TO many quarters now, any talk of a recovery from Covid-19 would seem like fluff.
For almost two years, the world and Malaysia in particular have been mired in a pandemic that seems to be neverending, with many stops and starts of movement control orders (MCOs).
The damage caused by the virus outbreak has not only affected lives, but has also cost hundreds of billions of ringgit in losses for the Malaysian economy.
Even if there were to be a recovery, some industries will never be the same again, such as food and beverage, hospitality and perhaps even manufacturing and plantations, the two staple economic growth drivers of Malaysia.
New norms will likely see more automation and less head count, and even when the latter is involved, they would be required to have workplace and living premises that have much higher standards to curtail any future disease outbreaks.
To optimists, though, there is some interesting data which could point towards some level of recovery, which the government is also banking on – phase four of the National Recovery Plan (NRP).
Phase four, being the last phase of the NRP, will enable the total reopening of the economic and social sector.
Earlier this week, Prime Minister Tan Sri Muhyiddin Yassin said most states are expected to transition to phase four of the NRP as early as October, given the continuous efforts to push the recovery process and immunisation programme.
Despite a slow start to vaccinations, as criticised by some quarters, the pace of the national inoculation programme has picked up over the past several weeks.
The first milestone of success is Labuan, which is the first place in the country to achieve herd immunity against Covid-19.
The federal territory has immunised 54,800 of the 68,500 adults listed as eligible for the National Covid-19 Immunisation Programme (NIP).
Not only that, as of July 29, the infectivity rate or the R-naught rate in Labuan was recorded at 0.68, much lower than the national rate of 1.15.
The lower infectivity rate, as a result, has significantly brought down daily cases to the below-20 range in the past several days, from over 100 cases just in June this year. The Covid-19 Labuan Field Hospital is also ceasing operations, with the positive turnaround in the Covid-19 situation on the island.
Given the reduction in cases and the success in achieving herd immunity, there have been increasing calls for Labuan’s economic sectors to be reopened.
The government plans to replicate the “Labuan success” across the country through vaccinations. By October, the government aims to get all adults in Malaysia fully vaccinated.
So, will the Klang Valley or Selangor, Kuala Lumpur and Putrajaya be able to move towards the “Labuan success” by end-September or early October?
Under the “Operation Surge Capacity” initiative, the government has embarked on an ambitious plan to vaccinate every adult aged 18 and above in Kuala Lumpur and Selangor with at least one vaccine dose by Aug 1.
As of July 29, official data showed that about 1.96 million people in Selangor and Kuala Lumpur, out of a total of 6.1 million adults, had received their two vaccine doses.
At the current rate of vaccination, it would seem that the economy is on track for a full reopening by October, assuming that daily Covid-19 cases also drop significantly.
With it, economic growth would also pick up, stemming the losses and recouping the billions of ringgit lost in the past many months.
The United Kingdom economy serves as a good example.
Following a robust vaccine rollout, growth forecasts for the UK economy have been upgraded.
The Bank of England projects the UK economy to grow by 7.25% this year, which will be the fastest growth in 80 years.
This is an upward revision from the 5% growth predicted back in February 2021.
Similarly, the faster more Malaysians are vaccinated and the economy transitions into phase four of the NRP, the better it will be for the business sector and the livelihood of the rakyat.
MIDF Research, in a July 28 report, said that the prospect of an MCO-free Malaysia before the final quarter of this year is not unlikely.
However, Malaysia University of Science and Technology or MUST professor Dr Geoffrey Williams believes Malaysia will see a long-haul recovery.
“Our estimates suggest that the economy will not start to pick up until the first quarter (Q1) of 2022 and will not recover to pre-crisis levels until Q1 of 2024,” he says.
The year 2020 was a huge black mark for Malaysian businesses. Most sectors took a hit financially, and definitely, all businesses were affected operationally at varying degrees.
The micro, small and medium enterprises (MSME) sector suffered RM40.7bil in losses last year as a result of a nationwide strict lockdown imposed by the government. By far, this was the biggest ever loss incurred by the sector.
The struggle did not just end in 2020.
The continued movement restrictions this year have taken a further toll on the business sector, including the larger companies.
The labour market conditions have also remained weak. As of May 2021, there were 728,100 unemployed individuals, with a national unemployment rate of 4.5%.
Nevertheless, some economists believe that the country is nearing the light at the end of the tunnel, given the ramp-up in vaccinations.
RHB Bank Bhd group chief economist and head of market research Sailesh K Jha says he is more optimistic than the market consensus on the gross domestic product (GDP) growth for 2021.
RHB forecasts a growth of 5.4% this year, slightly higher than the consensus estimate of 5.2%.
This is despite several economists reducing their forecasts to below 5%.
“We employed high-frequency data to determine our forecast. We used machine learning to convert satellite images for each sector such as construction, manufacturing and electronics into numeric data to further understand and analyse what’s happening on the ground.
“Up until mid-July, our data didn’t show major reductions in business activities despite the lockdown.
“The country’s exports, for example, have shown an improved performance. In June, the month-on-month three-month moving average was recorded at 2%, higher than the previous month.
“Moving forward, this should improve further. We are also relatively optimistic on consumer sentiment,” Sailesh tells StarBizWeek.
Looking ahead, Sailesh believes that the economy is closing in on a turning point in Q3.
“The turning point should be in August or September,” he adds.
Meanwhile, Malaysian Rating Corp Bhd (MARC) chief economist Firdaos Rosli concurs that the economy will likely move into recovery mode, once more states move into phase four of the NRP.
“However, questions arise as to which states will head into phase four. As west coast states of the peninsula account for about 73% of the country’s GDP, this is the priority region from the economic recovery perspective.
“Selangor, Kuala Lumpur, Johor and Penang already account for half of Malaysia’s GDP, so these are the priority states in my view,” he says.
Ahead of moving into phase four, Firdaos urges the government to explain what is expected to happen in the final phase.
“Are we going to return to our pre-pandemic lives and behaviours? Are we putting the economy at risk again for another disease outbreak? What changed between us living in the pre-Covid-19 and post-Covid-19 eras?
“These questions are key as economic sectors need time to adjust and adapt to the new business norm,” he says.
As more economic sectors are opened, with a higher operating capacity, economic growth could pick up once again.
Private consumption, which contributes to more than half of the economic value, would recover at a stronger pace with the transition into phases two, three and four.
Economists largely believe that the continued movement restrictions have suppressed consumer demand, especially on big-ticket items.
The reopening of more economic sectors, especially in the Klang Valley where the per capita income is the strongest in the country, will release pent-up demand and allow greater recovery ahead.
Firdaos concurs on the impact of pent-up demand on economic recovery.
“But then again, it hinges on how much capacity we have to operate when the economy resumes and what the government would do to the unvaccinated segment of the population.
“In other words, the ‘last mile’ vaccination campaign is the one that matters the most as the unvaccinated lot may be exposed to newer variants of Covid-19.
“Besides, the pent-up demand will drive inflation up and, subsequently, interest rates.
“Raising inflation may not necessarily be bad, but it could be challenging considering that Malaysia’s unemployment rate at 4.5% is still considered high for a developing economy,” according to him.
However, MUST’s Williams does not have high hopes on pent-up demand driving consumption, considering the extremely long lockdown period.
“Savings are exhausted, the Employees Provident Fund or EPF wiped out for nine million account two holders, debt has risen, the loan moratorium will end and repayments will begin at higher rates.
“Average salaries fell 9% and median salaries fell 15.6%, so more than half of salaried employees earn less than RM2,062 per month now. Around 3.4 million people are unemployed or underemployed which is 19.8% of the workforce.
“So, it is likely that households will struggle to rebuild their lives, get a job and rebalance their finances first before spending.
“If we are lucky, tourism, entertainment, bars and restaurants and shopping malls may see more footfall and hopefully more spending and for them this will be a welcome relief,” he says.
Williams points out that the recovery potential depends on a number of factors.
Companies that are resilient would be able to spring back as customers return.
Some companies will have to rebuild links with customers, especially the business-to-business and supply-chain firms.
However, Williams cautions that there will be many firms that will not survive, considering that some will have lost their markets and customers that may not return.
These will be in addition to the 150,000 firms that may already have closed down, according to industry estimates, he points out.
“As for stimulus packages, firms don’t really want handouts; they want customers.
“So, the best that can happen is to open up quickly and provide customers with opportunities to buy and sell again.
“Perhaps, help in dealing with cash-flow, paying outstanding bills and financing debt will be more useful.
“But is it essential that Putrajaya engages with companies, especially MSMEs, to find out what they need instead of dreaming up packages,” says Williams.
Across corporate Malaysia, any talk of sustainable and strong recovery is contingent on the full reopening of the economy.
Partial reopening that focuses only on the essential sectors, while neglecting the suppliers and vendors that may be considered as non-essential, will not allow the economy to achieve its optimum growth.
An analyst with a local investment bank says that corporate earnings may show a stronger recovery beginning Q4 of this year.
“The biggest growth will come from sectors that were previously badly affected by the lockdown.
“That said, it all depends on the vaccine efficacy in reducing Covid-19 cases. In the event, cases categorised as severe continue to be high and the daily cases don’t reduce as fast as expected, the recovery will be delayed,” he says.
MIDF Research, on the other hand, believes that a buoyant recovery in the final quarter would lift equity market sentiment as well as valuations.
With the expectation of an MCO-free Malaysia before Q4, the research house expects the equity market to regain its mean valuation range as early as September.
Looking ahead, while there are convincing signs of hope for the economy, a number of risks remain.
Covid-19 is likely to be endemic, as opined by the National Covid-19 Immunisation Programme Coordinating Minister, Khairy Jamaluddin.
Even fully vaccinated individuals will continue to have risks of Covid-19 infections, and in some cases, end in deaths.
A recent study published in The Lancet journal found that antibody levels of those that are fully vaccinated with Pfizer-BioNTech and AstraZeneca-Oxford vaccines start to wane at around two to three months.
The study covered 600 people.
Another risk is the increase in Covid-19 patients in Categories Four and Five, two categories which require treatment in intensive care units.
Based on data for July 29, about 21% of new cases in Categories Four and Five had either received one or two doses.
While risks remain, vaccines are the best ammunition in hand to deal with the pandemic. And with Malaysia’s robust vaccine rollout, the severity of Covid-19 in the country is expected to reduce significantly and put the economy back on track to recover in the coming months.