Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 7, 2021 - June 13, 2021

MALAYSIA has found herself in a full lockdown once again as Covid-19 rears its ugly head, a development that is likely to presage a downward revision of an earlier official GDP growth forecast of 6% to 7.5% for the year.

To date, there have been a total of 595,374 of Covid-19 cases, with 3,096 fatalities, and rising.

Putrajaya has imposed a full lockdown for 14 days (Phase 1) ending June 14, which will be followed by four weeks of a less stringent lockdown (Phase 2), and then the more lenient measures under Movement Control Order 3.0 (Phase 3) that was imposed prior to the lockdown announcement at end-May.

However, the transition between phases will depend on how well the country keeps infections under control.

Dr Yeah Kim Leng, professor of economics at Sunway University, is of the view that the lower end of the GDP growth forecast of 6% to 7.5% will likely be revised downwards by 0.5% to 1%. “The downside risk arising from a prolonged pandemic and restrictions on social and economic activities has materialised with the current nationwide lockdown, albeit for an initial 14 days. The duration remains uncertain, hence the quantum of downward revisions remains open,” he observes.

RHB Research senior economist Ahmad Nazmi Idrus agrees it is increasingly unlikely that the current official estimates can be reached, unless there is stellar growth in the second half of the year. “I would not rule out that possibility just yet, but I think they should already consider larger downside risks to their projections,” he says.

Economists’ early estimates of the economic impact following the lockdown range from as high as 1.6% to as low as 0.7%. Having said that, many think the impact will be less severe than the output loss experienced during the first MCO in March 2020, owing to the fact that the list of essential sectors has been broadened compared with the first iteration. Furthermore, export growth has been much more robust this year.

“We estimate a lower economic output loss of RM1.3 billion per day during the current lockdown compared with the RM2.4 billion per day during MCO 1.0. This will potentially reduce this year’s GDP growth by 0.7 percentage points, assuming six weeks of lockdown and partial lockdown as well as less stringent movement restrictions,” says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre.

CGS-CIMB Research head of economics Michelle Chia believes that for every two weeks of Phase 1 lockdown, 0.9 percentage points could be shaved off from GDP growth. “... hence, the stakes are high for Malaysia to make this full lockdown the final one, while ramping up progress on vaccinations,” she stresses in a report.

RHB Research’s Nazmi says the implications to consumption, the labour market and other economic areas will be compounded if the nation remains in full lockdown for an extended period of time, thus making it important for the country to come out of full lockdown as quickly as possible.

The current lockdown is certain to result in a lower rebound in economic activities in the second quarter, notwithstanding the huge 17.1% contraction in GDP during the same period last year after a six-week lockdown.

Yeah believes that 2.4 percentage points will be shaved off GDP growth for 2Q2021, based on the assumption of a daily loss of RM500 million. “If the lockdown eases after the 14-day period, 2Q2021 GDP growth is expected to remain strong at above 10% due to the low base in the previous corresponding quarter. However, if the lockdown is prolonged, the economic losses obviously will mount while company liquidations and retrenchments are expected to escalate,” he says.

“The recovery will be further delayed and become more uneven, with an even greater disproportionate impact on low-income households and micro, small and medium enterprises.”

Lee believes the growth momentum in 2H2021 will largely depend on the trend of infections and vaccination rate progress over the next two to four weeks of lockdown. “We are keeping our 2021 GDP baseline estimate of 4% for this year,” he says.

Fiscal deficit to be revised

Following the full lockdown, the government has doled out another stimulus package worth RM40 billion, named Pemerkasa+, with only RM5 billion of the total amount being a direct fiscal injection.

At a recent press conference, Finance Minister Tengku Datuk Seri Zafrul Aziz told reporters that there will “definitely be a revision” to the government’s fiscal deficit and statutory debt estimates following the lockdown and the RM40 billion stimulus package.

While the government has yet to provide an estimate on how the lockdown and additional stimulus package will affect the fiscal position, economists believe the budget deficit will breach 6% of GDP in 2021.

Lee sees the budget deficit being revised higher by 0.5 percentage points to 6.5%, reflecting the impact of higher stimulus spending, lower revenue and slower GDP growth. He also sees the government tapping into a mix of borrowings and reprioritising expenditure given the debt ceiling limit of 60% of GDP.

It is worth noting that Putrajaya has not said how the RM5 billion in direct fiscal injection is to be funded.

Yeah takes a slightly more optimistic view of the debt situation. He believes the economic recovery momentum has only eased and not stalled, owing to strong external demand that has generated significant export earnings for commodity exporters and manufacturers. This means government revenue collection is not likely to undershoot the initial optimistic budget estimates too widely, he says.

Nevertheless, the additional RM5 billion in direct fiscal injection will widen the deficit by an estimated 0.3% of GDP.

While the initial fiscal deficit target of 5.4% set for 2021 is unlikely to be achieved, Yeah believes the deficit will be close but not exceed the 6% deficit target achieved in 2020, given the global economic recovery and better prospects of containing the pandemic with the national vaccination programme.

Pemerkasa+ underwhelming?

The Federation of Malaysian Manufacturers says the assistance and initiatives announced fell short of the expectations of those impacted by the full lockdown, especially those unable to operate during this period. The federation is concerned that the lockdown will have a greater impact on businesses compared with its previous iterations as businesses have yet to recover from the previous lockdowns while their financial reserves, especially for SMEs, have been depleted over the past year.

Nevertheless, Nazmi believes the situation during the first MCO is vastly different from the current one. “For fiscal policy, we have systems in place to mitigate the lockdown through wage subsidies, cash handouts, SME financing and other measures. For monetary policy, we are at an ultra-low policy rate, coupled with various central bank policy instruments. On top of that, the public’s adaptability to the situation makes it less of a shock to the economy. As a result, we don’t see the impact being as strong as before,” he opines.

At this juncture, economists believe the only way out is to expedite the national vaccination programme and to inoculate as many people as possible.

“It is more important now to have a better coordinated virus containment strategy and better mobilisation of public and private healthcare resources to ramp up vaccination rates to achieve herd immunity. That will be the quickest way to avoid government expenditure shocks that will include the need for further stimulus packages moving ahead,” says Yeah.

 

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