MALAYSIA is the latest country to announce a stimulus package in response to the coronavirus (Covid-19) outbreak’s impact on the economy.
The RM20bil economic stimulus package, which was prepared under former Finance Minister Lim Guan Eng, is the government’s gameplan to prop up the Malaysian economy - which could otherwise hit a growth of only 3.2% in 2020.
While hailed as timely by many quarters, closer scrutiny of the stimulus package raises two key questions - will the measures be adequate and effective to offset the economic losses caused by Covid-19?
Also, is the package comprehensive enough to cover all affected business sectors in Malaysia?
The RM20bil economic stimulus package comes on top of the RM56bil development expenditure already planned by the previous Pakatan Harapan government under Budget 2020.
Aside from mitigating the Covid-19 impact, the stimulus package also focuses on “spurring rakyat-centric economic growth” and “promoting quality investments”.
It targets sectors that are most affected by Covid-19 and the slowdown in domestic economy such as tourism, construction and consumer-related sectors.
Notably, the RM20bil stimulus package is much higher than the RM7.3bil package offered by the government in 2003, following the Severe Acute Respiratory Syndrome (SARS) outbreak.
However, in comparison to the country’s economic size, the 2020 stimulus package is slightly smaller than the 2003 package.
According to AmBank Group chief economist Anthony Dass, the 2003 stimulus was valued at 1.7% of the nominal gross domestic product (GDP) then.
Meanwhile, the latest stimulus package is 1.3% of the nominal GDP.
“That said, the RM20bil stimulus package is very focused, ” he tells StarBizWeek.
The prime feature of the package is the government’s plan to “inject” cash into consumers’ pockets aimed at boosting private spending, which is a key pillar of the Malaysian economy.
This will be done by reducing employees’ contribution to the Employees Provident Fund (EPF) by 4% from 11% to 7%, with the option for contributors to opt out. This would potentially release extra RM10bil cash into consumers’ hands and spur buying interest domestically.
Other measures targeted towards the consumers are the early release of the RM200 Bantuan Sara Hidup (BSH) payment in March instead of May, an additional RM100 BSH payment in May and an additional RM50 in the form of “e-tunai”.
It remains to be seen whether these measures would effectively lift private spending, at a time when consumer sentiment and private sector wage growth remain weak.
Tan Hai Hsin, Retail Group Malaysia managing director, says that these measures will have a positive impact on Malaysian consumers’ spending in the next few months.
“However, based on previous experience, we expect many EPF contributors to maintain the current rate as this is their retirement fund. They do not want to spend their future money now, ” he says.
Tan also commented on other measures under the stimulus package.
“Cash handouts to public transportation workers and a special allowance for medical workers will not boost retail spending. However, it will help to reduce their financial burden.
“Personal income tax relief on domestic travel will not bring extra money to Malaysians until next year. But this is a good move to counter the drop in foreign tourist arrivals. Malaysians are also afraid to travel overseas now, ” he says.
Tan says that Retail Group Malaysia has revised its growth projection for retail sales from 4.6% to 3.6% for 2020.
“In the event the coronavirus outbreak lasts until the middle of the year, it would further affect the retail consumption pattern in Malaysia. Nevertheless, the retail industry in Malaysia is not badly hit by this outbreak as compared to Singapore, Hong Kong, Taiwan, Japan and South Korea, ” he says.
Meanwhile, OCBC Bank economist Wellian Wiranto says that the tourism industry players such as the hotels would see higher demand, on the back of the tax payment deferment and the RM100 digital trip vouchers promised under the stimulus package.
“It is very unlikely to fully offset the damage caused by the virus, however, with foreign tourist arrivals still making up the biggest bulk of customers for most operators. Moreover, domestic virus transmission concerns may compel Malaysians to stay put no matter what the incentive.
“The extra cash from the 4% EPF contribution cut may come in handy for some households that might be facing a cash crunch in a difficult period. On a broader level, however, the propensity to consume is likely to be fairly limited.
“The general atmosphere of malaise would limit how eagerly people want to spend on discretionary goods as well, ” he says.
Some have raised concerns about certain sectors that may be inadequately covered under the 2020 stimulus package.
Tan Sri Soh Thian Lai, the president of the Federation of Malaysian Manufacturers (FMM), says that the association is disappointed that the export sector was not given prominence in this stimulus package.
However, FMM welcomes several initiatives under the stimulus package such as the accelerated capital allowance for two years on expenses incurred on machinery and equipment, the RM200mil microcredit facility at a 4% interest rate to affected businesses as well as the RM500mil co-investment fund to boost private sector investment in early-stage and growth-stage Malaysian companies, among others.
Meanwhile, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain points out that the logistics sector was not emphasised in the stimulus package.
“With the previous announcement of an expansionary Budget 2020 coupled with the recent stimulus package, we believe that most sectors are covered in the initiatives.
“However, with the unresolved political crisis especially the dissolution of the Pakatan Harapan government, the new government would not be obligated to execute these proposed measures and initiatives, and possibly, it will also impact the Budget 2020 initiatives, ” he says.
Calling it a “band aid on a bullet wound”, CGS-CIMB Research said in a note that it is mildly positive on the stimulus package as it will help cushion the negative earnings impact faced by corporates and consumers from the Covid-19 outbreak.
“Overall, the stimulus package is unlikely to have a significant impact on our FBM KLCI earnings, ” it said.Stimulus package boost
Without the RM20bil stimulus, economic growth could fall drastically to as low as 3.2%, much lower than the government’s 4.8% target and 2019’s growth of 4.3%.
Tun Dr Mahathir Mohamad, the interim prime minister, however says the economy is expected to grow by 4.2% in 2020 - with the support of the RM20bil economic stimulus package.
“In formulating the stimulus package, the government exercised prudence with respect to its fiscal position, ” he says.
Of the RM20bil mentioned in the stimulus package, direct government injection is small at about RM3.5bil. The remaining balance of the stimulus comes from non-fiscal measures such as the EPF rate cut and RM3.5bil in subsidised loans by Bank Negara.
“As a result of the stimulus package, fiscal deficit is estimated to slightly increase to 3.4% of GDP compared to the original target of 3.2% of GDP, ” Dr Mahathir says.
On the other hand, Moody’s Investors Service forecasts the fiscal deficit to widen to 3.7%, higher than the government’s prediction.
“This slippage is smaller than the size of the package, as a number of measures are funded off-balance sheet through the central bank, government-related entities and household savings.
“Government debt is likely to rise to 56.7% of GDP by the end of 2020, up from 56.0% in 2019. This is significantly higher than our median debt forecast of around 36% of GDP for A3-rated sovereigns, ” it says.
Economists believe that Malaysia could see a greater negative impact from the Covid-19 outbreak as compared to SARS some 18 years ago.
This is mainly because the Malaysian economy today is more correlated to China, with greater integration in the supply chain.
For context, both SARS and Covid-19 broke out in China and have later become global pandemics.
However, Covid-19 has become more widespread as it has infected 83,330 individuals with a death toll of 2,856 in a span of two months.
In contrast, SARS infected over 8,000 individuals and claimed 774 lives over the course of six months.
Malaysia’s total trade exposure to China stands at about 74% currently, as compared to only 12% in 2003.
It is also worth noting that China was Malaysia’s largest trading partner for 11 consecutive years until 2019.
The Malaysian economic growth was slashed by 0.15 percentage points as a result of the SARS outbreak some 18 years ago.
Economists anticipate the Malaysian economy to grow by below 4% in the first quarter of 2020 (1Q20) and perhaps continue a similar momentum in the second quarter.
For perspective, in 4Q19, the country had posted its worst GDP growth since 3Q09.
Wellian of OCBC says Malaysia’s economic recovery “remains an open question”, depending on the speed, reach and duration of the Covid-19 outbreak globally.
“If the most recent scare in multiple spots outside of China proves to be unfounded, a recovery by the second quarter may still be in the pipeline. Otherwise, we may well have to wait until closer to the fourth quarter, ” he says.
The Covid-19 outbreak has not only affected the Malaysian economy, but has also dragged down growth in other countries.
Singapore, for instance, recently announced a S$6.4bil (RM19.35bil) stimulus package, which consists of S$800mil to fight the Covid-19 outbreak and S$5.6bil as economic support packages to support businesses and consumers.
Of the S$5.5bil, a total of S$4bil is allocated towards supporting businesses with wage costs, while the balance is to offer “additional, timely help to more households with cost of living, ” especially for lower-income families.
Meanwhile, Indonesia has introduced a stimulus package of 10.3 trillion rupiah (US$742mil), which includes a 30% increase in subsidies for basic needs for 15.2 million poor households for six months and a cash injection for airlines and travel agents to provide 30% discounts on airfares for some seats for three months.
The Indonesian government will also expand a state property financing programme to cover housing loan and down-payment subsidies for low-income Indonesians.
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