Malaysia suffers weakest growth in Q1, expects recovery from second half

14, May. 2020

On-going infrastructure project under sunset sky in Kuala Lumpur (Photo by  Zukiman Mohamad)
On-going infrastructure project under sunset sky in Kuala Lumpur (Photo by Zukiman Mohamad)

By Charlotte Chong

KUALA LUMPUR, NNA - Looking at it positively, the Malaysian economy still managed to grow 0.7 percent in the first quarter of 2020.

This was helped by the steady expansion in the first two months before things subsequently fell by the wayside as the coronavirus pandemic took its toll.

Q1 GDP slumped from 4.5 percent a year ago and from 3.6 percent in the preceding fourth quarter of 2019 to its lowest level in a decade for Malaysia which, like other economies in the region, was unable to escape the wrath of the deadly contagion and the economic impact of lockdown to contain its spread.

Releasing Q1 data on Wednesday, Bank Negara Malaysia (BNM), the country's central bank, said in a statement that the economy had contracted by 2.0 percent on a quarter-on-quarter seasonally-adjusted basis.

In a virtual press conference, BNM Governor Datuk Nor Shamsiah Mohd Yunus described the impact of the coronavirus crisis as “severe”, adding the second quarter will see the country falling into a deeper contraction after "most activities came to a complete and sudden halt on March 18" with the start of a nationwide lockdown.

It was extended three times before a less severe Conditional Movement Control Order (CMCO) was implemented from May 4. Although it has since been extended by another four weeks to June 9, curbs on most sectors were eased in early May.

So Q2 performance would reflect "the longer duration of containment measures both globally and domestically," said the bank's statement.


However, the bank expects the economy to improve gradually in the second half of the year after global containment measures are eased and the domestic MCO (Movement Control Order) is lifted.

Helping to boost growth will be the country's massive fiscal, monetary and financial measures, progress in transport-related public infrastructure projects and a recovery in commodities such as palm oil, crude oil and natural gas.

It is optimistic of a positive recovery in 2021 in line with forecasts in improvement in global growth, it added.

However, Nor Shamsiah warned that the unemployment rate will rise above 4 percent after more layoffs were noted in April and May due to business closures.

But she believes there would be rehiring in tourism and export-oriented sectors when they recover in the second half of the year. Collectively, these sectors employ about 45 percent of the total workforce.

The GDP forecast for this year will be revised again in the second half of the year as there are still pandemic-related uncertainties, said the bank governor.

Compared with the dire situation in 2009 brought about by the global financial crisis, Nor Shamsiah pointed out that Malaysia's stronger banking system today would mitigate losses better.

She said it is easier to leverage on additional borrowings now as the projected fiscal deficit of 3.5 percent of GDP is also less damaging than the 6.7 percent in 2009.

Alliance Bank chief economist Manokaran Mottain, who had initially expected Q1 GDP to be minus 3 percent, reckoned the better performance was due to the lockdown starting after mid-March when “the damage was not really reflected yet.”

Echoing Bank Negara Malaysia’s negative sentiment for the second quarter, he expects growth to drop by between 3 and 5 percent. As for a meaningful recovery after lockdown restrictions are lifted, he foresees a U-shape recovery over the span of a year.

However, Areca Capital CEO Danny Wong said Q1 growth rate had come up to his expectation.

“At least it is still a low growth. Malaysia’s industrial production index (IPI) was up and there were still activities before Chinese New Year.”

However, he has expected total write-offs for April and May after restriction orders halted most of the country's activities. He foresees Q2 to dip to around minus 2 percent.

He told NNA that a recovery would depend on consumption and trade with other markets. He expects consumption to weaken even after the lockdown is lifted as people would not start traveling or buy unnecessary things immediately.

Wong stressed that a truly meaningful rebound would hinge on how soon a coronavirus vaccine is discovered, and not on lockdown easing. He expects a small V-shaped recovery in the next two quarters after Malaysia's lockdown is totally lifted.

Financial help for businesses

In Q1, financial institutions collectively disbursed RM62 billion ($14 billion) to SMEs, of which RM48 billion was for working capital, reported the central bank.

Following the implementation of Special Relief Facility (SRF) to help businesses hit by the coronavirus crisis, financial institutions (PFIs) approved more than 20,000 applications amounting to about RM10 billion as of May 4.

The initial RM5 billion SRF allocation should directly benefit more than 9,000 SMEs across Malaysia and preserve more than 200,000 jobs, reported the bank. In view of strong demand, the central bank increased the facility by another RM5 billion to cater to all applications approved as of May 4.

With the gradual lifting of the movement control order and reopening of the economic sectors, SMEs can also avail themselves to existing financing schemes and options, said the bank.

Inflation and the ringgit

In Q1, headline inflation remained modest at 0.9 percent, mainly reflecting the lapse in the remaining impact from the sales and services tax (SST) implementation and lower price-volatile inflation, said the central bank. Core inflation moderated slightly to 1.3 percent.

Areca Capital's Wong expects low oil prices and consumption to drive down inflation but concurs with Mottain of Alliance Bank that a deflation is unlikely as prices of most products, especially essential items, would still be maintained and they would continue to be in demand.

During the first quarter, the Malaysian ringgit depreciated by 4.9 percent against the U.S. dollar in the first quarter as a result of foreign capital outflows which amounts to 26.2 billion ringgit, said the bank. The ringgit dipped further to 5.8 percent as of May 12.

"As this environment of uncertainty will persist in the near-term, capital flows and exchange rate volatility is expected going forward," said the bank.