Economists cut Malaysia’s growth forecast after new Covid lockdown and state of emergency

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A woman is seen in Kuala Lumpur with a Malaysian flag in the background.

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SINGAPORE – Several economists have reduced their 2021 growth forecasts for Malaysia after the country announced tougher measures to contain a recent surge in Covid-19 cases.

The Malaysian government has imposed a nationwide interstate travel ban and a lockdown of six states and territories for two weeks starting Wednesday. The country’s king has also declared a state of emergency which will last until August 1, or sooner if Covid cases are indeed reduced.

Here are some economists who have lowered their forecasts for Malaysia:

  • Capital Economics, a consultancy firm, said the Southeast Asian country will grow 7% this year – down from its previous projection of 10%;
  • Singapore bank UOB has lowered its forecast from 6% to 5%;
  • Japanese bank Mizuho lowered its projection from 6.7% to 5.9%;
  • Fitch Solutions has revised its forecast downwards from 11.5% to 10%.
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Malaysia was one of the worst performing economies in Asia last year. The International Monetary Fund said in October that the Malaysian economy will shrink 6% in 2020, reversing growth of 4.3% the year before.

Alex Holmes, Asian economist at Capital Economics, said in a report Tuesday that Malaysia’s latest lockdown “is likely to hit the economy hard.” He pointed out that the six states and territories under lockdown – which include the capital Kuala Lumper and Malaysia’s richest state Selangor – account for 57% of the population and 65% of the gross domestic product.

The lockdown – locally called a movement control order, or MCO – includes banning all social gatherings and dinners, shutting down schools and allowing only “essential” businesses to open.

Most of the rest of the country has been subject to less stringent measures, with most businesses allowed to operate, but activities involving large gatherings are prohibited.

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UOB economists said in a report on Wednesday that the downward revision to their growth forecast assumed the restrictions would be extended by four weeks until the end of February. But the overall economic blow from the latest measures is likely “less severe” compared to last year, when the whole country was locked down, economists added.

‘Blessing in Disguise’

The state of emergency declared on Tuesday shook stocks and the country’s currency.

But the move will remove the short-term political uncertainty the country has struggled with over the past year – and it could be “a blessing in disguise” for the Malaysian ringgit, said Lavanya Venkateswaran, market economist at Mizuho.

The currency slipped 0.5% against the US dollar in a knee-jerk reaction to the state of emergency announcement on Tuesday, but has since strengthened against the greenback and more than recouped those losses.

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Malaysian Prime Minister Muhyiddin Yassin said there will be no curfew under the state of emergency, and the government and the judiciary will continue to function. But parliament will be suspended and the elections will not be able to take place, he said.

Muhyiddin came to power in March last year and has faced growing calls within his ruling coalition to step down and make way for early elections.

The declaration of emergency “removes unnecessary and self-inflicted political uncertainty that could undermine the political response to the COVID resurgence,” Venkateswaran said in a report on Tuesday.

“Instead, a stable political platform to decisively tackle (the) an emergency pandemic is ultimately a positive factor in getting the economy back on track ”, she said.

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