This article first appeared in The Edge Malaysia Weekly on December 28, 2020 - January 3, 2021

THE Malaysian government, like many others around the world, has not held back on spending measures to revive the economy, which has been torn apart by Covid-19 this year.

In total, the government has doled out RM305 billion in stimulus packages for the healthcare sector, businesses and the rakyat. It also unveiled the largest national budget in history, amounting to RM322.5 billion, in November for the coming year.

The first stimulus was announced by then interim prime minister Tun Dr Mahathir Mohamad on Feb 27, totalling RM20 billion. But one of the most notable measures was the reduction of the employees’ share of the Employees Provident Fund (EPF) contribution rate from 11% to 7%, which is said to have had a RM10 billion impact on private consumption.

Malaysia experienced a change in government shortly after that. Mahathir was succeeded by Tan Sri Muhyiddin Yassin, who was appointed prime minister by the King.

Muhyiddin unveiled a massive stimulus package of RM230 billion less than 30 days into the job. He also implemented the Movement Control Order on March 18 to curb the spread of Covid-19.

With the stringent measures, the country managed to flatten the curve and even earned praise from the World Health Organization for its swift response. However, with business activity at a standstill, the economy languished — evident by the 17.1% contraction in GDP for the second quarter.

The RM230 billion stimulus package saw the government contributing direct spending of RM25 billion, while public and private institutions bore the motherload of RM225 billion.

The most significant measure under the package was a six-month blanket moratorium on loan repayment for individuals and small and medium enterprises (SMEs) starting in April, estimated to be around RM100 billion.

The blanket moratorium has certainly helped to alleviate the cash-flow burden of individuals and companies that have been hit hard by the pandemic. It is also one of the factors attributed to the stock market’s good performance this year, as the reprieve from servicing loans put extra money into the pockets of consumers.

This is evident in the increase in retail participation this year. The number of new Central Depository System (CDS) accounts opened from January to July jumped 125% to about 218,000 from just about 97,000 a year earlier.

The low interest rate environment is also believed to have played a significant part in fuelling the stock market.

Still, one of the key concerns about the blanket moratorium was the possible defaults that could emerge after it ends. This may weigh on the asset quality of banks and, if large enough, pose a risk to the banking system.

While the blanket loan moratorium ended in September, an extension has been given to individuals and SMEs still bearing the brunt of the Covid-19 pandemic. This moratorium on loan repayment ends in June next year.

It is worth noting that after the blanket moratorium ended, the banking industry’s gross impaired loan (GIL) ratio rose from an all-time low of 1.38% as at end-September to 1.45% within a month. That said, Bank Negara Malaysia noted that the banks’ asset quality had remained healthy post-blanket loan moratorium.

CGS-CIMB Research mentions in a recent report that it is expecting the uptrend in the industry’s GIL ratio to continue, estimating it to land at 1.7% at end-December 2020 and 2% at end-December 2021.

Subsequent to the stimulus package announced in March, the government unveiled another three smaller stimulus packages — the RM10 billion Prihatin Plus, the RM35 billion Penjana and the RM10 billion Kita Prihatin.

The Wage Subsidy Programme, first launched in April as part of the RM230 billion Prihatin package to provide much-needed support to businesses, especially SMEs, has been extended by three months until the end of the year.

This suggests that even after the MCO in March and April was over, businesses — especially SMEs — still had cash-flow concerns. A survey done by the SME Association of Malaysia in August found that SMEs in the retail sector continued to struggle with keeping their business afloat, followed by those in the manufacturing and services sectors.

Employers welcomed the Wage Subsidy Programme, which helped to keep workers employed. But despite the government subsidy, the unemployment number still rose to a high of 5.3% in May, with 826,100 workers without jobs.

Nonetheless, the figure trended down in the subsequent months. In October, unemployment fell to 4.7%.

On Dec 15, Deputy Finance Minister I Datuk Abd Rahim Bakri said in the Dewan Rakyat that the programme implemented over the last nine months involved an allocation of more than RM15 billion. As at Oct 31, the government had channelled RM12.5 billion under the programme, benefiting 2.7 million workers and more than 330,000 employers, he added.

In addition to the money spent on reviving the economy, the government also allocated RM1.5 billion under the Prihatin stimulus package for the healthcare sector to fight Covid-19. This amount will be increased next year, according to Budget 2021, which allocated RM3 billion to purchase Covid-19 vaccines and RM1 billion to stem the third wave of Covid-19 infections.

In terms of direct fiscal injections under the various stimulus plans this year, the government has injected about RM55 billion. It comes as no surprise then that the country will hit the self-imposed statutory debt limit of 55% of GDP with the various stimulus packages announced this year.

In August, parliament approved a plan to temporarily increase the statutory debt level to 60%. By end-2020, the debt-to-GDP ratio is expected to reach 56% and increase further in 2021.

The massive spending by the government also means that the fiscal deficit will come in higher this year and next. This year, the fiscal deficit is expected to sit at 6% of GDP as a result of the various economic stimulus packages and lower crude oil prices. In 2021, the deficit is projected to trend downwards slightly to 5.4%.

A setback for the country, however, is Fitch Ratings’ downgrade of Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to “BBB+” from “A-” in December. One of the reasons for the downgrade was the deterioration of government debt metrics due to the pandemic. Fitch forecasts that general government debt will increase to 76% of GDP in 2020 from 65.9% in 2019.

Whether or not other rating agencies follow suit on the downgrade remains to be seen.

While the government has come up with massive fiscal policy responses to keep the economy afloat in 2020, it has also been a busy year for the central bank as it manages the monetary policy side of the scale.

In March, Bank Negara announced a 100-basis-point cut in the statutory reserve requirement (SRR) ratio to 2% from 3%, releasing RM30 billion into the banking system. Thus, the SRR ratio is at its lowest since the 2008 global financial crisis, when it was lowered to 1%.

The overnight policy rate (OPR) was also slashed by 125 basis points (bps) this year from 3% at the start of 2020, bringing the OPR down to its lowest level of 1.75% since the interest rate framework was introduced in 2004. The rate cuts also came swiftly, with the reduction of 125bps taking place between January and July.

At its last monetary policy committee meeting of the year in November, Bank Negara kept its key interest rate at 1.75%. Many economists believe that the central bank is done with rate cuts until the end of 2021.

CGS-CIMB Research says Bank Negara’s statement that the current monetary settings were “appropriate and accommodative” can be read as a signal for an extended pause. Some economists opine that the 125bps reduction will continue to stimulate the economy going into 2021 and they believe that any additional rate cuts would have little positive impact on the economy.

In its November monetary policy statement, Bank Negara said the latest indicators pointed to significant improvement in Malaysia’s economic activity in the third quarter and it expected to see further improvement in 2021. For 3Q2020, the country’s GDP saw a smaller contraction of 2.7%, surprising economists who had been expecting a steeper contraction.

Nevertheless, Bank Negara is still cognisant of the downside risks and the ongoing uncertainties surrounding the pandemic both locally and globally.

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