Malaysia’s economy is likely to grow 6.0% this year, driven by the reopening of international borders and high vaccination rates, and as the country enters the transition to the endemic phase.
Moody’s Investors Service assistant vice-president and analyst Nishad Majmudar said the reopening of international borders would bolster the tourism-related services sector.
“(As for the transition into the endemic phase) over time, we expect that will support greater economic activity and private consumption in the country. Another factor is that we do expect weaker growth in key export markets like the European Union, which accounts for about 10% of exports.
“Nevertheless, Malaysia is exporting quite a diverse basket of goods whereby demand remains in the strong part of the cycle, such as electronics and oil and gas sector, which should perform well with the high prices,” he told reporters at Moody’s virtual media roundtable titled “Inside Asean: Malaysia” today.
However, he also said there were several downside risks, including the Ukraine-Russia conflict, as well as the potential for a surge in inflation to prompt Bank Negara Malaysia (BNM) to react more quickly in terms of policy rate normalisation.
“The Ukraine-Russia conflict is the biggest downside risk for growth. In fact, we have already marked down the forecast for a number of G20 economies, mostly in Europe but also in Asia Pacific,” said Nishad, adding that BNM is expected to raise its policy rate in the second half of 2022.
He said another round of border closures due to a new variant threat would be another potential risk but that the Malaysian government had indicated its interest in keeping the economy open and treating Covid-19 as endemic.
Additionally, a volatile political environment would undermine Malaysia’s credibility and the effectiveness of its institutions, as well as threaten the stability of capital flows and investment, which could be another potential downside risk for Malaysia, he noted.
“In our assessment over the last few years, some of the political noise that we have heard, in our view, have not affected the functioning of key economic institutions such as the finance ministry, Bank Negara, and securities regulators.
“However, the uncertainties around the election timing and the relatively thin majority in Parliament, we think, have constrained the fiscal reform process most notably and made it difficult for any of the governments that we have seen over the last three years to focus on some of these reforms,” said Nishad.
He added that if the general election were to come soon, it could lead to a more volatile political environment and political noise, but would not affect the overall functioning of key institutions.
Meanwhile, Moody’s expects Brent crude price to remain above US$100 (US$1=RM4.21) per barrel this year.
The rating agency expects Petronas to spend more of its capital spending this year, which could benefit the exploration and production contractors and oilfield services companies, said its analyst Hui Ting Sim.
“In terms of topline, I think we are quite positive as there will be more business for players in the oilfield service industry. The outlook for earnings and cashflows could be less positive because these companies will incur higher operating costs this year due to the inflationary pressure that leads to higher utility, equipment, and labour costs.
“Profitability of these companies will depend on their ability to pass through the increase in costs to oil and gas producers,” she added.