Affin Hwang: Strengthening economic fundamentals, tax measures key to stronger economy

IMF said going into 2021, Malaysia’s real GDP growth and external demand will likely be influenced by the state and health of the global economy. — Picture by Choo Choy May
IMF said going into 2021, Malaysia’s real GDP growth and external demand will likely be influenced by the state and health of the global economy. — Picture by Choo Choy May

KUALA LUMPUR, April 15 — Malaysia will not be spared the global headwinds combined with the mass effect of Covid-19, with the central bank together with the World Bank and Internal Monetary Fund (IMF) forecasting a growth contraction for this year, although its economy is expected to rebound with strong expansion next year, says Affin Hwang Investment Bank Bhd.

In its research note today, the investment firm said in the months ahead, sovereign rating agencies will continue to monitor Malaysia’s macroeconomic developments, focusing on the country’s economic growth, fiscal deficit and government debt, from the impact of Covid-19 and low global oil prices.

“We believe that improving Malaysia’s economic fundamentals will likely be the best option to ensure that the country’s sovereign rating outlook is kept as stable by international rating agencies,” it said. 

It said that there is a need for pragmatic measures on the tax and expenditure programme to improve the government’s budgetary position, and to remain committed towards fiscal discipline and consolidation. 

“We believe the government will be looking at ways to cut discretionary spending and slow the increase in operating expenditure to safeguard the country’s operating surplus position since 1987. 

“A sizeable operating surplus is important, where historically, the country’s annual deficits were financed partly by Government borrowings channelled towards development projects, and not for operating expenditure,” it said.

It said despite global oil prices forecast to recover in the second half of this year; the government may be required to make some adjustments to the 2020 budget and fiscal deficit target, if there is a need to introduce further new stimulus measures.

It added that the government has remained committed to ensuring the federal government debt remains below the self-imposed limit of 55 per cent of gross domestic product (GDP), as well as focusing on maintaining an operating surplus in the years ahead. 

“As such, despite the challenging macro environment, we believe meeting the fiscal deficit target would help the government to build a solid reputation for fiscal discipline and prudence.

“This is especially necessary after the downgrade of Malaysia’s sovereign credit outlook from stable to negative by Fitch Ratings recently,” it said. 

IMF yesterday said despite the sharp downgrade in the global economy for 2020, the organisation is positive on the prospects of Asean economies in 2021 as it expects growth in Malaysia to expand strongly by 9.0 per cent for 2021, a sharp recovery from a contraction of 1.7 per cent in 2020.

IMF said going into 2021, as a highly open and trade-dependent economy, Malaysia’s real GDP growth and external demand will likely be influenced by the state and health of the global economy, which is anticipated to be better than in 2020. 

IMF predicts global GDP growth to recover strongly by 5.8 per cent next year, sharply higher than the contraction of 3.0 per cent projected for 2020.

Bank Negara Malaysia recently announced its projections that the country’s GDP growth will be between -2.0 per cent and 0.5 per cent for 2020, with strong rebound signs expected in the late stage of the year as the Covid-19 aftermath subsides. 

“Domestically, in 2021, we are cautiously optimistic that consumer confidence and sentiment will turn positive and Malaysian households will remain financially sound, supported by improving employment conditions and stable incomes, as global and domestic economies recover next year,” said Affin Hwang. — Bernama

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