Fitch Group unit revises down Malaysia’s 2020 GDP growth to 3.7pc following Covid-19 outbreak

Fitch Solutions said private consumption and services exports will likely suffer further from a decline in international tourist arrivals. — Picture by Ahmad Zamzahuri
Fitch Solutions said private consumption and services exports will likely suffer further from a decline in international tourist arrivals. — Picture by Ahmad Zamzahuri

KUALA LUMPUR, Feb 13 ― Fitch Solutions has revised down its 2020 real GDP (gross domestic product) growth forecast for Malaysia to 3.7 per cent, from 4.5 per cent previously.

In a statement today, the research unit said this revision reflects the downside risks to all expenditure categories, except government consumption, as a result of the 2019 novel coronavirus (Covid-19) outbreak worldwide.

“We expect government stimulus and a likely sharper fall in imports to provide some support in the face of heavy downside risks, preventing a collapse in growth,” it said.

According to Fitch Solutions, the revision was made to account for increasing challenges to the Malaysian economy following the Covid-19 outbreak that has infected at least 60,000 people around the world as of February 13.

“This reflects our view for a deceleration from 4.3 per cent in 2019, following the data release showing just 3.6 per cent year-on-year (y-o-y) growth in Q419, the slowest since Q309 during the Global Financial Crisis.

“Our downbeat forecast reflects our view for all sectors of the economy to do worse than before as a result of the impact of the disease on key trade partner Singapore and regional growth lynchpin China,” it said.

However, the research unit viewed there would likely be support from an imminent government stimulus package expected to be announced by early March and from falling imports, which should help put a floor to the growth deceleration.

“In our view, the Malaysian economy is likely to be hit hard by the Covid-19 outbreak in China, which has also infected at least 18 people in Malaysia as of February 12.

“While Malaysia has a relatively well diversified economy in terms of sectors, a large portion of it depends on the economic health of Mainland China and Singapore, two economies which are closely linked and likely to slow further in 2020.

“The investment-led recovery which we had been arguing for is now threatened by the economic impact of the outbreak on China and Singapore, two key sources of foreign capital in Malaysia,” it said.

It was previously reported that RHB Research expected Covid-19 to have a limited impact on the Malaysian economy, with most of the fallout to be seen in the first and second quarter of this year.

On February 6, RHB research experts said Covid-19 still poses an uncertain downside given the ambiguity of its outcome. RHB Research, however, had still maintained its GDP forecast at 4.3 per cent y-o-y for 2020.  

Fitch Solutions, meanwhile, said private consumption and services exports will likely suffer further from a decline in international tourist arrivals, given that Singaporeans and Mainland Chinese make up the majority of this group at 60.2 per cent.

The research unit also predicts that goods exports are also likely to weaken in at least the first half of 2020.

Electrical and electronic products, which make up about 37 per cent of total exports, will likely be weighed on by the extended factory closures in China, given Malaysia’s close integration into the Asian supply chain.

“Oil and gas products, which make up around 24 per cent of total exports are meanwhile heavily exposed to the downward price pressures due to the even poorer demand outlook in China.

“From both a volume and value perspective, this important component of Malaysia’s goods exports is likely to decline, boding ill for net exports overall,” it added.

It added that the combination of a larger y-o-y drag on headline growth of 2.1pp from exports growth and a smaller contraction in imports of 1.4pp saw net exports pose a drag of 0.7pp from growth.

“This compares to positive contributions in the four quarters between Q418 and Q319, at an average of 0.5pp.

“Gross fixed capital formation recovered to subtract only 0.2pp in Q419, compared to 0.9pp in Q319.

“The key factor underpinning our previous view for a broad stabilisation of economic growth has been undermined and we are dialling back expectations for a recovery in gross fixed capital formation,” it said.

Given less favourable economic conditions in both Singapore and China, Fitch said, both public and private resources, especially in China, are likely to be focused on supporting domestic operations.  

“This is in line with our view for increased challenges for Chinese businesses to stay afloat given the Covid-19 outbreak and is a supporting factor behind our downward revision of China’s 2020 real GDP growth to 5.6 per cent from 5.9 per cent previously.

“FDI (foreign direct investment) from both Singapore and China had been on a broad accelerating trend since Q418, but this is unlikely to be sustained over the coming months,” it said.

In addition, Fitch Solutions said that existing China-backed projects such as the East Coast Rail Link (ECRL) and the Bandar Malaysia transport hub may be disrupted over the coming months due to health concerns, with the possibility of Chinese workers being denied re-entry into Malaysia.

“In our previous update, we had expected private consumption to remain an important growth driver but to slow slightly, due to the government’s plans to dial back subsidies and handouts in 2020 as part of their fiscal rationalisation efforts.

“We believe that this view has now been bolstered by the downside risks to especially the tourism sector in Malaysia,” it said.

Fitch Solutions also expects imports to continue contracting in the less favourable economic climate.

“This will take place alongside the dimmer outlook for investment, which would decrease the need for capital imports, thereby bolstering net exports.

“Indeed, the 8.9 per cent y-o-y decline in capital imports in Q419 likely helped to prevent a worse trade balance from dragging growth further,” it added.

*A previous version of this story contained an error which has since been corrected.

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