KUALA LUMPUR, 13 February 2020 – Bank Negara Malaysia (BNM) may not have much choice but to ease monetary policy further by making another cut on overnight policy rate (OPR) to help boost the economy, should the domestic economic growth continue to lose steam.

BNM governor Datuk Nor Shamsiah Mohd Yunus said during a media briefing yesterday that the government has room to provide fiscal stimulus if needed.

Still, some are less optimistic about the scale of the planned economic stimulus package that would be rolled out by early March to combat the effects of the Covid-19 virus.

OCBC Bank Research, which predicted growth of 3.5% in the first quarter of 2020 (1Q20), said there is a “distinct possibility” of another interest rate cut by March “especially so if production of commodities does not pick up”.

“While the government is preparing a stimulus package to help, we caution against harbouring hopes of any forceful injection, given (the) fiscal constraints,” said OCBC.

“Indeed, given the denominator effect, the slower GDP (gross domestic product) growth that we are likely to see is already going to present some challenges to meeting the 3.2% debt-to-GDP target.

“Hence, for all the help that the Malaysian economy needs this year, BNM remains the main source relative to the fiscal side,” it added.

Although economists had already revised downwards the growth projection for 4Q19, the actual growth figures came in even lower at 3.6%, bringing the full-2019 GDP growth data to 4.3%.

In 4Q19, agriculture and mining sectors disappointed, coupled with a moderated growth in the manufacturing sector on weaker exports and production disruption in the commodities sector.

The weaker-than-expected growth data painted a bleak picture of the country’s growth prospect this year. Already, 1Q20 growth is likely to be slower, no thanks to the virus outbreak that started in the beginning of the year.

Growth in 1Q20 will be dependent on the length and severity of the virus outbreak, which the market is expecting its economic impact to last for one or two quarters.

UOB Global Economics & Markets Research, in a report yesterday, said the virus outbreak is “generally expected to peak in 1H20 (first half of 2020)”.

Following the weak 4Q19, the research house has trimmed its 2020 GDP growth forecast to 4% from 4.4% previously. However, it sees no further OPR cut from 2.75% presently considering BNM’s pre-emptive 25-basis-point cut in January.

RAM Ratings, in its note, pointed to downside risks on industries, supply chains, exports and household consumption from the virus outbreak, with its guesstimate of 0.2 to 0.5 percentage points off its 2020 GDP forecast of 4.5%.

“That said, the potential support from monetary and fiscal policies will play an integral role in sustaining growth momentum. Expedient roll-out of projects as well as accommodative credit conditions are critical to driving growth this year amid such highly uncertain conditions,” RAM Ratings said.

‘Malaysia needs economic strategy’

Others see the weak 4Q19 numbers as a wake-up call for the government to have a clearer economic strategy, as it reflected low levels of private investments in the last few quarters, which signals a cautionary private investment outlook.

Institute for Democracy and Economic Affairs chief executive officer Ali Salman, in a note, concurred that Malaysia is facing a challenging external environment such as trade uncertainties and the virus outbreak.

“But they also reflect some weak conditions here in Malaysia, particularly low levels of private investment,” said Ali.

“It is clear that political uncertainty and a lack of a coherent economic strategy are undermining sentiment among private business, which is needed to drive economic growth.

“The government needs to move beyond the focus on politics and provide a clear direction for the Malaysian economy,” he said.

Ali also urged caution and clear thinking with respect to the need for a fiscal stimulus.

“[The] government’s withdrawal of GST (goods and services tax) and imposition of SST (sales and service tax) was a stimulus for consumption but we have seen it was short-lived,” he said.

Therefore, he said, it is important to act strategically and identify areas where government spending can contribute to long-term growth.

“For example, given the low unemployment rate and stable private consumption, any government stimulus should give priority to boosting private investment.

“More importantly, any fiscal stimulus needs to be accompanied with a commitment to structural reforms such as freeing up the economy from unnecessary government interventions. Spending money without a clear strategy or long-term political stability will not help for long,” said Ali.

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First published in The Edge Markets, 13 February 2020