The Covid-19 outbreak will affect Malaysia deeply in more ways than one. Its economy is definitely going to bear the brunt of this pandemic.
The forecasts are getting more and more pessimistic. The World Bank expects Malaysia to register a contraction in growth (-0.1%) for the year. Its report adds that the estimate has “a large degree of uncertainty”. That is to be expected since there are more than the usual number of variables that are floating around with some volatility.
Among the factors that have to be taken into account, but which cannot be done so with any certainty, is the speed at which the curve will be flattened, how long it will take for the Movement Control Order (MCO) to be lifted, and the extent to which industry and enterprises (including the informal sector and micro-enterprises) will be affected.
As Prime Minister Tan Sri Muhyiddin Yassin declared, this is an unprecedented disaster of global proportions. Yet, our hands are tied. We have limited fiscal space for several reasons. One, we switched from the Goods and Services Tax (GST), which had greater reach, to the Sales and Services Tax (SST), resulting in a shortfall of about RM22 billion. Tax collection has been reduced and the present outbreak will reduce it even further with businesses earning less revenue.
The prime minister has announced a RM250 billion economic stimulus package (with a fiscal injection of about RM25 billion) followed by a supplementary package of RM10 billion. Finance Minister Tengku Zafrul Tengku Abdul Aziz has said that the funding would come from government agencies and related parties within the “government ecosystem”, without going into the specifics.
Malaysia has been consistently reporting budget deficits over the years, regardless of the growth rates. There were only six years since independence when the budget recorded a surplus. In other words, the government was spending more than it earned, irrespective of whether or not the previous year was good.
Previous finance minister Lim Guan Eng had noted that we had RM1 trillion in debt, an issue that has not been resolved.
Today, the price of oil has nosedived. West Texas Intermediate crude, which sold at US$46 per barrel earlier this year, is now going for US$23 per barrel. The worst part is that analysts do not rule out the possibility of oil sliding towards US$10, given the lower global fuel demand caused by the pandemic and oversupply arising from the market war between big oil producers Saudi Arabia and Russia. That will affect our government’s revenues besides slashing Petroliam Nasional Bhd’s income.
There is not a glimmer of possibility that export figures will rise in the next few months. Even before the outbreak hit Malaysia, export-oriented manufacturers were complaining of the many problems they were facing because of the Wuhan episode: executives could not travel abroad to meet clients; machinery, raw material and intermediate products were not coming into Malaysia from China; and expectations were softening on fears of China’s slowdown. The situation now has deteriorated, if anything.
Bank Negara Malaysia has undertaken the unprecedented measure of cutting the overnight policy rate twice within the first quarter, bringing it down to 2.5%.
We are doubtlessly in a tight corner.
What are some of the lessons that the outbreak has taught us so far? The first most important lesson is the necessity for fiscal prudence. Fiscal discipline is of utmost importance if governments wish to implement fiscal stimulus packages and report budget deficits. The latter is to be used for a purpose — and a crisis (financial or biological) is precisely when a budget deficit is meant to be introduced.
The public healthcare system has been systematically neglected over the years. It is an excellent system that allows almost universal access but it has been bursting at the seams and not enough has been done to improve it. The futility of an increasingly privatised healthcare system becomes clear at times like these, when we find that we have to turn back to the public system. Hopefully, this lesson finds a place on policy tables subsequently.
Social safety nets have been ignored. It is time to reconsider in full earnest the design and implementation of social safety nets since they act as automatic stabilisers, increasing consumption expenditure when there is an economic downturn. Malaysian policymakers have seen social safety nets as a drain on resources and not as a fiscal instrument. Of course, they will have to be judiciously designed to avoid perverse behaviour where people switch their work-leisure preference profiles in favour of the latter.
We may have to consider a long-term specific fund for small and medium enterprises. The Covid-19 outbreak points out how a prolonged disaster can affect SMEs that may have cash flow problems and probably adequate reserves for only about two months. A fund that is jointly financed by the private sector and the government will be able to provide some relief for companies in times of emergency arising from economic and financial crises.
Agriculture has not been a priority sector for a long time. Agriculture’s contribution to the gross domestic product has been decreasing over the years and food security has not figured as a policy issue worthy of discussion. It is time to review our policy on food security. The current outbreak shows that food security cannot be taken for granted.
Last, but by no means least, we cannot afford to be caught in a state of unpreparedness. If the MH370 incident demonstrated how we were caught off-guard, so does the current outbreak. We need to be prepared for black swan events, although the Covid-19 pandemic is not entirely out of the blue, since we have witnessed threats to public health before with SARS and H1N1. Scenario planning should be part of the risk assessment process.