Malaysia, brace for the ‘new normal’ post-MCO

THE full reopening of the economy could be delayed until early June 2020, beyond the fourth phase of the movement control order (MCO) that is expected to end on May 12.

In his much-awaited speech on the eve of Ramadan, Prime Minister Tan Sri Muhyiddin Yassin has hinted that a fifth phase of the MCO remains a possibility.

What this means is that the return to normalcy in terms of economic activities pre-Covid-19 could take longer than expected previously.

An economist warns that Malaysia is heading into a crisis “almost similar to the 1998 Asian Financial Crisis, which is further exacerbated by a health scare like never before.

“Brace for almost similar economic contraction, high unemployment rates and business failures as seen in 1998. With such an impact, the rebound or recovery for Malaysia will not be easy moving forward, ” he says.

As the operations of many businesses have remained closed for a long time, business sentiment is likely to take some time to recover.

This could have a negative “trickle down” effect on the overall economy as businesses, especially small and medium enterprises that make up almost 98% of the local business entities, delay planned expansions, new job hirings and reduce loan applications to finance operational capacity expansion.

Speaking with StarBizweek, OCBC Bank economist Wellian Wiranto (pic below) expects that the reopening of the economy - after the MCO is lifted eventually - might not be “grand” as some form of restrictions might still be in place to prevent a resurgence of the virus outbreak.

CBC Bank economist Wellian WirantoCBC Bank economist Wellian Wiranto“Combine that with the continuing challenges posed by the global outlook, we might not see a sharp V-shape recovery that we all hope for, unfortunately. At best, we might have to prepare for a U-shape recovery, or perhaps a Nike-swoosh pattern with steady-but-slow pace of gradual recovery.

“There is also a possibility of another dip in the global economy even after things somewhat normalise, presenting perhaps a W-shaped recovery for the lack of a better term, ” he says.

Meanwhile, Institute for Democracy and Economic Affairs (IDEAS) research manager Lau Zheng Zhou believes that the economy might enter a “new normal” post-MCO, instead of a return to normalcy.

This, he says, is largely because of the extent of the demand and supply shocks on a global scale.

“Depending on the duration of the MCO period, the economy may see a one-off rebound in growth due to the low-base effect of slower growth in preceding quarters, but will then moderate for a longer time period before recovering more fully akin to a U-shape recovery.

“While our economy’s productive capacity is less likely to be permanently damaged, we may still return to factories and offices post-MCO just to find much lower demand for our goods and services than before, unless businesses adapt more successfully to the new environment, ” he says.

On April 23, Muhyiddin announced that the MCO will be extended further until May 12, bringing the duration to about eight weeks or slightly below two months.

In response to the extension, economists have again downgraded their economic growth forecasts for Malaysia in 2020.

“With the extension, we cut our 2020 gross domestic product (GDP) forecast from -4% to -6%, making this “Covid-19 recession” worse than the (2008-2009) global financial crisis and almost as bad as the (1997) Asian financial crisis, ” according to Hong Leong Investment Bank Research.

For context, the Malaysian economy contracted by -7.4% in 1998 and 1.5% in 2009.

CGS-CIMB Research has also lowered its 2020 GDP forecast to -6%, as compared to -4.3% previously.

“We have also cut 2020 market earnings to -3.5% from 1.6% to partially reflect the MCO, ” it says in a note.

These projections are much lower than Bank Negara’s official estimate earlier in the range of -2% to 0.5%. However, the forecast had only assumed the MCO to end by April 14, with some restrictions to continue post-MCO such as social distancing.

Amid the increasingly negative newsflow on the economic outlook, OCBC Bank’s Wellian says that it may not all be doom and gloom.

“Given the expected relatively early and sharper recovery for China’s economy, for instance, Malaysian businesses should continue to be on the lookout for some lights in the tunnel there.

“On a relative basis, given the close ties that Malaysian economy has developed with China over the years, this should be an area where sentiment might improve a bit more than others, ” he says.

According to AmBank Group chief economist Anthony Dass, the economic recovery will also depend on the widespread business shutdowns and bankruptcies.

“The question arises about how long it will take for businesses to be in a position to hire.

“If the government’s assistance is timely and sufficient, then it should not take very long at all.

“Meanwhile, various economic sectors may experience different rates of recovery unique to the challenges each faces. For instance, laid off workers in the services sector that rely a lot on large groups or close contact, will still not be able to spend and so their lack of consumption will continue to slow growth and recovery for a while until their jobs bounce back, ” he says.

Lau of IDEAS points out that the business recovery of listed companies and government linked companies (GLCs) are critical to improvement in the overall ecosystem.

This is because listed companies and GLCs are often anchor firms in the supply chain and they are surrounded by second and third tier suppliers which are usually SMEs.

This also means that the recovery of these larger firms will have spill-over effects on the wider economy.

“Globally, some of these larger companies in the aviation and oil and gas sectors have turned to their respective governments for subsidies or outright bail-outs. Critics have also pointed out that monetary stimulus measures may benefit larger companies than the SMEs.

“From this perspective, it may be possible for larger companies to experience softer landing than SMEs during this period, but the lack of resilience and adaptability of some of these companies are also being exposed, thus raising question if they could adapt successfully to the post lockdown new normal, ” says Lau.

Accelerating the recovery

In assuring the business community and the overall Malaysian population that it will not rest on its laurels, the government has started to engage stakeholders from various industries to get their feedback on efforts to restore the economy.

During his special address on April 23, Muhyiddin announced that the government would formulate a comprehensive short-, medium- and long-term economic recovery plan to revive the economic activities quickly, once the MCO period has ended.

In a statement yesterday, Finance Minister Tengku Datuk Seri Zafrul Aziz said that the economic recovery and development strategy will be tabled to the Cabinet and the Economic Action Council in the near future.

“In the near term, the Finance Ministry is focusing on short- and medium-term efforts that need to be taken during the MCO and post-MCO to ensure the country’s economic sustainability and well-being of the people, ” he said.

Meanwhile, the long-term strategy would entail strategies to safeguard Malaysia’s economic, environmental and social thrusts with digital technology playing an important role in ensuring the country’s sustainability and competitiveness in the future.

Moving forward, the recovery in business and consumer sentiment is contingent upon how the government tailors its policies to accommodate revival of economic activities, supported by the three stimulus packages worth RM260bil announced earlier.

In order to support domestic private consumption, which is a key pillar to the economy, an international consulting firm says the government could further improve the wage subsidy programme introduced in the second stimulus package through private sector involvement.

Businesses should be encouraged to retain staff amid the MCO and in return, the government is recommended to allow businesses to offset “the private sector wage subsidy” to their employees against future taxable revenues.

“This, of course, cannot be forced upon all private sectors, but is an alternative avenue for the government to not dig deeper into its own coffers during this difficult period, ” it says.

As a result of the ongoing global economic crisis, the consulting firm warns that several of the biggest industries in Malaysia could face disruption as multinational corporations (MNCs) reshore their production facilities. Such sectors include the oil and gas (O&G) as well as the electrical and electronics.

“Though said, the same impact would also be a great opportunity to attract more foreign investment into Malaysia.

The Malaysia Investment Development Authority has been doing a great job over the years, hence good foreign investment incentives that are win-win to all can be deployed in the current climate to capture those divestments from China.

“MNCs realised that they are too dependent on China, hence Malaysia may gain from the upcoming wave of production decentralisation.

For example, 54% of US firms want to move out of China, and about 19% of this looks at Southeast-Asia as their top destination, ” it says.

Meanwhile, GV Corporate Advisory urges the government to introduce additional stimulus measures to shore up local demand.

The firm recommends the exemption of the Sales and Service Tax (SST) across all sectors at least until the first quarter of 2021 (1Q21) to boost business confidence.

It also called for the re-implementation of the Goods and Services Tax by 4Q20 to enable revenue generation that would be utilised to increase government expenditure in value-adding projects such as the KL-Singapore High Speed Rail.

GV Corporate Advisory executive director Razlan Raghazli agrees that the removal of SST would adversely affect government revenue.

“However, at the same time, it would serve to mitigate the financial impact on businesses, specifically SMEs, that has arisen from the economic disruptions caused by Covid-19.

“It would seem more prudent than digging deeper into government coffers for additional stimulus measures for SMEs, ” he says.

On the proposed re-introduction of GST, Razlan says the tax rate should be fixed at a lower rate than the 6% previously, to ensure that the impact on consumers is kept at a minimum.

GV Corporate Advisory has also proposed other measures such as reassessing non-performing loan recognition by banks from 90 days to 180 days, loosening of credit control policies and procedures, reduction of stamp duty for properties and the transformation of the agriculture sector, among others.

AmBank Group’s Dass has urged the government to pay more attention to foreign worker issues, especially the illegals.

“Without addressing this group of people in relation to their exposure to whether they are positive or negative Covid-19, there is a high risk that the entire exercise of the current MCO can become fruitless, especially if these illegal foreign workers are positive carriers of Covid-19 and are not treated, ” he says.

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