2021 hanging in the balance

It has been a year since Malaysia’s first Covid-19 case was reported, and the situation has all but worsened.

Malaysia first hit its four digit Covid-19 cases on October 24, 2020, with the trend rising since, the highest being 5,725 cases on Friday, January 29, 2021 (as of time of writing). There is now a total of 203,933 number of cases with 733 deaths nationwide and 262 deaths recorded just within the first 29 days of 2021.

Even though Malaysia has one of the lowest mortality rates (0.4 per cent) worldwide, 75.7 per cent of the total deaths were seen during the third wave of Covid-19 pandemic in Malaysia (October to latest).

Thus, it is growing crucial for Malaysia to contain the spread of the Covid-19 pandemic within the next few weeks to minimise its impact on the economy.

Researchers with AmBank Bhd (AmBank Research) in a special report titled ‘Self-isolation and support must go hand in hand’, compared with the panic and disorder at the beginning of the outbreak, countries across the world have gradually established pandemic prevention systems. There has been better public understanding supported by a rational attitude.

“The world is still struggling to handle the ravaging Covid-19 pandemic and the deep economic recession caused by massive lockdown measures as we start the year 2021,” it said in the special report.

“Risks and uncertainties have undoubtedly remain, with mounting protectionism and anti-globalisation sentiment adding to the global economic challenges.

“While 2020 has been described as “the worst year ever” – which resulted in enormous and endless pain – still good things happened, giving hope, courage and confidence. Following months of fight against the pandemic, the global community has demonstrated the will and determination to work together to defeat the virus.

Despite some bright spots emerging at the end of the dark tunnel, the challenge to address the pandemic has again raised concerns at the start of 2021. The surge in the number of Covid-19 cases compounded the fresh challenge of a mutating virus.

The World Health Organisation (WHO) on January 7, 2021 has warned that the fight against the pandemic is at a “tipping point”.

“Being easily transmissible, it means that more people can get infected,” it warned.

“This could mean more serious infections and more fatalities. Hence, the centre of attention now is to have strong unity both at the global and country level to address the spread and mutation of this virus. It will depend on the measures taken to address the spread.”

Lockdowns only work if they reduce transmission, AmBank Research emphasised, and transmission can only be reduced if those who are sick self-isolate.

“Such measures comes at a great cost,” it said.

“Those who are unable and cannot afford to self-isolate will face a choice between financial devastation and compliance. By not providing proper support, this group of people will be forced to decide between their families and communities.

“Such choice is seen as a cruel option. Past lockdowns and movement control orders (MCO) have revealed the Covid-19 disparities were driven by differences in exposure at home and work. Those of lower socio-economic status were hit the hardest by both the virus and the collateral damage of restrictions.

“As a result of the restrictive movements, almost all risk is shifted to the millions workers who cannot work from home, and those who live in deprived areas as well as in overcrowded houses. These two groups often overlap. The new variant of Covid-19 is significantly more infectious. The risk of rising cases remains high.

“Hence, like lockdowns and MCOs, testing and tracing will only reduce transmission if the number of infectious cases are being isolated effectively. Yet how successful will it be? It remains unclear.

“Much will depend on adherence to the rules of the restrictive measures. In particular, those in the lower income group and cannot work from home will be badly afflicted.”

This time around, with the rising number of Covid-19 cases, AmBank Research said unprecedented restrictive measures are set to be introduced.

“Should that happen, there is a need to provide proper self-isolation support. Otherwise, this would mean that there will be protection for some, and pandemic for others,” it commented.

“The reason being there are two categories of people i.e. those who have the means to stay at home and those who cannot, no matter how much they want to.

“Hence, there is a desperate need for action from the government. Key workers must be guaranteed social and income protection. Additional support must be provided to ensure lowly-paid, non-salaried and zero-hour contract workers can afford to follow isolation rules.

“For individuals to be able to self-isolate, support should include a daily text or phone call and provision of food supplies and essential goods. There is a need for solidarity and togetherness rather than divisive messaging. Workplaces must be made safer.

“The government should use unoccupied hotel rooms to provide accommodation so that people, particularly those in crowded and multi-generational households, are able to self-isolate just like it’s practised in New Zealand, South Korea and New York.

“Also, by addressing the barriers faced by socio-economically vulnerable group, it will increase test uptake. But the government ignored the requests from local public health leaders for additional funds to support isolation. As a result, the mass-testing reduced following low-test uptake from the deprived communities. It was due to the fear of not having adequate support to self-isolate.

“The effectiveness of the restrictive measures depends on the isolation of infectious individuals, which is the single most important measure in terms of controlling transmission.

“If the basic public health brake levers are not pulled up to slow the spread of the virus, it will continue to transmit. The effectiveness of the lockdown will be limited if the financially vulnerable groups are not self-isolated. It will be seen as the government shooting for the moon without looking at the rocket’s fuel.”

In its efforts to slow the pandemic’s spread, Malaysia taps the economic brakes again by restricting mobility in an effort to slow the spread of Covid-19:

 

Managing a state of emergency

The government made a surprise announcement in the form of a declaration of emergency by the Yang DiPertuan Agong until August 1, 2021 to help contain the spread of the Covid-19 pandemic.

A state of emergency in Malaysia is a situation in which the federal government is empowered to be able to put through policies that it would normally not be permitted to do for the safety and protection of their citizens.

In other words, the executive branch will have almost absolute authority over the running of the country in a crisis. Article 150 of the Federal Constitution permits the Yang di-Pertuan Agong to issue a Proclamation of Emergency and to govern the country by issuing ordinances that cannot be challenged in a court of law.

The Agong can do so if he is satisfied that a grave emergency exists — in terms of security, economic life or public order in the country or any part thereof is threatened as permitted under Article 150(1) of the Federal Constitution.

Under the same Article, a proclamation may also be issued before the actual occurrence of the event, if the Agong is satisfied that there is imminent danger of said event should it happen. This proclamation can only be issued on the advice of the Cabinet or the prime minister.

Since the country’s independence in 1957, the Federation of Malaya and Malaysia have proclaimed only four emergencies:

• 1964, nationwide during the Indonesia-Malaysia Confrontation.

• 1966 in Sarawak, following a political crisis involving Stephen Kalong Ningkan’s leadership as chief minister.

• 1969, nationwide following the May 13 race riots.

• 1977 in Kelantan, following a political impasse and street violence when then chief minister Mohamed Nasir called for the dissolution of the Barisan Nasional state assembly after refusing to resign when ordered by his party PAS.

 

Caught by surprise

Initially rumoured as a possibility, the research team with Public Investment Bank Bhd (PublicInvest Research) said the eventual announcement still caught many by surprise judging by investors’ reactions.

“It was after all a move that pushed the market into a temporary state of unknown where investors always sell first and ask questions later,” it commented on the move.

“Fresh off announcing the imposition of the second Movement Control Order (MCO 2.0) which the market had been taking well, the benchmark understandably plunged in the aftermath of the announcement though recovering most of it to only end 0.3 per cent lower on the day.

“Overall, market sentiment had taken a turn for the better in early-December last year following breakthroughs in vaccine-related developments, though the stark reality was that the Covid-19 pandemic remained a bane to the country and the economy, domestically and globally.”

The sharp spike in domestic cases had put the country’s health system at breaking point, unable to cope with the recent surge in new infections. But just as noticeable in recent weeks were rumblings in the political scene which had also been ratcheted up by internal bickering amongst component parties in the ruling coalition.

The current declaration of Emergency should put a temporary stop to the hullabaloo, PublicInvest Research said.

“What won’t happen during this six-month period will be Parliamentary sittings, by-elections or even a general election,” it highlighted.

“What can happen is the federal government being able to push through policies which it would normally not be able to as laws and expenditures will be approved directly by the executive.

“Emergency Ordinances can be effected to compel private sector hospitals to assist in the tackling of the pandemic via usage of assets and manpower assistance, and the private sector to assist and alleviate public sector burdens (facilities, assets, laboratory tests and utilities), where necessary.

“In short, the government is now empowered in its efforts to curb the Covid-19 pandemic, but just as importantly, will not be distracted by political-related developments.”

In comparing the economies with the past state of emergencies, the last time an emergency was declared nationwide was in 1969 – a period in which the economy, market and circumstances then and now are totally incomparable, PublicInvest Research commented.

“Lasting impact on the market is therefore unknown at this juncture,” it continued.

“We can only take guidance and comfort from Prime Minister Tan Sri Muhyiddin Yassin’s overnight press conference that all manner of business activity will continue, the recent MCO 2.0 restrictions notwithstanding.

“He also assured that the civil government will continue to function as-is, and that there will be no executive interference in the judiciary system. Curfews will also not be in force. Malaysia remains open for business.

“What is interesting to note is that an independent special committee will be formed comprising Members of Parliament from both sides of the political divide and relevant health experts who will make recommendations to the Yang DiPertuan Agong on the possible early ending of the Emergency declaration, as and when necessary.”

 

MCO 2.0: A black swan returns

Because of rising Covid-19 cases, the Prime Minister announced that the MCO 2.0 would be reinstated in high-risk areas and hence affect the states of Penang, Selangor, Melaka, Johor, Sabah, Kuala Lumpur and Putrajaya for a two-week period from January 13 to 26, 2021.

The scope of MCO 2.0 was later expanded to all states in Malaysia excluding Sarawak, and extended until February 4 taking into account the growing number of cases.

Among some of the other measures implemented are restriction of movement within a 10km radius and only for the purchase of groceries while eateries will only be allowed to operate limited to take-away orders.

To also curb the spread of the virus, interstate travel would be banned while only five essential economic sectors would be allowed to operate – manufacturing, construction, service, trade and distribution and agriculture and commodities sectors.

“While this is not a nationwide lockdown as we saw in March last year, the 2021 MCO will nevertheless impact the key contributing economic states for Malaysia,” said Affin Hwang Investment Bank Bhd (AffinHwang Capital).

“However, judging from past mistakes, we do not think that the measures this time round are as strict as in 2020, when activity mostly came to a halt.

“Our channel checks indicate that production workers would still be allowed to be on the manufacturing floor while the 30 per cent restriction of workers within a company, applies to office staff.”

AffinHwang Capital also said there was uncertainty as to how long this lockdown will persist.

“In 2020, this was for a period of 47 days and when Covid-19 cases were only a fraction of that of today. Hence there is risk of further extension to this lockdown. In any event, because of the lower activity and closure of non-essential businesses, resulting in, for example, lower footfall in malls and consumption patterns,” it said.

According to projections by Ministry of Health, with the current R0 of 1.1, it is expected that Malaysia could reach 5,000 daily new cases by the second week of April 2021 and 8,000 daily new cases by the fourth week of May 2021.

Hence, it comes as no surprise that the government has decided to reimplement the MCO with the aim of bringing the R0 down to 0.335.

The culmination of recent events and possibility of the MC) being extended beyond the current stipulated period are likely to pressure the first quarter (1Q) growth further, OCBC Bank projects, with its 2021 gross domestic product (GDP) forecasts now at 5.7 per cent year on year (y-o-y).

OCBC Bank chief economist Selena Ling recapped that 2020 was a watershed year for the global economy, financial markets and also life in general.

“For Malaysia, the dramatic turn of events recently – with the re-imposition of MCO, followed by a declaration of a state of emergency – would inadvertently challenge the nascent recovery that the economy has started to eke out,” Ling said in an economic outlook on 2021.

“Already, even as growth surprised on the upside in 3Q20, we had cautioned before that 4Q momentum might be more challenged. The latest events could see growth becoming more curtailed in 1Q, in particular.

“Even as exports continued to show signs of benefiting from a recovery in demand in electronic goods, the domestic segment would likely to continue to be a drag – and potentially even more so now.”

Ling highlighted that even though the emergency powers allow the government to potentially issue ordinances to temporarily supplant existing laws, including the one concerning the recently approved budget, the government may remain reluctant to undertake a ‘bazooka’-type fiscal largesse, given the external constraints imposed by market.

She further highlighted that already, the December 4 downgrade by Fitch ratings agency serves as reminder of the limits of fiscal space that Malaysia may run into, especially given its relatively high stock of government debt.

 

Permai stimulus

Following MCO 2.0, the government announced additional stimulus measures worth RM15 billion under Perlindungan Ekonomi dan Rakyat Malaysia (Permai). The stimulus package comprises 22 initiatives in order to combat the pandemic, while also safeguarding the welfare of people and businesses.

This was on top of the earlier stimulus announced in 2020, such as KITA Prihatin worth RM10 billion, Prihatin Stimulus Package of RM260 billion and Penjana Stimulus Package of RM35 billion. In total, the stimulus measures introduced to offset the negative impact of the pandemic have now reached a total of RM320 billion or about 20.4 per cent of GDP.

The 22 initiatives under Permai aimed to support households which have been negatively impacted by the pandemic, especially the vulnerable groups and informal workers.

As a result, the government announced that the final phase for the payments of Bantuan Prihatin Nasional or BPN 2.0, which was introduced under the KITA Prihatin package will be accelerated from January 21, 2021, which will benefit 11.1 million recipients and will involve a total allocation of RM2.38 billion.

“We highlighted some other key measures, which included the continuation of loan moratorium and restructuring of loan repayment,” said AffinHwang Capital.

“Under the EPF i-Sinar Program for EPF members whose incomes have been negatively impacted by the pandemic, since 21 December 2020, more than three million applications had been approved, with a total of RM24 billion payable this year as at January 13, 2021.

“Besides that, the government continues to provide support for the labour market through programs like the Wage Subsidy Program 3.0 under SOCSO.

The program will be improved to include employers (irrespective of sectors) operating in states that are under the MCO.

PublicInvest Research commented that five fiscal stimulus measures in less than a year is “unprecedented”, aptly describing the severity of the Covid-19 pandemic.

“There has been no slowing down in the infection rates though we managed to briefly flatten the curve following a full lockdown in March last year.

“That came at a very expensive economic cost however, with the economy shrinking a whopping 17.1 per cent year on year in the second quarter of 2020 (2Q20). Amid the need to balance between life and livelihood, the government this time around opted for a more targeted approach following selective lockdown in red zone areas.

“An extended period of low interest rates following successive cuts in 2020 have also helped lower the cost of business. The government’s decision to allow five critical sectors to open during this current MCO is lauded as about 80 per cent of the economy is allowed to run normally albeit with minor hiccups due to some restrictions from Covid-19 measures.

“The only concern is where the RM6 billion direct fiscal injection for Permai will be sourced from the 2021 budget allocation,” it forewarned.

“A portion of the development expenditure (DE) may be sacrificed, as it had been given a bigger allocation of RM69 billion, the largest ever by the government.

“Its sizeable year-on-year jump suggests that the government can afford to take some of its allocation for Permai.

“This could however be at the expense of various projects allocated under education, healthcare, housing, transportation and public utilities though greater clarity from the government is needed to verify this.”

PublicInvest Research underlined that the government’s fiscal condition is stretched, though the worst may soon be over following the successful breakthrough in Covid-19 vaccine development.

“The government’s opting for a targeted lockdown instead of a full lockdown limits the economic damage from this current movement control order, in addition to unleashing various pro-consumption measures to keep the engine of growth running.”

Possible ratings downgrade?

Another aspect to worry about is in terms of Malaysia’s sovereign ratings.

Although the persistent budget deficit since 1998 continues to be a weak link to the country’s sovereign credit rating profile, AffinHwang Capital is of the view that it is understandable that the government needs to implement large fiscal spending plans in order to boost the country’s recovery.

“We believe that the current account surplus will continue to be the feature of economic fundamentals in Malaysia,” it said on this matter.

In early December 2020, Fitch Ratings downgraded Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BBB+’ from ‘A-’.

Fitch revised Malaysia’s ratings outlook from negative to stable after the downgrade to BBB+, signalling current sovereign rating will likely remain in the immediate term.

Meanwhile, Moody’s Investors Service on Thursday affirmed the Malaysian government’s local and foreign currency long-term issuer and local currency senior unsecured debt ratings at A3, and kept its outlook at stable.

In a statement, Moody’s said the rating affirmation was based on its expectation that Malaysia’s medium-term growth prospects will remain strong – underpinned by its diversified and competitive economy and supportive demographics – while its macroeconomic policymaking institutions will continue to be credible and effective, which provides resilience to the sovereign credit profile.

These strengths it outlined are balanced against the government’s relatively high and increased debt burden, which will leave the government with weakened fiscal strength for some time in the aftermath of the pandemic shock to public finances.

“In particular, while Moody’s continues to expect the government to remain committed to its gradual path of fiscal consolidation over the next two-three years, the rise in debt burden is unlikely to rapidly reverse,” Moody’s said, pointing to what is implied by the government’s fiscal targets for 2021-2023.

“That said, the country’s large pool of domestic savings can continue to finance the fiscal deficits and keep interest payments anchored,” it noted.

The rating’s stable outlook, meanwhile, reflects Moody’s view that risks to Malaysia’s credit profile remain consistent with the A3 rating level, based on current assumptions.

“Moody’s does not expect the coronavirus pandemic to have a sustained negative impact on Malaysia’s economic model; as such, the current and any subsequent waves of infections will delay, but not materially hinder the economy’s eventual return to high growth rates.

“The authorities’ track record of effective macroeconomic policies, including prudent fiscal policies, has also continued to lengthen, despite ongoing noise in the political landscape,” it said.

Standard & Poor’s Ratings Services (S&P) also maintained the country’s long-term foreign currency issuer default rating at A-.

However, it assigned Malaysia’s outlook long-term foreign currency issuer default rating from stable to negative on June 26, 2020.

 

Riding on vaccines’ saving grace

A key deciding factor towards soothing the economy is the Covid-19 vaccine.

While the pandemic situation seems perilous at the moment, MIDF Research believe that it is different from the one faced in March and April of last year.

“Back in March 2020, when MCO was first imposed, we were faced with more uncertainties. Vaccines were not available, all economic activities were closed and people were generally under prepared,” it explained.

“Now, people and businesses are better prepared having gone through nearly a year of the pandemic and the Standard Operating Procedures (SOP) to contain the coronavirus. Meanwhile, some economic activities are allowed to continue despite the MCO.

“More importantly, we have the vaccines and are awaiting the implementation of the vaccine programme. Malaysia is expected to receive the vaccine by Pfizer for Phase 1 by the end of February 2021.”

Procuring through Covax facilities, Pfizer and AstraZeneca, the government expect to secure supply vaccine for 40 per cent of population coverage.

The government is also in the process of final negotiations with Sinovac, CanSino and Gamaleya to get a guarantee of increased vaccine supply exceeding 80 per cent of the total population of the country or 26.5 million.

“With this, it is hoped that Malaysia can achieve herd immunity against the vaccine,” MIDF continued, maintaining its expectation that the vaccine will be widely available by the second half of this year.

On that note, the Malaysian Health Coalition (MHC) calls on the government to strengthen its vaccine confidence among the public, as well as establish a vaccine manufacturing capability for the long term.

“Only one month is left before the government’s intended vaccine rollout and there is still much to be done. We strongly urge urgent attention to strengthen vaccine confidence,” it put forth in a statement this week.

“We have yet to see a coordinated, government-led effort to boost vaccine confidence among the Rakyat. Meanwhile, anti-vaccine narratives, conspiracy theories and false information run rampant on social media and in chat groups.

“The government must engage with all levels of society to rapidly increase public education on vaccines and combat misinformation. We also urge non-government stakeholders such as the media, academics, businesses, religious authorities and civil society organisations to do their part in ensuring that only evidence-based information on vaccines is published and shared.”

The coalition also called on the government to seize this opportunity to develop infrastructure for long-term vaccine capability in Malaysia. This includes the end-to-end development from world -class scientific research to manufacturing and international distribution.

“These are ambitious but achievable goals as Malaysia is already equipped with high calibre human and technological resources,” it added. “This will reduce Malaysia’s reliance on foreign manufacturers. Moreover, a domestic vaccine and pharmaceutical infrastructure will have a far-reaching, positive ripple effects on our economy and global standing.

“The vaccine is not a silver bullet that will rid us of the pandemic. Therefore, we must remember that preventive measures will and must remain in place for many months to come.

“However, we must use our most important vaccination program in history to protect the vulnerable, address inequity and build future self-reliance in our health system.”

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