This article first appeared in The Edge Malaysia Weekly on August 24, 2020 - August 30, 2020

CLEARLY, economics and politics cannot be seen in isolation. Several opposition lawmakers, including former finance minister Lim Guan Eng, last week voiced their support for the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Bill 2020 when the bill was tabled for second and third reading in parliament.

Their support, however, was on condition that the RM45 billion direct fiscal injection by the federal government be doubled to RM90 billion.

The RM45 billion or about 3% of gross domestic product (GDP) mentioned in the bill to set up the Government Covid-19 Fund refers to the amount that the federal government needs to directly fund the RM295 billion (19.5% of GDP) headline figure for the National Economic Recovery Plan (Penjana) and Prihatin Rakyat Economic Stimulus Package (Prihatin). The bill will also temporarily increase the country’s self-imposed statutory debt limit under the Loans (Local) Act 1959 and the Government Funding Act 1983 from 55% to 60% of GDP through year 2023.

Citing Malaysia’s second-quarter GDP contraction of 17.1% as being worse than the Philippines’ -16.5%, Singapore’s -13.2%, Thailand’s -12.2% and Indonesia’s -5.3%, Lim urged the government to double fiscal pump-priming as soon as possible to aid the people and businesses. “The danger of waiting until next year is that we don’t know how many would have lost their jobs, how many businesses would have shuttered and how many cannot be resuscitated again by then and it will be too late. That’s why we need to double the amount now and not wait until next year,” Lim said in Malay in parliament on Aug 18.

Noting how the RM45 billion is expected to shore up the country’s fiscal deficit to between 5.8% and 6% of GDP this year, Lim said doubling the fiscal injection to RM90 billion would nudge the fiscal deficit to 9% of GDP — a figure that is still lower than the 15.1% to 16.2% seen in 1981 and 1982 and one that pales relative to the importance of saving the jobs and livelihoods of fellow Malaysians during these extraordinarily tough times.

Adding that there is ample liquidity in the domestic market for the government to borrow another RM45 billion, Lim also pointed out how Singapore just added another S$8 billion (RM24.4 billion) in spending on Aug 17 — including an extension of up to seven months to its Jobs Support Scheme to cover wages up to March 2021 amid the protracted downturn — to bring its total stimulus since February to S$100.5 billion or 20.8% of GDP.

While the unemployment rate in Malaysia had improved to 4.9% in June from 5.3% in May and 5% in April, Lim went on to cite how 84% of private-sector wage earners saw a salary cut in April and that private sector wages fell 5.6% year on year in the second quarter after rising 20.1% in the first quarter.

Weighing in on the argument for more stimulus was Ong Kian Ming, former deputy minister of International Trade and Industry, who argued that the existing Wage Subsidy Programme (WSP) “could have saved more jobs if the amount of subsidy were higher, similar to the amount given in Singapore”.

According to him, two million or 53% of Singapore’s 3.8 million workforce received S$16 billion under the Jobs Support Scheme that saw 75% of recipients’ wages paid by the government while only 2.6 million or 25% of Malaysia’s 15.2 million workforce received the wage subsidy. The unemployment rate in the city state also only increased from 3.3% in the first quarter to 3.9% in the second quarter, compared with 3.5% in 1Q2020 and 5.1% in 2Q2020 in Malaysia, Ong added in a statement dated Aug 21 — urging that Malaysia expand and extend its WSP that is scheduled to expire in December 2020.

Economists contacted reckon that the government must determine if additional stimulus is necessary by analysing data available to them.

“We think any further stimulus and assistance should be targeted and evidence-based, given that some parts of the economy have recovered,” says Julia Goh, senior economist UOB Bank Malaysia Bhd.

“At this point, the data points and trends suggest the economy is emerging from a record recession in 2Q2020,” she says, referring to how GDP was -28.6% in April, -19.5% in May and -3.2% in June, among other things.

“The latest indicators are certainly encouraging but the recovery has been uneven, with only a handful back to full capacity while others are still operating below pre-MCO (Movement Control Order) levels. While the initial rebound appears like a V-shaped bounce, the recovery path from here is expected to be milder depending on the state of the pandemic. The next hurdle will be the end of the blanket loan moratorium, though an extension on a targeted basis provides some relief,” she adds.

Another seasoned observer reckons that a drastic increase in the fiscal deficit to 9% from 6% this year could draw negative rating actions as it could cause the public debt ratio to jump above 60% by end-2020. “While saving businesses and jobs should be one of the topmost priorities, the doubling of direct fiscal injection to RM90 billion or 9% fiscal deficit still requires careful deliberation. The government has other non-fiscal measures to support businesses and the economy.”

While these are undoubtedly extraordinary times, and the central bank is projecting a sharp rebound in Malaysia’s GDP growth of 5.5% to 8% in 2021 [from -3.5% to -5.5% in 2020], it will not be as easy for the country to “grow out of debt” in the coming years compared with in the 1980s and 1990s when fast-growing economies could see their GDP double in size within five to six years. Malaysia’s growth, while impressive, has been slowing in pace, an analyst says.

“I agree sovereign rating shouldn’t be seen as the only yardstick in judging a country’s credit standing and macroeconomic fundamentals, but sovereign rating still matters … Malaysia’s reasonably deep capital market is constantly flagged as a major strength. Having said this, we shouldn’t forget that there is a large presence of foreign investors in ringgit government bonds and MGS (Malaysian Government Securities) yield curves will reprice according to supply-demand dynamics,” he says.

“A 9% [fiscal] deficit will mean that the net supply of government bonds is three times the amount in normal years. If the market reprices the yields higher, the government’s cost of debt will also go up,” he adds, reiterating the need for careful deliberation. “There could be other market and future implications … It might be good to leave some fiscal space for next year or any unexpected events, including the possibility of a second wave of infections that require another round of movement restrictions.” There are those who reckon it is better to be preventive and err on the side of caution — if the call to save jobs and businesses rings louder than the need to be prudent.

“In times of an extraordinary economic crisis, fiscal deficit may not matter much as government spending and fiscal assistance are needed to mitigate the profound economic damage. An additional direct fiscal injection of RM45 billion (via Prihatin and Penjana), together with the original budget allocation for 2020, has pushed this year’s budget deficit to at least 6% of GDP,” says Lee Heng Guie, executive director of Socio-Economic Research Centre (SERC), an independent non-profit think tank established by The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM).

The temporary raising of the self-imposed statutory debt ceiling from 55% to 60% through 2023, Lee says, gives the federal government the capacity to borrow an additional RM60 billion to RM75 billion, based on a nominal GDP value of between RM1.4 trillion and RM1.5 trillion. As at end-June, direct federal government debt stood at RM823.8 billion or 53.2% of GDP, according to Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz.

“A higher debt limit implies that the government is prepared to go for another year of expansionary and targeted budget deficit for 2021 to revitalise and sustain the current signs of economic stabilisation as the worst economic contraction has hit the trough in 2Q2020,” Lee adds, noting that some of the RM45 billion allocation may be carried forward to 2021.

Given that unemployment rates are a lagging indicator, he reckons that an extension of the WSP to help retain workers and ease employers’ burden “can be considered”, especially for sectors such as tourism, which would take a longer time to recover.

While noting that the Employment Insurance Scheme (EIS) data shows that the number of employment losses “has seemingly come off the peak to 16,660 persons in July from 18,579 persons in June” and further eased to 6,073 persons for Aug 1 to 17, businesses, Lee says, “still face challenges of the 3Cs — cash flow, credit and costs — as they slowly mend the collateral financial and economic damage” from the pandemic.

Here businesses may well draw some comfort from the words of Zafrul who noted in parliament last week that “while there might be difference in opinion, all parliamentarians share a common goal of ensuring the people’s welfare and well-being of the country”. He has previously said that while they are keeping watch on the fiscal space, the government’s priority is to protect the people and businesses and that the extent of debt that the government is willing to take for necessary fiscal injections is  up to a level where it reckons it can no longer repay its debt.

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