A high school teacher checks the temperature of a student in Kuala Lumpur, Malaysia. While the economy is picking up, infection rates are setting records. Photo: AFP

SINGAPORE – Malaysia’s economy is firmly in recovery territory with full-year growth for 2021 having expanded within the official forecast range at 3.1% after a rebound in the final quarter of last year.

But Southeast Asia’s third-largest economy isn’t out of the woods as inflationary headwinds threaten to stymie growth-spurring private consumption.   

Authorities are also now battling a surge in Covid-19 cases fueled by the highly transmissible Omicron variant, which has driven up daily infections fivefold. The country reported a record high of 27,831 cases on February 16, adding to a cumulative total of more than three million since the pandemic started.

With a 78.8% full vaccination rate and approximately 99.6% of new cases suffering only asymptomatic or mild symptoms, health experts say Omicron’s milder impact should make the current wave more manageable than the deadly Delta variant that killed tens of thousands last year, resulting in one of Asia’s highest fatality and infection rates.

Weary of a viral resurgence, authorities are still not ready to end quarantine restrictions for vaccinated travelers or reopen borders, which have been closed since March 2020. But as Malaysia’s neighbors step up their easing of restrictions on inbound international travel, analysts say the government’s guarded stance risks hindering foreign investment.

Prime Minister Ismail Sabri Yaakob has, however, ruled out new lockdowns that had previously crippled the economy, pushing last year’s gross domestic product (GDP) into contraction for two quarters, and promised that economic and industrial sectors would remain open even if Covid-19 cases were to increase significantly.

But since the National Recovery Council (NRC), a government advisory body, recommended on February 8 that Malaysia’s borders be fully opened to all countries as early as March 1, without requiring travelers to undergo compulsory quarantine, Ismail has erred on the side of caution, and he was reported in local media as saying “there is no discussion yet to reopen.”

Harrison Cheng, associate director with consulting firm Control Risks, said there is potential for reopening plans “to be delayed into April-June as there are signs that not all the cabinet members are aligned on this,” pointing to remarks by Health Minister Khairy Jamaluddin that booster vaccination rates are still not high enough to permit reopening.  

According to official data, 41.7% of the total population has had a booster to date. The country started inoculating children aged between five and 11 earlier this month in a bid to keep schools open, but only 8.2% have received their first dose.

People wait to receive their shots at the largest vaccination center at the Bukit Jalil National Stadium in Kuala Lumpur on June 21, 2021. Photo: AFP / Farid Bin Tajuddin / Anadolu Agency

Malaysia’s immunization program relies primarily on Pfizer-BioNTech and to a lesser extent Sinovac vaccines.

The NRC is chaired by former premier Muhyiddin Yassin, who suggested a full reopening of borders by March 1 to accelerate economic recovery. The health ministry had yet to provide its feedback on the proposal and the final decision must be made by the cabinet. 

“Ismail struck a tone that suggests that the decision is far from final,” said Cheng.

Some health experts pushed back against the NRC’s proposal, warning against repeating the past mistake of prematurely reopening at a time when the country is facing its largest viral wave to date.

Hospital admission rates have so far been manageable amid the Omicron surge and the health ministry expects the current wave to peak by the end of March.

Carmelo Ferlito, an economist and chief executive officer at the Center for Market Education, believes Malaysia could find itself isolated if neighboring countries begin to waive quarantine requirements on vaccinated tourists while it opts to remain closed, a scenario that could see the country lose out on foreign direct investment (FDI).

“If you wish to invest in manufacturing, warehousing … or hiring people, you need to physically be in the country. I think there is not enough realization that keeping borders closed is playing against investments,” Ferlito told Asia Times. “This will drive FDIs in another direction and undermine long-term ambitions for the country.”

Exports supported by FDIs have been one of the most important factors driving Malaysia’s growth in recent years, especially amid the pandemic. Though the economy expanded by 3.1% last year, official statistics show the total economy and all sectors remained smaller than in 2019, except for the manufacturing sector.

The country’s main exports are electronics products such as chips and semiconductor devices, petroleum products, liquefied natural gas and palm oil. Manufacturing contributed 24.3% to last year’s GDP, while private spending on services – supported in large part by government financial aid packages – contributed 57% to overall growth.

“The recovery has so far been driven by private consumption, government spending and exports, while investments are still in negative territory. This is a very fragile recovery. If something is not done to rebuild an ecosystem conducive to domestic and international investments, then recovery will not be sustainable,” said Ferlito.

Private consumption has been the main driver of Malaysia’s growth for the past decade, but has been depressed amid the pandemic, shrinking 4.3% in 2020 – when the economy contracted a record 5.6% – only inching up 1.9% last year despite the low base.

Headline inflation, meanwhile, came in at 2.5% in 2021, the second-highest level since 2015.

Malaysia’s annual inflation rate was at 3.2% in December 2021, compared with November’s five-month high of 3.3%, when food prices surged to their highest level in 47 months. The government announced measures to stabilize prices of essential foods such as rice and meat last month, reportedly setting aside 680 million ringgit (US$162 million).

Bank Negara Malaysia, the country’s central bank. Photo: WikiCommons

Bank Negara Malaysia (BNM) Governor Nor Shamsiah Mohd Yunus has signaled no appetite for hawkish rate adjustments of the sort undertaken by major central banks to mitigate inflation elsewhere. 

In January, the central bank left its key interest rate unchanged at a record low of 1.75% to support continued economic recovery.

The BNM governor expects headline inflation to likely remain moderate this year, with core inflation – which averaged 0.7% last year – projected to modestly edge upwards. Shamsiah, according to reports, said Malaysia’s economy would be impacted by a “premature withdrawal” of the current accommodative monetary policy stance.   

Authorities have explained rising inflation as a consequence of supply chain disruptions, high energy costs, as well as poor weather that has impacted food production. In addition to supply-side shocks, economist Ferlito argues that government deficit spending and expansive monetary policies have played a major role in pushing up prices.

In an effort to minimize the economic impact of the pandemic, which led to Malaysia’s poverty rate spiking to 8.4% in 2020, the government rolled out relief packages targeting mostly small- and medium-sized enterprises and the bottom 40% of household income earners that amounted to a cumulative 380 billion ringgit ($90 billion) in spending.

“Inflation is a monetary phenomenon and governments spent too much to face lockdown-induced disasters. Now it is impossible to get prices back on track without paying for it with a certain degree of economic contraction,” Ferlito told Asia Times. “We desperately need private investments to step up also to rebalance the supply chain.”

According to the central bank, growth is expected to accelerate in 2022 with Malaysia poised to benefit from stronger global demand and higher private-sector expenditure. 

BNM estimates that GDP will grow between 5.5% and 6.5% this year, with any revisions to the forecast set to be announced on March 30.

Economists like Ferlito argue that higher prices will apply downward pressure on spending and put the official growth target for this year at risk, while others note that a high number of Covid-19 cases could curb consumer sentiment, particularly if authorities backpedal on the current endemic strategy and pledges not to implement new lockdowns.  

Cheng of Control Risks said the biggest risk for Malaysia’s economy “would be a new and equally or more severe variant than Delta emerging in 2022, which could trigger lockdowns,” followed by slow progress in ironing out regulations allowing businesses to resume operations after serious supply chain disruptions in 2020 and 2021.

Some see a period of instability ahead for Prime Minister Ismail Sabri Yaakob. Photo: Facebook

Such a scenario could “prompt investors to reconsider and shift supply chains to other economies in the region – which could then hurt export growth in the longer-term.”

Amid a period of calm in Malaysia’s turbulent politics that has taken hold under Ismail’s tenure, Cheng sees renewed political instability and the potential for a snap election as key risks.

Ismail has faced mounting pressure by elements within his own party, the United Malays National Organization (UMNO), to call an early general election after a strong showing by the UMNO-led Barisan Nasional (BN) coalition in the Melaka state elections last November, say analysts. Polls must take place by or before July 2023.

A solid performance at the upcoming state election in Johor, seen as friendly terrain for UMNO, on March 12 would also fuel momentum for an early election. But with few landmark achievements under his belt since taking office only seven months ago, observers say Ismail is inclined to favor polls held closer to the end of term.  

“If the outcome [of a general election] is not decisive – such as a hung parliament where no coalition has enough seats to form a stable government – then investors could seriously stop their ‘wait and see’ approach and look to relocating their manufacturing export activities to relatively more stable jurisdictions like Indonesia and Vietnam,” said Cheng.

Follow Nile Bowie on Twitter: @NileBowie