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Is Malaysia prepared for the next recession?

Warnings of an imminent global recession have been ringing louder than before.

With key economic data worldwide continuing to disappoint amid the novel coronavirus (Covid-19) outbreak, experts say the worst is yet to come.

S&P Global Ratings expects the global economy to enter into recession in 2020, and says a recession across Asia-Pacific is “now guaranteed.”

On the home front, Malaysia is highly vulnerable to the global economic slowdown.

Being a trade-reliant country, with trade accounting for 131% of its gross domestic product (GDP) in 2018 according to the World Bank, Malaysia has minimal chance – if any – to escape a recession if the world plunges into economic turmoil.

After all, several major trading partners of the country have been severely affected by Covid-19. These include China, the United States (US) and Singapore.

Speaking with StarBizWeek, Asian Development Bank’s former lead economist Jayant Menon says Malaysia has all the co-factors for a significant negative impact from Covid-19.

A quiet economy: A view of the Sungai Besi highway after the government launched the restricted movement order.Malaysia is highly vulnerable to a global economic slowdown. Being a trade-reliant country, with trade accounting for 131% of its GDP in 2018 according to the World Bank, Malaysia has minimal chance, if any, to escape a recession if the world plunges into an economic turmoil. — BernamaA quiet economy: A view of the Sungai Besi highway after the government launched the restricted movement order.Malaysia is highly vulnerable to a global economic slowdown. Being a trade-reliant country, with trade accounting for 131% of its GDP in 2018 according to the World Bank, Malaysia has minimal chance, if any, to escape a recession if the world plunges into an economic turmoil. — Bernama

“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.

It is worth noting that on March 16, Prime Minister Tan Sri Muhyiddin Yassin had announced additional stimulus initiatives ahead of the two-week nationwide movement restriction.

AllianceDBS Research estimates the additional stimulus measures to be worth RM1.1bil.


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.


“The financial institutions remain robust with strong capital backing to support financial intermediation to households and businesses, ” he says.

Meanwhile, Prof Yeah of Sunway University says that the domestic banking and financial sector, which is the bedrock of the Malaysian economy, is in a relatively sound position.

“Most banks are well-capitalised with low non-performing loans, ample liquidity and proper risk management systems that should enable the country to avoid a credit crunch when the recession hits, ” he says.

On Corporate Malaysia, Yeah states that corporate balance sheets are generally not in such a bad shape that could likely cause a systemic crisis when the economy heads south.

“Likewise, except for a few industries such as commercial and high end residential properties, sectoral imbalances such as over-capacity and overleverage are not at excessive levels that would amplify the country’s economic distress.

“While the large and well managed firms could ride through the business cycle, SMEs that are less competitive, overleveraged and have inadequate reserves and working capital would be vulnerable to financial distress.

The same goes for households especially the low income ones with high debts and insufficient savings, ” he tells StarBizWeek.

Generally, a country is deemed to be in a favourable position to better withstand a global recession, if it enjoys a good current account surplus, which also mirrors a positive savings investment gap.

This applies in the case of Malaysia.

In 2019, the country posted a healthy current account surplus of RM49.7bil, the highest since 2012.

Recall that the government has previously estimated the current account surplus to hit only RM43.4bil in 2019.

It is worth noting that the ability of a government to mount counter-cyclical spending is a key measure of the country’s resilience in avoiding a deeper recession as well as in rebounding quickly when economic conditions normalise.


“On this score, the government’s fiscal flexibility – though limited by a moderately high debt level and recurring deficits – can still be deployed to ensure that the country’s economic capital is not destroyed by the recession.

“With further room to cut interest rates and flush the economy with liquidity, the recession period can be kept as short as possible while keeping the country’s production capacity and skilled workforce intact for the turnaround in global demand, ” according to Yeah.

Unleashing more bazookas

OCBC Bank economist Wellian Wiranto says it is impossible for any country in the world to be 100% prepared for a possible recession, given the extent of the multifront challenges and the speed at which economies are affected.

Nevertheless, given the government’s continued Covid-19 containment measures, he remains hopeful that a relative sense of normalcy could return by mid-April, allowing consumers and businesses to gradually resume some of the economic activities.

“On the monetary policy front, Bank Negara has had the foresight to start trimming the Overnight Policy Rate even before these challenges looked evident. It has also been actively trimming the Statutory Reserve Requirement rate, by 100 basis points, most recently, to ease any liquidity concerns.

“Indeed, we think there is some chance that it might opt to cut rates ahead of the scheduled meeting in May. While the effects of rate cut might not feel immediately evident to the man on the street right now, the greater degree of monetary policy accommodation will help over time, ” he says.

When asked about what should be the government’s utmost priorities at this juncture, SERC’s Lee says the focus should be on the preservation of job and income of employees and relieving businesses’ cash flow as well as protecting the vulnerable households.

He also adds that the government should work towards restoring investors’ and businesses’ confidence, aside from reassuring them on policy continuity.

On measures to boost household spending, Lee proposed for the increase in the Cost of Living Aid for targeted households and individuals.

“Introduce a tax holiday for taxpayers with taxable income below RM100,000 per annum for the year of assessment 2020. Provide spending vouchers on food and necessities tied to the supermarket and department stores.

“Also, the government is recommended to provide wage credit support (such as a fixed wage payment per employee) to ease employers’ cost of employment so as to help retain workers, ” he says.

Yeah recommends the government to increase access to export credit facilities and to make concessionary financing readily available to those that require funding for working capital and other needs to continue business operations.

“Investment incentives such as capital allowances, R&D tax credit, double tax deduction and accelerated depreciation could be expanded to make it more attractive for domestic and foreign investors during this ‘tough time’ period.

“Over-the-top incentives including skills training grants, special financing facilities and fast-track approval and full facilitation by federal and state authorities would be helpful in winning over the ‘wait-and-see’ investors wary about the recession, ” he says.

Yeah also proposed for the government to provide incentives for the middle and upper income households to invest or spend on big ticket items such as property, transport vehicles and durable goods.

This is because private consumption accounts for nearly 60% of the Malaysian GDP and such incentives would stimulate spending and in turn support the local industries.

In view of the ongoing macroeconomic challenges, Alliance Bank’s Manokaran has stressed that a recalibration of Budget 2020 is urgently needed, particularly to assist critical sectors affected by headwinds.

“Projects under the less critical sectors that are still under negotiations or planning should be postponed and prioritise those funds to help those which are heavily impacted, ” he says.

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