Chinese tourists are the booster shot for Malaysia’s tourism-related industries, and without their return in big numbers, the recovery of such industries would be impacted.

With the lockdowns in China amid its “zero-Covid policy”, there are concerns that fewer Chinese nationals will visit Malaysia this year despite the reopening of borders. Socio-Economic Research Centre (SERC) executive director Lee Heng Guie noted that about 11.9% of international tourists to Malaysia in 2019 were from China.

“If tourists from China are not coming back in a big way, I believe the anticipated rebound in tourism-related industries will be somewhat smaller than pre-pandemic levels.

“This is something that we have to monitor, any big shock in China will impact the global and regional economies, including Malaysia,” he said during SERC’s virtual quarterly economic tracker briefing yesterday.

Lee also said the supply chain disruption within the global semiconductor sector, including in Malaysia, may take a longer time than expected to ease.

“By right, the supply chain would likely ease off by the first or second half of this year, but with the Russia-Ukraine conflict, that could further lengthen the supply chain disruption for components and parts in the semiconductor industry,” he added.

Lee pointed out that Russia and Ukraine were important sources of raw materials needed in the semiconductor industry such as gases, rare earth metals, semiconductor-grade neon and palladium.

In the case of palladium, which is used in memory and sensor chips, about 45% of the global supply comes from Russia, according to Lee.

“With this prolonged supply disruption, higher prices of raw materials, increased shipping rates and the shortage of workers, it could potentially impact the global chip capacity and hence, it could cause a spike in chip prices.

“Malaysia contributes at least 7% of the global semiconductor supply. So with the disruption, our electrical and electronic sector will continue to expand, but it may increase at a smaller rate than what was anticipated earlier.

“Exports wise, I’m projecting a lower growth rate of 5.9% for overall exports in 2022 compared to Bank Negara’s estimate of 10.9%,” he said.

Commenting on the post-pandemic recovery, Lee highlighted that Malaysia’s economic recovery remained on track, amid downside risks to the outlook.

Maintaining his 2022 gross domestic product (GDP) growth estimate at 5.2%, he said the country’s recovery was underpinned by stronger revival in domestic demand and a rebound in the services and construction sectors.

Lee’s GDP estimate falls slightly below Bank Negara’s forecast of 5.3% to 6.3% for 2022.

“While SERC revises higher private consumption growth estimate to 6.5% in 2022 from 5.9% previously, it is lower than Bank Negara’s estimated 9%.

“While we reckon that pent-up demand, cash handouts and the fourth round of the Employees Provident Fund’s withdrawal will support consumer spending, the repairing of impaired households’ balance sheet and rebuilding of depleted savings as well as the pick-up in inflation will mean prudent discretionary spending.

“Higher inflation and cost of living concerns will crimp the household disposable income (purchasing power) and dampen consumer sentiment,” he said.

In addition, Lee said that the expected gradual improvement in the labour market condition and moderate increases in income would restrict spending.

With regard to private investment, the think-tank expects it to remain cautious this year to increased operating costs, supply disruptions, rising material costs as well as the shortage of workers amid the ongoing Russia-Ukraine war.

Private investment growth is expected to pick up moderately to 5% in 2022 from 2.6% in 2021. This is in line with Bank Negara’s estimate of 5.3%.

Meanwhile, Lee said that Malaysians should brace for further price hikes in 2022 as he expects the country’s headline and core inflation to move higher.

He pointed out that common consumer goods and services such as poultry products, vegetables, some processed foods and men’s haircut had already seen an increase in prices.“Consumer price pressures come from the pass-through effect from rising non-energy commodity prices, which have exerted price pressures on food and services,” he said.

For 2022, SERC forecasts the country’s headline inflation to increase by 3% to 3.5% in 2022, higher than Bank Negara’s estimate of 2.2% and 3.2%.

Looking ahead, Lee called for supply-side and monetary measures to contain inflation and to anchor inflation expectations. He recommended a gradual increase in the overnight policy rate from the current record-low rate of 1.75% and a staggered increase in prices.

Fuel subsidy rationalisation needs to be implemented on a gradual and measured pace, while there ought to be moral suasion for businesses and manufacturers to hike price increases in a staggered manner to avoid bunching price increases.

Lee also called for policy interventions by the government in the reduction in duties and tariffs, having temporary price ceiling and controls as well as easing import restriction to augment existing supplies.

These efforts must also be complemented by medium- to long-term supply-side policies.

“Supply-side policies through freer market entry and deregulation would make firms more productive and competitive,” Lee said.

“Reduce high import dependency on agricultural commodities that have Imports Dependency Ratio exceeding 50%, such as cuttlefish (52.2%), fresh milk (53.5%), round cabbage (63.6%), chilli (72.4%), beef (78.1%), ginger (81.5%), mango (86.2%) and mutton (90.4%),” Lee said, adding that the production of such products should be increased domestically.