This article first appeared in The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

WITH only one month to go before the third quarter of 2021 draws to a close, Prime Minister Datuk Seri Ismail Sabri Yaakob’s decision to reappoint Tengku Datuk Seri Zafrul Aziz as Finance Minister and Datuk Seri Mustapa Mohamed as Minister in the Prime Minister’s Department overseeing economic affairs last Friday (Aug 27) provides some reassurance that there will be no unnecessary delays to the tabling of the 12th Malaysia Plan (12MP) and Budget 2022, experts say.

“The main priority over the next 100 days for both Zafrul and Tok Pa [as Mustapa is fondly known] in their respective positions will be to emerge with a clear strategy and plan for restoring our economy in a post-pandemic Malaysia,” says Trica Yeoh, CEO of the Institute for Democracy and Economic Affairs (Ideas).

“Specifically, we would like to see the 12th Malaysia Plan being finally tabled in Parliament and passed, after much delay … Both documents, alongside the National Recovery Plan (NRP), must be aligned and provide clarity over how we can achieve economic recovery,” she tells The Edge. “As vaccination rates are steadily climbing, this presents an opportunity for our businesses to reopen and be revived, albeit within a rather dampened environment, as there will be significant costs to restart.”

Zafrul, who was also coordinating minister for Malaysia’s exit plan from Covid-19 under former prime minister Tan Sri Muhyiddin Yassin’s administration, is still expected to set the tone for Budget 2022 with a pre-budget statement soon.

The pre-budget statement was supposed to have happened by end-August before the previous Cabinet tendered its resignation after 17 months in office on Aug 16. Budget 2022 was previously slated to be tabled on Oct 29, after the tabling of 12MP on Sept 20. The dates had not been affirmed as The Edge went to print.

Still, in a note dated Aug 27, OCBC Bank economist Wellian Wiranto says: “[Zafrul’s] reappearance should be seen positively by the market, given his instrumental role in not only carrying out the existing fiscal plan but also to shepherd the new budget through the parliament in October.

“Changing the fiscal captain now is too tricky. He is also likely to spearhead efforts to raise the debt ceiling from the existing 60% of GDP, too, to win the government some wriggle room amid the considerable economic challenges posted by the virus resurgence. With cases and fatalities reaching yet another record high just yesterday (Aug 26), the need for yet more fiscal stimulus can never be dismissed altogether.”

UOB Bank Malaysia senior economist Julia Goh, who reckons that the reappointments “ensure broad continuity of economic policies that provides a sense of stability and certainty to Malaysia’s economic plans and recovery”, would be among those watching out for contents of that pre-budget statement — something that does not usually take place before the annual tabling of the federal government budget.

Among other things, she would be looking out for guidance on the fiscal gap for Budget 2022, with the deficit for Budget 2021 now expected between 6.5% and 7% of GDP. Guidance on the fiscal gap and debt levels in 2022, she says, would help bond players “size up the bond issuance for next year” apart from being a gauge on fiscal consolidation.

“Equity markets would focus on areas of spending, particularly development spending as infrastructure and investment activity resumes,” adds Goh, who also wants a better gauge of just how much allocations for assistance to targeted groups as well as broader consumer and business segments would revitalise spending in the economy. Just how much more emphasis the government would put on environment, climate change and ESG-related issues would also be of interest.

The guidance would be important to shore up confidence in Malaysia’s recovery from Covid-19, especially as Malaysia’s new official 2021 GDP forecast of 3% to 4% means that the economy is expected to see the slowest post-crisis rebound since the recession in 1985.

To avoid this, Malaysia’s GDP needs to grow at least 5.4% this year. At least two economists still think this is possible.

RHB Research chief economist Sailesh K Jha and senior economist Nazmi Idrus are among the minority of economists who kept their 2021 GDP forecast for Malaysia at 5.4% after Bank Negara Malaysia revised lower the official forecast from between 6% and 7.5% to between 3% and 4% on Aug 13.

“In our view, the economy could have bottomed out in July and early signs of recovery are evident as of the first week of August in the industrial and consumer sectors,” they wrote in a note dated Aug 13.

“We combine science with the art of forecasting, wherein we use close to real-time data (around seven days’ lag) to monitor the Malaysian economy. We find limited evidence that the Malaysian economy will contract in 3Q2021 and 4Q2021, which is what Bank Negara is suggesting for a second half of 2021 GDP growth estimate of 0.8% year on year based on the mid-point of their GDP growth forecast of 3% to 4%,” elaborates the RHB economists, who expect private consumption to recover in 2H2021 and the unemployment rate to ease to around 4%, from 4.7% in 1H2021 on the back of robust exports growth “and large parts of the economy reopening sooner rather than later”.

Given that Malaysia’s economy contracted 0.5% in 1Q2021 and expanded 16.1% in 2Q2021, back-of-the-envelope calculations show that Malaysia’s economy will grow only 3% for the whole of this year if the economy contracts 3.5% in the third quarter while showing flat (0%) growth y-o-y in the fourth quarter.

If Malaysia’s economy does not contract in the third quarter, growth for the whole year will exceed 4% if the economy expands only 1% in the last quarter, simple workings show.

RHB’s forecast of 5.4% can be achieved if the economy does not contract in the third quarter and rebounds up to 8% in the fourth quarter. A growth of 5.4% is also possible if the economy grows 3% in both 3Q and 4Q. If growth comes in at 1% for both quarters, Malaysia’s economy will grow 4.4% for the full year.

Malaysia will release 3Q GDP only on Nov 12, after the tabling of Budget 2022.

Much depends on the reading for July — which saw exports growing only 5% y-o-y due to the reimposition of the Enhanced Movement Control Order (EMCO) compared with 27.2% in June — as well as the strength of recovery for the rest of the year. Economists who lowered their forecasts after the official GDP forecast was revised lower pointed to the -4.4% reading for June before much of the Klang Valley — which accounts for around 40% of the country’s GDP — was put in much stricter movement controls in July.

As at Aug 25, however, Labuan had graduated to Phase 4 of the NRP, Perlis and Sarawak had graduated to Phase 3 whereas Penang, Perak, Kelantan, Terengganu, Pahang, Sabah and Negeri Sembilan were in Phase 2. While the Klang Valley, Johor, Kedah and Melaka were still under Phase 1, more businesses have been allowed to reopen even as more freedom is accorded to people who have been fully vaccinated.

Apart from how well Covid-19 is brought under control with rising vaccination rates, a crucial part to how strongly the economy can rebound in the last four months of 2021 would be the strength of domestic consumption. A big part of this would be the strength of the labour market — both employees and employers — and an environment that allows the safe resumption of consumer spending.

“Among the economic priorities over the next 100 days will be to address unemployment and underemployment and ensure that SMEs (small and medium enterprises) and their ecosystem — be it supply chains or sources of capital and the like — as the driver of the country’s productivity can be sustained and do not collapse before they have the opportunity to pick up again,” Idea’s Yeoh says.

While national oil company Petroliam Nasional Bhd (Petronas) is able to raise its dividend payment to the federal government to RM25 billion, up RM7 billion from the RM18 billion that was pencilled in when Budget 2021 was tabled last November, experts say the government will still need to make tough policy decisions on necessary fiscal expansionary measures that could make a huge difference in the strength of Malaysia’s recovery from Covid-19 as well as the country’s ability to deal with future crises.

“This will require a hard look at our less-than-adequate revenue base, which may include a discussion over restoring the Goods and Services Tax (GST) and introducing other forms of taxes such as a capital gains tax. Other innovative forms of increasing our revenue base will be necessary, to support national economic stimulus packages and social protection to those who fall between the cracks,” Yeoh says.

Beyond shoring up economic recovery post-pandemic, she asks that the government flesh out within their first 100 days the Perkukuh Pelaburan Rakyat (Perkukuh) programme announced by the previous administration on Aug 12 to reform the mandates of government-linked investment companies (GLICs) such as Khazanah Nasional Bhd, the Employees Provident Fund, Kumpulan Wang Amanah Pencen (KWAP), pilgrim’s fund Lembaga Tabung Haji and Permodalan Nasional Bhd (PNB).

“We hope to see the actual [more refined and sophisticated] policy document emerge. Apart from addressing GLICs, Perkukuh should also address a strategic plan towards the entire ecosystem of GLCs. This is an outstanding matter, and the government should seize this economic crisis as an opportunity to restructure the GLC ecosystem with the intention that is similarly pointed out in Perkukuh, which is to streamline these entities towards being more productive and efficient for the economy. Malaysia can ill-afford inefficient entities, and every ringgit counts,” Yeoh says, referring to the “first 100 days” timeline that all appointed Cabinet ministers have been given to prove their initial performance.

She reckons that the 100-day report card should also include a policy direction on Malaysia’s multilateral approach, for example, making a clear commitment towards ratification of the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). “These are two documents that the government has agreed to but has not fully dedicated time and energy towards making the changes necessary towards ratification. This includes amendments of specific laws, including labour laws, [and] bringing our standards up to international speed. I’m not saying we need to amend those laws now, but the government should provide a clear policy direction on its intention to do so.”

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