This article first appeared in The Edge Malaysia Weekly on July 5, 2021 - July 11, 2021

THE white flag campaign may have made the headlines and gained traction on social media last week but the surprise RM150 billion Pemulih economic stimulus and recovery package announced on June 28 signalled that Malaysia still has ammunition to fight the pandemic.

That’s important as Malaysia desperately needs to recover from the Covid-19 hit so that the people and businesses too can heal and carry on the race with hope for a better tomorrow.

While the direct fiscal injection for Pemulih was only RM10 billion, the fact that a RM150 billion package (about 10% of gross domestic product) was drawn up within a month of the RM40 billion Pemerkasa+ announcement on May 31, plus the arrival of more vaccines last week, helped renew hope even as more movement restrictions had to be imposed in Selangor and Kuala Lumpur, which make up more than one-third of the country’s GDP.

There is hope that Malaysia can meet the threshold of having at least 10% of the population receiving two doses of vaccine by mid-July to facilitate the transition from Phase 1 to Phase 2 of the National Recovery Plan, which will allow more businesses to reopen under the positive list — provided that the number of new daily cases falls below 4,000 and Intensive Care Units are not overwhelmed.

Our back-of-the-envelope calculations indicate that the 10% threshold is possible within a fortnight and the vaccine supply to cross it is already here. Appointments for the second dose of the AstraZeneca vaccine, for instance, were sent out within hours of the one million doses of the vaccine arriving at the Kuala Lumpur International Airport (KLIA) from Japan at 5.20pm on July 1. Those one million doses alone are enough to cover around 3% of the population with one dose. Malaysia already had more than 2.39 million people or 7.3% of the population who had received two doses of vaccine as at July 1, with 263,012 doses administered that day. Another one million doses of the Pfizer vaccine were slated to arrive on July 2, as The Edge went to print.

It is the transition from Phase 2 to Phase 3, which is targeted for end-August, that businesses want to happen much earlier, given that almost all economic activities (except negative list) will be allowed alongside more freedom on social activities. Phase 3 — which requires 40% of the population or some 13.1 million people getting two doses of vaccine — is also when parliament is expected to reconvene, according to Prime Minister Tan Sri Muhyiddin Yassin. This would allow the tabling of Budget 2022 as well as the 12th Malaysia Plan (2021-2025), which had been pushed to the second half of the year.

There is no denying the government’s fiscal space is tight and there is a need to find new revenue sources. A number of economists had already signalled the need for fiscal rules to be loosened further to allow more borrowings to be made to give an extra boost to the people, businesses and the economy.

Malaysia needs more things to be done right. Last Tuesday (June 29), Finance Minister Tengku Datuk Seri Zafrul Aziz told reporters that the government would be revising lower its official 2021 GDP forecast of between 6% and 7.5% when the second quarter GDP reading is released on Aug 13. He had already signalled the possibility of a downward adjustment on June 1 as the country went into the so-called third Movement Control Order (MCO 3.0) period that is estimated to cost the economy about RM1 billion a day. A new fiscal deficit target — which is expected to be wider than the current 6%, owing to the downward revision in GDP — would also be announced on Aug 13, Zafrul told reporters. He did add, however, that the Pemulih stimulus package is expected to lift Malaysia’s economy by 2%.

“Direct fiscal injection of RM10 billion, together with RM5 billion from the Pemerkasa+ package, may push the fiscal deficit to 7% of GDP this year from the 6% that was planned,” OCBC economist Wellian Wiranto told clients in a June 29 note, but went on to say that the government “may dip into other funding channels to limit bond supply, in part due to the persistent negative outlook from Standard & Poor’s”.

There are those who reckon that more aid needs to be given fast to prevent greater damage to the economy. The stricter lockdown in June is likely to have nudged Malaysia’s GDP growth for the second quarter to single digit, say economists who had already revised lower their growth forecasts for 2021 even before the World Bank cut its forecast for Malaysia’s GDP to 4.5% on June 23 from 6% in March and 6.7% in January.

Though not high double-digits as some had hoped, Malaysia’s second quarter growth will still be positive year on year — the first positive after four straight quarters in the red — given that the economy contracted 17.2% in 1Q2020. Malaysia’s economy contracted 0.5% in the first quarter of this year (0.7% in 1Q2020) but GDP growth rebounded from -3.6% in February to 6% in March.

More targeted aid may well be necessary to ensure that the economy is ready to bounce back stronger once vaccinations reach the required thresholds to allow greater freedom. After all, it is only with vaccinations and effective testing and containment that all countries — including Malaysia — can hope to safely reopen without tumbling back into more lockdowns. “No amount of fiscal largesse would be enough to support endless lockdowns,” an economist rightly puts.

Zafrul maintained last week that there would be no need to further raise the self-imposed debt ceiling above 60% of GDP, although a number of economists reckon that to be necessary should the people and economy require more aid.

Others, however, believe that the government has other avenues that it can still tap to deliver further stimulus without raising its debt ceiling, even as it ramps up vaccinations.

In April, for instance, the government tapped RM5 billion from the National Trust Fund (KWAN) to pay for Covid-19 vaccines and vaccine-related expenses. While controversial, most do not rule out the possibility of the government further tapping KWAN should the situation warrant it. When withdrawing RM5 billion from the fund, Zafrul pointed out that the government was only taking a portion of the RM9.1 billion in returns on investments and not the RM10.4 billion that Petroliam Nasional Bhd (Petronas) had contributed to KWAN over the years that had grown to RM19.5 billion as at end-2020.

While most of the RM200 billion that the government has yet to spend is likely to go to sticky operating expenses such as emoluments, pension and debt service charges that make up a sizeable chunk of operating expenses, there is the option of tapping KWAP, which reportedly had RM140 billion in assets under management as at end-June 2020, for more as it is government money grown to aid public pension obligations and not members’ savings.

There is also the option to tap Petronas for higher dividends, given that only RM18 billion had been pencilled in for Budget 2021, which assumed oil prices at US$42 per barrel — at least US$30 per barrel lower than what Brent crude oil was fetching at the time of writing.

Bank Negara Malaysia also has the capacity to provide more aid to small and micro businesses, a seasoned economist says, when asked whether unconventional monetary policy would soon be necessary to boost the government’s hand to lift the economy.

“That may be necessary if helicopter money is absolutely necessary to revive the economy … I don’t think we have reached that state yet [even though Bank Negara did make more bond purchases in the secondary market]. But third quarter growth is crucial [for recovery] and the government can do more to help businesses and the people,” the economist adds, referring to the increase in the central bank’s holdings of Malaysian government debt paper since March 2020.

From RM1.74 billion in February 2020, Bank Negara’s holdings had jumped to RM9.55 billion in April 2020 and had inched higher to RM11.46 billion in March this year. But they had come off slightly to RM11.43 billion in April and May, central bank data shows.

Quelling talk that quantitative measures had begun in Malaysia with a jump in its asset purchases, central bank governor Datuk Nor Shamsiah Yunus told The Edge last November that the bank sees no pressing need to employ unconventional monetary policy to support the government’s fiscal spending to battle the pandemic.

That a loan moratorium is being extended to all who ask for it under Pemulih also removes the need for Bank Negara’s monetary policy committee to further trim its record-low benchmark rate from 1.75% on July 8, especially with some regional peers already mulling normalising towards the later part of this year.

To be sure, the headline RM150 billion figure for Pemulih was greatly bolstered by an enhancement to loan moratoriums (RM80 billion) and allowing more withdrawal of retirement savings from the Employees Provident Fund under i-Citra (RM30 billion). The actual boost from i-Citra may well fall short of RM30 billion should members either choose not to take out more retirement savings or no longer have that much to take out (see “i-Citra may fall short of pencilled RM30 billion boost to economy” on P14).

“There are those who think Pemulih is only enough to keep things afloat rather than provide any real boost that is necessary to the economy. But will the country really be better off if the government dishes out helicopter money in a big way to stimulate consumption? Debt, in one form or another, needs to be repaid eventually and [the ringgit is not a reserve currency]. Malaysia needs to do better, for sure, but it has always managed to survive [despite the circumstances] and it has not run out of resources yet,” says one Malaysian.

A Pemulih+ may already be underway.

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