WHILE the battle to recover completely from the Covid-19 blues continues, it appears that the worst is over for the Malaysian economy.
With the economy now in the third quarter, experts believe that the severe growth contraction projected for the April-June period – potentially the country’s worst quarterly slump since the Asian Financial Crisis in 1998 - is unlikely to repeat itself in the current and coming quarters.
Signs of recovery are gradually emerging, with businesses beginning to ramp up production and the local job market indicating increasing hopes of recruitment in certain sectors.
The manufacturing sector, as reflected in June 2020’s Purchasing Managers’ Index (PMI), recorded its first expansion in 21 months, hinting at green shoots of recovery in factory activity.
The pent-up demand from consumers, following the end of the travel restrictions, is expected to reinvigorate consumption, moving forward.
The government’s four economic stimulus packages worth RM295bil, which entail wage subsidies, a loan moratorium and interest-free financing, among others, have also been instrumental in preventing the economy from suffering a worse downturn.
Thanks to the loan moratorium, Malaysians have been able to save what was supposed to be their loan installment payments since April.
For instance, a household with a monthly loan commitments of RM2,000, would have been able to save RM12,000 within the six-month loan moratorium period until September.
The decision to allow contributors to withdraw from EPF savings, despite being criticised by certain quarters, have also “injected” extra cash into their pockets.
These could now act as their financial buffer and even enable them to spend on leisure or non-essential items over the coming months, boosting private consumption that accounts for nearly 60% of the Malaysian economy.
The stock market, which is often seen as a leading indicator of the economy, witnesses improving investor sentiment as the bellwether index - FBM KLCI - has by large stayed above the 1,500 points level since June.
Particularly, stocks in the healthcare and technology-related sectors have enjoyed strong investor interest.
While these are positive signs for Malaysia, it is still early to celebrate, given the continuing uncertainties and challenges in the domestic and global environment.
To be sure, despite the returning market demand, not all businesses are well-prepared to capture the opportunities, especially those hit by cash flow issues and high debt burden.
Several sectors that are heavily exposed to the global environment would also struggle to retain workforce and sales.
Corporate earnings in Malaysia, without doubt, will be lacklustre in 2020 and market analysts have downgraded their forecast by factoring in the disappointing first quarter earnings season and the challenging outlook ahead.
For context, the aggregate earnings of the 30 constituent stocks of FBM KLCI fell by 48% year-on-year and nearly 42% sequentially in the first quarter of 2020 to RM7.57bil.
Based on a Bloomberg consensus, 2020 FBM KLCI core earnings could fall by 15% this year.
Meanwhile, the hefty contraction in loan applications also shows that the economy is yet to come out of the woods.
In May, loan applications across the banking sector tumbled by 39% year-on-year (y-o-y), following a 41.4% decline in April.
Households have been curbing their interest for borrowings at a sharper rate than the businesses for the past several months, and the decline in new loan applications by households and businesses is putting further pressure on the banking sector’s loan growth.
Speaking with StarBizWeek, Malaysian Institute for Economic Research (MIER) economist Shankaran Nambiar concurs that the country is already on the path of recovery, although he believes it is going to be “a long, slow path”.
“I do not think there will be cheer till after the first quarter of 2021.
“The external environment is not out of the woods. The impact on the EU, UK and the US is not on an upturn.
“The worst is not over for the US in terms of the effect of Covid-19 and that is going to shake global markets for some time to come.
“US-China tensions could worsen for a number of reasons, ” he said.
The challenging external environment is a major headwind for Malaysia, given its export-reliant status.
Exports contribute nearly 65.3% of the domestic gross domestic product in 2019, according to the World Bank..
With key trading partners such as the US continuing to struggle from production interruptions due to their domestic Covid-19 cases, this would likely reduce Malaysia’s exports to these countries.
Sectors such as electrical and electronics that are highly exposed to these economies would also be affected in turn.
“In view of these factors, it will be difficult to expect the government to do much to encourage export-oriented manufacturing.
“This is likely going to be a bad patch for foreign direct investments, ” Nambiar says.
He also thinks that Malaysia may not see a quick restoration of business and consumer confidence.
“I would expect a slow pick-up on both business and consumer confidence.
“Households are probably starting to experience the effects of an economy that is being supported by government intervention.
“Otherwise, the fall would be deeper, ” he says.
Referring to the MIER’s Consumer Sentiment Index and Business Condition Index, Nambiar points out that the indices were already straggling even before the coronavirus outbreak.
“Covid-19, of course, put a sharper break on confidence in the economy, ” he says.
Moving forward, he adds that there is more that can be done in terms of infrastructure development to spur the economic growth.
“However, that would not apply to the digital infrastructure right now. It would also not be the best time to encourage disruptive technologies till the economy is on its feet, ” he says.
Meanwhile, Bank Islam chief economist Mohd Afzanizam Abdul Rashid says the complete recovery of the Malaysian economy greatly depends on Covid-19 infections being contained.
“So far, the infection rate is very decent. It allows the economy to gradually reopen. If this can continue, we can expect positive growth in the second half of 2020.
“The government has responded accordingly (in response to the crisis) and thus far, we can see favourable results. For instance, automotive total industry volume has rebounded sharply from 141 units in April to 22,960 units in May. Malaysia’s PMI has surpassed the 50-point demarcation in June.
“So businesses are feeling upbeat at the moment which then could translate into rehiring of staff, ” he says.
Looking ahead, Afzanizam adds that the government will need to remain vigilant and do whatever necessary to resuscitate the economy.
“Beyond this, the focus should be on how it could address the structural problems such as our dependencies on low skilled foreign labour, ” he says.
Economists have largely said it is unlikely for the government to announce more stimulus packages, although Budget 2021 will be expansionary in nature.
The economy and the population seem to be in need of further incentives that could help achieve pre-pandemic kind of growth.
In stimulating domestic retail spending and boosting disposable income, a key question is whether the government should reduce income tax or the sales and service tax (SST).
In response to this, Sunway University economics professor Yeah Kim Leng says a reduction in SST will spur spending through the price elasticity effects.
This would be more effective than income tax cuts as a large portion of the tax reduction tends to be saved.
“Moreover, those paying income taxes tend to be in the higher income groups whose stronger discretionary spending are mostly driven by confidence and sentiment factors.
“A sharp plunge of up to 20% in private consumption is expected in the second quarter due to the brunt of the movement control order period and recover from the third quarter onwards before normalising and reaching pre-Covid levels in the second half second of 2021.
Yeah, who is also the deputy president of the Malaysian Economic Association, points out that in order for the economy to recover completely, the government must ensure effective implementation of the stimulus packages.
“Besides encouraging healthy firms and businesses to innovate, invest in new skills and competencies and adapt to the post-Covid technological and consumer trends and challenges, the government could redouble its efforts to enhance the country’s investment climate and attract foreign direct investment seeking to reconfigure production and supply chains in the aftermath of the pandemic, ” he says.
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