KUALA LUMPUR: Malaysia has been hit with a series of stiff challenges this year - the COVID-19 pandemic, crash in global oil prices and political instability which saw an unexpected change of government.
With most business activities halted for about two months in a lockdown since Mar 18, the country’s central bank estimated the economy to contract as much as 2 per cent, or grow as up to 0.5 per cent this year. This is markedly lower than the original target of a 4.8 per cent expansion.
To cushion the economic blow, stimulus packages worth RM295 billion (US$69.2 billion) in total have been rolled out. Around 15 per cent, or RM45 billion, is direct fiscal injection from the government.
Having taken the latest stimulus package announced last Friday (Jun 5) into consideration, Finance Minister Tengku Zafrul Aziz said that fiscal deficit is expected to almost double from 3.2 per cent of economic output last year to 6 per cent this year.
As COVID-19 infection rate slows following the implementation of stay-home order, Malaysia has allowed some economic sectors to operate again beginning May 4.
More curbs will be lifted from Wednesday onwards in the recovery phase of the lockdown known as movement control order (MCO).
Once economic activities resume, disruptions in the supply and demand chains will ease, paving the way for an economic recovery as early as the second half of 2020, analysts said.
While there have been more than 8,300 COVID-19 cases and 117 deaths so far, new cases fell to a single digit for the first time on Tuesday since MCO was enforced.
“Malaysia has done remarkably well in flattening the COVID-19 curve, thus putting the economy in a stronger footing to recover,” said Mr Lau Zheng Zhou, research manager of the Institute for Democracy and Economic Affairs (IDEAS).
Even though the direct fiscal injection from the government will cause fiscal deficit and debt-to-GDP to rise, “it is nevertheless done to pre-empt further deterioration in unemployment and income losses, which may then necessitate more drastic policy options,” he told CNA.
ECONOMIC CHALLENGES NOT UNIQUE TO MALAYSIA
Malaysia’s debt-to-GDP ratio, which currently stands at 52 per cent, could exceed the self-imposed ceiling of 55 per cent “in order to help the people and the economy”, if necessary, Mr Tengkul Zafrul also said.
Raising the threshold will require approval by the parliament, which met for a one-hour sitting on May 18 for the ruler’s speech.
The sitting was the first since the Pakatan Harapan government led by Dr Mahathir Mohamad was ousted from Putrajaya and replaced by the newly formed Perikatan Nasional (PN) coalition under the premiership of Mr Muhyiddin Yassin.
Current economic challenges are not unique to Malaysia, analysts said, as countries attempt to recover economically after imposing tight measures to contain the spread of the coronavirus.
“The top-up stimulus announced last Friday does demonstrate a significantly weak state of the economy requiring more policy stimulus,” ING’s Asia economist Prakash Sakpal told CNA.
“The total stimulus, which constitutes 20 per cent of GDP (gross domestic product) so far, puts Malaysia’s government in the ranks of Asian and global counterparts going all the way to soften the COVID-19 impact on their economies.”
While agreeing that the overall quantum of 20 per cent of GDP is sizeable - the third highest among the Association of Southeast Asian Nations - UOB Research senior economist Julia Goh said every country is seeing a sharp widening of their fiscal positions.
“Hence it is no different for Malaysia,” she said.
SUPPORT FOR JOBS AND WAGES
The RM45 billion direct fiscal injection from the government comprises mainly wage subsidies for small- and medium-size enterprises (SMEs), cash aid, small-scale infrastructure spending, grants, and others, according to an analysis co-authored by Ms Goh and economist Loke Siew Ting at UOB Global Economics and Markets Research.
There are also tax relief or deferment measures worth RM8 billion. The rest is funded through the private sector, government-linked companies (GLCs), government-linked investment companies (GLICs) and development financial institutions, it noted.
The direct fiscal spending would be funded through higher dividends from GLCs or GLICs, fuel subsidy savings and repackaging of development and operating expenditure. Any shortfall would be financed via domestic borrowings, the report noted.
“Despite the challenges and fiscal risks, the economic costs from the pandemic require additional support, particularly for jobs and wages,” Ms Goh, the senior economist, told CNA.
“More important in this unprecedented crisis is to ensure that the recovery continues and livelihoods are protected,” she said. “The aim is to bring the fiscal deficit back down once the economy rebounds.”
BOOSTING REAL SPENDING, EMBRACING OPPORTUNITIES IN NEW NORMAL
ING’s Mr Prakash said that while the measures announced appear to be sufficient in turning the tide, what matters most in this downtime is the real spending to boost demand. “Not the monetary side measures such as soft loans, government guarantees, etc, which will only help after the confidence returns,” he said.
The economist added that the real spending - such as cash handouts, wage subsidies and tax relief that directly benefit people and businesses - in the packages stand little over 5 per cent. “It’s still a significant thrust given already stretched public finances. How much of this really trickles down still remains to be seen amidst persistent political uncertainty,” he told CNA.
Commenting on the latest package announced on Friday to regenerate the economy, Mr Lau from IDEAS noted that the key initiatives are in addressing jobs and unemployment, supporting SMEs and stimulating consumption.
But some of the initiatives appear to be an extension to the protection-focused theme from previous packages, rather than embracing more fully the opportunities present in the new normal.
For instance, the extra boost of RM5 billion for the wage subsidy programme reflects the government’s priority to promote employee retention and reduce layoffs, he noted.
He added: “According to the Ministry of Finance, only RM3.22 billion out of the total RM13.8 billion allocation in the previous stimulus package had been approved as of May 31. The low take-up rate raises concerns over the efficiency of approval and disbursement processes.”
The package’s focus on digital investment for consumer and business adaptations is also forward-leaning, according to Mr Lau.
However, the immediate impact likely to be seen from this is increasing e-commerce participation, instead of a path-breaking digitalisation of the economy. Structural reforms are necessary to enable higher digital adaptation, such as increasing investment in the rural areas and addressing monopolies in service provision and infrastructure construction.
“It is also a missed opportunity to scale up investment in digitalising public education,” he said, adding that technology can promote greater education equality.
ECONOMIC RECOVERY EXPECTED TO BEGIN LATER THIS YEAR
With the interstate travel ban lifted and people’s movement much less restricted beginning Wednesday, industries in Malaysia can slowly shift back into high gear.
Globally, many countries are also slowly easing lockdowns to revive their economies. A few are in talks over reconnecting via “travel bubbles”, early signs of business exchanges slowly returning to normal.
On Tuesday, the World Bank said Malaysia’s economy is expected to be on the mend beginning end of the year, and return to growth into 2021.
Cautioning that it would be a slow climb out of the trough, Ms Goh of UOB noted that there is at least a glimmer of recovery.
“The worst is likely behind us as sectors reopen, and a strategy is in place with strict SOPs, along with monetary and fiscal support,” she told CNA.
The UOB Global Economics and Markets Research’s macro note estimated Malaysia’s economy to gradually recover in the second half of the year.
The key risk, however, is a spike in infections during this period, it added.
Another factor to watch out for is the lingering political risk, Mr Prakash said.
Highlighting that the political jitters in late February has depressed economic confidence, he said in a note in late May that the timely implementation of measures to combat COVID-19 and support measures to mitigate the economic impact, while deserving credit, do not guarantee lasting power for the ruling administration.
“The issue of the legitimacy of the new government is still hanging in the balance. So is the sword of no-confidence motion hanging over Muhyiddin,” he wrote.
“The failure of the new government to prove its strength in parliament could mean a snap election on the horizon, before the next scheduled general election in 2023. Such a political turn could be more painful for the financial markets than the pandemic.”