This article first appeared in The Edge Malaysia Weekly on January 10, 2022 - January 16, 2022

THE presence of the Omicron Covid-19 variant in Malaysia is not expected to pose a major threat to GDP growth, as long as the country does not resort to imposing a nationwide total lockdown as it did in the middle of last year.

The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre’s (SERC) executive director Lee Heng Guie acknowledges that the Omicron variant is one of the key risks this year, but thinks it will not be a significant threat to the economy.

“At the moment, daily Covid-19 cases related to the Omicron variant have spiked. However, the hospitalisation rates pertaining to the variant are quite low (compared with other strains). The good thing is a large percentage of the Malaysian population has been fully vaccinated, and as quite a number of people have taken their booster doses, this would help to strengthen protection against Omicron.

“However, we do note that Omicron is highly contagious, and it could affect sentiment as people would tend to be more cautious. Nevertheless, as long as we don’t revert to imposing a total lockdown, which caused a contraction in GDP last year, the risk to GDP posed by Omicron would not be as significant. On an overall basis, we are expecting a GDP growth of 5.2% in 2022, contingent on uninterrupted economic activities and a sustained revival of domestic demand, driven by public investment growth,” he said in a media briefing last week.

Lee qualifies that SERC’s 2022 GDP forecast of 5.2% is lower than the Ministry of Finance’s official forecast of between 5.5% and 6.5%, as SERC envisages private consumption growth to come in at 5.9%, lower than the government’s official forecast of 7.3%, after taking into consideration headwinds such as inflation risks and the high cost of living. SERC expects public investment growth to come in at 13.3%, also lower than the government’s official forecast of 24.1%.

Health Minister Khairy Jamaluddin said in a press conference last week that Malaysia’s daily Covid-19 cases could skyrocket past 30,000 by the end of March if preventive measures such as suspending umrah trips to Saudi Arabia are not taken to curb the Omicron wave. This is as Saudi Arabia is Malaysia’s largest source of imported Omicron so far — out of the 123 new Omicron cases in the country, 71.54% comprised those who had returned from the kingdom.

The minister had also dismissed the suggestion of a total lockdown, as he said the government would prefer to enforce targeted measures to contain the virus.

Since the start of 2022, daily Covid-19 cases in the country have remained below 4,000 cases, with the seven-day moving average of daily cases nationwide at 3,142 as at last Friday.

UOB Malaysia senior economist Julia Goh says that while Omicron is a key risk and adds uncertainty to the economic outlook, its impact and the impact of any other new variants for that matter are expected to be moderate at this juncture.

“Thus far, governments around the world are reluctant to re-impose tight lockdowns despite the spike in global infections. It is possible the current suite of vaccines will provide protection against Omicron.

“While much is still not known, we think that economies are now better prepared to deal with a resurgence of the pandemic compared with March 2020 (during the first Movement Control Order). The new variant may result in temporary border closures and delay reopening of international borders, alongside re-imposition of some level of social and mobility restrictions. However, we think the end-goal of reopening economies and travel lanes has not changed materially, perhaps only delayed and at a more cautious pace if this variant is found to be more dangerous than the Delta strain,” she tells The Edge.

Goh expects the Malaysian economy to expand 5.5% in 2022, compared with a projected gain of 3.5% in 2021.

“The improved outlook is primarily driven by broader vaccine coverage, supportive global demand, normalising domestic demand, recovery in labour market, resumption of infrastructure spending and further fiscal support,” she says.

However, on supply-side implications and given China’s strict containment measures following its ZeroCovid strategy, Omicron could stretch the supply chain effects to cause further delays and extend pressure on input and import costs.

“Malaysia’s import prices have risen 6.7% year on year between June and November. The impact from the UK and the US could be from slower export demand. Nevertheless, we expect a bumpy recovery for Malaysia’s exports in the coming months, with a projected 2% export growth for 2022. The Omicron variant, ongoing supply chain disruptions and higher prices of traded goods could pose downside risks to the trade outlook. Domestically, worker shortages and floods have dampened production in selected sectors and areas,” she says.

China’s strict containment efforts may dampen Malaysia’s GDP by between 0.2 and 0.5 percentage point, depending on the severity, says Mizuho Bank head of economics and strategy Vishnu Varathan.

“It will have discernible economic impact, but perhaps not as large as for Thailand and the Philippines — both countries are dependent on Chinese tourists to a far greater extent. Imaginably, the lack of Chinese tourists in the region and slowdown in Chinese activity from lockdowns within China will impact both tourism as well as supply chains.

“We expect that in sum, this may dampen Malaysia’s economy — via its various tourism, industrial and current account channels — by between 0.2 and 0.5 percentage point, depending on the severity,” he tells The Edge.

Sunway University economics professor Dr Yeah Kim Leng opines that if the Omicron wave does not derail global growth and domestic growth solidifies in the first half of the year, a 25-basis-point hike in Bank Negara Malaysia’s overnight policy rate (OPR) would likely be imminent in the second half.

“While the timing of the commencement of interest rate normalisation is contingent on how the growth and inflation trajectories will pan out amid uncertainties over the downside risks posed by the emergence of new Covid-19 variants, the rise in global inflation — if found to be persistent rather than cyclical — may prompt policymakers, especially in advanced economies, to bring forward the expected rate hikes,” he tells The Edge.

UOB’s Goh also expects Bank Negara to hike the OPR by 25bps from 1.75% to 2% in the third quarter of the year.

“However, interest rate swaps have signalled that markets are pricing in more rate hikes this year, possibly due to expectations of earlier US rate hikes, a more robust domestic growth and higher inflation risks. So far, Bank Negara has signalled that it will be patient in adjusting monetary policy and interest rates in the months ahead, given lingering risks to growth.

“We think potential triggers for earlier rate hikes would be if Omicron risks abate to pave the way for a more robust and stable domestic growth, as well as signs of wider pass-through of higher costs to consumers as the economy recovers,” she says.

On the ringgit, Goh projects significant weakening bias for the local currency as the US dollar is expected to gain going into US rate hikes, which could come as early as the second quarter of this year.

“Oil prices remain supportive, although we have kept a neutral view on Brent crude oil. On the local front, political risks may resurface due to the possibility of elections this year.

“Meanwhile fiscal consolidation measures, particularly tax reforms to restore the country’s fiscal sustainability, may also affect sentiment. Our model predicts a gentle rise in USD/RM over the next four quarters towards 4.28 by mid-year,” she says.

For the full year, Yeah projects the ringgit to strengthen between RM4.05 and RM4.10 against the US dollar on account of anticipated dollar weakness due to the country’s burgeoning twin fiscal and trade deficits.

“A stronger ringgit this year will likely arise from the expected improvement in underlying fundamentals such as better GDP growth and export performance while short-term in and outflow of funds such as portfolio and direct investment along with investor sentiments could cause wide currency swings,” he says.

At press time, the ringgit was trading at 4.2075 against the US dollar.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.