Saturday, December 4

Stimulus versus slowdown: Is it enough?


KUCHING: A contagion, volatile oil prices and political change – some say the start of 2020 has the makings of a Hollywood thriller with no end in sight yet.

Kicking things off is the Coronavirus Disease 2019 (Covid-19) pandemic, unprecedented in many ways including the speed of contagion and the number of infected persons.

The pandemic is damaging to the global economy due to its massive reach, and which has witnessed more than of 96,000 number of deaths as of time of writing.

The speed of this contagion has pushed governments into undertaking drastic measures, including full lockdowns which will undoubtedly result in massive knock-on effects on the global economy.

“The still-evolving nature of Covid-19 pandemic in Malaysia suggests that support from monetary and fiscal authorities must be bold and excessive due to its severe ramifications on the economy,” outlined analysts with Public Investment Bank Bhd (PublicInvest Research) in a note on the pandemic’s impact.

“The main priority now must be to stabilise the economy. It is also imperative that these measures must be rolled-out swiftly and reaches the critical sectors of the economy expeditiously in order to prevent the economy from slipping into a tailspin.

“The challenging economic backdrop is expected to continue into 2Q before seeing some improvements in 3Q, and finally reaching its potential in 4Q.”

Many signs point towards Malaysia being on the brink of a recession. In fact, Bank Negara Malaysia (BNM) itself steered this message in releasing its latest Economic and Monetary Review 2019 report last week.

While BNM Governor Datuk Nor Shamsiah Mohd Yunus carefully avoided using the word “recession”, the central bank’s official forecast points towards an economic growth in the range of minus two per cent to 0.5 per cent.

Output is expected to decline across all sectors, except for services, although it is forecast to witness a much slower growth.

The economic growth would be weighed down by the output loss from Covid-19, the Movement Control Order (MCO) as well as the disruption in the commodity supply.

Table of Malaysia’s stimulus package comparison

Perfect storm brewing

Malaysia has not been spared from rising economic headwinds with depressed commodity prices, poor business and consumer confidence, in addition to the prolonged disruption in economic activities, said AllianceDBS Research Sdn Bhd (AllianceDBS Research) in its April 3 strategy report.

This serves as the “perfect storm” for the economy which is expected to post much weaker GDP growth in 2020 after registering 3.6 per cent growth in 4Q19 – the lowerst the country has seen since 2009.

“In addition, the MCO is likely to result in much lower revenue collection for the government while allocating more funds to mitigate the economic fallout from the Covid-19 outbreak,” it underscored.

RHB Research Institute Sdn Bhd (RHB Research) economist Ahmad Nazmi Idrus in another note titled “Bracing for a recession” said Malaysia’s services sector will likely lead the recession, being the most impacted by the MCO which is quite likely to be extended until April 28.

The services sector is likely to be the most impacted by the MCO, with growth projected to contract at minus 0.5 per cent in 2020 from 6.1 per cent last year.

“The sharpest decline is expected in the subsectors involved in tourism and recreation such as accommodation, transport, food and beverage, and retail trade. For accommodation and transport, growth should fall in tandem with the sharply declining tourist arrivals as well as a decrease in domestic consumption.

“A similar impact should be seen in the food and beverage and retail trade, although we expect growth in these segments as they have the potential to recover immediately following the removal of the MCO.”

On the other hand, some services subsectors are less impacted by the lack of tourist arrivals but are still dampened by reduced consumer demand and movement restrictions, he said. These include utilities, finance and insurance, information and communication, real estate, education, and business services.

“Growth in these subsectors are projected to soften but not severely affected relative to other services components.”

Federal government fund injection by category

‘Stimulus a welcome relief’

Given the accelerating number of confirmed Covid-19 cases, the government has extended the nationwide MCO until April 28, which prohibits mass gatherings, restricts entry of foreign visitors, bans local residents travelling abroad and within affected areas, and closes schools and education institutions, and non-essential government and private premises.

During this extended MCO period, the government will impose stricter guidelines to ensure full compliance.

At this juncture, UOB economists Julia Goh and Loke Siew Ting expect economic growth in 1H20 to be negatively affected with potential spillovers up to the third quarter of the year if the situation becomes more protracted.

“The effects of Covid-19 and MCO have been widely felt across the domestic economy as a
global recession becomes imminent.

“We expect Malaysia’s economy to post a full-year contraction of minus 3.5 per cent in 2020, which marks the sharpest decline since the 1997/1998 Asian Financial Crisis when GDP fell 7.4 per cent.”

As such, the relief measures that have been announced during various stages of the Covid-19 development are critical to avert a sharper downturn, particularly as the global pandemic worsens and the MCO has been extended and tightened.

Power to the people

A lack of income, consumer goods and healthcare scares are but just a few of the concerns the rakyat face in today’s trying times.

Thus, it was a warm welcome for Muhyiddin’s Prihatin Rakyat Economic Stimulus Package (Prihatin), which provides reprieve via RM250 billion worth of measures.

The total size of the relief package makes up 17 per cent of GDP that covers three key thrusts: preserve the people’s welfare; support businesses; and strengthen the economy.

UOB noted that the overall fiscal stimulus package is expected to add 1.5 per centage points to Malaysia’s baseline GDP.

“This includes some of the earlier measures announced in the first fiscal package (RM20 billion), withdrawals from the Employee Provident Fund (RM40 billion), and banks’ loan moratorium (RM100 billion) that defers loan repayments over six months for non-arrear household and SME loans starting from April 1,” it recapped.

PublicInvest Research noted that this was the government’s biggest stimulus package in history “in its bold attempt to avert economic catastrophe due to the Covid-19 pandemic which remains unabated not only in Malaysia but also the world.”

“Though looking a little stretched, unprecedented times call for unprecedented measures,” it said. “The expected fiscal deficit in 2020 is still manageable and a far cry compared to the 6.7 and 16.6 per cent fiscal deficits at the height of the Global Financial Crisis in 2009 and Commodity Crisis Shock in 1982.

“The second stimulus package’s main focus is to assist the vulnerable groups namely the SMEs, M40 and B40 groups which form the backbone of the economy.”

“The government has placed a strong focus on reviving household spending amid consumption activity that has been severely affected since the unfolding of the Covid-19 pandemic.”


Private consumption to lead the way

The plethora of stimulus packages affirmed one note across the board for analysts: that private consumption was key to Malaysia’s growth.

PublicInvest affirmed that private consumption is the nation’s main engine of growth, making up about 59 per cent of the economy.

However, a combination of supportive fiscal and monetary policies may put the economy on an even keel but may not be able to push it higher due to the still-raging headwinds.

“Private consumption is the most vibrant sector in the economy, recording a resilient long-term average growth rate of 7.1 per cent from 2016-2019. Private consumption also forms the largest part of the economy making up 59 per cent of the GDP.

“It contributed over 80 per cent of growth during the 2016-2019 period, making the sector a significant and main focus during any economic headwinds.

“The massive measures to assist private consumption totaling RM163 billion (combination of measures by BNM and social assistance) is equivalent to 20 per cent of private consumption-to-GDP ratio and this may be able to prevent activity from collapsing especially with a lengthy period of the MCO.

“Even then, no one can tell with certainty when the pandemic will peak or whether the MCO will be extended or lifted. This will certainly add another layer of uncertainty on the economy.”

It is estimated that for every 10 per cent drop in private consumption, PublicInvest Research said GDP may decrease by 1.8 per cent which begs the need to roll-out massive measures to assist private consumption or risk pushing the economy into a tailspin.

“The knock to our fiscal position as a result of massive fiscal measures should not be a concern and not the main priority as the main objective is to stabilize the economy first.”

More monetary easing in the future

Also, year-to-date, BNM has cut the Overnight Policy Rate (OPR) by 50 basis points (bps) bps to 2.50 per cent and lowered the Statutory Reserve Requirement (SRR) ratio by 100bps to two per cent in the first quarter of 2020.

UOB estimated that for every 100bps cut in the SRR, RM14.8 billion is released into the financial system.

“Coupled with the additional SRR flexibilities granted to principal dealers, this has released approximately RM30 billion worth of liquidity into the banking system,” it calculated.

“The amount of excess liquidity in the banking system amounted to RM160 billion currently. The liquidity measures alongside easing of compliance and operational burdens on financial institutions enables more support to businesses facing cash flow issues and individuals in need of financial assistance.”

Going forward, UOB did not rule out further monetary support including cuts in the OPR and SRR given mounting risk from Covid-19 that has roiled the economy and global financial markets. Lower inflation risks and US interest rate cuts leaves room for BNM to pursue further monetary policy easing.

“From our perspective, the US, large parts of Europe, and many other major economies are expected to be in contraction for 2020, while China will record recessionary growth rate close to four per cent.

“This will be a synchronised recession across major economies and we conservatively project a “U” shaped recovery where the Covid-19 may be contained by 4Q20.

“Global central banks and governments have responded aggressively to tackle the negative impact brought about by the Covid19 but monetary and fiscal policies are ill equipped to solve a public health crisis.

“The one critical element that determines the speed of recovery from this global economic crisis will largely depend on how successful health security measures are in containing the pandemic so as to allow normal economic activities to resume.

SMEs: Better late than never

Small and medium enterprises (SMEs) have been getting the short end of the stick, according to respondents after looking at initiatives offered under the first two stimulus packages.

This prompted the government to provide remedies via a third stimulus announcement earlier this week, whenby Prime Minister Muhyiddin revealed an additional RM10 billion to help ease the financial burden of SMEs in the country.

He said the additional stimulus package, called the Prihatin Package for SMEs (Additional Measures), would guarantee two-thirds of the country’s workforce remain employed.

“Among the additional measures taken is increasing the allocation for the wage subsidy programme announced on March 27 to RM13.8 billion from RM5.9 billion, an addition of RM7.9 billion.

“Under this additional initiative, all companies with local workers earning RM4,000 and below will receive wage subsidy assistance of between RM600 and RM1,200 depending on the number of employees,” he said during the televised announcement.

This assistance is for a period of three months and is restricted to employers registered with the Companies Commission of Malaysia (SSM), Socso or local authorities before Jan 1, 2020, he added.

About 4.8 million workers are expected to benefit from the initiative.

Focus on wage subsidies

Affin Hwang Investment Bank Bhd (AffinHwang Capital) noted that the additional RM10 billion is mainly allocated to the wage subsidy scheme amounting to RM7.9 billion, while the remaining RM2.1 bn will be allocated to the Prihatin Special Grant for all SMEs that qualify.

The wage subsidy programme, which was previously announced in the Prihatin stimulus package, with an allocation of RM5.9 billion previously, now has been raised to RM13.8 billion whereby all workers that earn RM4,000 and below will receive a wage subsidy for three months.

“The amount of subsidy will depend on the number of employees the SME has employed; for instance, SMEs with more than 200 employees will receive a subsidy of RM600 per worker and is limited to 200 workers (limited to 100 workers previously), and so forth,” it explained.

Previously, in the Prihatin stimulus package, only companies whose businesses have experienced a 50 per cent drop in earnings since January 2020 were able to qualify for the wage subsidy scheme.”

Besides the wage subsidy programme, the Prime Minister also announced the creation of RM2.1 billion Prihatin Special Grant for all SMEs that qualify. The government will provide a Special Grant of RM3,000 to all micro SMEs, which is expected to benefit close to 700,000 micro SMEs.

In addition, the government will also abolish the two per cent interest rate for the micro credit scheme worth RM500 million under Bank Simpanan Nasional.

“Meanwhile the micro loan scheme for micro businesses will be extended to TEKUN Nasional with a maximum loan limit of RM10,000 per company at zero per cent interest,” it detailled. “The government has allocated RM200 million for this purpose.

“Besides that, the government will provide a temporary rental waiver or rental discount for SME retailers, which are premised in locations owned by government-linked companies.

“Private premises owners are encouraged to provide the same facilities by reducing their rental rates at least during the MCO period and 3 months after the MCO ends.

“Moreover, an additional tax deduction equal to the amount of the rent reduction for April 2020 to June 2020 (at least 30 per cent of the original rate for the period).”

‘Policy responses necessary’

As exports stay weak from lockdowns and commodity prices remain soft, AmBank Research chief economist Anthony Dass said policy responses are necessary because small businesses contribute disproportionately to job loss during recessions.

“Many SME businesses have been forced to close their doors, and some may not reopen. Apart from revenue loss, they will be impacted by poor credit standings,” he explained in a note.

“With the additional measures plus the increasing focus on micro businesses which make up a big share of the SMEs, the support will more likely help reduce bankruptcies and bad loans.

“There could be some relief on job losses which remain a major concern although these are expected to vary considerably according to the age and size of the small businesses.”

Even now, industries in the palm oil and consumer manufacturing segments are calling on the government to allow exemptions for them to resume operations.

Earlier this week, the Malaysian Palm Oil Association and the Malaysian Estate Owners Association say they have been actively engaging with the Sabah government on the closure of oil palm operations in six districts to prevent the spread of Covid-19.

In a joint statement, the associations said they have provided the state authorities with information on the list of plantation operations in the six districts, together with maps indicating their locations.

In Sarawak, the Sarawak Oil Palm Plantation Owners Association has made the same plea on the state government to reconsider the parameters for the MCO for isolated cases of mills or estates.

In another case, the government had earlier allowed Heineken Malaysia Bhd and Carlsberg Brewery Malaysia Bhd to continue their operations during the MCO period only to make a u-turn during a special Cabinet meeting.

The Federation of Malaysian Manufacturers (FMM) is appealing to the government to allow product manufacturers to operate during the extended Movement Control Order (MCO) period and in the anticipation of a possible further extension of the MCO.

Its president Tan Sri Soh Thian Lai said the association requested for an extension of operation approval to essential product manufacturer to operate at 100 per cent capacity and the non-essential at a 50 per cent capacity.

To recap, the Ministry of International Trade and Industry (MITI) has granted approvals for the production of critical essential goods such as food items, personal protective equipment such as face masks, sanitisers, pharmaceuticals and medical equipment during the MCO.

Soh said the extended MCO and tightened conditions effective April 1, 2020, however, has caused some workers of companies MITI’s approval issued prior to the extension announcement were denied permission to travel to workplace, including several cases of workers being arrested.

“This is despite workers showing proof of the media statement released by MITI on March 25 on the extension of all approvals in accordance with the extended MCO period,” he said.

The enforcement has also resulted into disallowing movement beyond the tightened MCO hours, thus affecting workers scheduled on shift work for companies with MITI approval, he said

FMM he said, was strongly of the view that factories operate under a very controlled environment, where the movement of the workers are from home to the workplace and back thus limiting the exposure of workers to an environment beyond their workplace and home.

Some manufacturing entities, that are part of the supply chain of the essential products, were not granted the approval to operate, in view that they do not fall under the category of essential product manufacturers.

This too has hampered the operations of the manufacturers granted approval to operate.

SMEs’ survival depend on macro environment

This crisis demands a set of policy support measures that are both broader and longer term than those pursued in 2009. Otherwise, AmBank’s Dass warned that small businesses are certain to face a calamity.

“Unlike the 2008 Global Financial Crisis where shops and restaurants could still rely on social interaction and foot traffic for business, Covid-19 has stripped that advantage away,” he said.

“Thus, the latest additional stimulus measures worth RM10 billion to soften the impact of the MCO on SMEs and micro businesses are welcoming. Many are experiencing a tight cash flow due to zero or minimal sales revenue.”

But the tight cash flow is not just because of the MCO, Dass said. Businesses are also affected by the slow and inconsistent implementation of policies and measures as well as trade wars and other domestic challenges in the past.

“Without these additional measures, even if the MCO is lifted, demand is expected to be weak for some time due to travel aversion and social distancing. Not every small business is equipped to survive this downturn,” he enthused.

“The drop in consumer and corporate spending will intensify the adverse chain reaction that will fuel the collapse of micro businesses — especially the younger and smaller businesses due to their highly vulnerable situation.

“Generally, the older and larger small businesses are more likely to withstand an economic crisis.”

On the economy as a whole, AffinHwang Capital anticipate downside risk on the investment activity, with current sharp slowdown in global economic conditions and cautious business sentiment.

“Private consumption growth will not be normalised anytime soon as households will likely be impacted from possible temporary shocks to their incomes and cautious on their spending due to the uncertain employment situation as well as affected by the expected slower growth in real disposable income,” it affirmed.

“Apart from the existing measures introduced to support the SMEs, we believe one of the other key strategies to assist the SMEs in Malaysia will be for the government to create possibly a special fund by the government-linked investment companies and government ecosystem, where they can invest or inject funds in potential SMEs and companies for them to ride through and survive the current Covid-19 crisis.

“We believe it is important for the government to look beyond the short to medium term, as when the Covid-19 crisis ends and when the economy returns to normal, the network of SME firms will maintain the existing industrial linkages with minimal disruption.

“A healthy SMEs ecosystem will support the sustainability of the domestic economy and employment.”

What lies beyond Covid-19?

After introducing the Prihatin SME Plus, the government should next look at providing targeted incentives for businesses to adapt and reskill.

Institute for Democracy and Economics Affairs (IDEAS) research manager Lau Zheng Zhou sees the SME stimulus package as primarily a ‘stop-gap’ measure and that encouraging businesses to reskill particularly in the area of innovative technology such as digital solutions would help pave the way for an eventual recovery.

On the Prihatin SME Plus, he acknowledged that it is intended to expand the government’s stimulus package coverage to include the different sizes of SMEs as a means to address short-term liquidity concerns.

“This is crucial to minimise the risk of mass business insolvency, which will create more issues with unemployment and damage to the economy’s productivity capacity.

“Of course, businesses will continue to ask for more from the government, but it is important to emphasise the need for risk-sharing as businesses must also adapt to the new environment,” he told Bernama in an interview.

On worker layoffs by SMEs, Lau said the government should consider attaching positive conditionalities as part of the stimulus application progress.

“For instance, a credit-score system, where businesses that manage to retain employees after receiving stimulus support, can have priority or advantage in future funding programmes. This will give business operators incentives to think long-term,” he said.

The government, he said, should also prepare for the worst as termination is inevitable for some businesses, “especially if the business turns insolvent”.

He opined that business recipients of stimulus measures should be enrolled in an SME recovery programme, which may entail creating a special job database and reskilling programme.

Lau also wondered if the government has a plan for a gradual loosening of the MCO to allow more industries to resume operations.

“Economic activities are usually organised around geographical clusters – would it be possible for a more targeted approach based on locations or a zoning system?” he asked.

On whether the SME stimulus package should include the self-employed and informals, Lau replied, “Ideally, yes, as they form a part of the supply chain too.”

“But existing measures may not be straightforward to many of these self-employed and informals as their businesses are not necessarily registered under the Inland Revenue Board or Companies Commission of Malaysia; therefore they may not have access to the distribution channels of these stimulus measures,” he added.

Meanwhile, Lau said it was important for the government to consider a longer-term economic strategy, at least for the next six to 12 months.

“This is so that it could communicate its ‘exit strategy’ from the stimulus package, and that it would not be a prolonged one.

“Measures that the government will take to speed up business adaptability and reskilling leading to a recovery is fundamental to demonstrate capacity to generate tax revenue in future,” he asserted.

According to Lau, a recovery plan would also help bolster market confidence on fiscal consolidation objectives when the economy eventually recovers.

“It is not unreasonable to project a relatively high budget deficit as a percentage of gross domestic product (GDP) for the year, given the three-way impact of rising fiscal spending, falling fiscal revenue, and a slowing domestic economy. These factors will push up the budget deficit as a percentage of GDP,” he said.