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

SINGAPORE — Several economists slashed their 2021 growth forecasts for Malaysia after the country announced stricter measures to contain a recent surge in Covid-19 cases.

The Malaysian government imposed an inter-state travel ban nationwide and a lockdown on six states and territories for two weeks starting Wednesday. The country’s king also declared a state of emergency that will last until Aug. 1, or earlier if Covid cases are effectively lowered.

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

• Capital Economics, a consultancy, said the Southeast Asian country will grow 7% this year — down from its previous projection of 10%;
• Singaporean bank UOB downgraded its forecast from 6% to 5%;
• Japanese bank Mizuho lowered its projection from 6.7% to 5.9%;
• Fitch Solutions revised down its forecast from 11.5% to 10%.

Malaysia was one of the worst-performing economies in Asia last year. The International Monetary Fund in October said the Malaysian economy would shrink 6% in 2020, reversing a growth of 4.3% in the previous year.    

Alex Holmes, Asia economist at Capital Economics, said in a Tuesday report 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 capital city Kuala Lumper and Malaysia’s richest state, Selangor — account for 57% of the population and 65% of gross domestic product.

The lockdown — locally referred to as a movement control order, or MCO — includes banning all social gatherings and dine-ins, closing schools and allowing only “essential” businesses to open.

Most of the rest of the country were placed under less stringent measures, with most businesses allowed to operate but activities that involve large gatherings are banned.

Economists from UOB said in a Wednesday report that their growth forecast downgrade assumed that the restrictions are extended for another four weeks until end-February. But the overall economic hit from the latest measures is likely “less severe” compared to last year when the whole country was locked down, added the economists.

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

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

The currency slipped 0.5% against the U.S. 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.

Malaysia’s Prime Minister Muhyiddin Yassin said there won’t be a curfew under the state of emergency, and the government and judiciary system will continue to function. But parliament will be suspended and elections cannot be held, he said.

Muhyiddin came to power in March last year and has been facing increasing calls from within his ruling coalition to step down and make way for a snap election.

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

“Instead, a steady policy platform to decisively tackle (the) pandemic with urgency is ultimately a positive for getting the economy back on track,” she said.