This article first appeared in The Edge Malaysia Weekly on March 2, 2020 - March 8, 2020

THE stimulus package announced by interim Prime Minister Tun Dr  Mahathir Mohamad last Thursday has been lauded by economists for being targeted at the sectors most affected by the Covid-19 outbreak.

However, the political uncertainty over which parties will form the government and whether it will be a minority government, without control of parliament, or a unity government, as proposed by Mahathir, still loom large over the economy.

But for now, economists are saying that the stimulus package, crafted to reduce the impact of the Covid-19 outbreak on the economy, prioritises growth, stability and efficient execution by introducing measures that can be implemented quickly to shore up confidence.

“We think the measures are encouraging from the aspect of assistance to the hardest hit sectors and affected individuals, stimulating private spending and promoting investments,” says Julia Goh, an economist at United Overseas Bank (M) Bhd in an email response to The Edge.

Apart from the size of the stimulus package, which came as a surprise to many  economists, it is also being praised for helping to improve the cash flow of companies affected by the outbreak.

According to Bank Islam Malaysia Bhd chief economist Dr Afzanizam Abdul Rashid, the bank is positive on the announcement as the measures are well targeted, with emphasis on the affected sectors as well as ensuring the viability of the economy in the long run.

“All in all, the measures are timely and well targeted. Expansionary fiscal policy should provide the right support to the  economy alongside the accommodative  monetary policy adopted by the central bank,” he tells The Edge.

Last Thursday, Mahathir announced a RM20 billion economic stimulus package to ensure economic risks associated with the Covid-19 outbreak are addressed. While the epidemic has been effectively contained in Malaysia, its impact on the global economy as it spreads elsewhere will still be felt here.

Among the measures introduced to alleviate the burden of businesses in the tourism sector are a six-month deferment of monthly income tax instalment payments, 15% discount on monthly electricity bills and a service tax exemption for hotels.

Financing facilities will also be made available to affected companies, including a RM2 billion special relief facility by Bank Negara Malaysia for small and medium enterprises and a RM200 million microcredit facility by Bank Simpanan Nasional, at a rate of 4% per annum.

Assistance is being given not only to businesses but also directly to the people affected by the slowdown in tourist  arrivals. A one-off payment of RM600 each will be given to taxi drivers, tourist bus drivers, tour guides and registered trishaw riders.

Members’ contributions to the Employees Provident Fund will also be cut by 4%, to 7% of the monthly income from April 1 until Dec 31. This will potentially release  RM10 billion into the economy via increased private consumption.

The government will also spend  RM2 billion to repair and upgrade small  infrastructure nationwide, especially in  rural areas. These projects will be expedited to stimulate the economy in small communities in rural areas.

As a result of the outbreak, the government has reduced its gross domestic product growth target for 2020 to 3.2% to 4.2%.  Mahathir believes the economy can reach the higher end of this band this year.

Sizeable stimulus package, without putting a strain on government coffers

The size of the stimulus also came as a surprise to many economists. Most had  estimated that about RM15 billion would be released.

Amarjeet Singh, EY Asean and Malaysia tax leader, says the package is sizeable compared with those announced by neighbouring countries. Singapore’s stimulus package totalled US$4.6 billion while Indonesia unveiled US$742 million worth of measures.

He notes that in contrast to the stimulus package unveiled during the global financial crisis in 2009, which increased Malaysia’s budget deficit to 7.6% from 4.8% of GDP, this package is only expected to increase the fiscal deficit by 0.2% to 3.4%.

However, it is estimated that only  RM4 billion was additional direct transfer from the government to the people as most of the measures were either already in the pipeline to be implemented or, rather, the unlocking of income residue to stimulate consumption.

“Notably, the measures are not mainly reliant on government spending.  Private-sector investments and expenditure by government-linked companies, such as Tenaga Nasional Bhd, will play a big part. The increased spending arising from increased disposable income of individuals, particularly from the reduced EPF contribution, is also expected to boost economic activity.

“While there will be a reduction in income tax and service tax collections, the introduction of the digital service tax and improvement in tax enforcement will hopefully help close the gap,” says Amarjeet in a statement released to the media last Thursday.

Based on the country’s GDP of  RM1.51 trillion as at 2019, and the budget deficit increase of two percentage points to 3.4%, it can be estimated that the government will only spend RM3 billion to RM4 billion on the stimulus package. It is designed to ensure that multiple aspects of the economy receive assistance, says the tax expert who contributed to the crafting of the package.

“First, we looked at how to reduce the burden of strained cash flows for companies affected by the Covid-19 outbreak. Then we [looked at] how we could boost economic activity in rural areas. We focused on giving small contractors jobs to upgrade and repair small infrastructure in rural areas,” he says.

He adds that the stimulus package is targeting small and medium-sized companies, rather than big companies and GLCs, as past stimulus packages and budgets have done.

It will also be the first time direct cash transfers are being given to trishaw riders, the economist says. There are still a lot of trishaw riders in Penang and Melaka, and the drop in tourist arrivals would have impacted their incomes.

Political instability still looms

Mahathir did not just announce the stimulus package during a packed press conference at Perdana Putra last Thursday. During a  question-and-answer session, he said it is likely that the next prime minister will be decided in the Dewan Rakyat come Monday.

However, as at press time, this was not the case as a new government appears to be taking shape. (See Cover Story on Pages 58-59.)

The nonagenarian, who came out of retirement in 2017 to lead the Pakatan Harapan coalition to win the 14th general election, resigned last Monday and was appointed interim prime minister by the Yang  di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah ibni Almarhum Sultan Haji Ahmad Shah Al-Musta’in Billah.

The fluidity of the political situation has cast a cloud over the economic direction of the country. The latest reports, at the time of writing, say Tan Sri Muhiyiddin Yassin, with the backing of the Muafakat Nasional coalition — comprising Umno and PAS — looks set to be the next prime minister.

The political turmoil obviously adds another spectrum of risk assessment of the country, says Bank Islam Malaysia’s Afzanizam. This is reflected in the gradual increase in the five-year Credit Default Swap spread for the government of Malaysia to 45 basis points as at Feb 26, from 37 bps on Feb 21, he says.

“At the end of the day, what matters is the functioning of the economy amid the global threat of the Covid-19 outbreak. As such, the announcement of the fiscal stimulus package on Feb 27 shows that fiscal policy is operating as per normal.

“This would allow an effective demand management policy to take place as Bank Negara has delivered a 25 bps cut in the overnight policy rate in January and perhaps more to come at the subsequent meetings of the Monetary Policy Committee,” says Afzanizam.

Credit rating not expected to be reviewed

The 0.2 percentage point increase in the budget deficit this year, to 3.4% of GDP, due to the stimulus package is not expected to affect the country’s sovereign credit rating, says Lee Heng Guie, executive director of the Socio-Economic Research Centre of the Associated Chinese Chambers of Commerce and Industry Malaysia.

“We think a slightly larger deficit is conceivable to counteract the short-term economic shock. We do not expect global rating agencies to put Malaysia’s sovereign rating on review as the government remains committed to fiscal reform and consolidation as well as debt containment,” says Lee.

However, he says the near-term risk is that prolonged political upheaval may cause delays in the implementation of fiscal measures to support the economy and stall reforms. “Prolonged political turmoil and a stalemate will undermine efforts to ensure sustainable economic growth, maintain fiscal discipline, uphold the rule of law and maintain well-functioning, strong institutions. This will dampen an investment-enabling climate.

“An unstable political environment will dent investor confidence and weaken consumer sentiment and, hence, reduce investment and the pace of economic growth on concerns over the continuity and smooth implementation of policies.”

The political turmoil could not have come at a more inopportune time for the country. Just as in many other economies around the world, growth is being disrupted by the Covid-19 outbreak.

The next government must address the sluggish economy

Laurence Todd, director of research at the Institute for Democracy and Economic Affairs, says the Malaysian economy and society are resilient, and that politicians should be given the space to form a stable government and rebuild trust.

“We urge them to do so as soon as possible and then refocus on the structural challenges in the economy. In addition to responding to the Covid-19 outbreak, whatever government emerges will need to address the sluggish economy, including taking steps to stimulate investment, which has been struggling in recent months.

“The uncertainty is likely to continue for some time as a new government establishes itself and decides on its policy direction but, ultimately, a democratically legitimate government, committed to reform, is in the long-term interests of the economy,” says Todd.

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