The Malaysian economy contracted by 3.4% in the fourth quarter (3Q 2020: -2.6%)

The economy registered a negative growth of 3.4% in the fourth quarter (3Q 2020: -2.6%), largely attributable to the imposition of the Conditional Movement Control Order (CMCO) on a number of states since mid-October. For 2020 as a whole, the economy contracted by 5.6%. The restrictions on mobility, especially on inter-district and inter-state travel, weighed on economic activity during the fourth quarter. Nevertheless, the continued improvement in external demand provided support to growth. Consequently, except for manufacturing, all economic sectors continued to record negative growth. On the expenditure side, moderating private consumption and public investment activities weighed on domestic demand. On a quarter-on-quarter seasonally-adjusted basis, the economy registered a decline of 0.3% (3Q 2020: 18.2%).

For the quarter, headline inflation declined to -1.5% in part reflecting the larger decline in retail fuel prices as compared to the corresponding period last year. Core inflation moderated to 0.8% due mainly to lower inflation for communication services and rental.

Exchange rate developments

The ringgit appreciated by 3.6% against the US dollar during the fourth quarter of 2020, driven mainly by non-resident portfolio inflows as investors’ risk appetite continued to improve. Positive investor sentiment during the quarter was driven by news of successful vaccine trials and the rollout of vaccination programmes in major economies, as well as greater clarity on US policy direction following the outcome of the US presidential election. Taken together, these factors formed the basis of a more positive investor outlook for the recovery of the global health crisis, which strengthened expectations for the eventual normalisation of economic activity. From 1 January to 8 February 2021, the ringgit has depreciated by 1.2% against the US dollar, in line with broad-based weakening in major and regional currencies, following the strengthening of US dollar amidst enhanced prospects for an economic rebound in the US. Concerns over the rise in COVID-19 infections and its implications for domestic economic activity also weighed on investor sentiments. Portfolio investments recorded a smaller net outflow of RM6.9 billion in the fourth quarter (3Q 2020: -RM23.1 billion), while net FDI recorded an inflow of RM6.1 billion (3Q 2020: -RM0.8 billion). In the near term, the risk of heightened exchange rate volatility remains as lingering uncertainties surrounding the momentum of the global economic recovery will continue to have a bearing on investor sentiments.

Financing conditions

Net financing to the private sector continued to expand at 4.4% on an annual basis. Total outstanding loans grew by 3.7% (3Q 2020: 4.7%) supported by continued growth in the household and business segments. Total loan disbursements to both businesses and household increased during the quarter. Business loan repayments were also higher, with its growth outpacing that of disbursements. Loan demand remained forthcoming especially in the household segment.

The Malaysian economy to recover supported by better external demand and the 2021 Budget measures

While near-term growth in 2021 will be affected by the re-introduction of stricter containment measures, the impact, however, will be less severe than that experienced in 2020. The growth trajectory is projected to improve from the second quarter onwards. The improvement will be driven by the recovery in global demand, where the International Monetary Fund (IMF) has revised upwards their 2021 global growth forecast by 0.3 percentage points to 5.5%. Growth will also be supported by a turnaround in public and private sector expenditure amid continued support from policy measures including PENJANA, KITA PRIHATIN, 2021 Budget and PERMAI, and higher production from existing and new facilities in the manufacturing and mining sectors. The vaccine roll-out which will commence this month is also expected to lift sentiments.

In line with earlier assessments, the average headline inflation was at -1.2% in 2020 due mainly to the substantially lower global oil prices. For 2021, headline inflation is projected to average higher, primarily due to higher global oil prices. Underlying inflation is expected to remain subdued amid continued spare capacity in the economy. The outlook, however, is subject to global oil and commodity price developments.

See also:

• Table 1: GDP by Expenditure Components and Economic Activity
• Publication: Quarterly Bulletin Fourth Quarter 2020
• Presentation slides [PDF]