KUALA LUMPUR: The Malaysian economy is expected to grow strongly this year, regaining momentum after the Delta strain of Covid-19 infections disrupted recovery in the third quarter of 2021, said Asean+3 Macroeconomic Research Office (Amro).
Amro said while the country was currently experiencing a resurgence of infection by the Omicron variant, symptoms were much milder, thanks in large part to the high, almost 80 per cent vaccination rate of the population.
"The continuing inoculation program and adequate healthcare capacity should keep the economy relatively open to allow for a sustained rebound in domestic demand. Accordingly, policies should be recalibrated to support a robust and sustainable recovery," Amro said today.
These conclusions form the preliminary assessment by Amro after its virtual annual consultation with the Malaysian authorities in January and February this year.
The Amro team, led by lead economist Dr. Sumio Ishikawa, director Toshinori Doi and chief economist Dr. Hoe Ee Khor, participated in the policy meetings.
The discussions focused on Malaysia's recent economic developments and risks to recovery, continuing policy support in response to pandemic disruptions, and policy considerations as the economy transitions to an endemic Covid-19 phase.
"We expect the Malaysian economy to grow by 6.0 per cent in 2022 from 3.1 per cent in 2021. This year's growth will be driven by a sustained rebound in domestic demand, as economic and social activities continue to recover despite the Omicron wave," Ishikawa said.
"At the same time, Malaysia's exports should remain supported by buoyant global demand, as well as increased production capacity," he added.
Amro said Malaysia was set to build on the recovery momentum that resumed toward the end of 2021 as mobility restrictions were lifted.
In the final quarter of 2021, the economy expanded 3.6 per cent relative to the previous year.
The expansion took hold despite the floods that hit several parts of the country in December.
"Latest indicators suggest that manufacturing output and private consumption continued to grow in the first or second months of 2022," it said.
Amro said due to the weaker recovery in 2021, Malaysian authorities had decided to pursue a more gradual pace of fiscal consolidation to support the economy.
"The 2022 Budget will remain sizeable, amounting to RM332 billion (20.3 per cent of GDP), and the fiscal deficit will stay elevated at six per cent of GDP compared to the 2016-19 average of 3.3 per cent. Targeted cash assistance, wage subsidies, and job hiring incentive schemes will remain available to vulnerable groups," Amro said.
The emergence of more virulent vaccine-resistant Covid-19 variants remained a major threat to economic recovery, although a tail risk, Amro said.
The spike in global inflation also risks disrupting the strong external demand, as advanced economies pursue more aggressive monetary tightening that could lead to weaker growth.
"Higher borrowing costs could likewise hold back the rebound in Malaysia's domestic demand as households and firms prioritixe debt servicing over spending and investment. In this risk event, fiscal policy will be left with limited space to further support the economy, given the already sizeable debt burden," it added.
Amro said while supportive fiscal policy remains critical to narrow the disparity across sectors, a faster pace of fiscal consolidation over the medium term is warranted to ensure fiscal sustainability.
In particular, revenue can be boosted by broadening the sales and services tax first, before eventually transitioning to the value-added tax, as the recovery becomes entrenched, perhaps starting in 2023.