- FBM KLCI dropped below the 1,300 mark for the first time in a decade
- Brent crude plunging 60% year-to-date to trade at US$26 per barrel
- Ringgit to a four-year low of 4.42 to the dollar
- Public sector total debt plus government guarantees now stand at more than RM1 trillion
- Covid-19 outbreak could cost the country’s economy RM5.9 billion
- Up to 157,000 Hotel Room Bookings Valued at RM66 Million had been Cancelled
- Up To 1 Million Malaysians Could Face Unemployment
- Most companies only have two months of reserves to cover their operational costs
“A recession is no longer just a distant possibility but increasingly it is more probable. It is imperative that we focus efforts on helping those who will be harmed the most by a recession — namely the already poor and marginalised,”
What had started as a viral flu outbreak has now turned into a global pandemic. The Covid-19 coronavirus outbreak has put most countries around the world on lockdown, and has crippled economic activity across the globe.
Close to 250,000 people have been infected across 181 countries thus far, and with more than 10,000 deaths reported. Already, there have been reports of potential bankruptcies as a result of the global lockdowns, and the International Labour Organization estimates that almost 25 million jobs could be lost worldwide as a result of Covid-19.
In Malaysia alone, more than 1,400 people have been infected by Covid-19 as at the time of writing, with three fatalities reported. The growing number of cases in Malaysia resulted in the government imposing a two-week Movement Control Order (MCO) nationwide that started on Wednesday.
Meanwhile, the benchmark FBM KLCI dropped below the 1,300 mark for the first time in a decade on Monday. Year to date, the index has lost more than 300 points, or 30% year-to-date to close at 1,219.72 points last Thursday.
A tumble in crude oil prices, with benchmark Brent crude plunging 60% year-to-date to trade at US$26 per barrel drove the ringgit to a four-year low of 4.42 to the dollar.
Bleak economy, layoffs if Covid-19 problem persists past June
Economists have warned of a global recession kicking in if the Covid-19 pandemic lasts beyond June, causing the government, companies and households to go deeper into debt.
Economist Mohamad Nazari Ismail said the Covid-19 pandemic would certainly cause a slowdown in the economy, with retrenchments and layoffs being inevitable in sectors that have been hit the hardest, such as tourism, airlines and related industries.
“The government cannot do much to help the situation beyond borrowing more money to pay for the economic stimulus package,” he said referring to Malaysia’s RM20 billion economic stimulus package announced in late February.
However, higher government debt would create additional problems for tax payers in the long term, he said.
Public sector total debt plus government guarantees now stand at more than RM1 trillion.
“No wonder the government is thinking of reintroducing the GST in order to solve its financial problems,” he said, referring to the abolished goods and services tax.
Prime Minister Muhyiddin Yassin had said last week that the government would review the need for GST which was scrapped after Pakatan Harapan took power in May 2018.
“But that will be bad news for the rakyat who are already suffering from the effects of Covid-19. Our main problem is that many firms and households are in debt,” he said.
Covid-19 could cost Malaysia’s economy RM5.9b this year
THE Covid-19 outbreak could cost the country’s economy RM5.9 billion this year and the figure could rise further if authorities around the world fail to contain the spread of the deadly virus.
The coronavirus, which originated from Wuhan, China, had already slowed manufacturing activities, grounded factory lines, disrupted supply chain and dented consumer spending in China and elsewhere.
The tourism sector had been hit the hardest. Fear of the virus had forced travellers, especially from China, to postpone their trips. Major airlines had cancelled or reduced flights to China.
Malaysia is still reeling from the US-China trade war which dragged the October-December period or fourth quarter of 2019’s (4Q19) growth to 3.6%, the lowest level in 10 years.
AmBank Group chief economist and head of research Dr Anthony Dass said using the estimated GDP forecast of 4.6% and minus 0.4% point, the drop is equivalent to RM5.9 billion.
“If we take the estimated GDP nominal value of about RM1,600 billion for the full-year 2020, a 0.4% drop will be around RM6.4 billion.
“Slower growth would affect business cashflows and orders. It will add pressure on retrenchment as more companies downsize,” he told The Malaysian Reserve (TMR).
World Bank said sectors which are impacted by Covid-19 in Malaysia are tourism, foreign direct investment (FDI), supply chains and commodities, which include palm oil and oil and gas (O&G).
In Malaysia, hotel room cancellations are mounting.
The Malaysian Association of Hotels said up to 157,000 room bookings valued at RM66 million had been cancelled. Most of the cancellations involved visitors from mainland China besides Singapore, Hong Kong, Taiwan, Vietnam and Europe.
Tourism-related industries like tour services and retailers have been hit as tourist arrivals drop significantly. Malaysia received 10.28 million visitors from Singapore and China in the first nine months of last year.
Putrajaya is targeting 10 million foreign visitors to the country this year with tourist receipts of RM100 billion or about 7% of the country’s GDP.
Malls and retailers are already reeling with a drastic drop in footfalls, including for the big-spending tourists. Manufacturers have also warned of raw material disruptions which will slow production and sales.
Malaysia’s exports to China, the former’s largest trading partner, could drop due to the latter’s sluggish economy.
The Malaysia-China bilateral trade reached a new 11-year high, estimated at US$124 billion (RM519.56 billion) or 17.2% of Malaysia’s total trade last year.
China had also become Malaysia’s largest export destination for the first time, with exports totalling RM139.61 billion. A 10% drop in exports would cost the country RM13.9 billion.
Singapore, Malaysia’s former biggest export destination, has warned of a possible recession this year after recording only a 0.7% growth last year. Malaysia’s GDP expanded 4.3% last year.
Dass also expects a slower 1Q growth and any measures introduced by the government should ensure the downside risks are stabilised.
But calculations of the GDP drop would be moderated by the stimulus and increases in the production of products like gloves.
OCBC Bank Malaysia Bhd recently said the Covid-19 outbreak may impact 0.4% of GDP in 1Q20.
The bank has also revised the GDP growth to 4% from 4.2% as a result of weaker than anticipated performance in 4Q19. OCBC expects the GDP to expand 3.5% in 1Q20.
Dass said based on the estimates that the 1Q20 GDP will be below the 3.6% reported in 4Q19, the outlook for 2Q20 will depend on how fast the Covid-19 outbreak can be resolved and the impact of the stimulus measures and Budget 2020.
“Assuming all these events turn positive, the 2Q20 growth should be better than 1Q20. Otherwise, the downside risk in 2Q20 remains high,” he said.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said he foresees growth coming in at around 3% to 3.5% in the first half of 2020 (1H20).
“This would mean the economy is operating below its potential level as there are unused resources (labour and capital) in the economy. As such, policy responses from the fiscal and monetary authority are warranted to ensure economic growth can be stabilised.
“I think the 1H20 GDP growth will be weak. At the moment, we don’t have any solid data to assess the immediate impact,” he said.
The global economic growth this year is expected to drop by 0.2% to 0.3%. The US 1Q growth could take between 0.2% and 0.4% hit as investors dread the impact of the coronavirus outbreak.
Up To 1 Million Malaysians Could Face Unemployment – Malaysia SME Don’t Have The Financial Capability To Survive
Up to one million Malaysians could lose their jobs if 10% of small and medium enterprises (SME) in the country go bust in the coming months.
SME Association of Malaysia president Datuk Michael Kang said he fears the worst following the global Covid-19 outbreak that has forced Malaysia to impose a 14-day movement control order (MCO).
“If the pandemic is not addressed soon, I would say easily 5% to 10% of SMEs could be forced to close for good.
“This is because they don’t have the financial capability to survive. Most companies only have two months of reserves to cover their operational costs. We can expect to see this happening in the next six months,” he told theSun yesterday.
Kang pointed out that SMEs employ about 10 million workers, meaning the number of those who could face unemployment might increase significantly in the coming months.
“If we are looking at 10%, then up to one million could be out of work.”
Prime Minister Tan Sri Muhyiddin Yassin had on Monday announced the MCO after the number of Covid-19 cases continued to increase.
This has forced all companies that do not fall under “essential services” to temporarily close, with some requiring their staff to work from home while others were told to go on leave.
On Wednesday, economists told theSun that Malaysia would be facing a recession by year-end due to the impact of the global outbreak.
Meanwhile, Malaysian Employers Federation executive director Datuk Shamsuddin Bardan said looking at the current situation, his initial prediction last month that 100,000 Malaysians could be out of jobs could be worse than expected.
“In Singapore, 108,000 people have already either lost their jobs or suffered income losses. In Malaysia, the earlier 100,000 estimate now looks very conservative,” he said.
Is Malaysia prepared for the next recession?
“It is a small, open economy, highly dependent on international trade, heavily integrated into regional and global supply chains, and an oil exporter that relies on its revenue to fund a significant portion of government spending.
“All these are major negative factors currently because global growth is dwindling, supply chains are being severely disrupted, and oil prices have plummeted, ” says Jayant, who is currently serving as a visiting senior fellow at Singapore’s ISEAS-Yusof Ishak Institute.
In view of such challenges, he calls upon the government to introduce a “massive” second stimulus package.
Jayant points out that the first RM20bil, which was announced on Feb 27 by former Prime Minister Tun Dr Mahathir Mohamad, may not be sufficient to avert a recession.
“This kind of spending should be carefully targeted to ensure that it boosts growth while ameliorating the impact on the most vulnerable groups in society.
“Although such a stimulus package will inevitably involve a marked increase in the deficit and the financing burden on future generations, it may be unavoidable given the confluence of negative impacts hitting the economy simultaneously, ” he says.
Echoing a similar view with Jayant, Sunway University economics professor Yeah Kim Leng also believes that another round of fiscal stimulus is necessary.
“The government may be able to increase deficit spending from the projected 3.4% to 4-5% of GDP which rounds up to a stimulus package of between RM10bil to RM20bil, ” he says.
Manokaran Mottain, chief economist of Alliance Bank, expects the government to introduce another stimulus package by March 27 to the tune of RM10bil to RM15bil.
“This time around, I believe that the RM10bil to RM15bil will come entirely from the government.
“In the first stimulus package, although it was worth RM20bil, only about RM3.5bil came from the government. The remaining amount was from other sources such as RM10bil from EPF employee contribution rate cut from 11% to 7%, ” he says.
Is Malaysia prepared for recession?
The next recession will be unprecedented in modern history. The principal trigger of the downturn is a virus outbreak that has since morphed into a pandemic and forced the halt of production activities in many countries.
This is in stark contrast with the Great Recession, the 2008 financial crisis that transpired following the collapse of the subprime mortgage market in the US.
Malaysia was dragged into a recession in 2009, even though the cause of the crisis did not emerge from within the country.
However, this time around, Malaysia faces a bigger threat considering that Covid-19 is debilitating the economy domestically and across the other countries.
Alliance Bank’s Manokaran warns that Malaysia’s GDP could likely decline in the second quarter of 2020 (2Q20), following a weak growth of about 0.2% to 1% in 1Q20.
“While we forecast a small positive growth in the first quarter, there are chances for the growth to slip into negative territory. If that happens and followed by a decline in the economic growth in 2Q20, Malaysia will enter into recession, ” he says.
Generally, recession is defined as two consecutive quarters of declines in a country’s real gross domestic product.
So, looking at the cloudy outlook ahead, is Malaysia prepared for a recession?
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie believes that the country’s economic and financial fundamentals are in a position of strength to confront the perfect storms.
Malaysia, he says, enjoys a diversified economic structure, significant natural resources and human capital endowments. It also has a strong external position, backed by still unencumbered foreign reserves accumulation.
Don’t buck the coming recession, says economist
An economist says Bank Negara Malaysia’s recent move to cut the statutory reserve requirement of commercial banks will merely delay the inevitable, in the face of a looming recession.
The economist, Barjoyai Bardai of Universiti Tun Abdul Razak,said that at best, the cut in the reserves held by banks, from 3.5% to 3%, may lead to better market sentiments as it was expansionary.
“I think we are headed for a recession and the government should just let it happen.
“Policies like this only serve to delay the inevitable, it’s better to let the recession happen and introduce stimulation initiatives during the recovery process.”
Another economist Carmelo Ferlito, said the rate cut essentially allows banks to keep a smaller amount of reserves so that more money will flow into the banking system, be it through increased lending or investment activities.
The move has led ING to lower its forecast of gross domestic product growth from 4.7% to 4.5%.
Barjoyai said that the cut was a way to prop up numbers but would mean little to the people whether or not GDP growth targets were met.
He said recessions were a normal part of an economic cycle and the faster the country faced it, the faster it could recover.
Ferlito, a senior fellow at the Institute for Democracy and Economic Affairs said ING’s lowering of its GDP growth rate forecast was less concerning than the fact that GDP growth was coming from private consumption.
“We have seen a slowdown in private investments and exports, so the fact that the GDP is being supported by private consumption is not healthy as the structural part of the economy, namely private investments and exports are declining.”
Exports, he said, had taken a beating due to the US-China trade war and this affected other trading nations.