This article first appeared in The Edge Malaysia Weekly on June 14, 2021 - June 20, 2021

AT a time when hopes are pinned on Malaysia’s export sector to deliver the results needed to meet the GDP target, the high number of Covid-19 infections and an ensuing lockdown have proved to be disruptive to economic recovery.

Putrajaya’s implementation of a Full Movement Control Order (FMCO) from June 1 to 14 and its nationwide freeze on non-essential movement has taken the wind out of export sales. At the same time, limitations imposed on essential sectors have hurt entire industries and supply chain operations.

Following the announcement of a full lockdown, automobile manufacturers Toyota and Honda as well as brewer Heineken were among the many companies that confirmed they would shut down production for the fortnight. Under the FMCO guidelines, auto manufacturers and steelmakers are permitted to continue operating but may only allow 10% of their employees to work, while electronics, chemical and pharmaceutical companies are limited to 60% of their workforce.

While the decision-makers intended to allow some level of production in this lockdown, trade associations have pointed to the impracticality and lack of productivity given the incomplete workforce in the manufacturing sector. This will ultimately have a significant impact on Malaysia’s overall trade and exports.

Data provided by the World Bank’s World Integrated Trade Solutions show that Malaysia’s manufacturing sector is deeply embedded within the international supply system, with 28.3% of the country’s output related to the global value chain in 2019.

Professor Dr Yeah Kim Leng, director of the economic studies programme at the Jeffrey Cheah Institute on Southeast Asia at Sunway University, tells The Edge that disruptions to the global supply chain can bring about wide-ranging consequences.

Apart from reducing exporters’ income and foreign exchange earnings, other negative repercussions include global value chain players shifting to suppliers from other countries, reduced investments by existing multinational corporations and potential foreign investors, and relocation of production facilities to other countries.

Given the existing shortage of chips in the auto sector, the current movement restrictions on semiconductor-related manufacturers have exacerbated the global supply shortages.

Penang, as a key semiconductor hub in the region, had its multinational companies running at top capacity to meet clients’ demands, says Datuk Seri Lee Kah Choon, InvestPenang special investment adviser to the chief minister of Penang. He adds that the way forward is now blurred because of the many restrictions in place.

If prolonged, the halt in overall production could lead to higher prices for end-consumers and reduced profits or even losses for producers, says Yeah. “Uncertainty over the duration of the shutdown is equally disruptive to marketing, sales and production planning. It is imperative that such uncertainties be minimised as much as possible with open channels of communication, consultation and coordination so that the local and international supply chains can be normalised quickly.”

Meanwhile, small and medium enterprises (SMEs) in the non-essential service sector have been experiencing troubles too, as orders and payment collections are pending amid the lockdown.

SME Association of Malaysia national president Datuk Michael Kang cautions that manufacturers and traders in the furniture sector with pending shipments overseas can only rely on the goodwill and understanding of their customers.

A fresh survey conducted by the Federation of Malaysian Manufacturers (FMM) on the impact of the two-week Phase 1 lockdown on businesses found that unmet sales orders and export obligations have resulted in potential legal repercussions and fines as well as requests for discounts and rebates. To aggravate matters, suppliers expect payments as scheduled even though Malaysian players face tremendous constraints in their cash flow during this period of reduced or no operations.

“While employment remains intact for now for the majority, some are considering measures such as unpaid leave or pay cuts to continue preserving jobs,” says FMM president Tan Sri Soh Thian Lai.

The series of lockdowns that have been implemented since last year have been effective in bringing down the infection rate but they are not sustainable over the long term as the government has to take into consideration the various health, social and economic concerns when deciding to lift the lockdowns and movement restrictions, says Soh.

The high number of Covid-19 clusters in the manufacturing and construction sectors have fuelled calls for stricter lockdowns. Ministry of Health (MoH) data show that the manufacturing sector alone registered 48% of the clusters between Feb 22 and April 2.

While infections in a factory may be unavoidable despite adherence to the standard operating procedures (SOPs) imposed by the government, industry leaders find that a blanket shutdown or arbitrary limit to operating capacity is a costly response, even for a quarter.

“Allowing firms greater flexibility to determine the Covid-19 infection risk to workers in tandem with the ability to ensure full compliance with SOPs, while taking full responsibility for the welfare of the staff should they be infected, would be a more balanced approach,” Sunway University’s Yeah suggests.

“Many factories in Penang practise very strict SOPs that are beyond the MoH’s requirements The key lies in the authorities’ strong understanding of the source of infections and implementation of precise SOPs with no confusion and flip-flops as well as speedy contact tracing and testing. If we falter economically, it is not due to our inability to compete globally, but rather our failure in the vaccination race,” InvestPenang’s Lee asserts.

He adds that targeting the source is critical, otherwise the nation would have wasted time and resources and still be unable to contain the pandemic.

Apart from the need to boost the vaccination rate, the members of trade associations are mooting for private vaccination to be allowed for entire organisations.

“Given the susceptibility of infections among manufacturing workers, frontliners need to be vaccinated first. Manufacturing companies are willing to pay hundreds of thousands of ringgit to protect their workers and curb the spread of the disease,” says Kang, adding that a new norm of business operations such as physical distancing and stringent routines must be practised.

While not a panacea, the availability of vaccines has helped to contain the pandemic in many countries and allowed economies and societies to return to normalcy.

“Mass vaccinations offer a clear strategy. The quicker the workforce and the rest of the population are immunised, the faster the country’s output can normalise and the economy resume its growth trajectory,” says Yeah.

During MCO 1.0 from March 18 to May 3, 2020, the economy declined 17.1%, with actual loss in GDP averaging RM700 million a day, based on constant 2015 prices.

Assuming the current lockdown results in a lower loss of RM500 million daily, Yeah estimates that the 14-day FMCO will result in losses amounting to RM7 billion or 2.4 percentage points of 2Q’s GDP growth, dragging it to an estimated low teens or high single digit due to the low base in the previous year.

Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre, predicts prudent GDP growth of 4% for the full year of 2021, nearly half of the higher end of the government’s earlier projection of between 6% and 7.5%.

On June 5, however, Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed said the figure will be revised as it is no longer achievable because of MCO 3.0.

“We will see a ‘halved’ GDP growth in 2Q, probably 5% to 5.5% instead of 10% growth. That’s taking into account all the risks as well as the sharp pullback in consumer demand. What is crucial is domestic growth in 3Q and 4Q, which hinges on the gradual reopening of the economy amid the vaccination rollout,” says Lee.

He maintains that while export sales will not fully compensate for the slowdown in 2Q consumption, the government will take into account the strong foreign demand for Malaysian exports such as furniture products at this time of year as the loss of raw materials due to logistics disruptions is another key consideration. He estimates that the export value of furniture products is about RM22 billion, which is close to 1.6% of total Malaysian exports.

Currently, the electrical and electronics (E&E) sector contributes about 39% to the country’s export industry. “The E&E industry grew in 1Q on the back of buoyant orders. If the FMCO drags on and supply chain players cannot produce for other manufacturers, Malaysia risks having its export customers reduce their dependence on our goods,” says SERC’s Lee.

FMM’s Soh anticipates that manufacturers will have to regain the confidence of some of their existing customers who may have had to source from alternative suppliers during this period. “It is hoped that more measures to strengthen and support trade will be introduced to help address some of the challenges faced by the industry, especially in helping them expand and enter new markets,” he says.

Other companies such as those that produce gifts and stationery, garments and apparel, wood and timber-based products as well as plastic goods, that are not listed as “essential”, are appealing to their export customers’ sympathies. Otherwise, they would have to face penalties for breach of contract, says Small and Medium Enterprises Association Malaysia (Samenta) national secretary Yeoh Seng Hooi.

Trade associations have pleaded with the government to come to the financial aid of bleeding SMEs, dozens of which have not been able to pay salaries for the month of May.

SME Association’s Kang points out that many retail players have not survived the collective disruption to the business and those that are barely standing have closed up to 90% of their outlets. He urges the government to alleviate the financial plight of ailing SMEs through a blanket moratorium as well as deferment of income tax until the year end.

On May 31, the government announced the Pemerkasa+ aid package of RM40 billion, under which an additional RM500 would be disbursed to each micro enterprise, thus increasing the total payment to RM1,500 — an amount that is expected to help them navigate through MCO 3.0.

Pemerkasa+ follows the Pemerkasa stimulus package announced on March 17, which provides RM1,000 to more than one million micro traders to ensure the continuity of their business, especially in managing their cash flow.

“We hope that the government will consider our proposal to extend the wage subsidy programme throughout all phases of MCO and Conditional MCO, or to end-2021 at the least, as wages remain one of the largest costs for SMEs,” says Samenta chairman of policy and government relations Datuk William Ng.

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