The State of the Nation: Economists welcome stimulus measures, with or without virus outbreak

This article first appeared in The Edge Malaysia Weekly, on February 10, 2020 - February 16, 2020.

Members of a neighbourhood committee register a local and ask about his travel history in Jiangxi province, China. If the coronavirus outbreak worsens for an extended period, it could cripple the country’s consumer demand and disrupt global supply chains.

Photo by Reuters

Source: IHS Markit

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WITH the death toll from the coronavirus (2019-nCoV) in China reaching 636 as at Feb 7, and total infections surpassing 31,000 people, concern over the economic fallout has prompted various governments to announce relief measures to soften the blow.

Not to be left out, last week, Finance Minister Lim Guan Eng announced that the Cabinet had tasked the ministry with planning a stimulus package that will mitigate the potential impact of the outbreak on the Malaysian economy.

“The ministry will organise a discussion with the Ministry of Economic Affairs, Ministry of Tourism, Arts and Culture and Ministry of International Trade and Industry as well as industry players and related services companies to obtain input for its planning of the economic stimulus package,” he said in a statement.

It was previously reported that, due to the virus outbreak, the MoF intends to bring forward an economic stimulus package initially planned to address the potential impact of the US-China trade war.

According to Ministry of Health (MoH) data on Feb 7, 12 people in Malaysia have tested positive for the virus — 10 are Chinese citizens and two are Malaysians.

Economists concur that stimulus measures targeted at sectors directly impacted by the virus would be a timely move. Many expect the measures to be similar to those rolled out during the Severe Acute Respiratory Syndrome (SARS) outbreak in 2003.

However, they also note the financial constraints the government could be facing if more stimulus is needed to help the economy weather the outbreak.

Tourism and its related industries will be one of the key sectors that will bear the brunt of the outbreak, while manufacturers and exporters could also suffer from reduced trade activity and a slower economy.

“The measures should roughly be the same type of stimulus that was seen in 2003, as the intention would be to help the sectors most impacted by the outbreak,” says Affin Hwang Investment Bank Research chief economist Alan Tan.

In 2003, recaps UOB Global Economics & Markets Research research senior economist Julia Goh in a report, the government announced relief measures to mitigate the impact on the retail, transport, hotel and food and beverage sectors. The residential property sector benefited while small and medium enterprises were also given credit financing.

“As the risks from the virus outbreak widen, the government would need to consider targeted fiscal measures to support the hardest hit sectors and support economic growth. Further support from fiscal contingency measures will help to speed up the recovery once the outbreak recedes,” Goh tells The Edge in an email reply.

In her Jan 31 research note, Goh highlights that under Budget 2020, RM3.2 billion had been allocated as a pre-emptive measure to support the economy. At the time, the concern was about the trade war between the US and China.

However, Goh also says, should the risk from the virus outbreak increase, there may be a need to consider additional fiscal measures which would be “challenging” for the government given the fiscal constraints. “In 2003 (during the SARS outbreak), out of the RM7.3 billion fiscal package (1.7% of gross domestic product), about RM1.7 billion was direct spending by the federal government while the remaining RM5.6 billion came from Bank Negara Malaysia and other financial institutions, including Bank Pertanian and Bank Simpanan Nasional.”

It is worth noting that while there was a loss in government revenue of RM800 million for the provision of incentives and tax exemptions, according to Goh, the fiscal deficit narrowed to 5% of GDP from 5.3% in 2002, due to an expanding economy.

During the SARS outbreak, the fiscal support package comprised 90 measures, which included short-term relief to mitigate the impact on the retail, transport, hotel and food and beverage sectors. The residential property sector also received support to spur demand for low and medium-cost housing, SMEs were given credit financing and there were measures to strengthen new growth areas for domestic and foreign investment.

Tan says it is important for the fiscal stimulus to take place soon to stimulate economic growth, which will then translate into revenue for the country, which can be used to facilitate development expenditure.

“Even in the absence of the outbreak, the trade war has caused a drag on the economy. This has affected business sentiment and slowed private investment. I believe business confidence will improve once we see an acceleration in the implementation of development expenditure,” says Tan.

He believes the economy needs more private investment activity, which was weak in the second half of last year.

Where monetary policy is concerned, Tan sees the central bank keeping the overnight policy rate (OPR) at 2.75% after the 25-basis-point reduction last month.

The Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-economic Research Centre executive director Lee Heng Guie takes the same view, saying 2.75% would be sufficient for now to provide “insurance” to protect economic growth.

However, he adds that the government must expedite the implementation of projects and programmes, as well as identify some quick-gain projects for fast-track implementation.

Lee suggests that some measures could be undertaken for the domestic tourism-related sector, such as providing tax relief and allowance for the hospitality sector while banks could provide three to six months debt servicing relief.

On the private consumption side, Lee suggests that there could be an additional e-wallet top-up to encourage e-payment spending and a voluntary 2% reduction of the employee contribution rate to the Employees Provident Fund to increase disposable income.


Recovery of manufacturing sector delayed?

After a positive showing in December last year, when Malaysia’s manufacturing Purchasing Managers Index (PMI) moved up to 50 points for the first time in 15 months, it fell again last month to 48.8. Now, the added pressure of the outbreak in China could slow down the trajectory of recovery for the sector.

It is worth noting that China is Malaysia’s largest trading partner, contributing 17.2% to total external trade last year. Furthermore, exports of electrical and electronics products to China made up 13.3% of total E&E exports and 35.5% of Malaysia’s exports to China.

Lee believes that if the coronavirus outbreak in China worsens for an extended period, it could cripple the country’s consumer demand and disrupt global supply chains. Then, the impact on the manufacturing sector would be inevitable.

“Some of the locked down cities are hubs for technology manufacturing, logistics and automotive and transport, hence, the extended holiday break and restricted movement of people would disrupt supply chains,” he says.

Lee believes that while global semiconductor sales are expected to turn around this year, backed by the development of 5G and wireless technology demand, the outbreak could dent sales growth in the near term.

“The surge in demand for medical gloves and face masks would lead to higher production and help to partially offset a temporary disruption in the production of E&E,” says Lee.

RHB Research economist Ahmad Nazmi Idrus acknowledges that a near-term risk is present but believes that as long as production is not substantially affected, manufacturing should gradually improve.

Lee says the manufacturing sector should return to normalcy in 2H2020, assuming the outbreak stabilises towards the second quarter.



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