PETALING JAYA: Fitch Solutions has revised down its Malaysia real household spending growth forecast for 2021, to 7.2% year on year (yoy), from the previous forecast of 11% yoy, due to MCO 2.0.

“While we still hold a positive outlook for the Malaysian consumer, several recent events have led us to revise down a number of our consumer spending forecasts for 2021. Coming out of a bleak 2020, the Malaysian consumer is again facing the prospects of a strict lockdown and movement restrictions over H1’21. In an effort to curtail the spread of Covid-19, the Malaysian authorities have barred non-essential retail from opening, while also limiting the movement of consumers to just essential shopping,“ it explained in a report.

While still positive, it highlighted that this is partly caused by base effects. The estimated 5% y-o-y drop in 2020 real household creates a low y-o-y base for 2021 to grow from. In nominal terms, total household spending will be worth RM950 billion in 2021, slightly higher than the RM932.9 billion estimated for the pre-Covid-19 environment in 2019.

“The Malaysian government has been relatively supportive of households during 2020 and have plans to continue this support into 2021. Our pharmaceutical & healthcare team predict that Malaysia will receive the vaccine as part of the first group of countries, indicating that the recovery in household spending is expected to be robust in H2’21.”

Retail sales in Malaysia have been down significantly over 2020, as both consumers and retailers were impacted by Covid-19 related restrictions. However, monthly retail sales data is showing signs of recovery, even posting positive growth in September 2020.

“As Malaysia vaccinates its population and gradually eases restrictions over 2021, we believe retail sales will recover over the year, with all retail sub-sectors expected to rebound. We do note that continued restrictions on inter-district and inter-state travel within the Klang Valley, which accounts for 60% of retail sales in the country, will delay this recovery.

“While Malaysian households will face continued pressure on their purchasing power over 2021, we believe that there will be pent-up demand over the year, especially as consumer confidence rises with increases in vaccinations,” said Fitch.

Additionally, it only expects non-essential spending to ramp up over Q3’21 and Q4’21, as a large population gets vaccinated, restrictions are gradually lifted and consumer confidence improves. However, over the year, it still forecast essentials such as food and non-alcoholic drinks and health spending, to continue their outperformance.

In line with this, Fitch’s country risk team has revised down its 2021 real GDP growth forecast to 10% from 11.5% previously.

“We project that the unemployment will only begin falling from H2’21 onwards. Additionally, we see inflation picking up slightly over 2021, as increasing demand from H2’21 puts upward pressure on prices. However, we do not expect this level of inflationary pressure to significantly impact our outlook for Malaysia.”

Fitch believes that it is very likely that lockdown measures will last longer than the initial two weeks and restrictions on high-risk environments, like shopping malls and crowded stores, will likely be some of the last restrictions to be lifted. This will have a disproportionate impact on the retail sector in the country

Over 2020, the Malaysian government announced five stimulus packages, to a total of RM72 billion. However, Fitch said the Malaysian government is reaching a point where they may not be able to finance the current plans, or other future stimulus plans.

“Any stimulus measures that will be announced in the coming weeks is unlikely to top what was announced in 2020 given the constraints the government faces, with the 2020 stimulus already being relatively small compared to what other economies fielded, such as Singapore and Hong Kong.

“The high public debt load is likely to have a negative impact on investor sentiment towards Malaysia and could raise its borrowing costs further. We highlight this as a significant risk to the Malaysian consumer, who is likely to face another six months of restrictions and subsequent job losses and/or pay cuts.”

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