Every crisis has been different.
From the commodity rout that sent prices of raw materials lower to the oil shocks of the 1970s, each of the supply shocks have drilled its way into the broader economy that precipitated an economic shock.
Even the bursting of the dotcom boom had a telling impact on how companies reacted to the implosion of inflated asset prices.
It took the US some time to recover from that and there has been no greater asset bubble burst than what had happened in Japan, where it took decades for prices to recover on a broader scope.
This time around, for Malaysians, another crisis is before us.
How different is it from the worst we have seen in the Asian Financial Crisis?
Early signs are that this is different and not very good.
The Asian Financial Crisis was triggered by excesses. Twin deficits, an overheated lending environment and spiralling asset prices were the recipe for disaster.
The pinata were the rouge currency traders. Those bad boys were tarred and feathered for taking advantage of nascent and vulnerable Asian economies by targeting the currencies of countries.
The impact from people seeing an opportunity to profit from misery was telling on Malaysia, like many countries in the region.
Many had to swallow the bitter conditions of terms needed by the International Monetary Fund before the bailout money was granted.
The economic impact then was also telling.
In Malaysia, economic growth swung from a strong expansion into a deep contraction.
From 7.32% in 1997, it shrank to -7.36% in 1998. The stock market bled profusely, there were stories of people selling their houses cheap and unemployment was a concern.
The turmoil ended with the stock market at the 260-point level after a massive crunch from the 1,200-point level.
What triggered the turnaround was the pegging of the ringgit to the US dollar.
With currency certainty, the economy was able to heal itself once again. Growth rebounded to 6.14% in 1999.
This time around with Covid-19, it is something many have not experienced before. It is not just one black swan impacting Malaysia, there is also the glut of crude oil sloshing through the global markets that have tanked the prices of the commodity.
That will have a telling impact on countries like Malaysia which has seen its dependency on crude oil for revenue as a percentage of GDP rise as a result of the switch from GST to SST.
Malaysia, like the rest of the world, would have been able to weather an oil shock with time.
And any recovery would have been fast given the world increasingly less dependent on oil to generate a point of GDP.
Lower oil prices would be positive for most of global growth as cheap energy is a catalyst for many economies.
But add Covid-19 to the mix and you have a cocktail of disaster.
It is also because the coronavirus outbreak gives no clarity or certainty as to a turnaround.
The only thing people and governments can hope for is to reduce the rate of infection and wait it out.
Doing so will have a terrible cost on any economy.
China’s growth has come to a standstill and factory output data and even car sales numbers are a prelude for what to expect. The rest of the world is increasingly adopting what China has done to combat the disease and that means a similar end result on economic activity.
Expect the global economy to screech to a halt fighting Covid-19 and Malaysia will not be spared as external trade is 130% of GDP.
The big worry for Malaysia is the length and severity of the closure. As people are subject to a control movement order, there is very little activity besides the essential industries operating.
That means companies will see themselves in a cashflow crunch, if not already, and the worry is what will that have on wages and employment.
Bad loans will certainly rise the longer this goes on.
Should the impact from Covid-19 move in much more negative way and for a prolonged period, then that will have the making of a worse crisis than the AFC.
The stock market is already an indicator of that.
The speed and ferocity of the decline is almost unprecedented.
The large swings we are seeing today were commonplace in 1998 but that was when the crisis was well underway already.
We have seen violent swings now for a stock market which has already been underperforming for years with lethargy of declining corporate profitability. In other words, the “base” is much lower now than it was more than 20 years ago when corporate earnings and the economy was surging.
The MCO is for two weeks and that is a sacrifice the government has to make to lessen the impact of the disease on its citizens and the healthcare system.
The fear of the unknown will mean that consumption, which is a big driver in the Malaysian economy, will dry up if it hasn’t already.
Very little is expected from consumption except for the purchase of essentials and with tourism in cold storage from the border freeze and foreigners staying put in their countries, that will just compound the economic impact on Malaysia.
The best we can do is our part.
Stay indoors so we can navigate through this tempest in haste so that the well-being of our people and the country is not damaged for any period longer than necessary. — By Jagdev Singh Sidhu
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