Saving Malaysia’s economy


  • Economy
  • Saturday, 28 Mar 2020

Help for the people: A security guard checks the temperatures of customers arriving at a supermarket during the MCO to contain the spread of the COVID-19 coronavirus in Penang. The second stimulus package is expected to ease the pain of many businesses, especially SMEs that are fast running out of cash, and vulnerable households that have lost their incomes and now struggling to put food on the table. — AFP

‘We are facing all together against a common enemy, invisible but not unbeatable’ – Italian embassy to Greece on Twitter

An unprecedented situation requires unprecedented measures.

To combat the economic fallout from the coronavirus outbreak, Malaysia has unveiled a landmark comprehensive rescue plan worth a total of RM250bil, that’s almost one-fifth of the country’s gross domestic product (GDP).

It is the largest-ever stimulus package for the country.

It is also one of the most aggressive responses thus far by an Asian government to the pandemic, which has upended the lives of billions around the world.

The move, however, is expected to cause Malaysia’s fiscal deficit to widen to about 4.9% of GDP this year from 3.4% of GDP in 2019.

Prime Minister Tan Sri Muhyiddin Yassin, however, stressed the Government’s priority at the moment is to curb the spread of the Covid-10 outbreak.

“We are a nation at war with invisible forces. The situation we are now facing is unprecedented in history, ” he told the country in a televised address yesterday.

During the unveiling of the “People’s Economic Stimulus Package”, Muhyiddin said the RM250bil plan would be one that would benefit all in the country, particularly the small guys.

“The main priority now is to boostthe private consumption, which contributes to around 60% ofthe total GDP,to ensure no deterioration in economic growth”. - Manokaran Mottian“The main priority now is to boostthe private consumption, which contributes to around 60% ofthe total GDP,to ensure no deterioration in economic growth”. - Manokaran Mottian

The package has earmarked almost RM128bil to protect the welfare of the people; RM100bil to support businesses, including the small and medium-sized enterprises (SMEs); and RM2bil to strengthen the country’s economy. It is inclusive of RM20bil stimulus package announced in February.

“This package will provide instant assistance instant assistance to ease the burden that all of you have to bear, ” Muhyiddin said.

“You will all enjoy the benefits of the economic stimulus package that this people care about. As I mentioned, no group will be left out. No one will be left behind, ” he added.

Among the key measures in the package are cash handouts to eligible households and affected businesses; a wage subsidy programme to help employers retain workers; and additional funds to assist SMEs.

Muhyiddin, however, noted almost all of the measures were one-off, so as not to burden the Government’s finances in the medium term.

“This step is important to ensure that the country’s fiscal and debt position is sustainable. Accordingly, the Government will need to re-implement fiscal consolidation measures in the medium term to create long-term fiscal space, ” he said.

According to economists, the RM250bil package involves only RM25bil of actual fiscal injection by the Government. The package is also made up of RM100bil loan moratorium measures by Bank Negara, RM50bil Danajamin guarantees, and RM40bil of household EPF savings.

The medicine

Malaysia’s expansive measure is in step with other major economies that have been ramping up their responses in recent weeks to deal with the Covid-19 economic fallout.

Globally, central banks have been aggressively easing their policies, slashing interest rates and lowering capital requirements for banks, among other things, while governments have been pumping huge sums of money into the economies to fight Covid-19 and to provide stimuli that include more spending and tax cuts.

Singapore, for instance, has recently rolled out its second stimulus package worth S$48bil (RM143bil), while the US Senate has passed a historic US$2 trillion (RM8.5 trillion) rescue plan.

The whole idea is to resuscitate their battered economies by putting cash in the hands of the people and helping companies manage their cashflow and losses to avoid as much job loss as possible.

  “Businesses need to be back up and running, while the vulnerable groups need the most help” - Lee Heng Gui“Businesses need to be back up and running, while the vulnerable groups need the most help” - Lee Heng Gui

As it stands, the prognosis for the global economy remains grim.

According to the International Monetary Fund’s words, the outlook for global growth for 2020 is negative - a recession at least as bad as the 2008/09 global financial crisis, or worse, is in store.

It says advanced economies are generally in a better position to respond to the Covid-19 crisis, but many emerging markets and low-income countries will face significant challenges.

Economy in ICU

As in the case of other economies in the world, Malaysia has endured horrific economic repercussions of the Covid-19 outbreak.

For the most part, the damage is not due to the virus itself, but efforts to stop the invisible enemy from spreading, and claiming more lives.

With more than 2,000 confirmed Covid-19 cases, Malaysia is currently the third most infected nation in Asia-Pacific after China and South Korea. More than 250 have recovered, but to date, 26 have lost their lives.

Significant parts of Malaysia’s economy have now been put on an induced semi-comatose state since March 18 under the Movement Control Order (MCO) to contain the disease. The MCO is expected to last till April 14.

However, with almost all business activities coming to a halt, and millions of people forced to stay at home, the financial pain has been quickly piling up. People are losing their jobs and incomes, as business owners are losing their businesses. The hard-earned savings and retirement funds of many are also evaporating.

To borrow the medical term, Malaysia’s economy is already in the intensive care unit, or ICU, as in the case of many other countries, in the fight against Covid-19.

A grim estimate by the Malaysian Institute of Economic Research (MIER) is that Malaysia’s economy would shrink 2.9% this year.

The number of job losses could reach 2.4 million, of which 67% are unskilled workers, and household incomes are projected to fall by 12%, or RM95bil in absolute terms. This could lead to an 11% drop in consumer spending, says the think tank.

On a positive note, the damage can be contained. MIER says a massive stimulus package could help the nation’s economy to stage a V-shaped recovery into 2021.

Easing the pain

While the package will not entirely resolve the economic woes, it is expected to ease the pain of many businesses, especially SMEs that are fast running out of cash, and vulnerable households that have lost their incomes and now struggling to put food on the table.

Commenting on the second round of stimulus, economist Lee Heng Guie notes the package is bolder, as the Government acts decisively to provide a timely and much-needed financial assistance support to households as well as to businesses to manage cash flow challenges during these turbulent times.

“Businesses need to be back up and running, while the vulnerable groups need the most help, ” the executive director of the Socio-Economic Research Centre (SERC) says.

“There is a compelling need to deliver a strong dose of stimulus to soften the substantial economic damages caused by the Covid-19 pandemic. While the package is unlikely to avert a recession this year, it is expected to ease the magnitude of economic contraction, ” he adds.

Lee notes while the wage subsidy support to employers is a welcome relief, the scheme could be further enhanced to save jobs and keep employment as well as preserve income of employees.

It is inevitable that many profitable and financially viable businesses could temporarily face financial distress because of the economic fallout of the Covid-19 outbreak, Lee says, adding many SMEs could run out of cash within the next two to three months, and would unlikely be in financial good shape for the next six months to a year, if the crisis remains unabated.

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“In this regard, it is important that the economic stimulus package through financial guarantee and other funds by Bank Negara provide financially distressed businesses a safety net to buffer them against this unprecedented demand and supply shocks so that they continue to stay viable to resume normal business operations and be ready for an upturn, ” Lee says.

Similarly, Khazanah Research Institute notes it is important that the economic stimulus package is aimed at protecting businesses and households, so that they have sufficient resources to ride out the shocks of the next few months and can restart production as soon as the Covid-19 crisis is over.

Economists say SMEs, in particular, matter because they are the lifeblood of Malaysia’s economy.

Collectively, SMEs contribute about 40% to the country’s GDP and 20% to exports annually.

According to the Statistics Department, 98.5% of business establishments in Malaysia are SMEs, and they cut across all sizes and sectors.

SMEs also hire 65% of the country’s workforce and contribute.

This implies that if SMEs, now suffering from immeasurable losses, were to go down, many would also lose their jobs.

Despite the expansive measure, SME Association of Malaysia president Datuk Michael Kang reckons it is insufficient to help companies pull through the current crisis.

Kang predicts 50% of SMEs will likely close down, and about four million people are at risk of losing their jobs.

Budget blow

Meanwhile, additional government spending to save the country’s economy will undoubtedly exert pressure on its budget balances.

Malaysia has consistently run a budget deficit every year since the 1997/98 Asian Financial Crisis, with the budget deficit rising to as high as 6.7% of GDP at the height of the Global Financial Crisis in 2009, before progressively narrowing to 3.4% of GDP last year.

But pressure on fiscal deficit should not be the focus in the current extraordinary circumstances; the priority should be on supporting the economy, economists say.

“Widening fiscal deficit and rising government debt could be one of many concerns, but the main priority now is to boost the private consumption, which contributes to around 60% of the total GDP, to ensure no deterioration in economic growth, ” Alliance Bank chief economist Manokaran Mottain says.

Similarly, Institute for Democracy and Economic Affairs (IDEAS) research manager Lau Zheng Zhou says if aggregate demand were not supported now, the country could see private consumption falling further, which would then create knock-on effects such as falling employment and business spending.

This would then result in tax revenue losses, and increased social assistance spending too, which would imply further pressure on the Government’s financial position.

“It is not expected of the Government to completely disregard the fiscal impact of stimulus packages, but rather to be highly targeted and measured when intervening in the economy, ” Lau says.

“If the economy slows down further without adequate fiscal intervention to support, the fiscal deficit as percentage of GDP ratio will rise disproportionately, and this will further spook investor and possibly aggravate foreign capital flight and the fall of ringgit, ” he explains.

What’s important, Lau argues, is for the Government to communicate its economic strategy for the short-to-medium term, which should entail measures to promote income and business recovery in order to demonstrate future capacity for tax revenue generation.

On the risk of a rating downgrade, SERC’s Lee says he believes global rating agencies would provide a breathing space for the Government to derail its fiscal consolidation path during this extreme time.

However, Lee points out, the Government must remain committed to reduce its deficit and contain the debt when the economy recovers.

“The Government needs to rebuild fiscal space as having fiscal space is like having money in the bank. It provides us the fiscal flexibility during the rainy day, ” he adds.

Oil woes

It is notable that the Budget 2020, which outlines Malaysia’s revenue for this year, is based on an estimated oil price of US$62 per barrel.

However, oil prices have since crashed, and they currently trading below US$30 per barrel.

According to Manokaran’s estimation, every US$1 per barrel decline in oil prices could result in a revenue loss of RM300mil for the Government. Overall, he says, the recent oil price plunge is estimated to cost the Government a revenue loss of RM12.6bil.

“We believe there are ways for the Government to reallocate its funds to more critical sectors, which are impacted by the pandemic and MCO. The Government’s fiscal position might not be jeopardised if the Government could recalibrate its funding wisely, ” he says.

“We believe the Government could still come up with measures to ensure the sustainability of its revenue streams, ” he notes, adding that the re-implementation of the goods and services tax (GST) and reducing less critical allocations could be viable solutions for the budget shortfall.

The stimulus packages aside, Lau of IDEAS says, Malaysia’s economic outlook remains dependent on three “E”s – epidemic, external and employment.

“It is still unclear when Covid-19 spread will peak. The longer it takes, the longer will normal economic activities be disrupted, ” he says.

He notes demand has been artificially suppressed in most countries because of lockdowns, while businesses that have been put in hibernation could face liquidity issues if the epidemic prolongs.

“Supply chain will be disrupted in the short term even after the epidemic has reached a peak because many suppliers and buyers could become non-existent by then and business sustainability will be tested, ” Lau explains.

“Malaysia, like most countries, is dependent on a healthy external environment to grow.

The previous US-China trade war has already impacted its trade and dampened investor sentiment; so, even if Malaysia managed to contain Covid-19 successfully, if the external conditions did not improve, it would be hard for the country to have full economic recovery, ” he adds.

Lau points out that the longer the epidemic and external challenges persist, the risk will be even greater in terms of losses in employment. This will weigh on private consumption growth and creates a vicious cycle of falling demand and businesses suffering from losses.

No one knows how long the war against Covid-19 is going to last, but this crisis will eventually pass.

As the Italian Embassy to Greece says, the common enemy we are facing may be invisible. But it is not unbeatable.

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