This article first appeared in The Edge Malaysia Weekly on August 9, 2021 - August 15, 2021

AT the start of this year, hopes were high that the economy would stage a strong recovery after the lost year in 2020 — just as it did in 1999 after the Asian financial crisis. However, eight months into 2021 and with much of the economy under movement restrictions, those hopes seem to be fading. Frontliners are still overwhelmed and politicians are still bickering over who has the majority in parliament.

The official GDP projection for 2021 of 6% to 7.5% is set to be revised lower this Friday (Aug 13), when the second-quarter figure is announced, and expectations are that the number may not be that much higher than the 4.3% economic growth seen in 2019 despite the low base from last year. What will be closely watched is Bank Negara Malaysia’s reading of the economy and financial developments as the country went through the various stages of lockdown and the central bank’s guidance for the rest of the year.

Even if the lockdown in June causes the economy to lose a record-high double-digit year-on-year rebound in 2Q2021, there is still hope of growth returning in 4Q2021 should the vaccination rate progress as expected, which would allow more states and sectors to reopen.

The silver lining amid the gloom of the pandemic is how Malaysia has been making a sprint in its vaccination efforts over the past month. As at Aug 5, 24.5% of the Malaysian population had been fully vaccinated while 46.4% of the population had had at least one dose of the vaccine.

Undoubtedly, the vaccination rate is one of the key factors that will impact the economy’s prospects as we take into account the lessons from other countries that managed to successfully inoculate a significant percentage of their populations earlier this year.

The success of the national vaccination drive will have a significant impact on consumer and business confidence, which can be further bolstered by government spending as well as the political stability necessary to instil confidence that there will be policy certainty — regardless of who holds a majority in parliament.

With just five months to go before 2021 draws to a close, we take a look at five factors that will determine if Malaysia can end the year safely.

A tight race for Malaysia between vaccines and virus

Vaccination is the way out of this pandemic, as witnessed by how advanced economies that secured vaccines early and delivered jabs fast are reopening their economies and reaping the benefits ahead of most of the world.

After a slow start, owing to a lack of vaccines, Malaysia’s National Covid-19 Immunisation Programme was ramped up significantly in July when supply arrived. From merely 27,049 doses a day on March 3, the number of daily jabs reached as high as 556,404 on July 29, and remained high at 514,674 doses at the time of writing on Aug 5.

As at Aug 5, some 46.4% of the country’s total population of 32.7 million had received at least one dose of Covid-19 vaccine, while 24.5% or nearly 8 million people had completed two doses. The percentage among the adult population is even higher, with 64.8% having had at least one dose while 34.2% had completed two doses.

These official numbers do not include undocumented persons, which some experts believe total around three million, a factor that policy experts have highlighted as “no one is safe until everyone is safe”. Khairy Jamaluddin, who heads the National Covid-19 Immunisation Programme, told the media in late July that guidelines to vaccinate undocumented migrants and refugees had been approved and that the government would be roping in non-governmental organisations such as the Red Crescent to smoothen its implementation.

At the current rate of vaccination, Malaysia could have 70% of the population vaccinated with two doses by the middle of September. But speed is of the essence, given the spread of the Delta variant, which is a lot more transmissible.

The faster the jabs, the sooner the economy and businesses can reopen, with the percentage of inoculated adults being one of three key indicators of the National Recovery Plan (NRP).

While the country’s vaccination rate — as measured by doses being administered daily per 100 people in the population — is currently among the highest in the world, the race against variants will remain fierce over the coming weeks.

“It is a critical time for our nation right now. There is a tight race between the speed of new virus variants fast spreading that pushes daily caseloads higher by the day and the speed of vaccination,” says Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC).

“Speed of vaccination is of the essence. A faster and more effective vaccination rollout across the states, especially the hotspots, is critical to fast-tracking a transition to a safe reopening and returning to normalcy under the four-phase NRP,” he adds.

The fear is that the reopening of the economy could be delayed, thwarting recovery, if the number of infections that require hospitalisation remains high and intensive care units continue to be overwhelmed. Already, it is estimated that RM1.1 billion of daily economic output is lost due to the Full Movement Control Order (Phase 1).

While it is disheartening to see the number of daily new cases breach 20,000 for the first time on Aug 5, even as more tests are being done, it is important to remember that those who are vaccinated are a lot less likely to need medical attention than those who are not protected.

That nearly 40% of the adult population will soon have received two doses of vaccine — a threshold that has been surpassed in the Klang Valley, Negeri Sembilan, Sarawak, Perlis and Labuan at the time of writing — was why the NRP replaced one of its key indicators for reopening, from the number of daily new Covid-19 cases to new hospital admissions (category three, four and five patients who have more than mild symptoms).

“There is now a growing narrative that it’s time to change the saving lives versus livelihoods strategy, from pandemic to endemic — an annual flu virus. As we may never be able to control this pandemic outbreak, which has seen new virulent variants spreading fast in the community, we may be forced to live with the virus for good with the faster ramping up of the vaccination programme to immunise at least 90% of the population and continued strengthening of health protection measures,” says SERC’s Lee.

At the time of writing, two states and one federal territory — Perlis, Sarawak and Labuan — have moved to Phase 3 of the NRP, whereby some restrictions, such as dining-in and sports activities, have been lifted, although standard operating procedures (SOPs) will still have to be observed. Selangor, Kuala Lumpur, Putrajaya, Kedah, Negeri Sembilan, Melaka and Johor are still under Phase 1 of the NRP while the remaining states have moved on to Phase 2.

According to the NRP, the government’s target is that 100% of those registered for vaccinations in Labuan, Sarawak, Putrajaya, Selangor and Kuala Lumpur will have received their doses by the end of this month. By end-October, all who have registered for vaccines should already be inoculated. What’s certain is that any undue delay in the reopening of the economy — if not enough is done to save lives and prevent permanent damage to the economy — would make it even harder for real recovery to take place.

Gauging the strength of pent-up demand

Undeniably, consumer confidence has taken a beating as Covid-19 infection rates scale new highs and the lockdown measures keep people at home. The Malaysian Institute of Economic Research’s (MIER) Consumer Sentiments Survey for 2Q2021 reports that the Consumer Sentiment Index (CSI) dived to a low of 64.3 points quarter on quarter.

According to MIER, 64.3 points is the second lowest reading ever recorded in the series, with its lowest point being in 1Q2020, when the country first moved into a complete lockdown in March last year.

“Clearly, signs of consumer fatigue are becoming more apparent. Not only have consumers’ finances deteriorated further recently, their expectations of their finances and, especially, their assessment of the employment outlook in the next six months, are anything but positive,” says the institute.

It adds that consumers have less cash, implying that they have tighter budgetary constraints and will now need to prioritise their purchases.

Consumption, particularly private consumption, has been a significant contributor to economic growth in Malaysia. It makes up close to 60% of GDP. Pre-pandemic, private consumption recorded a growth of 7.6% year on year (y-o-y) in 2019 and 8% y-o-y in 2018. When the pandemic hit in 2020, private consumption contracted 4.3% y-o-y.

For 1Q2021, private consumption posted a smaller contraction at 1.5%. To recap, the economy was partially open during the first quarter of this year before the country went into a much stricter lockdown on June 1.

Will the upcoming data show a steeper contraction in private consumption?

The sentiment among consumers that is reflected in the private consumption numbers, though not positive, should be expected as uncertainty and a higher unemployment rate tend to weigh down on consumers’ spending. However, the big test will come when the economy starts to reopen which, according to the government’s recent statements, could be as early as October as the country plans to get all adults fully vaccinated by then.

Prime Minister Tan Sri Muhyiddin Yassin is expected to announce a relaxation of Covid-19 SOPs for fully vaccinated individuals within the next few days, which should help spur some economic activity.

Nevertheless, the lingering question is whether there will be a strong release of consumer pent-up demand, which everyone is hoping for. If this occurs, it could help give the economy the big boost it needs. But if consumers continue to remain cautious when spending, it could dampen the prospects of the economic recovery.

In economies that opened up earlier, consumer spending has rebounded sharply. Take the US, which reopened its economy earlier. In the country’s 2Q2021 GDP report, consumer spending grew at a robust annualised rate of 11.8%, making up for most of the economy’s growth rate of 6.5%. Savings rates in the US were reported to have fallen in June, to 9.4% from 10.3% in May, another indicator that consumers are spending more.

Economists take the view that a release of pent-up demand in Malaysia will likely be the case when the economy reopens.

“Understandably, the sentiment may remain cautious even with the reopening, especially if daily new cases are still high. However, we still think there is likely to be a release of pent-up demand, as observed during other reopenings, whether due to pandemic fatigue or just the ‘Malaysian way’,” says United Overseas Bank (M) Bhd senior economist Julia Goh.

RHB Research economist Ahmad Nazmi Idrus shares a similar view, saying that consumers are likely to start spending whenever they can.

Nevertheless, Goh thinks the high unemployment rate and a run-down of savings may weigh on the strength of consumer spending.

Meanwhile, some quarters are concerned that the high debt level among Malaysian households could crimp a rebound in spending when the economy reopens.

Last year, household debt as a percentage of GDP increased to 93.3%, largely because of the weak 2020 GDP number. While it is true that it is not so much a reflection of households taking on excessive amounts of debt that resulted in higher household debt levels, Malaysia’s household debt has always been an indicator that is keenly observed, even prior to the pandemic. In 2019, household debt stood at 82.7% of GDP, largely driven by house financing.

Lifting the shackles that restrict growth

The effect of the lockdowns on the economy cannot be overstated. It is estimated that 580,000 businesses, which represent 49% of micro, small and medium enterprises (MSMEs), are at risk of failing by October, according to the Ministry of Entrepreneur Development and Cooperation.

While there have been indications that the government may relax the movement restrictions, the businesses’ confidence in the economy is currently bleak. According to the Malaysia’s Business and Economic Conditions Survey (M-BECS) conducted by the Associated Chinese Chambers of Commerce and Industry of Malaysia, 64.5% of respondents foresee that economic conditions will be worse in the second half of the year compared with the first half.

Overall, 65.1% of respondents were not confident about an economic recovery in 2021. The survey received responses from 693 respondents, with 91.8% being MSMEs.

While that bleak assessment is understandable, considering the restrictions that are currently in place, these scarring events could take a longer time to fade away before people are confident enough to start investing and expanding again. All these will result in a much longer economic malaise if there is no further assistance extended to businesses.

“A deep concern is that with the longer restrictions and containment measures, the economic damage will be long-lasting and irreversible, as well as have far-reaching social implications on society, causing more hardships,” says SERC’s Lee.

“Some sectors will take years to recover from the economic blows, and the poorest and most vulnerable will bear a disproportionately high share of the burden. Micro businesses and SMEs have drained their cash reserves and are having difficulty in restarting.”

Policy responses, encompassing immediate, short- and long-term measures, are needed to help SMEs build back better, he adds.

The immediate measures must be aimed at easing their liquidity and cash flow constraints while the short- and medium-term policies need to be aimed at providing structural support for the businesses’ digital technology transformation. For example, a deferral of income tax and statutory payments, discounts on rent and utility payments as well as a loan repayment moratorium to preserve the liquidity and cash flow of SMEs could be implemented to ensure their survivability.

Dr Afzanizam Abdul Rashid, chief economist at Bank Islam Malaysia Bhd, says providing more incentives and organising promotional activities for equity crowdfunding (ECF) and peer-to-peer (P2P) financing could be a focus area in helping SMEs.

“One of the key issues with SMEs is financing. With the proliferation of technology and the savviness of investors in Malaysia, alternative financing platforms such as ECF and P2P have gained in popularity. Based on the Securities Commission’s annual report for 2020, ECF and P2P jumped 43% to RM0.6 million when the economy was contracting at a rate of 5.6%,” he points out.

In the longer term, capacity building via training will be one of the measures taken, he adds.

The continued restrictions that are in place, both in terms of public movement and operational capacity, have caused worries that Malaysian companies, which are part of the global supply chain, could lose their competitiveness in the international market.

“[Companies face] cancellation of bookings and demands for compensation due to contractual breaches. [There will be] collateral damage to a company’s reputation and credibility, and it will take time to rebuild trust and credibility. [Companies are reluctant] to take new orders due to the lingering ‘open-shut’ uncertainty,” says Lee.

“Businesses face the risk of a diversion of orders from Malaysia to our neighbouring countries. Loss of market share means a reduction in export earnings and an impact on GDP and employment.”

Timely aid to save lives and livelihoods

Since the pandemic hit, the government has doled out a total of RM530 billion in stimulus packages, which required a direct fiscal injection of RM82 billion. The latest was the RM150 billion National People’s Well-Being and Economic Recovery Package (Pemulih) on June 28.

Yet, calls for more government spending has not abated, with movement restrictions still in place in most parts of the country even though some states have transitioned to Phases 2 and 3 of the National Recovery Plan, which allow more activity.

With unemployment rates expected to remain high for some time due to the lockdowns and uncertainty faced by businesses that could ultimately delay investments and hiring plans, there is no question that more targeted measures would accelerate the pace of recovery for the people, businesses and sectors still badly affected by Covid-19.

The problem is that Malaysia’s RM1 trillion in debt and liabilities is straining coffers, resulting in a debate over whether the government can afford to spend more than what it already has.

The country had already broken one piggy bank, so to speak, when it tapped into the National Trust Fund (KWAN) in April, withdrawing RM5 billion to pay for Covid-19 vaccines and vaccine-related expenses. Many say that the government could do it again if the situation calls for it.

According to the Ministry of Finance, the country’s statutory debt level is 58.6% of GDP, still below the 60% self-imposed statutory debt ceiling. However, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz told the Dewan Rakyat recently that the government is ready to relax the debt restrictions as early as the next parliament session “to support the economic recovery plan” while taking into account the nation’s indebtedness ability.

Economists agree that the debt ceiling needs to be raised in light of the pandemic’s severity.

“Given that the current debt levels are nearing the debt ceiling of 60% of GDP, pressured by a higher fiscal deficit and weaker GDP outturn compared to initial expectations of over 6% growth, the debt threshold will need to be raised. This adjustment also reflects the ongoing battle with a pandemic that has worsened with new virus variants,” says UOB’s Goh.

Other than debt, there does not appear to be many options for the government to raise funds, economists say.

RHB’s Ahmad Nazmi says the government could probably tap government-linked companies for more funds or reduce development spending, but these measures would have implications on growth.

“I think there aren’t many choices for the government now to raise funds. I support its efforts to raise the debt ceiling to 65%. That would release some funding for the government to help with the economic recovery,” he adds.

Nevertheless, raising the debt ceiling and taking on debt would have implications of their own. Ahmad Nazmi says the concern is whether the government will be able to lower debt levels over the next few years to appease the rating agencies.

“Plus, under the Temporary Measure Act, the 60% debt to GDP [ceiling] was supposed to be reduced to 55% by end-2022. So, raising the debt ceiling further would mean either a sharper consolidation sooner, which would be negative for the economy, or later, [which would be] negative for ratings,” he adds.

The government will need to spring some positive surprises on this front, perhaps by looking at how it can further tap savings at its related institutions and agencies to aid economic recovery (see “Ways to expand fiscal space besides lifting the statutory debt limit” on next page).

One thing is for sure — debt incurred will have to be repaid eventually and more debt today would mean that the burden will likely be passed on to our children and grandchildren. That said, they too will benefit if the economy they inherit is stronger because of the stimulus money spent today.

Putting the economy and people’s well-being first

The Covid-19 pandemic is arguably the worst crisis that Malaysia has ever faced in the 64 years since independence. Up to Aug 5, more than 10,000 people had lost their lives, due to various complications caused by the coronavirus.

While Malaysia is not the only country to suffer heavy casualties from the pandemic, it stands out for the way its politicians are bickering when the people they are supposed to serve are suffering.

The country has been beset by one political crisis after another since February last year, when the then Pakatan Harapan government collapsed due to defections by a few politicians from its camp. The government chosen by the people in the 14th General Election was replaced with a coalition that, in essence, nobody had voted for.

While the public generally accepted Muhyiddin as prime minister initially as the number of new Covid-19 cases was swiftly brought under control, the Perikatan Nasional government was soon heavily criticised because of the actions of some in its camp.

With the number of new daily cases currently reaching fresh records and the number of deaths continuing to rise, our politicians are still fighting over who should run the country. While they count the number of seats they command, the people are counting the number of lives lost.

Based on back-of-the-envelope calculations, Muhyiddin has lost the confidence of the majority of the members of parliament. This should be tested in parliament, but it has been suspended yet again.

Calls for Muhyiddin’s resignation as prime minister are growing louder by the day as the Covid-19 situation worsens. While these calls can be justified, will replacing him lift Malaysia out of the crisis?

Politicians from both sides of the divide should set their differences aside and work together to come up with solutions to the health and economic crises. Many would agree that this is not the time for politics, but for national unity to combat a common foe.

The prime minister, whoever it may be, must ensure that the economy continues to grow, even as the health and social well-being of the people are taken care of. This is where certainty of policies is crucial.

The Covid-19 situation must be put under control first, as the recovery of the economy would naturally follow. To do this, Malaysia must have a government that does not need to continuously look over its shoulder as its legitimacy is questioned time and again.

Back in June, Fitch Solutions Country Risk & Industry Research said it sees a worsening of the already elevated political risks in Malaysia. It added that the situation would likely have a negative impact on policymaking and policy continuity, as well as social stability.

“We see this as largely the result of mounting dissatisfaction with the government’s handling of the Covid-19 pandemic, which has seen daily caseloads rise to the thousands while residents have had to cope with multiple lockdowns and confusing instructions.

“Accordingly, we have revised downward our Short-Term Political Risk Index score to 65.2 out of 100, from 66.7 previously, to reflect these risks,” Fitch Solutions stated in a June 7 report. A lower index score denotes worsening political risks.

The government of the day — whether it is Perikatan Nasional headed by ­Muhyiddin, or a new coalition with a new prime minister — has a huge responsibility to ensure the well-being of the people in this unprecedented health and economic crisis.

Will cooler heads prevail among the politicians for the benefit of the people?

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