This article first appeared in The Edge Malaysia Weekly on July 19, 2021 - July 25, 2021
WITH eight states already in Phase 2 of the National Recovery Plan (NRP) as of last Wednesday and the rest poised to do so in about a fortnight as vaccinations are ramped up, Malaysia is inching closer to a post-Covid-19 recovery.
NRP coordinating minister Tengku Datuk Seri Zafrul Abdul Aziz assured on July 14 that states that have transitioned to Phase 2 would not revert back to Phase 1. If necessary, only “a certain area or location” will be closed, not the whole state.
While the progress thus far is unlikely to change the fact that Malaysia will probably trim its 2021 GDP forecast to “around the 4% range”, signalled by Zafrul, when the second quarter GDP is released on Aug 13, observers say the government will need to make sure a lot more things are done right to shore up growth in the third and fourth quarters of the year to make up for the movement restrictions imposed from June 1.
On July 14, economists at Malaysia Rating Corp Bhd (MARC) trimmed their 2021 year-on-year (y-o-y) GDP forecast to 3.9% — among the lowest, if not the lowest of forecasts — which they say implies that the Malaysian economy will be 2% below pre-pandemic levels this year. “We expect the economy to recover to pre-pandemic GDP levels only in late 2022, or even later, if mobility restrictions were to continue as is,” Firdaos Rosli, Lee Si Xin and Lyana Zainal Abidin wrote in a July 14 note, stating that their forecasts had been trimmed from 5.1% previously and 6.4% in January.
Economists at RHB Research, however, kept their GDP forecast at 5.4% for 2021 and 5.5% for 2022 in their July 12 note. “Malaysia’s fiscal, monetary and Covid-19 pandemic policy framework are calibrated appropriately to provide a floor on economic activity in case downside risks to growth emerge in the next few quarters,” group chief economist Sailesh K Jha and senior economist Nazmi Idrus wrote.
Data appended in the note indicated 16.8% y-o-y GDP growth in the second quarter of 2021 — strong double-digit growth which an increasing number of economists reckon will be hard to attain due to the Movement Control Order (MCO 3.0) imposed in June, which is estimated to cost the economy about RM1 billion a day.
It is likely that both figures will not fall that far short when the new official forecast is revealed in about a month’s time, with economist forecasts largely ranging between 4% and 6% now — below the current official forecast of between 6% and 7.5%.
While GDP may only be a headline number to some, data watchers note that a strong GDP number will give Malaysia more room to stretch its fiscal spending, apart from signalling a commitment to support recovery.
To illustrate, a 6% fiscal deficit is RM90.8 billion based on 2019 GDP (current prices) of RM1.51 trillion but only RM85 billion based on 2020 GDP of RM1.42 trillion. The recently announced Bantuan Prihatin Rakyat cash transfer, for instance, involved an allocation of RM6.5 billion and is expected to benefit 8.1 million recipients.
Targeted subsidies aid fiscal space
Zafrul, who is also finance minister, also indicated that Malaysia’s 2021 fiscal deficit may need to be revised higher from the current 6% with GDP likely to be revised downward.
There is also the option of further raising Malaysia’s statutory debt ceiling to 65% of GDP from 60% currently to allow greater fiscal flexibility to borrow to support lives and livelihoods even as the country prepares a recovery package for Budget 2022, with parliament set to be in session from Sept 6 to 30 as well as from Oct 25 to Dec 16, apart from the five days of special sitting between July 26 and Aug 2 for “briefings by ministers” (Penerangan daripada menteri-menteri). The date for the tabling of Budget 2022 and the 12th Malaysia Plan (2021-2025) was not known at the time of writing but consultation and preparation work for Budget 2022 are already underway.
Expectations are that government institutions will likely continue being tapped to boost the government’s hand, given the need to keep its debt service charges under 15% of revenue as far as possible even when more debt is taken to support the economy.
“In our assessment, raising the debt ceiling to 65% from 60% of GDP and raising the fiscal deficit target to around 7% from 6% of GDP is unlikely to lead to a sovereign rating downgrade by Moody’s or Standard & Poor’s in 2021. These magnitudes of adjustments in fiscal policy are unlikely to put Malaysia on an unsustainable trajectory of debt dynamics,” say RHB economists.
Noting “significant revenue shortfalls and rising expenditure to finance various stimulus packages”, MARC expects Malaysia’s 2021 fiscal deficit to be 6.3% of GDP instead of the prevailing guidance of 6% for 2021, which had already been revised higher from the 5.4% of GDP targeted when Budget 2021 was tabled in November 2020.
The forecast takes into account the fact that the latest RM150 billion Pemulih support package unveiled on June 28 with a fiscal injection of RM10 billion had increased the government’s direct fiscal injection to RM87.6 billion (RM55 billion in 2020 and RM26.8 billion in 2021) and the total value of Covid-19-related stimulus packages to RM530 billion (RM305 billion in 2020 and RM225 billion in 2021). The RM26.8 billion fiscal injection for 2021 packages alone is about 1.8% to 1.9% of GDP, our back-of-the-envelope calculations show.
The 40% rally in Brent crude oil prices to above US$75 a barrel since the start of the year “could help ease some of the fiscal pressure”, says the MARC economists who expect oil prices to average around US$65 a barrel, compared with US$43 a barrel assumed in Budget 2021. Every US$1 increase in Brent crude oil prices raises Malaysia’s fiscal revenue by RM365 million, they add.
That Malaysia continues to cap RON95 and diesel pump prices at RM2.05 and RM2.15 a litre respectively while the unsubsidised premium RON97 is selling at RM2.73 per litre at the pump points to expensive blanket subsidies, which experts say should be gradually rationalised in favour of targeted aid to not cause a sudden spike in inflationary pressure even as the economy recovers.
A reimplementation of the Goods and Services Tax (GST) or a wider form of the current Sales and Services Tax (SST) is also seen by economists as a more sustainable way of financing the necessary social safety nets that are part of the government’s fiscal spending.
For now, MARC at least, is not worried about the ringgit. “The uncertainties surrounding the pandemic remain the major hurdle to ensuring the recovery of Malaysia’s economy. Additionally, looming political tensions weaken the ringgit further as steps taken to retain political stability remain highly contested. The strong US recovery is another determining factor of a weaker ringgit against the US dollar. However, we believe that the ringgit’s decline will be limited due to sturdy crude oil prices.”
While strong oil prices are expected to cushion any weakness in the ringgit, the local currency on July 14 had weakened past 4.2 against the US dollar for the first time since August 2020 as concerns re-emerge over the strength of economic recovery in the region as countries battle with Covid-19 variants by ramping up vaccinations as fast as the vaccine supplies would allow. The ringgit was still hovering at 4.2 versus the greenback at the time of writing. Most economists do not expect Bank Negara Malaysia to further trim its key overnight policy rate (OPR) this year.
Carrots with jabs
Eight states, which accounted for 14.5% of the country’s GDP in 2019, had transitioned to Phase 2 of the NRP as The Edge goes to print. Perlis, Perak, Kelantan, Terengganu and Pahang were the first to transition on July 5, followed by Penang (July 7), Sabah (July 10) and Sarawak (July 14).
As at July 15, about 4.16 million or 12.7% of Malaysia’s total population or 17.8% of the adult population had completed two doses of the Covid-19 vaccine while 8.95 million or 27.4% of total population or 38.2% of the adult population had had at least one dose of the vaccine.
Over 13.1 million doses of vaccines had been administered as at July 15, a number that can potentially double in the coming weeks with 14,395,330 doses expected to arrive in July (Pfizer-BioNTech: 6,429,150; AstraZeneca-Oxford: 1,585,100; and Sinovac: 6,381,080) and daily vaccinations ramped up to 460,158 doses last Thursday.
On July 15, Prime Minister Tan Sri Muhyiddin Yassin said the government was mulling the possibility of giving more leeway to people who have completed two doses of vaccine, including dining at restaurants and travelling interstate.
While he was silent on the “sticks”, expectations are that there will be a need to further nudge the rest of the unvaccinated population in the country to get to the targeted 80% once all who have registered for vaccination have been given appointments and received at least one shot of vaccine, especially if the country is faced with having more vaccines than there are arms to be jabbed. Some reckon vaccines should no longer be free after a deadline.
France, for instance, saw a rush of people booking vaccine appointments after the government said anyone wanting to visit a theatre, cinema, sports centre or areas with more than 50 people from July 21 would need to have been vaccinated or have tested negative for Covid-19, a requirement extended to cafés, restaurants, bars, shopping malls, trains and planes from Aug 1.
Some local governments in China, including the Shaanxi province, have reportedly barred unvaccinated people from places where crowds gather such as supermarkets, hotels, restaurants, public transport, entertainment venues and government halls.
Privileges for the vaccinated may not include not wearing face masks in crowded places just yet, though, at least until herd immunity is attained.
Last Thursday, Ministry of Health director-general Tan Sri Dr Noor Hisham Abdullah warned that the airborne Delta variant can be caught with just five seconds of exposure. Every 100 persons infected with the Delta variant could spread the virus to 500 or 800 people, given its infectivity rate of Rt5 to 8 compared with Rt2.5 to 3 for the normal Covid-19 strain, he said at a televised media conference.
He also put into perspective the new record high number of positive cases even as tests are ramped up, noting that 96% of the 13,215 new Covid-19 cases on July 15 were Category 1 (60.9% or 8,047) with no symptoms and Category 2 (35.1% or 4,637) with mild symptoms. Only 531 cases were in Category 3 with lung infection, Category 4 requiring oxygen, and Category 5 requiring ventilators in the intensive care unit (ICU), he added.
Even among the 245,932 frontliners with the Ministry of Health who had been fully vaccinated, only 1.26% or 3,106 contracted Covid-19 between Feb 24 and July 14, of which 1,012 (32.6%) were Category 1 and 2,088 (67.2%) were Category 2. Only three or 0.1% were in Category 3 or Category 4 and none were in Category 5. This, said Noor Hisham, attested to the effectiveness of vaccines in saving lives and preventing serious illness, though one may still contract the virus after a jab.
Moving away from total cases
Ong Kian Ming, member of parliament for Bangi and former deputy minister for international trade and industry, are among those who reckon that Malaysia’s NRP should take into account the high instances of Category 1 and 2 cases among those who test positive for Covid-19 and “shift away from looking at the total number of daily Covid-19 cases” as one of three key criteria for safe reopening. The more relevant figures, he says, include the percentage of positive cases, deaths and the number of people who are seriously ill and need to be in the ICU.
“With the focus on the right set of figures, there is hope for a gradual reopening of various economic sectors safely and responsibly even if the number of cases remain high. As we have seen in the UK, even with 80% of the adult population vaccinated, the number of cases has averaged close to 35,000 over the past seven days. What is important is that the number of serious cases and the number of deaths, especially among the vaccinated population, is very low. This has allowed the UK economy to reopen even while the number of new Covid-19 cases remain relatively high,” Ong wrote in a July 15 statement.
“Any decision by the National Security Council for any sector of the economy to remain closed has to be based on science and data, not on unsubstantiated speculation and fears on where clusters may develop, for instance, in shopping malls or gyms,” he adds.
Indeed, Singapore on June 30 signalled that the city state would stop reporting daily Covid-19 cases as more people get vaccinated and shift their focus to key outcomes such as the number of people who fall seriously ill and those who require care in the ICU. Turning Covid-19 into something much less threatening like influenza or chicken pox, the three ministers on the Covid-19 task force say, would be Singapore’s template to return to normal life and resume travel and tourism.
Among the hardest hit by Covid-19, Malaysia’s travel, hospitality, retail and food and beverage industries would certainly be among those concurring with this view, even as islands such as Phuket and Mauritius open up travel bubbles. Tourism alone contributed 15.9% to Malaysia’s GDP in 2019, up from 15.2% in 2018.
World Bank: Investment in digital infrastructure, social safety net critical for inclusive Covid-19 recovery
Investments in social safety nets and digital cash transfer programmes are critical during the Covid-19 pandemic as they not only help protect the most vulnerable in society but also build on a country’s ability to combat crises, according to World Bank president David Malpass (pic).
“The investments are heavy for digital infrastructure systems, but they may be critical in the East Asia and Pacific [region] over the course of the pandemic,” Malpass said in his opening remark at a special online regional media roundtable on July 15.
“In Malaysia, there’s a universal national ID system, there’s wide mobile phone coverage and high financial inclusion. And these have helped government assistance to reach more than 10 million beneficiaries,” he added.
While stimulus and social protection measures are critical amid the pandemic, Malpass said they “must be adaptable, well-targeted and fiscally sustainable. Policies are introduced to mitigate the impacts of the pandemic and they must be complemented by fiscal reforms capable of facilitating greater relief spending without sacrificing public investment”.
Rising public debt “is an issue” in the East Asia and Pacific region where borrowings have jumped by seven percentage points of GDP, on average, as stimulus measures are ramped up.
“Governments in the region currently raise, on average, only 18% of GDP through taxation — that’s one-third less than in other emerging markets. Some are continuing to spend more than 1% of GDP on energy subsidies. Those are regressive and they should be reduced as part of both the effort to have fiscal balance and the effort to have an impact on climate,” Malpass said, adding that a better tax system “can help offset costs of necessary social spending programmes”.
Some relief could come should advanced economies release their vaccine options to help accelerate vaccinations in developing countries, including many in the region that may not fully vaccinate their population until 2024 even as new variants emerge.
“It’s clear it would add percentage points to the GDP growth of countries as their vaccination rates go higher. It’s hard to be specific in that, but the dollar value of having broad vaccinations is in the trillions of dollars for the world, many trillions of dollars for the world,” Malpass said.
Advanced economies too would benefit from having “a world that’s got a stronger economy, plus less of an environment that causes the [Covid-19 variants]. It’s very important that vaccinations be available broadly in the world, including to developing countries and poorer countries, because there is transmission worldwide of the disease”.
According to GAVI Alliance’s website at the time of writing, the World Health Organization (WHO)-backed Covax facility had delivered 121 million vaccine doses to 136 participants — only 6% of the two billion it targeted to distribute by end-2021.
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