Malaysia: Economists see less severe impact from MCO 2.0, state of emergency

Malaysian Economic Association deputy president and Sunway University Jeffrey Sachs Centre on Sustainable Development senior fellow Prof Dr Yeah Kim Leng.

KUALA LUMPUR, Jan 12 (Bernama): The Malaysian economy will likely take another hit in 2021 but at a less severe level compared to when the Movement Control Order (MCO) was imposed during the first two Covid-19 waves in 2020, economists said.

Following the MCO last year, second-quarter Gross Domestic Product (GDP) shrank by 17.1 per cent.

Sunway University economics professor Prof Dr Yeah Kim Leng said the recovery expected this year would be temporarily stalled but the momentum was not likely to be derailed given the higher likelihood of suppressing the pandemic with the vaccine now in sight.

"The economic impact can be managed with further fiscal support for the affected small and medium enterprises and households.

"It will result in a slight erosion of fiscal deficit and debt metrics but a slight slippage of 0.1 to 0.2 percentage point in GDP should be recoverable when the economy is on the mend earlier rather than later without government support,” he told Bernama.

Yeah said this in response to the announcement of the state of emergency earlier today.

On Monday, Prime Minister Tan Sri Muhyiddin Yassin announced a full-scale MCO restriction orders would be re-imposed for major parts of the country and today, the Yang di-Pertuan Agong Al-Sultan Abdullah Ri'ayatuddin Al-Mustafa Billah Shah proclaimed a state of emergency would be enforced until Aug 1 or when Covid-19 had come under control.

The announcements came following an alarming increase in Covid-19 infections.

The country started to see daily cases breaching 3,000 last week, putting the healthcare system under siege.

Yeah said the latest MCO was expected to see an uptick in business and job casualties besides prolonged hardships faced by the low income group.

He called for a quick roll-out of the 2021 Budget relief measures including new ones if needed to offset the economic trade-offs as the balance of risks shifted to public health amid the rising infections.

"The government may need expand on loan moratoriums and other reliefs provided in the Budget 2021 to accommodate the impact of the new MCO especially if extended beyond two weeks, which is likely based on the two previous episodes last year,” he stressed.

OCBC Bank, in its note today, said with the recovery momentum stymied, it would be even harder now for the Malaysian economy to reach the 6.5-7.5 per cent GDP growth target that the government had in mind.

"Hence, Malaysia would continue to have to lean more heavily on monetary support. Bank Negara is likely to cut its overnight policy rate once more on Jan 20,” it said.

The bank said while the MCO restriction orders were not applied in a wholesale fashion across the country as per in March-April 2020, the affected areas this time were nonetheless the heavyweight regions in terms of economy.

It noted that together, the five states (Selangor, Penang, Johor, Melaka and Sabah) and Kuala Lumpur commanded a hefty 67.7 per cent of the economy.

As for the stock market, it is expected to experience a knee-jerk reaction at first and panic selling may occur among investors.

"For example, the FBM KLCI dropped by 11.77 points during the first session of the day as market closed at midday. Perhaps investors will be slightly more cautious in terms of risk appetite but in the medium term, the sentiment should normalise.

"The reason is that the civilian government will continue to function during the state of emergency. The emergency proclaimed by the Yang di-Pertuan Agong is not a military coup and curfew will not be enforced, based on the speech by the Prime Minister,” Bank Islam Malaysia Bhd economist Adam Mohamed Rahim said.

Adam said if the current MCO remained at two weeks, the economic output loss would be less than when the first MCO was imposed in the first quarter of 2020.

Even if MCO 2.0 were extended, the impact could be less or at worse, similar, to last year, he said.

He said this was because this time, the MCO would affect fewer states and sectors such as factories, manufacturing, construction, services, trade and distribution, agriculture and farming were considered essential economic sectors so they were allowed to operate with standard operating procedures in place.

"Aside from that, businesses and consumers have well adapted themselves with the new normal -- they know how to manage resources and spend wisely. Therefore, the economic impact will be less adverse than during the first MCO imposed in March last year,” he opined. - Bernama

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