This article first appeared in The Edge Malaysia Weekly on April 6, 2020 - April 12, 2020
MALAYSIA still has a fighting chance of escaping a recession this year, according to Bank Negara Malaysia’s 2020 GDP growth projection range of -2% to 0.5% versus 4.3% recorded in 2019.
Governor Datuk Nor Shamsiah Mohd Yunus says the central bank will use its “policy arsenal flexibly” alongside accommodative monetary policy to complement the government’s fiscal policies to cushion the adverse effects of the Covid-19 pandemic — as demonstrated in the recent RM250 billion economic stimulus package where excess buffers in the banking system are being utilised to support lending and extend cash flow.
“Ultimately, the aim of the recent stimulus package is to mitigate the impact of Covid-19 and avert large-scale and lasting impact on people, businesses and the economy,” she said in the central bank’s first virtual press conference in conjunction with the release of its 2019 annual report last Friday, noting that more measures will be taken, where necessary.
If the central bank’s projection — which has private consumption growing 4.2%, albeit slower than last year’s 7.6%, and the services sector booking positive growth of 2.3% owing to the stimulus measures — looks a tad optimistic, its critics probably hope to be wrong. It would mean that the Covid-19 pandemic-induced pressure on people’s livelihoods, businesses and the economy could ease within two months.
Incidentally, the World Health Organization (WHO) on April 2 said it expects the number of Covid-19 cases in Malaysia to peak in mid-April and that there are signs of a flattening of the infection curve as travel and movement curbs have helped curtail the spread of the virus.
Various degrees of lockdown have already begun globally. Wuhan — the Chinese city in Hubei province where the novel coronavirus first emerged late last year — managed to partly reopen in late-March after imposing a two-month lockdown on its 11 million population from late January.
In Malaysia, the virus had infected at least 3,333 people and claimed 53 lives as at April 3, being 10 weeks since the first (imported) case emerged here on Jan 24 and about two months since the first Malaysian tested positive for Covid-19 on Feb 4.
The central bank’s GDP forecast assumes a gradual decrease in the number of new cases after reaching a peak within four months (by late May) and successful containment within nine months (by late October), according to slides presented at the virtual media conference. Other key assumptions include Brent crude oil at US$25 to US$35 a barrel, liquefied natural gas at RM1,150 to RM1,250 per tonne and crude palm oil at RM2,000 to RM2,200 per tonne.Headline inflation is expected to average between -1.5% and 0.5% amid low oil prices and subdued demand.That leaves ample room for at least a 25bps or up to 50bps cut in the overnight policy rate by May 5 from 2.5% now.
The GDP forecast also assumes the economy operating at 45% capacity during the four weeks of the Movement Control Order (MCO) that began on March 18 — the day after the first two deaths were reported — and ends on April 14, if not extended again.
Your guess is as good as mine
To be sure, the depth and duration of the shock from the pandemic is “unusually uncertain”, notes the World Bank, which released its April 2020 report on East Asia and Pacific (EAP) Economic Update just two days earlier. It sees Malaysia’s economy declining by 0.1% in the baseline scenario and 4.6% in the lower-case scenario. Growth in China is projected to decline to 2.3% in the baseline scenario and 0.1% in the lower-case scenario from 6.1% in 2019 while the rest of the developing EAP region is projected to slow to 1.3% in the baseline scenario and decline by 2.8% in the lower-case scenario from an estimated 4.7% in 2019.
“With so many factors changing on a daily basis — from oil price to growth outlook globally, and from virus case counts to the length of MCO domestically — economic forecasts, to be extremely frank, have been rendered largely meaningless,” Wellian Wiranto, economist at OCBC Bank Treasury Research in Singapore, candidly tells clients in a March 30 note. From what he thought was an already conservative forecast of 4.2% growth for Malaysia late last year (when the government’s projection was 4.8%), his forecast was subsequently trimmed to 1.7% and thereafter to a “working range” of -2.5% to 1.5%. “If the virus outbreak situation does not come under control in major export markets such as the US, Eurozone and Japan in the coming weeks, the lower end of the forecast range would look more and more likely by the day,” he adds.
Research houses with more conservative 2020 GDP forecasts for Malaysia include CGS-CIMB Research (-2.3%), UOB Bank Malaysia (-3.5%), AffinHwang Research (-3.5%). The more optimistic include Hong Leong Investment Bank Research (-2%), RHB Research (0%), DBS Bank (-0.5%) and AmInvestment Bank Research (0.4%), according to a quick compilation at the time of writing.
Only 4% unemployment?
Pointing to the sharp jump in jobless claims as layoffs escalate from mandatory closures of non-essential businesses in the US and Europe, some economists see upside risk to the central bank’s unemployment projection.
While admitting that labour conditions would be weaker, given that unemployment rises as economic growth falters, Bank Negara only expects unemployment to rise to 629,000 or 4% this year — pointing out that this is already higher than the 3.7% seen during the global financial crisis and 3.2% amid the Asian financial crisis in 1998. The number of unemployed stood at 511,700 this January with the unemployment rate at 3.2%.
Positive private consumption
A number of economists see private consumption coming in significantly weaker than the central bank’s projection, among other things. Many expect global sentiment to remain cautious until a vaccine is found — something that could be a year away.
While speedy disbursement of cash transfers to the lower and middle-income households would help, there are already missed opportunities due to the need for social distancing to contain the spread of Covid-19.
Not only has the outbreak whacked the annual increment and bonus period for the office crowd but small traders at open-air Ramadan bazaars would likely also have to be another necessary casualty, given that some buyers may not want to fork out a delivery fee for small items even if sellers are connected to buyers online. At least six states — Selangor, Melaka, Terengganu, Negeri Sembilan, Penang and Kedah — have reportedly cancelled the fixture during the Muslim fasting month (which begins on April 23) to prevent crowds.
With private consumption being a key engine of growth for Malaysia for some years now, it is little wonder that Shamsiah said Malaysia “needs private consumption to recover”.
“I encourage everyone to spend wisely and prudently,” she said after asking that everyone work with the government to contain the public health emergency by adhering to social distancing and hygiene rules. Small and medium businesses, she said, should maximise the central bank’s RM300 million automation and digital facility fund, through which financing of up to RM3 million is available at 4% per annum, to leapfrog to a new level of growth when the world returns to normalcy.
“These are extraordinary times in Malaysia, and in fact, the world. All of us at the very basic level are a mother, a parent, a child, a sibling, a spouse and all of us are worried about the impact of this virus on the health of our family. So the faster we can flatten the Covid-19 curve, the faster we can speed up the recovery and the faster we can revert to our normal lives. Every one of us can do our bit. Please observe the MCO, please stay at home,” she said, not forgetting to thank “all medical security frontliners working tirelessly to keep us safe”.
For private consumption to remain strong, cash transfers alone will not be enough. Policymakers will need to ensure that the vast majority of businesses are able to secure the necessary aid in a timely manner to be able to keep employees on their payroll. Policy failure on this front would risk lasting damage to people’s livelihoods, businesses and the economy.
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