KUALA LUMPUR: Malaysia's economy is expected to rebound strongly this year and in 2022, riding on the vaccine-driven global recovery despite the disruption from the resurgence in COVID-19 cases since late 2020.

According to the 2020 Annual Consultation Report on Malaysia released by the ASEAN+3 Macroeconomic Research Office (AMRO) today, the growth would be underpinned by supportive domestic policies, a diversified economy and a resilient banking system.

AMRO chief economist Dr Hoe Ee Khor said in 2021, the Malaysian economy is expected to rebound by 5.6 per cent, owing to a low base and a strong pick-up in global demand, driven by vaccination programmes.

"International travel and tourism activities are expected to gain traction in 2022, as COVID-19 vaccinations achieve herd immunity in Malaysia and abroad, lifting Malaysia's (economic) growth to 6.2 per cent," he said during AMRO's virtual press briefing on the Malaysian economy today.

However, he said the outlook is clouded by the uncertain trajectory of the pandemic, as vaccine development and deployment race against virus mutations.

Moreover, Hoe said 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.

He said the continuation of both fiscal and non-fiscal measures by the government 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 stabilised financial markets.

"The policy rate, which was lowered by a total of 125 basis points in 2020 to a record low of 1.75 per cent, remains accommodative despite the recent weakening in growth momentum," he said.

Hoe said going forward, the 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," he said.

Hoe said that 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 Bank Negara Malaysia's (BNM) 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," he said.

Hoe said adjustments to the foreign exchange policy in late 2016 have contributed to lower capital flow volatility during the stress episode in March 2020.

He noted that 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.

Meanwhile, he said the domestic 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," said Hoe.

Looking ahead, he said 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," he added.