Economy at a standstill

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The phrase “it never rains but it pours” best describes Malaysia’s current situation, just three months into the new 2020 decade.

Still reeling in from the political upheaval that sent jitters in the market last month, Malaysia was caught off-guard yet again by the second wave of the Coronavirus Disease 2019 (Covid-19) infections which affected the whole nation.

While Malaysia was also affected by the Covid-19 outbreak, with its first cases reported early this year, involving a handful of tourists from China who entered Malaysia through Johor from Singapore, the second wave of the Covid-19 outbreak, which was said to have originated from a large-scaled religious gathering in Petaling Jaya, made a more significant impact on the country as thousands of people were affected by the coronavirus.

The number of positive cases have since continued to rise, as attendees of the event head back to their home states, unknowingly spreading the infection across the country.

Malaysia’s newly minted Perikatan Nasional government are now tasked with the mammoth job of containing this spread and ensuring the country’s economy continues to remain afloat while markets worldwide continue to spiral.

Initially, Malaysia’s previous Pakatan Harapan government had introduced a ‘Economic Stimulus Package 2020’ fiscal stimulus to support industries heavily affected by the disruptions caused by the Covid-19. These industries include the tourism and aviation industries which were affected by the lockdown in China and the travel restrictions between countries affected by Covid-19.

The Economic Stimulus Package 2020 was also to ensure economic risks associated with the outbreak was effectively addressed.

The stimulus programme was based on Malaysia’s performance in 2003 in the face of Severe Acute Respiratory Syndrome (SARS) outbreak that began in East Asia.

Aside from providing financial and fiscal reliefs to businesses and workers in the hardest-hit sectors like travel, tourism, retail, transport and manufacturing – especially for the SMEs, the Economic Stimulus Package 2020’s strategies also include boosting domestic tourism, consumption and investments via measures like RM1,000 personal income tax relief for domestic tourism spending; lowering employees’ minimum monthly contribution to the Employees Provident Fund (EPF), tax incentives for businesses to invest in machinery, equipment and technology to upgrade, automate and digitalise productive assets and operations, as well as maintaining and accelerating public sector capex involving Federal Government, ministries, agencies and government-linked companies (GLCs).

On top of grappling this immediate problem, Malaysia now faces multiple other major threats; the inevitable global economic slowdown as well as the current extremely low oil prices.

The rapid global spread of Covid-19 has quickly eclipsed other recent epidemics in both size and scope. In addition to the deadly human toll and the disruption to millions of lives, the economic damage is already significant and far-reaching.

In the face of the pandemic, the World Health Organisation (WHO) had advised for movement restrictions, social distancing, and heightened sense self-hygiene to slow the contagion.

China had implemented the harshest forms of social distancing and have flattened its Covid-19 growth curves to near-zero.

Malaysia was quick to emulate this practice by imposing the Movement Control Order (MCO) for a period of approximately two weeks (from March 18 to 31) to curb the spread of the coronavirus, which was then extended further to April 14 as the number of cases continue to rise.

While the move was necessary, its impact on the economy and businesses, especially on small-medium enterprises, will likely be felt throughout 2020 and possibly beyond this year.

BizHive Weekly takes a look at how Malaysia is handling the situation and efforts the government is taking to stem the spread of this disease that has upended Malaysia’s normal daily lives.

Policies and financial aid to prop up the economy

During these troubled times, policies and financial aids are needed to prop up the economy to ensure it it able to withstand the current economic turbulence.

Before the implementation of the MCO, the new Perikatan Nasional government announced an additional stimulus worth RM0.62 billion or 0.04 per cent of Malaysia’s gross domestic product (GDP) on top of the RM20 billion stimulus package tabled earlier by the previous Pakatan Harapan government.

The additional measures include financial assistance of RM600 per month for up to six months for employees who were given unpaid leave from March 1, contribute to the Employment Insurance Scheme and with a maximum monthly salary of RM4,000.

For consumers, the measures include electricity discount of two per cent for all commercial, industrial, agriculture and domestic sectors, effective April 1 to September 30 this year.

Nevertheless, the MCO will undeniably leave an adverse impact on the economy in the short-term short term but analysts believe this would be limited. Given the fact that there is an exception for important government and business services to run as usual, the research team at Kenanga Investment Bank Bhd (Kenanga Research) believe that the full impact would depend on how fast the virus spread, and the period taken to combat the outbreak should there be an extension in movement restriction.

“Though the downside risk has somewhat elevated, we have factored in the potential economic consequences in our recent GDP forecast.

“Our base case forecast for GDP growth to moderate by 2.3 per cent in the 1H20 (2H19: 3.6 per cent) is mainly due to expectation of weaker growth in the services sector (4.6 per cent; 2H19: 6.0 per cent) as the virus will impact the transportation and tourism-related industry the most.

“Similarly, the manufacturing sector slowdown (1.2 per cent; 2H19: 3.3 per cent) following supply disruption due to factory closure, and weak external demand from the key trading partner is expected to contribute to the slower growth momentum.

“On the demand side, we expect private consumption to ease further to 5.7 per cent in 1H20 (2H19: 7.5 per cent). This brings the overall GDP growth to moderate to 3.1 per cent this year (2019: 4.3 per cent),” it added.

Shortly after the announcement of the MCO, Prime Minister Tan Sri Muhyiddin Yassin announced a second round of measures to the existing Economic Stimulus Package 2020 after the second meeting of the Economic Action Council (EAC).

The EAC unveiled further key initiatives, where the main measure is allowing EPF members below the age of 55 to withdraw a maximum of RM500 a month for a period of 12 months from their second account effective April 2020. There will also be an allocation of RM500 million to the Ministry of Health (MOH) to support in mitigating Covid-19.

The provision will be used to finance the purchase of medical equipment such as ventilators and ICU equipment, in addition personal protective equipment (PPE) for public medical service personnel as well as laboratory requirements for Covid-19 screening.

On top of that, RM100 million will be provided to MOH to employ 2,000 new contract healthcare workers. The government also agreed to allocate RM130mn to other states to help the state government deal with the Covid-19 crisis.

The measures also include the extension of National Higher Education Fund Corporation (PTPTN) loan repayment from three to six months which amounts to RM750 million.

Despite these measures, analysts believe that the impact on Malaysia’s economy weighs heavily on how long it would take to contain the spread of the coronavirus.

“We are currently maintaining our real GDP growth forecast of around 3.3 per cent for 2020, which is at the lower end of the official forecast of between 3.2 to 4.2 per cent (4.3 per cent in 2019), with weak growth in domestic demand and exports.

“However, there is increasing downside risk to our growth forecast, where we believe the prolonged Covid-19 outbreak will not only weigh on tourism-related sectors but also across all other sectors of the economy, especially the disruptions within the global supply chain in the manufacturing sector.

“Based on our preliminary estimate, assuming if the Covid-19 outbreak lasted until the end of June 2020, affecting the Malaysia’s economy over the course of two quarters, the impact is likely to drag and weigh down country’s real GDP growth by 2.5 to three percentage points (ppt) in 2020,” Affin Hwang Investment Bank Bhd’s research team (AffinHwang Capital) warned.

“This indicates that Malaysia’s GDP growth may only be expanding by around 0.3 to 0.8 per cent for 2020 as a whole, from our current base case assumption of 3.3 per cent, if the Covid-19 crisis drags on.

“As such, it is necessary for the government to take further and possibly larger fiscal stimulus measures to safeguard and support the economy from slowing down sharply,” it opined.

‘More still needs to be done’

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said the government should be looking at revising the 2020 Budget as oil price has hit a new low, which would put extra burden on the government financials.

“In the past, we have seen the government responding to the sharp fall in crude oil prices in 2016 by recalibrating the existing budget,” he was quoted in a Bernama interview.

Based on data from the Ministry of Finance, Malaysia’s economic reliance on oil stood at 20.7 per cent based on the government’s estimation.

At this juncture, Mohd Afzanizam said the government should spend more to boost the local economy as the credit rating agencies are more receptive to deficit spending to safeguard the growth momentum.

“In 2009, we could see the fiscal deficit being bumped up to 6.7 per cent of GDP from 4.6 per cent in 2008. That is about two percentage points higher. Perhaps, the fiscal deficit could be raised within such quantum,” he added.

 

A much-needed stimulus

On Friday, Prime Minister Tan Sri Muhyiddin Yassin unveiled a RM250 billion economic stimulus package deemed ‘Prihatin Rakyat Economic Stimulus Package (Prihatin)’ which have been viewed by economists as a ‘timely’ measure during these extraordinary times. The objective of this stimulus package are to protect the welfare and well-being of the rakyat as well as to support businesses during these trying times.

Deloitte Malaysia country tax leader, Sim Kwang Gek, said the allocated RM250 billion is more than three times the RM67 billion allocated for stimulus packages during the 2009 financial crisis.

“This demonstrates the commitment of the government in prioritising the well-being of the rakyat while also ensuring the survival of businesses impacted by Covid-19,” she told Bernama.

EY also pointed out that this is the largest sum ever announced for a stimulus package in Malaysia, in comparison to the total stimulus package announced by the Singaporean government which to date, amounts to S$55 billion or approximately RM164 billion.

“The measures which have been announced are people-focused and are a result of extensive consultations undertaken by the government with various stakeholders. The government has sought to address the immediate needs and concerns of the rakyat and to ensure, as the prime minister put it, that no one will be left behind. The benefits for the people range from additional allowances for the front-liners heroically treating and protecting the rest of us from the effects of this terrible pandemic, direct one-off financial assistance targeted at the B40 and M40 groups and wage subsidies for individuals. The recognition that the M40 group also requires assistance is very welcomed but is also a solemn reflection of how far-reaching the effects of Covid-19 are,” it added.

It noted that the aim now will be to ensure that the funds are disbursed and the relevant measures implemented without delay, as the man-on-the-street and businesses need support immediately.

“The prime minister has directed the Ministry of Finance to act quickly, so it looks like there is some light at the end of the tunnel.”

Malaysia’s financial institution

During the last few months, in the face of the global economic slowdown, Bank Negara Malaysia (BNM) has made efforts to re-invigorate domestic economic activities and growth by cutting interest rates.

Earlier this month, BNM announced its second Overnight Policy Rate (OPR) cut, a reduction by 25 basis points to 2.5 per cent.

“Global economic conditions have weakened in the recent period. The ongoing Covid-19 outbreak has disrupted production and travel activity, especially within the region.

“This has also led to greater risk aversion, resulting in tighter financial conditions and a resurgence in financial market volatility.

“Downside risks to the global growth outlook have increased, particularly in the near term,” it explained.

To further assist Malaysia’s financial system, the central bank had lowered its statutory reserve requirement (SRR) ratio to two per cent from three per cent. In addition, each Principal Dealer is able to recognise MGS and MGII of up to RM1 billion as part of the SRR compliance.

This flexibility to the Principal Dealers is available until March 31, 2021. These combined measures will release approximately RM30 billion worth of liquidity into the banking system.

Analysts were generally positive on these measures as it indicates the central bank’s efforts to keep Malaysia’s financial system afloat.

“In our view, the impact will be positive for the banks as the additional liquidity would ease their funding cost while simultaneously allowing banks more room to step-up lending activities (to boost the flagging economy),” AffinHwang Capital commented.

Kenanga Research had also pointed out that combined with synchronous monetary easing move by major and regional central banks, BNM has ample room to lean further towards an expansionary monetary policy.

“As such, we foresee another 50bps rate cut in the near term, bringing the OPR to two per cent, its lowest since the global financial crisis (GFC) in 2008 to 2009.

“Similarly, we also believe that BNM still has scope to cut the SRR by up to 100bps to as low as one per cent as it did in March 2009 to provide ample liquidity in the financial system during the GFC and avert a liquidity crunch,” it added.

Banks easing Malaysians financial burdens

BNM had also announced temporary shift in Malaysian banks’ financial measures for Malaysians to ease their financial burdens during these tough times.

In recognising that the Covid-19 impact is probably transitory, yet the impact of which can inflict lasting damage if not urgently addressed, BNM announced a number of regulatory and supervisory measures in support of efforts by banking institutions to assist individuals, small and medium-sized enterprises (SMEs) and corporations to manage the impact of the Covid-19 outbreak.

Malaysian banks are extending temporary financial relief to affected borrowers, which include the R&R of credit facilities as well as a moratorium on loan repayments of up to six months.

Although banks do not need to set aside provisions for loans that come under the relief measures now, impairment charges may be pushed out to 2021 if borrowers’ weaknesses stretch beyond short-term cashflow issues.

These measures allow banking institutions to remain focused on supporting the economy during these exceptional and unprecedented circumstances brought on by the outbreak, by providing flexibilities for banking institutions to respond swiftly to the needs of their customers.

Kenanga Research noted that these measures were “sensible and timely”, as these critical pre-emptive measures cushion short-term stresses on the banking system, which if otherwise left on its own, might give way to larger systemic issues.

“It is precisely in recognising that the economic situation can normalise after Covid-19 comes to pass in a matter of months that the materialisation of that outcome must be enabled. And to enable that requires these very measures that BNM had the foresight to implement,” it opined.

However, it noted that if the Covid-19 outbreak continues to plague the nation beyond the six-month moratorium, credit costs would likely shoot up and the outlook for the entire economic and financial system would then be extremely dire.

Nevertheless, it said: “One hopes that the Covid-19 issue does really come to pass within the next six months, confidence restored and servicing of loans can take on its normal rhythm.

“In the meantime sceptics may point to prudential lending standards being compromised and call for some form of sector de-rating to price in heightened risk.

“But we see such a price worth paying to avoid a larger mess from developing.”

A strong financial system

BNM had assured that by implementing these temporary measures, banking institutions are well-positioned to do so, given the large financial buffers that have been built up over the years. Concurring this, RAM Ratings viewed that Malaysian banks’ fundamentals are strong enough to weather the downside risks this year.

“Escalating headwinds on both the domestic and global fronts pose greater downside risks to the performance of banks this year, even though we believe that Malaysian banks – with their strong fundamentals and prudent risk management – will be able to weather the storm,” observed RAM Ratings’ co-head of Financial Institution Ratings Wong Yin Ching.

Nevertheless, it warned although the situation is still fluid, persistently weak prices will constrict activity and again lead to repayment difficulties, as witnessed several years ago.

During this tumultuous period, RAM estimates that the banking system’s GIL ratio may worsen to 1.7 to1.9 per cent in 2020 (end-January 2020: 1.56 per cent) after taking banks’ forbearance measures into consideration – this is equivalent to a 15 to 30 per cent increase (or about RM3 billion to RM7 billion) in absolute GILs.

“As events are still unfolding, our best estimate of credit cost ratio stands at 50 bps, which is still manageable in our view,” said Wong.

Looking ahead, topline pressure and potentially heavier impairment charges amid the current environment could dent banks’ earnings this year (the eight banking groups’ pre-tax ROA came in at 1.4 per cent in 2019).

BNM has slashed the overnight policy rate twice in 1Q20 to mitigate downside risks to Malaysia’s economic growth, which will undoubtedly crimp NIMs further.

 

Plunging oil prices another cause for concern

As an oil producing country, the oil and gas sector is a key component to Malaysia’s economy and an important contributor to the government’s revenue and trade account.

The country’s 2020 Budget tabled October last year was also based on oil prices which was expected to average at US$62 per barrel.

However, global oil prices are expected to slip further in April after OPEC deal between Saudi Arabia and Russia soured early this month, leading to a global oversupply amid declining demand. To make matters worse, the Covid-19 outbreak is negatively affecting the demand of oil.

“Oil war adds another downside factor on crude oil prices. Covid-19 affecting negatively on the demand side while oil war is putting pressure on the supply side. The impacts on the Malaysian economy would be more negative than positive,” MIDF Research highlighted.

It added the sharp decline in global oil prices could suppress Malaysia’s fiscal capacity given that previous Budget 2020 is based on the assumption of US$62 per barrel.

“The newly formed government will likely revise the Budget 2020 and we may see reduction in government expenditure and investment.

“As for mining activities, we view continuous slowdown in the sector amid weak demand and nosediving global oil prices. Slowdown in mining sector would affect Malaysia’s GDP significantly due to its high value-added content. At this juncture, we are expecting GDP growth to be under pressure in 2020,” it said.

For O&G companies, it pointed out that the sharp plunge in oil price would definitely hit the upstream exploration and production (E&P) players the most given that the oil productions are directly correlated to the oil price.

“In a prolonged oil price war environment, globally, we anticipate oil majors to cut or delay some portion of their planned capital expenditures (capex) for 2020 which in turn, could potentially result in delayed contract awards for the oil and gas service providers. Therefore, the low oil price environment is negative for the oil and gas players,” it said.

As for the local oil and gas support services players, in the event of a prolonged low oil price environment; MIDF Research said it is favourable towards companies that are involved in maintenance, construction and modification (MCM) services.

“This is due to the fact that Malaysia is an oil exporting nation and revenue from oil-related income constitutes 30.9 per cent of the total Government revenue in 2019. To ensure stable revenue and cash flow, oil production must be sustained. Hence, MCM services will be carried out regardless of the oil price environment.

“Therefore, we believe that national oil company Petroliam Nasional Bhd (Petronas) will remain committed to its maintenance spending in 2020. Nevertheless, the low oil price environment could also mean compressed margins for the players.”

Three nuances to keep in mind:

  • Demand and supply-side shocks: you’ve likely already felt the supply-side shock (like a reduction in supply chain capacity through lost productivity or access to key inputs), but don’t forget this can quickly turn into a demand-side shock (changing consumer patterns, cash flows drying up).
  • Second and third-order impacts: a country may not be physically exposed to Covid-19, but it doesn’t mean that it won’t be affected in other ways – from a slowdown in tourism and other exports, to foreign exchange volatility and falls in the oil price. But not all impacts will be negative – for example, lower oil prices may actually drive down inflation in some emerging markets.
  • 4D risk: the risks posed to your financial, business and operating models exist in a network. Understanding not only the impact and likelihood, but also the velocity and contagion effects (interconnectivity) can help ensure that you know which issues to deal with together, to effectively identify and prioritise your response measures accordingly.

Source: KPMG

What next?

As the government has announced an extension in the MCO while events revolving around Covid-19 continue to develop and shift policies worldwide, it is difficult to truly decipher the full impact of this pandemic in the long run.

For businesses, financial experts have advised for them to be prepared for any sudden changes in policies.

“These are times where companies are expected to do their best in ensuring their employees are protected, the companies business risks are identified, and supply chain disruptions caused by the efforts to contain the spread of Covid-19 are well managed,” said Deloitte’s Asia Pacific and Southeast Asia Operational Risk leader Cheryl Khor.

“What we’ve learned from the previous two epidemics is that immediate response to challenges and a steady cash flow in times like this, will help protect a company,” she added.

KPMG International Global Geopolitics lead, Sophie Heading in a post, noted that Covid-19 could have a benign, serious or severe impact on a company. However, the most important part is ensuring that a company could tailor itself to these situations as an overkill could be as crippling as missing the warning signs.