Malaysia/Philippines: Asynchronous recovery
- Philippines is facing speed bumps to its recovery path, driven by Omicron and virus curbs
- Malaysian growth to pick up, with further reopening progress, and flooding reinvestment upside
- Fiscal and monetary policies remain growth supportive, but to wind back from ultra-easy stance
- Implication for GDP forecasts: Raise Malaysia 2022 GDP forecast to 5.5%
- Implication for policy rate forecasts: Add 25bps rate hike for BNM in 4Q22; BSP could hike later
The COVID-19 pandemic and the emergence of Omicron continues to pose considerable uncertainty for ASEAN in early 2022, complicating the economic recovery path. Economic activity normalisation will depend partly on the authorities’ health policy response. With Omicron likely to be less fatal based on international evidence, the hope is that its spread in the region would taper rapidly after the initial one-month spike similar to places like South Africa and the UK.
Within ASEAN, the Philippines’ rapid virus case surge and tough mobility restrictions in early 2022 strengthen our existing view for the archipelago to remain a regional underperformer. Real GDP will see a slower return to pre-pandemic levels in 2H22, even though growth strengthened and surprised to the upside in 4Q21. Our base case growth forecast of 6.5% for 2022 incorporated the possibility of speed bumps driven by the virus and sporadic tightening. Risks remain tilted to the downside, should restrictions be prolonged, less targeted, and more stringent.
Malaysia in contrast continues to progress towards ‘living with COVID’ and an endemic environment against a backdrop of relatively manageable infections, likely helped by high vaccinations and the booster rollout, even as the authorities are bracing themselves for another virus wave. We expect Malaysia to return to its pre-pandemic real GDP level in early 2022, based on our recalibrated growth forecast of 5.5% (from 5.0% previously).
Fiscal and monetary policies in the Philippines and Malaysia will remain growth-supportive, but will wind back from the very accommodative levels provided through the pandemic crisis. Our expectations are for fiscal deficits to be wider than pre-COVID levels, but policy space is challenged by higher public indebtedness and possible credit rating pressures. On monetary policy, at least Malaysia is set to argue for interest rate normalisation in 2H22 as core inflation rears its head on firming demand. Philippines would normalise on the recovery, but uncertainty posed by the pandemic threatens to push back the potential tightening timeline from 4Q22, even as the Fed’s hawkish tilt raises capital flow volatility.
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