SINGAPORE, May 4, 2021 – Despite the disruption brought about by a renewed spike in COVID-19 cases since late 2020, the Malaysian economy is expected to rebound strongly this year and in 2022 as it rides on a vaccine-led global recovery. Growth would be underpinned by supportive domestic policies, a diversified economy, and a resilient banking system. This is according to the 2020 Annual Consultation Report on Malaysia published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared based on AMRO’s Annual Consultation Visit to Malaysia in late 2020, and data and information available up to 19 March 2021.


The Malaysian economy contracted by 5.6 percent in 2020, reflecting the steepest recession on record in the second quarter as a nationwide lockdown was imposed to contain the spread of COVID-19. In 2021, the economy is expected to rebound by 5.6 percent, owing to a low base and a strong pick-up in global demand induced by vaccination programs. International travel and tourism activities are expected to gain traction in 2022, as COVID-19 vaccinations reach herd immunity in Malaysia and abroad, lifting Malaysia’s growth to 6.2 percent. However, the outlook is clouded by the uncertain trajectory of the pandemic as vaccine development and deployment race against virus mutations. Moreover, the damage to businesses and the labor market suggests that the economy may not return to its pre-pandemic output trend in the near term.

Policy Response and Recommendations

The swift deployment of a comprehensive economic response to the COVID-19 crisis has been crucial in supporting economic activity and the recovery. The response package expanded from MYR20 billion (USD4.8 billion) in early 2020 to MYR340 billion (USD82.4 billion), or over 22 percent of GDP, by March 2021 as the economic impact of the pandemic mounted.[1]

The fiscal burden, which accounts for about 20 percent of the total package, mainly comprises cash transfers to vulnerable households and wage subsidies to small- and medium-sized enterprises (SMEs). Meanwhile, non-fiscal measures leverage on (1) a healthy banking system to implement loan deferral schemes and deploy Bank Negara Malaysia (BNM)’s concessional lending facilities to SMEs, and (2) substantial and well-managed retirement savings that enabled account withdrawals and lower contributions. Credit guarantee schemes have also been made available to SMEs and larger businesses.

The continuation of both fiscal and non-fiscal measures through 2021, in addition to investments in transport and digital infrastructure under this year’s budget, is essential to ensure that the economic recovery remains on track.

At the same time, the aggressive loosening of monetary conditions has complemented the economic stimulus and helped stabilized financial markets. The policy rate, which was lowered by a total of 125 basis points in 2020 to a record low of 1.75 percent, remains accommodative despite the recent weakening in growth momentum. Going forward, monetary policy should be on an easing bias as uncertainty continues to cloud the economic outlook. However, the low interest rate environment calls for vigilance against a potential build-up of financial imbalances.

Malaysia’s external position is strong, supported by a sustained surplus in the current account and continued foreign direct investment inflows. The resumption of foreign capital inflows since the US dollar funding stress in March 2020 has reinforced BNM’s reserves buffer and the overall external position. It would be prudent for BNM to accumulate more reserves during periods of capital inflows, while maintaining flexible exchange rate as a primary buffer against external shocks.

Adjustments to the foreign exchange policy in late 2016 have contributed to lower capital flow volatility during the stress episode in March 2020. In particular, the tightened enforcement against offshore ringgit trading and development of the onshore hedging market have led to capital inflows that are more stable and less speculative in nature. Sustaining efforts to improve the trading flexibility of participants, including non-resident investors (on a pilot basis) and banks, should support the deepening of the onshore hedging market and enhance the flexibility of the exchange rate.

The banking system is in a strong position to manage increased credit risks and facilitate continued credit expansion. Stress-testing exercises by AMRO and BNM indicate that banks have ample room to absorb loan impairments given their strong capital buffers. As the economic outlook and extent of loan impairments after the expiry of the debt repayment assistance scheme remain uncertain, frequent stress-testing of the financial institutions is strongly recommended to guard against unforeseen risks. Contagion risks from overseas should also be closely monitored, given the large presence of foreign banks and extensive overseas operations of the domestic banks.

The enlarged debt burden, as a result of the sizeable fiscal stimulus, underscores the importance of restoring fiscal buffers once the economic recovery is firmly on track. Tax reforms are essential to enable a faster reduction of the fiscal deficit and guide the government debt back to the pre‑pandemic statutory limit over the medium term. However, revenue measures, including the reinstatement of the goods and services tax (GST), should be implemented in a measured way to avoid a cliff effect.

Looking ahead, sustaining policy reforms to safeguard people’s welfare and raise productivity are critical to achieve a dynamic and inclusive post-pandemic economy. Incorporating a broad-based environmentally sustainable agenda into the development plan will enhance economic resilience as Malaysia advances to a high-income nation.

[1] Converted to USD using an MYR/USD exchange rate of 4.1275 as of April 19, 2021; the aggregate economic response is compared against the nominal GDP for 2021 as projected by AMRO.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing, and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.