This article first appeared in The Edge Malaysia Weekly on April 19, 2021 - April 25, 2021

A renewed spike in Covid-19 infections in recent weeks is sobering. Last week, the number of new daily infection cases breached 2,000 again, with Sarawak taking pole position with 960 cases on Friday.

Experts have warned that a fourth wave of Covid-19 infections may be looming in the country as the basic reproduction number (R-naught or R0) for Covid-19 infections has risen above 1.0 in recent weeks, indicating that the infections are spreading.

Although the National Covid-19 Immunisation Programme is underway in the country, many have expressed concerns that the vaccination rate is too slow. As at April 15, some 434,301 individuals had received both doses of the vaccine shots under the first phase of the programme while 671,589 individuals had received only the first dose, bringing the total number of doses administered in the country to 1.1 million.

The pace of economic recovery hinges on how quickly the immunisation programme is carried out. A slow rate of inoculations, coupled with the threat of a fourth wave of infections, could slow the anticipated rebound in economic growth. Bank Negara Malaysia’s projected GDP growth for the year stands at 6% to 7.5%, after a contraction of 5.6% last year.

Economists believe growth could come in below the central bank’s projections under such circumstances. However, they agree that a derailment of economic recovery is unlikely to happen as long as the country does not enter a strict lockdown, like it did in March 2020.

The likelihood of a complete halt to economic recovery is unlikely, says Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre. “As long as movements remain less restricted, the extreme ‘low base’ effect in 2Q2020 will give a strong lift to growth bouncing back in 2Q2021.”

Nevertheless, he cautions that 1Q2021 could still see sluggish growth.

Economists observe that growth in the second half of the year will depend largely on progress made in the immunisation programme.

Lee opines that the export-oriented manufacturing sector and the continued expansion of exports are expected to be a bulwark, holding up overall economic growth. Indeed, the strengthening global economic recovery, led by the US and China, will put Malaysia’s export performance in the spotlight.

But for economic growth to be durable, consumer spending and private investment need to be improved, in addition to the timely rollout of the vaccines, says CGS-CIMB Research economist Michelle Chia, who has pegged Malaysia’s GDP at 5.7% this year.

Dr Yeah Kim Leng, professor of economics at Sunway University, sees rampant workplace-related clusters that disrupt manufacturing production on a large scale, coupled with an inability to contain the pandemic, as the biggest risk to economic recovery.

“For now, it is a sprint to suppress the pandemic by securing sufficient vaccine supply and achieving herd immunity without resorting to lockdowns. It could turn out to be a marathon. The longer the pandemic persists or if the vaccine efficacy is low, it would subject the economy to periodic interruptions, depending on the virus infections’ trajectory,” he says.

Science, Technology and Innovation Minister Khairy Jamaluddin recently attributed the current pace of vaccination to more of an issue of “demand outstripping supply” at this juncture. He said Malaysia would start to get a steady stream of vaccine supply in June, based on the delivery schedule received from suppliers, at which point mass vaccinations would go full swing.

Khairy assured that supplies would be sufficient to ensure the nation hits 80% population target before the end of the year.

Undeniably, there are many moving parts, from the virus mutations to vaccine hesitation among the population. This has prompted Bank Islam (M) Bhd chief economist Dr Mohd Afzanizam Abdul Rashid to call for a more frequent review of the forecast numbers to ensure they remain realistic, as the lifespan of economic forecasts has become extremely short.

Although Covid-19 numbers and vaccination rates will have a major bearing on Malaysia’s economic performance, how China, the US, and other major trading partners in the region perform will also be key. “Their economic performance will be important to gauge the buoyancy injected by the external sector into Malaysia’s open economy,” says Yeah.

Another key indicator for growth is private consumption, which makes up about 60% of GDP. It is especially important, given how household income, purchasing power and consumer confidence have suffered because of the pandemic.

Labour market conditions will be among the indicators to watch as well, given their close links to economic health. In February, unemployment stood at 4.8%, having eased a little from 4.9% in January.

Lee expects the unemployment rate to improve slowly to 4.5% sometime this year, noting that the gradual pace is because of the long recovery in travel-related sectors and work-from-home arrangements, which have reduced demand for transport services. The tapering effect of government aid intervention is another factor.

As the government has loosened its purse strings considerably to salvage and support the economy amid the pandemic, the fiscal deficit is expected to rise to 6% of GDP this year from an earlier estimate of 5.4%. The estimate takes into account Pemerkasa, the latest stimulus package by Putrajaya, which includes a fiscal injection of RM11 billion.

The government has reiterated its commitment to fiscal consolidation. However, when such actions can be taken and at what pace depends on the extent of economic recovery.

“The government has committed to providing fiscal support throughout the pandemic, and we expect policymakers to pivot to fiscal consolidation when economic recovery becomes more entrenched, which could be in 2022 if global vaccinations are able to keep the Covid-19 pandemic in check,” says Chia.

Lee agrees. He expects fiscal consolidation will likely be pencilled into Budget 2022 to ensure a gentle landing when some of the one-off booster measures such as the Employees Provident Fund withdrawals, cash handouts and loan repayment assistance comes to an end this year.

“The bigger concern to fiscal consolidation is the slowness in the vaccination rate of the population amid still high new daily cases of infections, which require more extended fiscal support and financial assistance for some targeted sectors. This will mean more stretching of the fiscal balance sheet,” he says.

However, the elephant in the room is the possible general election that the prime minister has promised to hold once the pandemic is under control. Yeah believes that after the general election has taken place, the government of the day should consider more aggressive fiscal-tightening and revenue-boosting strategies.

“A more aggressive policy stance is needed to restore the country’s fiscal metrics, which have deteriorated further than those of its A-rated peers. After being downgraded to BBB by one of the three global credit rating agencies, the risk of a downgrade by the other two agencies has ratcheted up. More importantly, the government needs to rebuild its reserves and fiscal buffers to be ready to face another crisis,” he says.

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