Malaysia’s firming economic recovery helps recalibrate policy support


The Malaysian economy is recovering strongly from the Covid-19 disruptions in 2021 and early 2022.

Protected by its high vaccination rate, the continuation of a national immunization program and adequate healthcare capacity, Malaysia has gradually reopened its economy despite the resurgence of infections with the Omicron variant in early 2022. Economic growth is expected to strengthen further with the country’s transition to the endemic phase of Covid-19 since the beginning of April. In this regard, accommodative policies can be recalibrated to provide more buffers against future shocks and preserve financial stability.

These findings are highlighted in the 2022 Malaysia Annual Consultation Report released by the ASEAN+3 Macroeconomic Research Office (AMRO) today (8 August). The report was based on AMRO’s virtual annual consultation visit to Malaysia in January-February 2022, and data and information available up to April 29, 2022.

Economic Developments and Prospects

The economy is on track to grow by 6% in 2022 after a firming up in growth in the first quarter thanks to a strong rebound in private consumption and buoyant exports. Headline inflation is expected to increase moderately to 3% in 2022 from 2.5% in 2021, reflecting the partial pass-through of higher global food and energy prices to consumer prices.

Robust trade, strong foreign investment inflows and an allocation of Special Drawing Rights (SDRs) from the IMF have enabled Bank Negara Malaysia (BNM) to build its reserve buffer in 2021. The improved position reserves has strengthened the BNM’s ability to withstand volatility shocks to capital flows.

Risks and vulnerabilities

Covid-19 remains a serious threat to economic recovery. Although this is an extreme risk, the emergence of more virulent and vaccine-resistant variants of Covid-19 could again lead to strict mobility restrictions if a rise in cases threatens to overwhelm the healthcare system.

At the same time, the economic outlook is clouded by a new set of headwinds. The war in Ukraine and more aggressive monetary policy tightening by the United States (US) and the European Union (EU) have exposed Malaysia to the risks of higher inflation and a global economic slowdown . Heightened inflationary pressures could persist due to prolonged disruptions to global supply chains. Meanwhile, aggressive monetary policy tightening in the US and EU amid the ongoing war in Ukraine could trigger a drop in global demand, including for Malaysia’s exports.

Aggressive rate hikes by the US Federal Reserve also present funding challenges for the Malaysian economy, as bond yields rise in tandem with US bond yields. On a positive note, the strong recovery in profits, higher cash reserves and lower leverage, especially for large corporations, provide reassurance that corporate sector balance sheets would remain strong in the face of rising costs. of refinancing.

Policy recommendations

While supportive fiscal policy remains essential to reduce disparities across sectors, a faster pace of medium-term fiscal consolidation is warranted to preserve fiscal sustainability.

AMRO welcomes increased spending in the 2022 budget, with more targeted support to vulnerable groups and greater allocation to development spending, while lowering the budget deficit to GDP ratio. As the recovery takes root, tax reforms — notably on indirect taxes — could be implemented, starting in 2023, to boost fiscal revenues and facilitate a faster reduction in the high tax ratio. debt to GDP.

The BNM has started to normalize its monetary policy, a welcome move given the strong rebound in economic activity and elevated global inflationary pressures. The policy rate, which was raised from an all-time low, may rise further as the output gap continues to narrow and inflation continues to rise.

Meanwhile, the phasing out of loan relief programs in 2022 is timely as business and labor market conditions continue to improve. Loan write-downs could result, but banks should be able to withstand credit losses given their wide safety margins and preventive provisioning.

Finally, proactive initiatives aimed at facilitating foreign direct investment and mitigating the impact of climate change are highly commendable and must be maintained to propel the economy onto a progressively more sustainable path. Ensuring the timely delivery of investment commitments while strengthening workforce development programs and the national funding ecosystem would be essential. At the same time, strengthening disaster preparedness and accelerating the implementation of policies that incentivize a shift to low-carbon domestic activities would put Malaysia on a solid footing to address climate-related risks. climate change.

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to help ensure macroeconomic and financial stability in the ASEAN+3 region, comprising 10 members of the Association of ASEAN Nations Southeast Asia (ASEAN) and China; Hong Kong, China; Japan; and South Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Multilateralization Initiative (CMIM), and provide technical assistance to members.


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