This article first appeared in The Edge Malaysia Weekly on November 23, 2020 - November 29, 2020

THE drop in gross domestic product in the third quarter may have been smaller than projected, but economists say Malaysia’s recovery still has a way to go given the movement restrictions in the final last months of the year.

At 2.7%, the contraction was milder than the projected 4%, and indicates that the economy has emerged from its trough and is unlikely to repeat the sharp 17.1% plunge of the second quarter.

Even so, many see speed bumps ahead as the third wave of Covid-19 infections in the country led to the imposition of a Conditional Movement Control Order (CMCO) in a number of states, including the most productive, from mid-October to Dec 6.

These nine states and three federal territories account for 84% of Malaysia’s GDP, Maybank Investment Bank Research noted in a Nov 15 report.

Economists agree that the economic recovery ahead will be uneven given the resurgence of the virus and the near countrywide CMCO. They expect fourth quarter GDP to shrink around the same magnitude as the third quarter.

Bank Negara Malaysia estimates the economic cost from the current CMCO at RM17 billion to RM22 billion, significantly lower than the RM30 billion to RM45 billion during the initial MCO phase in March and April.

“Nevertheless, business and consumer sentiment has turned more cautious despite the containment measures being less stringent and economic activity being allowed to continue,” UOB Research says in a Nov 13 note.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s (ACCCIM) Socio-economic Research Centre (SERC), believes that economic recovery is likely to be affected in the final quarter, possibly extending into the first quarter of next year, depending on how the pandemic evolves and the availability of vaccines.

“The most important indicators to track are retail sales, footfall in the malls and retail outlets as well as the number of patrons in restaurants and eating places.

“Our channel checks indicated that footfall in the malls collapsed to 15% to 30% from 80% to 90% previously; retail sales dropped between 60% and 80% in October after the occurrence of a third wave of virus. Hotels’ average occupancy rate has fallen to around 20%,” he elaborates.

In a survey by the ACCCIM, Lee points to a bearish revenue outlook as more than 40% of respondents expect their revenue to drop more than 20% in 4Q2020 and 1Q2021. Close to half of the respondents, which are businesses operating in Selangor, Kuala Lumpur and Sabah, expect revenue to decline between 21% and 50%.

While existing businesses struggle with the fall in revenue as a result of the CMCO and cautious consumer sentiment, a surprisingly large number of new businesses (281,781) registered with the Companies Commission of Malaysia (SSM) between March and October.

During the same period, 31,190 business entities filed for cessation, SSM records show.

The high number of new businesses that registered could indicate that more are positive about the economic recovery. However, some observe that there is a lag in terms of the number of businesses ceasing operations as it requires months to wind down a business.

“Business closure in some cases is tantamount to a loss in the economy’s productive capacity as workers would take years to master certain skills while businesses would have invested a lot to innovate and perfect certain ways of doing business. This human capital accumulation may not be easily replaced in the short run even as more business registrations are occurring,” says Institute for Democracy and Economic Affairs (IDEAS) research manager Lau Zheng Zhou.

However, he does not discount that with changing consumer behaviour and new consumer trends in response to the pandemic, there could be new ideas and business models that will serve the needs of the market better — one plausible explanation for the increase in new businesses.

What is important now is the effectiveness of the ongoing CMCO in managing the third Covid-19 wave, says Lau, as this will weigh on how the Malaysian economy recovers moving into 2021.

“If the CMCO compliance is poor, we might see the possibility of a more stringent control measure being introduced, and that will result in an even steeper contraction in the economy,” he stresses.

Recovery depends on the containment of the virus and effective implementation of 2021 Budget measures and projects, Lee adds, noting that the external sector plays an important role in supporting recovery efforts.

“SERC has resisted the temptation of presenting a robust GDP estimate, putting it at 5% in 2021. We remain wary over the [developments in regard to the coronavirus] and the strength of recovery in advanced economies as well as the effectiveness of the Budget’s capital spending in 2021 amid lingering concerns over domestic political developments.

“It is better to have a conservative assumption and be pleasantly surprised on the upside. ‘Timely and targeted’ will need to be adapted to make the fiscal stimulus more effective and quicker to implement so that the impact feeds through to the economy, businesses and households,” Lee adds.

Apart from the pandemic, Maybank IB Research sees politics and policies as additional challenges to the economic outlook. It says the domestic political instability and policy uncertainty arising from the razor-thin majority of the Perikatan Nasional government in parliament are exacerbated by the risk of a political or legislative impasse should Budget 2021 not be passed when lawmakers vote on Nov 25.

“While there is the provision in the Federal Constitution via Article 102 where parliament can approve an interim budget to ensure the government will continue to meet obligations such as salaries, pensions and debt servicing as well as to ensure no disruptions to essential public services, there is the political risk of the voting on Budget 2021 being a de facto no-confidence vote on the PN government, with potential ramifications such as a change in leadership and government or a snap election. This adds to the already-fluid outlook from the pandemic,” opines the research house.

Should Budget 2021 fail to be passed in parliament, Lee believes that it will not only undermine investor confidence but also stifle the timely implementation of budget measures and spending programmes, all of which are critical to support the revitalisation of the economy.

Malaysia’s economy is forecast to grow between 6.5% and 7.5% in 2021, according to a finance ministry forecast.

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