Covid-19 takes precedence over politics

  • Analyst Reports
  • Saturday, 22 Feb 2020

IF anyone does not understand the gravity of the Covid-19 epidemic, just visit any bank branch. For the first time, there are more bank tellers behind the counters than customers in a large branch in Bandar Utama.

From air travel to banking and retail, all segments of the economy have been hurt by the epidemic. The crowds at banking halls and malls have disappeared. Eateries are complaining of a 50% drop in business while hotels are throwing room rates due to cancellations of bookings.

Even the small guy selling cup corn at the zoo in Kuala Lumpur is feeling the effect. According to a report, the outlet only sold one cup a day, the lowest ever in its 10-year history.The Malaysian economy grew by only 3.6% in the fourth quarter of 2019, which is the lowest quarterly performance since 2009. Most economists have forecast Malaysia to see poor economic growth in the first half of this year before a rebound in the second half.

This is on the assumption that the Covid-19 virus peaks in April or May this year. If the situation worsens, brace for a more difficult year.

Against a difficult economic environment, not many really care about politics. The small businesses want to see the demand for their products pick up. Trucking companies are hoping for a recovery in deliveries, which are down by 40% so far this year. Eateries are seeking relief to tide over the tough times to cover their overheads with the drop in business.

Try talking to the small businesses and all they really hope for is a pick-up in daily business and cash flow. They don’t really care about the main agenda in Putrajaya, which is the scheduled transition from Prime Minister Tun Dr Mahathir Mohamad to Datuk Seri Anwar Ibrahim.

Dr Mahathir wants to stay on in the post until the Apec summit in November this year. There is some opposition towards the move. (Note that a decision is to be made at the time of writing).

But really, the small businessmen don’t understand what Apec really is about and why it is so important to Dr Mahathir.

Put in a nutshell, the vast majority of those who voted in the Pakatan Harapan government don’t really care about Apec. All they know is that there is supposed to be a transition in May.

If it does not happen, then the leadership needs to fix a schedule as to when it would happen. The sooner the transition is cast in stone, the better it is for business and the economy.Somehow, the Covid-19 situation has helped Dr Mahathir with his case to stay on a little longer. After having led the country through its worst crisis in 1998, Dr Mahathir is a safe pair of hands to lead Malaysia as it goes through its worst economic slowdown in more than a decade.

Malaysia is not alone in experiencing a slower growth due to Covid-19. From South Korea to South Africa, countries are facing a slowdown due to the Chinese economy being floored by the virus.

Covid-19 is less fatal compared with SARS in 2003. However, its economic impact is more far-reaching compared with the SARS episode because of China’s influence on the global economy. In the 2000s, China contributed to 8% of the global economy while today it is more than 19%.

If only Asia is taken into account, China’s impact on the continent is great.

According to a sensitivity analysis by the International Monetary Fund (IMF), the top four countries that are most affected due to the slowdown in China are South Korea, Hong Kong, Thailand and Malaysia.

In Malaysia’s case, for every 1% decline in China’s economy, the impact on the Malaysian economy is estimated at 0.3%, according to some reports.

The Chinese government has already taken measures to counter the slowdown of its economy. The biggest fear is rising default of debts that a rating agency estimated may go up to US$1.1 trillion.

Standard & Poor’s estimated China’s economy to slow down to as low as 4.4% this year if the non-performing loans surge to US$1.1 trillion, impacting banks’ ability to lend. However, that is only in the worst-case scenario.For now, the rating agency estimates China’s growth to be 5% for this year, which is lower than the 6.1% recorded in 2019. It is on the assumption that the virus would peak in April or May and allow for a strong rebound in the second half.

The Malaysian economy is almost certain to record slower growth than last year. To counter the slowdown, the government is coming up with a package of measures to help alleviate the situation. According to reports, the stimulus will be about RM2bil to the economy.But what if the epidemic continues to spread and does not peak in April/May? The government will need to take more drastic measures such as opening the taps and letting its fiscal deficit balloon.

It would need to convince international rating agencies that economic textbook solutions do not work. Dr Mahathir has dealt with the likes of IMF and the rating agencies. His experience and knowledge would surely come in useful.

But whether he stays on or not is increasingly becoming a secondary issue.The issue of transition has lost traction among businesses and voters. The main worry now is how big an impact the Covid-19 epidemic will have on the economy and how we are going to weather the slowdown in the next few months.The views expressed here are the writer’s own.

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