Emerging

Priority on fiscal support

st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
7
MALAYSIA  
PRIORITY ON FISCAL SUPPORT  
Malaysia is one of the emerging Asian countries hit hardest by the Covid-19 crisis. Although a recovery is underway, it  
is bound to be hampered by new lockdowns in Q4 2020 and January 2021. Public finances have deteriorated sharply,  
but the government does not seem inclined to pursue fiscal consolidation. It is giving priority to the economic reco-  
very and support for the most fragile households. The public debt ratio will continue to deteriorate, and in December,  
the rating agency Fitch downgraded Malaysia’s sovereign rating. Yet refinancing risks are moderate: the debt struc-  
ture is not very risky and the country has a large domestic bond market. Malaysia will continue to report a current  
account surplus and has a solid banking sector.  
DEEP ECONOMIC CONTRACTION IN 2020  
FORECASTS  
Malaysia’s economy was hard hit by the coronavirus pandemic. From a  
health perspective, although Covid-19 did not hit the country nearly as  
hard as Indonesia and the Philippines, the situation is much worse than  
in Thailand, South Korea or Vietnam. In March 2020, the government  
imposed severe shelter-in-place restrictions throughout the country.  
These restrictions were partially lifted in mid-May, but were tightened  
again in Q4 2020 and in January 2021 after a surge in the number of  
new cases. Looking beyond the decline in domestic demand due to the  
general lockdown of the population, the Malaysian economy – which  
is highly integrated in world trade – was hard hit by the disruption  
in global supply chains, the collapse of tourism revenues and the  
decline in commodity prices. Nonetheless, its external accounts are  
still solid: at year-end 2020, foreign exchange reserves and the ringgit  
2019  
2020e  
2021e  
2022e  
Real GDP growth (%)  
4.3  
0.9  
-5.0  
-1.2  
-6.9  
61.3  
4.0  
7.5  
-0.3  
-5.6  
63.0  
2.0  
3.9  
1.0  
Inflation (CPI, year average, %)  
General Gov. balance / GDP (%)  
General Gov. debt / GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
-3.4  
52.5  
3.4  
-4.5  
64.7  
2.1  
62.6  
97  
66.5  
98  
66.0  
98  
65.5  
98  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDMYR (year end)  
5.7  
6.2  
5.7  
5.6  
4.1  
4.1  
4.1  
4.1  
(
MYR) were close to year-end 2019 levels, and the country is expected  
e: ESTIMATE & FORECASTS  
TABLE 1  
to report a current account surplus.  
SOURCE: BNP PARIBAS ECONOMIC RESEARCH  
In the first three quarters of 2020, real GDP contracted by 6.4%  
compared to the same period in 2019. Economic activity rebounded  
strongly between June and September, especially thanks to an upturn  
in exports, before slowing again in October and November, under the  
impact of tighter lockdown restrictions. In November, industrial output  
was 2% below the year-end 2019 level. In full-year 2020, real GDP is  
expected to decline by 5% compared to 2019.  
INDUSTRIAL OUTPUT  
Total Industrial production  
Electrical and electronic products  
Manufacturing  
y/y, %  
1
5
0
5
0
5
1
In 2021, economic growth prospects are looking strong, even though  
the new lockdown is bound to slow the recovery and the vaccination  
campaign will not begin before February 2021. Looking beyond  
a favourable base effect, domestic activity will get a boost from an  
expansionist fiscal policy that is geared towards helping the most  
fragile households and increasing public investment. Export activity  
should remain buoyant as well, bolstered by the rebound in global  
trade and the electronics market.  
-
-
10  
-15  
20  
-25  
-
To reach its medium-term objective of becoming a high-revenue  
country by 2023, the government will have to pursue structural  
reforms to raise productivity growth, which has declined over the past  
several years. To achieve this, it must increase the level of training and  
education of workers and improve the business environment to make  
the economy more propitious for domestic and non-resident private  
investment, which has been declining since 2018. Yet the government  
has only a slim majority in parliament, which is not good news for Public finances began to deteriorate well before the Covid-19 crisis. In  
reforms. New elections will also have to be held, as soon as the health 2018, government revenues (excluding exceptional dividends) began  
situation improves enough for them to be safe.  
2017  
2018  
2019  
2020  
CHART 1  
SOURCE: CEIC  
EROSION OF PUBLIC FINANCES: WHAT ARE THE RISKS?  
to decline after the newly elected government eliminated the tax on  
goods and services.  
The bank  
for a changing  
world  
st  
Eco Emerging // 1 quarter 2021  
economic-research.bnpparibas.com  
8
Meanwhile, its dependence on oil revenues increased considerably,  
and oil revenues accounted for 39% of total revenues in 2019. The  
new government also followed a much more expansionist fiscal policy.  
Whereas government expenditures had declined by 5.3 points of GDP  
in the period 2013-17, they rose by 1.6 points of GDP over the next  
ECONOMIC RECOVERY DRIVEN BY EXPORTS  
3
4
mma, %  
0
Exports  
Imports  
2
years to 20.9% of GDP. The increase is mainly due to higher social  
welfare spending.  
30  
20  
In the first 11 months of 2020, government revenues contracted 21.6%  
in keeping with the downturn in economic activity and the contraction  
in oil revenues. Spending was reduced by 10.1% thanks to cutbacks in  
investment spending while sparing social welfare spending. The central  
bank bore most of the brunt of the support package for households and  
small businesses. At the end of November 2020, the fiscal deficit had  
risen by more than 65.6% compared to the same period in 2019. The  
full-year deficit is expected to swell to nearly 7% of GDP (up from 3.4%  
of GDP in 2019).  
1
0
0
-
10  
-20  
30  
-
2017  
2018  
2019  
2020  
At the same time, the federal government’s debt-to-GDP ratio is  
expected to rise by nearly 9 points to more than 61%. After integrating  
all of the government-backed guarantees as well as the debt pertaining  
to 1MDB, total public debt could rise to nearly 88% of GDP at year-end  
CHART 2  
SOURCE: CEIC  
2
020 (up from 77.4% of GDP in 2019).  
Yet companies, already heavily in debt, were hard hit by the Covid-19  
crisis after being weakened by the 2019 economic slowdown. In Q2  
020, corporate debt swelled to 108.1% of GDP. Although corporate  
profits declined, they still covered interest charges by 3.7 times in mid-  
020 (down from 4.8 times at year-end 2019).  
The government does not seem to be inclined to consolidate the  
fiscal situation significantly in 2021. It continues to give priority to the  
economic recovery and to the support oflow-income households. In the  
2
2
2
021 budget that parliament approved in December, the government  
plans to reduce the fiscal deficit by only 0.6 points to 5.4% of GDP  
vs 6% of GDP in the revised 2020 budget). Government spending  
The household situation has also deteriorated. Household debt rose  
to 87.5% of GDP in Q2 2020, although it was largely offset by financial  
assets, the value of which still amounted to 190% of GDP in Q2 2020.  
Liquid assets still covered household debt by 1.4 times in mid-2020.  
(
should remain high (20.5% of GDP) while fiscal revenues, which are  
still highly dependent on oil, are unlikely to exceed 15.1% of GDP, even  
though growth is forecast at between 6.5% and 7.5%. The government  
does not plan to reduce the fiscal deficit to pre-Covid levels even by a  
horizon of 2022-2023, when it will still amount to about 4.5% of GDP.  
As in many other emerging countries, households and corporates  
benefited from a 6-month moratorium on loan payments between  
April and September 2020. Moreover, at the end of September, the  
most fragile households and small businesses could request debt  
restructuring for a period of 6 months. To prepare for the expected  
increase in credit risks, banks sharply increased their provisions, which  
strained profitability. Although ROA and ROE both declined, they still  
held at 1.2% and 10.1%, respectively, in Q3 2020. According to the  
central bank, 60% of household loan defaults will occur in H2 2021,  
and the doubtful loan ratio could rise to 4.1% at year-end 2021, up  
from 1.4% in Q3 2020. At the end of October, banks had sufficient capital  
to face up to this situation, with a capital adequacy ratio of 18.4%.  
Liquidity is also abundant, with a liquidity coverage ratio of 153% at  
the end of October.  
These projections do not seem to be very compatible with the target  
of reducing the federal deficit below the threshold of 55% of GDP by  
2
023. By then, the federal debt-to-GDP ratio could exceed 65%. Yet  
refinancing risks are moderate, even though they have been on the  
rise, as illustrated by Fitch’s downgrade of Malaysia’s sovereign rating  
to BBB-.  
The interest charge on government debt accounted for only 12.5% of  
government revenues in 2019, and according to the government, they  
should rise to only 15.1% in 2021. The cost of financing is still low.  
In December 2020, 10-year government bond yields were only 2.7%  
(
down from 3.3% in the year-earlier period). Moreover, nearly 97% of  
government debt is denominated in the domestic currency and is still  
held primarily by residents (non-residents held 21.8% of debt in Q3  
Completed on 11 January 2021  
2
020). Malaysia has a key advantage over countries like Indonesia: with  
its highly developed financial markets, the government is able to issue  
domestic debt easily.  
Johanna MELKA  
johanna.melka@bnpparibas.com  
A SUFFICIENTLY SOLID BANKING AND FINANCIAL SECTOR  
Malaysia has a solid banking and financial sector. It is in a position  
to face up to the deterioration in the financial situation of economic  
agents, the downturn in the real estate market and the increase in  
credit risk triggered by the Covid-19 crisis.  
The bank  
for a changing  
world  
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