Cash is indeed king

Economic action: The Petronas Twin Towers stand next to commercial buildings in Kuala Lumpur. All in, we need a package that is worth some RM130bil to address the economic fallout from Covid-19 to return to the normal economic path within the next six months. — Bloomberg

VERY rarely have there been times when so many tumultuous events took place at the same time.

So far, what do we have?

We have equity markets that are deep into bear territories, we saw a carnage in the oil market, we have seen the huge volatility in the fixed-income market, while the dollar, as measured by the Dollar Index, is near its highest level in 17 years. Cryptos are down heavily, while gold has lost some of its glitter after recent gains and nobody talks about start-ups as they have probably been left high and dry.

Companies like Uber and Lyft are now trading at almost half and one-third of their values from their respective initial public offering prices. This would also likely mean that the valuation that we had seen among start-ups has also collapsed.

How can we overcome this unknown factor in a structured and holistic manner?

Let’s assume that we are now at sea. How do we navigate ourselves out of the deep waters and return to shore if all of a sudden and without clear warning, we are up against high winds and big waves?

Imagine that the nations around the world are like boats at sea now. The large nations, like the United States, the European Union, China, India and Australia have what is defined in navigating terms as the length and beam to handle the rough waters.

As a nation, they have the resources, especially in terms of monetary and fiscal space, to manoeuvre the unchartered waters.

If they have to print money to get out of the financial predicament that they are in, then so be it.

However, for smaller nations, like a small boat at sea, they have less available tools at hand to handle the rough seas and are at a greater mercy of the waters.

The worse thing would be for one to panic and not think straight, as well as make hasty decisions that could result in severe consequences.

As a boat at sea, the worst outcome would be for your boat to capsize and all the crew and passengers (if any) to drown.

As a nation, delaying making a major decision or making the wrong decision when you are up against a perfect storm can cost you dearly, as people’s lives are at stake in terms of their financial well-being while businesses too can be impacted, as they are unable to pull themselves out of the patchy period due to inaction from the government.

In actual fact, all it takes is common sense. Just like being in the water, all you have to do is manoeuvre like a sail boat and you will have a better ride on the rough seas with the storm soon passing.

For governments, what does this mean?

Granted that economic activities have come to a halt and we will go into a deep economic contraction in the first and second quarters, the measures to be introduced by the government on March 27 should be able to address the vacuum created by this economic disruption.

The disruption is on three key economic pillars - the government, the business community and households. The size of Malaysia’s economy was RM1.51 trillion in 2019. On average, this is RM4.1bil in gross domestic product (GDP) output per day.

As it is, we will be under the movement control order (MCO) for four weeks and assuming that economic output that is lost due to the MCO is approximately 50%, we have effectively lost some RM58bil in economic output in this period alone.

After all, as all of us can see, hardly anyone is on the streets, shops are all closed, businesses are mostly on a “work from home” basis while #stayathome is the order of the day.

Even when the MCO is lifted, there will still be spill-over effects on the economy over the next two months at least due to the Covid-19 pandemic. The economic output lost could be another 10% of the normalised output or RM25bil by then.

Hence, all in, Malaysia is looking at about RM83bil in lost economic output this year. With a base-case GDP growth of at least 3.2% for 2020 (as envisaged by the interim Prime Minister), the additional momentum that the economy was supposed to generate was another RM48bil.

In these trying times, failure to address the economic malaise is not an option.

The loss in output alone based on the above parameters is about 5.5% in GDP growth, resulting in Malaysia going into recession in 2020 with a GDP contraction of between 1.3% and 2.3% (based on the revised GDP growth estimate of 3.2% and 4.2% for the year).

A RM130bil stimulus packageAll in, we need a package that is worth some RM130bil to address the economic fallout from Covid-19 to return to the normal economic path within the next six months.

The RM130bil works out to some 8.6% of GDP, which is not too far-fetched if we were to take the benchmark packages that other nations have introduced.

The US, with a US$2 trillion package, is about 9.3% of GDP, while Germany, the UK and France are mulling between 10% and 13.4% of their respective GDP figures.

Two weeks ago, this column suggested five strategies that the government should undertake and the actual cost to the government was estimated at RM20bil. To-date, the government has introduced an economic stimulus package and measures to the tune of RM61.5bil.

Sadly, only some RM4.4bil or approximately 7% of the amount is directly related to actual cash outlay from the government, while some RM50bil is related to members’ EPF contributions, which is now either allowed to be withdrawn or via the reduction in the members’ rate of contribution to 7% from 11% previously.

Assuming some 50% of these EPF measures amounting to RM25bil do trickle into the economy, we then only have measures that are cash in nature and tangible amounting to just under RM30bil. We are still short of RM100bil in actual cash distribution to businesses and households.

Since this column had suggested a package of RM20bil earlier, provided below are additional measures worth RM80bil that the government should be taking when it tables the second economic stimulus package:

1) A RM52.8bil package for businesses to meet their operational needs. It is time to help all businesses overcome this difficult time in terms of their actual operating expenses.

One of the largest core expenses of any corporate is the employer’s contribution to the EPF. This amounts to RM3.3bil a month and for a period of six months, the total amount will be RM19.8bil. It is recommended that instead of employers being burdened with paying this amount, the government steps in to pay on behalf of the companies.

Another large expense item for companies is staff salary. Based on EPF data, it is believed that the total salaries paid by employers is approximately RM27.5bil a month.

To mitigate the employers’ burden due to a loss of income/revenue or closure of business, it is recommended that the government shares the burden of salary payments to the tune of 20% of the monthly salary for the next six months.

In this way, the total amount the government contributes to employers for salary payments is approximately RM33bil. All in, the government allocates RM52.8bil to employers in the next six months to mitigate the impact of Covid-19 on their business. This is to ensure that employees have job security to a certain extent and employers are able to meet their obligations.

2) Provide an additional RM7.6bil to the B40 group. This column had earlier suggested introducing an e-wallet credit for 3.8 million “Bantuan Sara Hidup” (BSH) recipients of RM1,000 each with a six-month expiry date. It is now further suggested that due to the severity of Covid-19 and the impact to households, another RM2,000 is added to the initial RM1,000 amount.

This will cost the government RM7.6bil in total handouts. With RM3,000 in e-wallet credits, B40 recipients have some RM500 per month over the next six months to ensure that their lives are not disrupted.

3) RM4.5bil for petty traders. Based on the 1.5 million registered petty traders, the government should provide relief income to them to ensure that they are able to overcome this difficult period, as most of them are unable to find a source of income.

The government should allocate RM1,000 per petty trader per month for the next three months to ensure that there are able to make ends meet, at least.

4) RM10.6bil for miscellaneous purposes, which could be channeled to the needy not captured under the above three categories. This may include unemployed youths, single mothers, daily wage earners, freelancers, and those dependent on farming and fishing. The government could also use this extra allocation to waive all utility bills payable for those in this group, as their income has been seriously eroded by circumstances beyond their means.

For example, instead of the meagre 2% discount in electricity bill payment to 7.5 million domestic users costing some RM180mil, perhaps the amount should be raised to 25%, ie, RM2.28bil, with the rebate being borne by the government itself.

To fund this, it would be difficult for the government to tap into the sovereign space or on the national oil corporation, Petronas, again. Due to the urgency of the funds that are required, the government should make a private placement for 10-year, 15-year and 20-year MGS papers directly to the EPF. In this way, members are not drained of their savings but rather the EPF is actually investing with the government and earning long-term interest on the investments for its members. After all, the EPF does invest in government papers anyway, and hence, this is an additional investment for it.

To kick-start this massive stimulus package, the government should convene a special Parliamentary sitting to approve the allocation, as this will definitely blow off the current self-imposed debt/GDP ratio, budget deficit targets and debt-servicing ratios. But this is not the time to play politics or be worried about economic ratios, and surely, the Speaker of the House will be able to ensure that only a Bill related to the Emergency Covid-19 Fund is tabled and not any other matters.

Hopefully, with a huge bazooka like a RM100bil stimulus package, Malaysia would be able to manoeuvre itself out of the choppy waters and soon reach the distant shore, which at the moment seems to be out of sight.

After all, without this package, how are we to have any comfort that businesses and households have what it takes to withstand the economic and financial impact arising from a once-in-a-lifetime event driven by external factors?

It’s time for cash handouts – as cash is indeed king.

Views expressed here are the writer’s own.

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