In my last article “Applying lessons in economic history to resolve the crisis arising from the coronavirus outbreak” (Issue 1320, May 25), we pointed out that lessons from economic history such as Japan during the Great Depression and Malaysia during the Asian financial crisis (AFC) can be used as a useful reference in addressing the current economic crisis caused by the Covid-19 pandemic.
Critics tend to pour cold water over the solutions from economic history, stating that it is different this time. They claim that there is no bubble associated with this crisis and this is a supply shock.
However, the effects of any economic crisis are still the same. As a result of the pandemic, aggregate demand falls because of demand destruction, loss of employment, collapse of businesses, cutbacks/tightening of expenditure, and declining trade and commodity prices and, most importantly, confidence.
In this harsh economic environment, the psychology prevalent is to save or pare down debts. We only now know too well that the shrinkage of private debt has adverse effects on aggregate demand. The level of fiscal stimulus required to increase aggregate demand has to be upped to balance the fall in private consumption and the reduction in private investment and net exports. Further, as in all other economic crises, basic needs such as food, shelter and medical treatment for the weakest in society must be met.
The proponents of Rethinking Economics are asserting that the previous responses towards sociopolitical stability, liquidity and aggregate demand are still relevant and necessary but insufficient. Further, we acknowledge that, this time around, Malaysia’s ability to depend on exports or mortgage growth in the short term unlike the AFC are not viable options.
First, Covid-19 is first and foremost a public health crisis and must be addressed as such. This is supported by economic evidence gathered during the Spanish flu. Moreover, so far, the successful management of the Covid-19 pandemic by South Korea, Taiwan and Hong Kong points to the same, and the fact that they have managed to keep their economies fairly open supports this contention.
Policymakers appreciate it is not a trade-off — the economy needs to be at the optimal level while the safety of the population must be ensured. Simply put, high-risk activities with low economic value should be put on hold, and those with high value and lower risk should be activated as soon as possible. Unfortunately, we must have the cake and eat it too, that is, pandemic fully contained and the economy functioning. This is the only viable option. To a great extent, the government’s response so far seems to follow the broad strategy.
The problems of supply shock will manifest in difficulties in the production of goods and services. Components and sub-components are not being manufactured because of the current lockdowns globally, which, while cumbersome, are necessary safety measures. This adversely affects efficiency and productivity, as a longer time is needed for supplies from around the world to arrive.
In respect of supply shock, however, the problem should pass in the short term. An educated guess is that businesses will resolve these problems as soon as possible, given their pressing needs and business ingenuity. Here, there appears to be no role for government, other than to eliminate bureaucratic roadblocks that are not related to public health safety, while being mindful that it is not a trade-off. The more pertinent effects are on demand because of fear that even those who have the financial means will not spend.
Owing to fear, prohibitive measures or strict conditions are imposed. There are products and services that customers shy away from during this period and thus there will be overcapacity of cinema seats, airline seats, hotel rooms, restaurant tables, exhibition spaces, stadium seats and university places — all of which have fixed costs. These assets need to be preserved or even mothballed while waiting for consumers to become less fearful and for confidence to return. On the other hand, closures could result in the permanent destruction of the supply of goods and services even when the pandemic passes.
In respect of industries that are already in decline, the pandemic will accelerate their demise and thus the requirement for capital, both physical and human, will be redeployed. These would, for example, include retail and commercial office space, which were already at overcapacity pre-crisis, and the traditional newspaper and printing businesses.
In this crisis, policymakers need to be cognisant that US President Donald Trump himself had favoured trade protection even before the pandemic and in depression economics, which is affecting the whole world. The temptation is for protectionist policies as well as demands for self-sufficiency. However, a geopolitical shift between Western democracies and China provides opportunities for Malaysia to position itself to cater for the expected new wave of investments arising from a shift in the supply chain away from China. This can provide Malaysia with a once-in-a-lifetime opportunity to move up the ladder of economic complexity and reshape our economy to become a truly high-income nation.
The overriding question for this crisis is, how do we include the elements of speed, precision and effectiveness to reshape our economic recovery? The military and wartime methods provide perceptive insights.
Rationale for command and control
What is clear is that a large number of unemployed people would have to be redeployed temporarily and some permanently. The classic example in which large numbers of people are deployed quickly is government-coordinated supply-side initiatives, with production targets supplementing demand-side initiatives. Good short-term examples are the production of ventilators, test kits, personal protective equipment and hospital beds, and an increase in the number of medical staff to address the pandemic.
During the war years, major powers set up production targets and resources were deployed, and economies actually grew with an increase in employment. In this instance, demand is determined by the government, but it also then initiates the coordination of the supply of products and services through centralisation, enabling rapid deployment of both capital and labour focused on meeting the demand targets set by the government.
Today, there are products and services that we desire as a society, where government coordination and direction of production could be used to redeploy excess capacity quickly. Let us say the country decided it requires three million affordable homes in two years. The government should set regional targets, acquire land or uncompleted buildings from cash-strapped developers (or state governments) by issuing bonds, coordinate and plan with developers to build and deliver affordable homes across the country as well as work with financial institutions and the likes of Cagamas to provide financing.
The result is that a desired product is produced at low cost because land is acquired cheaply and funded at low interest rates and depressed prices for building materials (including using bulk purchasing). Economic activity is thus stimulated and the idle capacity in the construction and building material sectors are fully utilised while ancillary services such as legal professionals, surveyors, architects and banks — all of whom are facing a slowdown — will benefit as well.
More comprehensive solution needed
This coordinated approach was proven to be very effective in enabling capital, preserving viable businesses and enabling recapitalisation of businesses to avert the worst effects during the AFC. Compared with the AFC, however, this crisis has a broader effect, and the deployment of a few agencies simply would not be able to resolve the problems of the overall economy. A more comprehensive solution with wider reach must be evolved. The government’s approach of using the banks as the lynchpin to resolve the crisis is undoubtedly the right one, as they have large networks and are well plugged into the economy. Using development finance institutions (DFIs) to provide guarantees on a case-by-case basis is flawed, however, as it will be too slow.
The goal of the command-and-control structure is to plan and drive industries and banks to ensure speed and yet effectiveness. Labour and capital are to be preserved as well and enable growth in employment, where new business opportunities will arise.
The point is that the command structure needs to show clearly that authority is from the prime minister and then be coordinated by the Economic Unit (EU) under the PM’s office. The EU’s authority over other ministries is critical if proper command is to be established.
The second point is as with the military, intelligence is critical. Data produced from the period before the crisis, however, is vastly irrelevant for decision-making. In fact, the data has to be as real-time as possible so that decision-making is based on the latest and best available information. In this respect, using industry groups to collate information will provide insights into the current status of these industries and issues that need to be tackled urgently.
Information generated from the internet as well as payment systems should be analysed to fully understand the situation closer to real-time. Large surveys can be done quickly by using new technology to gain forward-looking information through predictive analytics. This crisis presents a unique opportunity to develop knowledge and know-how in artificial intelligence and Big Data in respect of economic intelligence and decision-making processes.
In my view, there are four segments that require an organised and coordinated response.
Businesses in this segment have no debt obligations, thus their cash flow pre-Movement Control Order/pre-crisis was mainly to provide promoters with sufficient income. This segment requires cash urgently in large numbers of businesses but smaller amounts in value, not only for basic survival but also to restart the businesses after the lockdown. Commercial banks can reach a large number of this segment, as they have, at the very least, the bank accounts of these businesses and would be able to analyse their bank activity patterns to make credit decisions. To facilitate the speed of non-performing loans (NPLs) arising from this programme, there is a need for an underwriting mechanism by the government that is more efficient than the current process. One option is the variant used during the AFC to resolve Sime Bank’s NPL problems and that can be deployed quickly without burdening the federal government. The central bank could underwrite the risk by offering to buy back a portfolio, say, up to 30% of the loans disbursed which turn NPL at par value by issuing AAA guaranteed bonds. The buyback facilitated with AAA bonds could be traded or discounted with central banks to increase liquidity in the banking sector. The bonds represent central bank liabilities and not federal government liabilities, that is, it is able to work around the statutory limits imposed on government borrowings. There is certainly a precedent for central banks to purchase banking assets using special-purpose vehicles (SPVs).
These businesses would have benefitted from the loan repayment holiday but will face problems post-moratorium. This segment requires loans to be restructured in addition to lines of credit not being pulled back and not blemishing the credit standing of businesses during this extraordinary time, including the relaxation of Central Credit Reference Information System (CCRIS) reporting. Borrowers that are unable to restructure their loans with the banks would need assistance for negotiation and should be provided professional advice, perhaps something similar to Agensi Kaunseling dan Pengurusan Kredit (AKPK) for individuals and/or the Small Debt Resolution Committee (SDRC), which can be enlarged to take on this role. We believe even this segment will need a portion of new loans to be underwritten, similar to Segment 1.
Further, some of the loans that are backed by property assets will require resolution in which normal restructuring cannot be done because of no, or weak, income for a considerable period of time. The temptation for banks would be to foreclose on these loans, but this would create a crash in the property sector. Danaharta could be the agency to hold these loans to allow managed resolution of these loans and disposal of property assets in an organised manner thus not crashing the market. The consensus view is that Danaharta can be reactivated fairly quickly as its legislation was never retracted in accordance with the provisions of the Danaharta Act. While the powers of Danaharta are extensive and well suited to resolving a crisis, there is serious concern, understandably, for potential abuse of power. But it is no different from 1998. It is incumbent on the government and the opposition to ensure accountability of our institutions such as Bank Negara Malaysia, Ministry of Finance, the Securities Commission Malaysia, the Courts and independent press to ensure checks and balances. Otherwise, Malaysia will be disadvantaging itself in our response to the crisis.
These industries are undergoing distress involving large corporations in which their failures will lead to an adverse chain reaction and pose a systemic risk to the banking sector and economy. This segment is best served by a “tag team” of Corporate Debt Restructuring Committee (CDRC) and Danaharta, which proved to be very effective during the AFC. Combined with Danajamin’s guaranteed financing post-restructuring, it would further enhance the effectiveness of this approach.
These businesses are enjoying rapid growth because of the shift in demand arising from the pandemic or created by government-based initiatives. To ensure supply, the government could issue RFPs (requests for proposals) swiftly to mobilise Malaysian businesses to provide new products and services to achieve the desired outcome for the products and services discussed earlier, for example, affordable homes.
For these businesses, opportunities and capital should be allocated quickly to ensure jobs are created and there is growth in economic activity. Further, this enables Malaysian businesses to benefit from first-mover advantage, gaining competitive advantage through scale and complexity. Commercial banks are hungry for such businesses with a track record. For those businesses without a track record of bank financing, Malaysia Venture Capital Management Bhd (Mavcap) and Malaysia Debt Ventures Bhd (MDV) ought to be geared up to provide growth capital to these businesses.
In summary, the above proposition is effectively government-directed lending, which we have advocated previously even in normal times. This has been a successful model for the rapid growth of East Asian economies, with lending directed towards more productive purposes rather than for increasing property and share prices. In a crisis, government directed lending is even more compelling and must be applied swiftly to have a meaningful impact.
Over the long term, if such a policy is implemented, it should be followed by a rollback to the market economy because we know that malaise eventually sets in when the government determines both supply and demand. Policymakers must be cognisant that, in the long run, millions of motivated entrepreneurs trying new business ideas and models will propel the economy for long-term higher and sustained growth. Policymakers need to know when crisis policies need to be rolled back, modified or abandoned entirely.
Malaysia is only about to embark on the initial phase of a severe economic slowdown and may experience a prolonged recession. Therefore, it is imperative that policymakers act swiftly and decisively in reviewing and adjusting the policy response to address the economic crisis.
If the government is truly committed to act on a platform of “whatever it takes”, then nothing must be ruled out in the arsenal of weapons to deal with the crisis, which will require full strategic flexibility, including government-led command and control of demand and supply for selective goods and services. Policymakers must always be mindful, however, that the policies are guided by the need for pragmatism and realism.
The policy response needs to minimise the expected loss of value in the next 18 months. Policymakers must strive for a V-shaped recovery rather than settle for a U-shaped recovery.
Datuk Mohd Anwar Yahya is a partner and executive director at Sage 3, a boutique corporate finance advisory. He serves on the boards of directors of several Malaysian public and private corporations and has over 25 years of experience in public policy, corporate finance and strategy at a Big Four accounting firm.