Political developments are existential threat to economy, amid Covid-19 outbreak

Lee Heng Guie SERC

THE fluid and developing political situation will be closely watched and its eventual outcome could also have a bearing on how the newly announced stimulus measures will be implemented eventually.

While on the surface, the measures have already been announced by the interim prime minister Tun Dr Mahathir Mohamad, it would require the necessary implementation by the government agencies that are not currently headed by any government minister now.

“The implementing agencies must not be slack since there is no minister in charge, so there may be some slack; hopefully this would not happen, ” Socio-economic Research Centre (SERC) executive director Lee Heng Guie(pic) tells StarBizWeek.

Lee says the stimulus measures will now be left to be carried out by the civil service and technocrats that have been appointed in the various agencies.

“These institutions will still run business as usual and carry out what had been planned and drawn up by the Pakatan Harapan government prior to their breakup - as it is independent of what happens at the government level which we are seeing now, ” Lee says.

Lee also highlighted the near-term risk of a prolonged political upheaval that may cause delays in the implementation of fiscal measures to support the economy and stall reforms.

“We believe that Bank Negara would continue to make timely assessment it deemed appropriate and necessary to provide additional monetary stimulus. Ultimately if more interest

rate cut is needed, there is definitely still some dry powder left for any further contingencies, ” Lee says.

He says that depending on how the Covid-19 outbreak develops, there may be a need to also adjust these stimulus measures accordingly perhaps in the second quarter or so.

“This might happen should there be a need for more money to be spent to pump prime the economy in times of need like this, ” Lee says.

Commenting further, Ernst & Young Tax Consultants Malaysia tax leader and business tax services leader Amarjeet Singh tells StarBizWeek that measures such as the tax measures that have been announced would still have to go through and be approved by lawmakers.

“All of these tax measures that have to be announced, in particular has to be tabled in Parliament and they will have to approved: similar to how the national budget is dealt with, ” Amarjeet says.

“The announced measures help alleviate immediate cash issues, such as the deferment of tax installments, revision of tax installments and banks to support the restructuring of the loans, ” he says.

He also expects that the potential increased spending by individuals from the additional disposal income arising from the reduced Employees Provident Fund contribution by employees is expected to unlock up to RM10bil in domestic consumption.

“More importantly, this will not strain the budget deficit position, ” Amarjeet says.

He also notes that the budget deficit increase is being done in a controlled fashion, noting that the 2009 stimulus package then had increased from 4.8% to 7.6%.

“In comparison, the 2020 stimulus package is expected to increase the fiscal deficit by 0.2 percentage point to 3.4%, ” he says.

Professor of economics at Sunway University Business School Yeah Kim Leng says that the RM20bil stimulus package amounts to about 1.3% of the country’s 2019 GDP.

“This amount is larger than the estimated overall impact of Covid-19 on the economy, various analysts have put it at around a 0.3-1% impact to the GDP, ” Yeah says.

“It is good to have this growth insurance built into this package. But at the same time we also take note of the domestic shock to the economy in the form of political uncertainty, ” he says.

He notes that if political uncertainty is prolonged, or if it leads to an unstable govt, then the impact of the economy will be more severe in terms of investor and consumer confidence.

It also affects the implementation of the various development plans and policies, especially with regards to the shared prosperity vision and the 12th Malaysia Plan.

“All this will be important

to the investors and the public

to determine future direction of the economy, without which the direction will still remain a question mark for the investors and general public, ” Yeah says.

He says it is important that the country deals with this properly and carefully.

“We should deal with it as if we are dealing with the existential threat to our economic growth. But it is also to be emphasised that Malaysia’s economic resilience is very well established – as long as it is peaceful, the eventual impact will not be as severe compared to other countries undergoing political changes – and we take comfort in this political maturity, ” Yeah says.

Yeah notes that these sort of political uncertainties will cast Malaysia in an unfavorable position when competing for foreign direct investments and trade as well as other business opportunities regionally.

Yeah says political certainty or stability is the top macro factor for investors evaluating any investment analysis.

“Without a stable government there are concerns of policy certainty and changes. In terms of government projects, the weak implementation may derail these projects and some of these are are important to the private sector especially those with strong private sector linkages, ” Yeah says.

He says that this will affect both domestic and foreign investor confidence.

Yeah notes that another area of impact is that when there are political uncertainties, investors will tend to look for other places to invest thus it reduces the attractiveness of Malaysia as an investment destination.

Yeah expects that with the latest development that foreign investors will hold back their planned investments into Malaysia pending a greater clarity of the situation.

“In the worst case scenario they may even relocate to other countries while new investors evaluating Malaysia as a destination could see us losing this when comparing to other countries, ” he says.