On 11 January, in the face of an accelerating Covid-19 pandemic, first in Kuala Lumpur and then in the state of Selangor, PM Muhyiddin Yassin announced a two-week lockdown in half the country, including five states and the capital Kuala Lumpur. The day after, King Abdullah of Pahang declared a state of emergency that might last until August if necessary. Since last October, the number of infections has been on an upward trend and a recent intensification highlights an ongoing third wave. Compared to its previous peak last spring, daily infections are ten times higher at more than 3,000 on average. The state of emergency prevents parliamentary sitting and general elections from being held.  


The extraordinary state of emergency is motivated by the need to address effectively the ongoing third wave of the pandemic. Besides, the opposition blames it for being politically motivated, as it will offer temporary relief to PM Muhyiddin Yassin after months of political turmoil. Since the new government took office last March, PM Muhyiddin Yassin’s policies have indeed been hindered by his narrow majority by recurrent instability and infighting within its fragile coalition. Therefore, the prime minister might take advantage of the state of emergency to take (pro-Malay) measures favouring his election, amid an intense power struggle, potentially later this year. The handling of the pandemic will nevertheless be a dominant concern in the next elections.  

The Malaysian economy has been among the hardest hit by Covid-19 in South-East Asia. Its high reliance on exports, the importance of the oil and gas and tourism industries have made it very vulnerable to the global trade slump, global supply disruptions, tourism crisis and collapse in oil prices. As a result, Credendo decided last year to downgrade Malaysia’s ratings for ST political risk (from 1/7 to 2/7) and commercial risk (from A to B). Last October, the IMF forecasted the expected 6% recession in 2020, mitigated by moderate fiscal and monetary support, to be followed by a strong rebound in real GDP growth close to 8% this year. The vaccination rollout across the region is also likely to support external demand for Malaysian exports. However, a continued Covid-19 shock, with the re-imposition of lockdown measures weighting on private consumption and business activity while travel restrictions will probably be prolonged, will cloud the ST outlook and reduce the size of the recovery. Based on the previous three-month lockdown, the new one will certainly last much more than the announced two weeks, as the current wave is much more intense (at least according to regional standards). Until now, the Covid-19 crisis has deteriorated Malaysia’s fundamentals, particularly public finances with a fiscal balance expected at 6.5% of GDP and a general government debt expected at a 30-year high above 67% of GDP this year. The new lockdown is likely to affect further not only public finances but also foreign investments amid continued risks of political uncertainty (with both the government and the opposition in delicate positions for distinct reasons) until general elections are held. This being said, the country risk increase still looks manageable on the back of a persisting current account surplus, a sustainable external debt and adequate foreign exchange reserves.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com