MARC: Governments’ response to Covid-19 surge a challenge to vaccine-fuelled recovery

PETALING JAYA: The anticipated governments’ response across various countries to the resurgence of Covid-19 cases is likely to challenge the earlier forecast of a V-shaped recovery in 2021, according to Malaysian Rating Corp Bhd (MARC).

Despite the rapid development and deployment of vaccines in recent weeks, it noted that the pandemic will continue to force economies to balance a difficult trade-off between managing public health and driving economic growth.

“We forecast that the Malaysian economy will record a contraction of 5.7% in 2020 and a rebound to 6.4% growth in 2021 due to the low base effect,” said the rating agency in a statement.

It elaborated that the rebound will be driven by private consumption (7.7%) and private investments (6.5%) amid a higher inflation of 2% while the unemployment rate is expected to remain elevated at 4%, subject to a full recovery.

If the present conditional movement control order (CMCO) were to persist, MARC expects another round of debt-led stabilisation policy to take place in 2021, which will likely strain Malaysia’s fiscal position further as the government may need to revisit the recently raised debt ceiling of 60% and increase it to 65%.

“The Malaysian labour market has somewhat improved in recent months, but it will likely trend sideways as the economy continues to perform below its long-term capacity,” said the ratings agency.

Furthermore, it pointed out that as the oil prices have risen alongside the resumption of economic activities, naturally inflation will also similarly increase in 2021.

Throughout this year, MARC sees the overnight policy rate will remain low at 1.75% as further rate cuts will be unlikely.

It expects more upside for the ringgit given that its real effective exchange rate is currently trading at one standard deviation below its 10-year mean.

“Overall, Covid-19 shaped the global and the Malaysian economies in 2020 and, due to the resurgence of new cases, this will continue in 2021.”

As far as the major economies are concerned, the ratings agency noted the International Monetary Fund and Organisation for Economic Co-operation and Development’s forecasts that the US economy will recover in 2021.

“However, political risks will weigh on such positive outlook given a large segment of the US population did not vote for president-elect Joe Biden.”

Meanwhile, it opined that there has been speedy recovery observed in the Chinese economy and it will continue to perform well despite the resurgence of Covid-19.

On the other hand, it said the European Union appears to be facing a realignment of new economic engagements in 2021 following the conclusion of the Brexit deal in late December last year.