billion worth of stimulus measures are estimated to add 2.8% to the 2020 GDP growth, while the RM15 billion in capital expenditure to build major transport infrastructure will help lift 2020 GDP growth by 1%, Nor Shamsiah said.

BNM also has the “flexibility and space” to “deploy” its policy levers where necessary, including monetary policy, macro prudential and micro prudential policies, and oversight over financial institutions.

“These are trying times. I believe we have what it takes to endure and emerge stronger. Malaysia has done this before and we can do it again,” Nor Shamsiah stated. “Most businesses have earnings buffers over four times their debt.”

According to BNM’s Financial Stability Review 2H19, businesses in the transport and storage, wholesale and retail trade, hotels and restaurants, and manufacturing sectors — those most hit by Covid-19 — represent about 44% of banks’ business loan exposures and some 16% of total loans from the banking system.

Although many small and medium enterprises are already struggling with cashflow issues due to the impact of the MCO and greater caution among consumers, the central bank said its stress tests found households and businesses are able to withstand extreme shocks beyond past events.

It estimates households that are most vulnerable — those with negative financial margins — comprise about 5.2% of total household debt.

“Most businesses have earnings buffers of over four times their debt servicing obligations,” BNM deputy governor Jessica Chew said.

For large borrowers, BNM applied an earnings shock “double the shock experienced” during the global financial crisis.

For households, the income shocks applied were also higher than that experienced during the Asian financial crisis. This was combined with a house price shock of “more than double (what was) historically experienced”, Chew said.

The aggregate excess capital buffers of the banking system currently stands at RM121 billion, while impairment levels are currently at a historical low of 1% of the total banking system and banks have set aside more than adequate provisions, she added.

“While we do expect that given the weaker underlying conditions, there will be households and businesses that will face some repayment difficulties, we expect that any increase in credit losses from the current loan levels will be well within the capacity of banks to absorb. This will be without impairing credit flows to the economy,” Chew explained.