MCO 3.0: Here we go again

ANALYSTS wonder if “third time’s the charm?” with the Movement Control Order (MCO) making a comeback.

Prime Minister Tan Sri Muhyiddin Yassin announced last week that Malaysia would again implement the MCO nationwide from May 12 to June 7, in an effort to curb the growing spread of Covid-19.

However, despite the entire country – minus Sarawak which decided to continue under the Conditional MCO (CMCO) – having to enter into MCO 3.0, it was clear that this current ‘lockdown’ is far less stringent compared to its predecessor MCO 1.0.

The main difference is that all economic sectors will be allowed to operate during this period, compared to only essential sectors during MCO 1.0.

The reason for this, as explained by Senior Minister (Security Cluster) Datuk Seri Ismail Sabri Yaakob, was that the government wanted to strike a balance between health and the livelihood of the people, after the country had lost RM2.4 billion per day during the implementation of the first MCO from March 18 to May 3, 2020, which saw the closure of all economic sector.

“When we announced the MCO 3.0 (on May 10), some people are questioning why don’t we make it as (strict as) the first one,” he said in a Bernama interview.

“But if we do it like MCO 1.0, people will get angry as well. We cannot satisfy everybody.

“When we shut down all economic sectors, the most affected group will be small traders who are unable to survive.”

As such, the fact that all economic sectors are allowed to remain operational is definitely a silver lining for businesses, large or small, and will this will in turn prevent a rise in unemployment rates.

“The implementation of MCO 3.0 on May 10, 2021 is not expected to have a significant impact on economic growth as almost all economic sectors are allowed to operate,” Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said in a statement last week.

“An overall closure of economic sector such as during MCO 1.0 will see unemployment reaching seven per cent (or over one million unemployed), mostly affecting the self-employed, youth, women, as well as the low-skilled or low-income groups.

“The fact is, the closure of the entire economic sector will be more detrimental to the low and vulnerable than those who can afford it.

“In addition to the risk of unemployment, the self-employed and about 2.8 million micro small and medium enterprises (SMEs) are also more at risk of experiencing a lack of income due to the overall economic closure.

He noted that with the re-implementation of the MCO, or MCO 3.0, several segments of the services sector that are based on physical interaction, including tourism, are expected to continue to be affected by interstate travel bans and restrictions on social activities.

Labour market, non-essential business to take another hit from restrictions

SENTIMENT wise, netizens are understandably upset at having to celebrate Hari Raya during MCO for the second year in a row.

“Netizens are in a word ‘upset’; on top of that, having all these new rules and different announcements every few days only makes things worse,” noted research firm iWisers in an analytics report,

“Fed up with the Movement Control Order (MCO) announcements, 35.2 per cent of netizens have got #MCO3.0 trending.”

According to iWisers, 20.6 per cent of netizens want the current MCO 3.0 to be enforced like the very first MCO as the strict SOP compliance led to successfully flattening the curve back then.

“From zero new positive cases to the current blow up in cases, 32.2 per cent of netizens say that the government has completely failed to manage the pandemic crisis, that MCO 3.0 was implemented because vaccines are being rolled out too slowly and they (15.6 per cent) question the rationale on why MCO 2.0 was lifted so soon. Many fear the ultimate impact that this confused governing could have on the nation’s economic outlook and citizens’ livelihoods.”

Meanwhile, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) recalled that while MCO 2.0 managed to somewhat control the spread of infection and rising cases since end-September 2020, the relaxation thereafter may be the culprit in the recent resurgence of new cases.

The number of daily cases nationwide reached a new high of 6,806 cases just this Thursday.

“Anecdotally, the relaxation following MCO 2.0 had seen lack of adherence in the standard operating procedure (SOP) by certain members of the public,” MIDF Research said.

“Furthermore, new and more infectious variant of the Covid-19 have made its way into the country, prompting the tighter restrictions imposed.”

According to MIDF Research, weaker economic activities will potentially result in another round of rationalisation including the decision on employment and hiring as companies will struggle financially to maintain their business operations.

“This could affect the recovery in the labour market that we have been observing since the unemployment rate peaked in May 2020 at 5.3 per cent.”

MIDF Research opined that the prospect of increasing unemployment in the non-essential sectors and also as a result of reduced activities in restaurants for instance is high.

It also opined that weak labour market condition and lower income will affect consumption activity and eventually drag down gross domestic product (GDP) growth.

“Sectors that will likely be affected by the restrictions will be wholesale and retail trade, which will see lower sales as a result of reduced outside home consumption and more Malaysians will return to a full work-from-home arrangement.

“Meanwhile, other sectors which had benefited from the recent rise in domestic tourism, such as restaurants and accommodation services, will once again hit by the travel restrictions and prohibition to accept dine-in customers.

“Although domestic consumption is expected to weaken because of the latest MCO, the option to place orders online and the availability of home delivery will continue to contribute towards growth for the local consumption spending.

“Non-essential businesses, such as recreational services, and entertainment and leisure, will be hit by another round of closures and lower demand.”

GDP 2021 forecast revised upwards or downwards?

TENGKU ZAFRUL highlighted that the government is confident the country’s gross domestic product (GDP) will continue to grow based on projections of six per cent to 7.5 per cent in line with estimates by the International Monetary Fund (6.5 per cent), World Bank (six per cent) and the Asian Development Bank (six per cent).

“In addition, the country’s economic recovery will also be supported by the economic growth of major trading partners such as Singapore which recorded growth of 0.2 per cent, China (18.3 per cent) and the US (0.4 per cent) in the first quarter of 2021 (1Q21).

“The implementation of the National Covid-19 Immunisation Programme (PICK) will also drive the reopening of various sectors of the economy, the recovery of consumer sentiment, and hence the growth and resilience of the Malaysian economy.”

MIDF Research also remained sanguine for 2021 as the situation is improving albeit with some short-term pitfalls.

In fact, the research arm expected that 2021 will see a recovery in the economy, driven by domestic demand and supported by government spending especially with the highest development expenditure in history.

“We observed that the impact of the MCO 2.0 was much better than expected. The imposition of MCO 2.0 for several weeks during the quarter seemed to have smaller economic impact and did not significantly affected the recovery trajectory as highlighted by the improvement in 1Q of current year 2021 (1QCY21) GDP.”

While 1QCY21 GDP still showed a decline, down 0.5 per cent year on year (y-o-y), it was much better than the research arm had anticipated.

“It was a significant improvement compared to -3.4 per cent y-o-y recorded in the preceding quarter.

“In fact, Malaysia’s decline in GDP was softer compared to Philippines and Indonesia which contracted by 4.2 and 0.7 per cent y-o-y (4Q20: down 8.3 per cent y-o-y and down 2.2 per cent y-o-y) respectively.”

Looking ahead, MIDF Research foresees the economy to grow in 2021, reversing the fall observed in 2020 in line with resumption in domestic and global economic activities also due to low base factor in 2020.

Previously the research arm downgraded its forecast on the fear of possible adverse impact from MCO 2.0 and also renewed restrictions in key countries.

“However, the recent performance of GDP not only in Malaysia but other key countries suggested that the impact were less severe than anticipated as almost all economic sectors are still allowed to operate and consumers are likely to have shifted part of their spending or purchases online in the event of movement restrictions.

“The latest consumer sentiment index released by the Malaysian Institute of Economic Research (MIER) for 1Q21 were up by 13.7 points to 98.9, the highest reading since 3Q18, pointed to strengthening consumer confidence amid ongoing National Covid-19 Immunisation programme and recovery in both local and external front.”

Associations: No full lockdown, please

AS cases continue to rise, calls are being made for the government to implement a full lockdown as per the first MCO last year.

However, various business associations in Malaysia spoke up against this and urged the government not to institute any form of a total lockdown be it a nationwide or for states with high infection rates such as Selangor.

According to the Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai , “the industry is not in favour of a total lockdown because it will cost irreparable damage to our economy.”

“There is no doubt that the previous MCOs implemented were effective in bringing down the Covid-19 infections but at the same time they, especially MCO 1.0, had a damaging impact on the economy,” he said in a statement on Thursday.

“The impact of MCO 1.0, which was an almost full lockdown situation where only essential services were allowed to operate at 50 per cent capacity, was very severe on the economy, resulting in a drop in gross domestic product (GDP) to minus 17.1 per cent in the second quarter of 2020 and loss of jobs hitting 826,100 in May 2020.

“The government had to pump in various financial aids to help the industries as well as individuals to wade through this unprecedented pandemic situation, without which many businesses would have had to fold their operations.”

In this regard, the FMM strongly urges the government under the MCO 3.0 not to institute any form of a total lockdown be it a nationwide or for states with high infection rates such as Selangor.

The federation urges the government to continue with the MCO 2.0 model to allow the economic sectors to operate but institute stricter standard operating procedures (SOPs) to bring down the infection rates quickly.

This sentiment was echoed by Malaysia Shipowners’ Association (Masa) chairman Datuk Abdul Hak Md Amin and the Malaysian Automotive Component Parts Manufacturers Association (MACPMA) president Peter Lim, who both urged the authorities not to implement a full-scale lockdown of the economy.

“We believe that it is important for the economic sector to operate as usual as the people could not afford to lose their jobs and livelihoods,” Masa’s Abdul Hak said in a statement.

“The maritime industry is considered as an “essential service” for transporting various daily basic resources such as food, medicine, oil and gas by sea not only within Peninsula ports but also between East and West Malaysia.

“Masa cautions against a full lockdown as it will certainly hinder Malaysia’s economic recovery and social sustainability which the maritime industry has already suffered and yet to recover from the Movement Control Order (MCO) 1.0 in March 2020. Another full lockdown will be disastrous to this fragile industry.

“To date, shipping companies in Malaysia have abided by the SOPs set by the government as well as adopted stricter measures to ensure health and safety of employees despite the losses that they have faced.”

For the car sector, MACPMA’s Lim said a total lockdown would have severe impact on the automotive supply chain, in particular the automotive component parts manufacturing industry.

“The industry is already grappling with rising cost of production (for example, rising raw material and shipping costs), output reduction, skilled labour shortage and margin squeeze, just to name a few.

“A total lockdown would deal a severe blow to the industry.”

MACPMA represents almost 100 automotive component parts manufacturers supplying to multiple brands and car makers. About 70 per cent of MACPMA members are small and medium enterprises (SMES) and more than 30 per cent of the association’s members are exporters.

“Our exporters need to continue operations as the repercussion of a total shutdown of operations would have very damaging effects on businesses as well as the economy.

“Many automotive parts manufacturers are dependent on export business. Malaysia supplies automotive component parts to all over the world and is part of the global automotive supply chain.

“Currently our automotive component parts manufacturers, especially those that support the replacement or spare parts market (REM) export items such as body parts, leaf springs, moulded rubber parts, plastic parts, gaskets and many others, export to over 60 countries in the world.

“A shutdown of four weeks as experienced during MCO 1.0 last year had resulted in a RM1.15 billion loss from export sales alone.

“As such, we cannot afford another total lockdown.”

 

Economic impact of MCO 3.0

 

ON the economic imposition of MCO 3.0, analysts predict this to have more or less the same impact as MCO 2.0 due to its similar restrictions.

Furthermore, MIDF Research believed that strong external demand will also continue to support growth significantly in which we had recently revised upward as well.

“Taking into account all these factors on top of low base effect that will be more evident in upcoming quarter, we revised our 2021 GDP growth forecast upward to 6.2 per cent y-o-y from 5.4 per cent y-o-y initially estimated.”

That said, MIDF Research remained cautious on the downside risks to the estimate which include hiccups in National Vaccination Plan, political situation, price volatility in commodity prices, protectionism and geopolitical tensions.

Meanwhile, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) maintained 2021 GDP forecast at 6.5 per cent but revised downwards its 2Q21 forecast to 14.1 per cent from 14.3 per cent previously.

Kenanga Research explained that this was largely to take into account the reimplementation of a nationwide MCO 3.0, with SOPs that are almost similar with MCO 2.0, in which almost all economic sectors are allowed to operate with limited hours.

While the impact is expected to be minimal due to a less stringent containment measures, the research arm remained cautious as the ongoing rise in the number of local Covid-19 cases could continue to pose significant risks to Malaysia’s economic recovery.

“Nevertheless, Malaysia’s Covid-19 inoculation drive and a continued targeted policy support from the government is seen to boost consumer sentiment, providing support to domestic demand in the second half of 2021 (2H21).

“Hence, our stronger growth expectation in the 2H21 at 6.4 per cent versus a projected 6.2 per cent in the 1H21.”

Kenanga Research gathered that public investment is projected to continue to improve on the continuation of large infrastructure projects such as the East Coast Rail Link (ECRL), Light Rail Transit Line 3 (LRT3), Pan-Borneo Highway and National Digital Network (JENDELA).

It also noted that on the external front, strong demand for Covid-19-related items and semiconductors, coupled with stable global crude oil price are expected to provide an additional boost to exports growth.

“Despite improving growth prospects, our outlook is contingent on multiple external and domestic risk factors, including the fierce new wave of Covid-19 pandemic both locally and abroad, slow progress of the national Covid-19 immunisation program, vaccines effectiveness against the Covid-19 variants, potential domestic political tussle and rising geopolitical uncertainty, for example US-China and Australia-China.”

Meanwhile, Kenanga Research also outlined the central bank being expected to keep the overnight policy rate (OPR) unchanged at 1.75 per cent amidst an uneven domestic economic recovery due to a resurgence in local Covid-19 cases and Malaysia’s relatively slow vaccination rate.

“On the downside, if the current nationwide MCO 3.0 fails to curb the rise in local Covid-19 cases, Malaysia might once again be placed under the draconian MCO 1.0.”

Should this happen, Kenanga Research believed that Bank Negara Malaysia (BNM) could adjust the OPR lower by at least 25 bps as the central bank still has ample room to manoeuvre in the 2H21.

“But before the monetary option is taken into consideration, we expect that the government might again opt for another stimulus package to support the economy.”

As for AmBank Research, the research firm noted that its initial projection of around 16 per cent–18 per cent in 2Q21 will have to be downgraded.

“The resurgence of rising Covid cases and restrictive measures now pose more downside risk to growth,” AmBank Research said.

“More so with the lack of clarity and transparency over the use of the Hotspot Identification for Dynamic Engagement (HIDE) system starting May 7.

“The HIDE list tracks visitors based on the MySejahtera app. While the list would enable the owners of the premises and the public to take appropriate action, it has caused confusion among the public and businesses especially the SMEs.

“Even if a visitor is found to be high-risk and rejected by the business owner from entering the outlet, the person would be listed to have visited the outlet.

“And businesses listed in HIDE will need to clean and sanitise. It will certainly impact them from the negative publicity and may take longer than expected to recover.”

The research firm opined that there is a need for clarity and transparency, adding that those listed on the HIDE system need not necessarily mean that their business premises face higher risk of having an infection than others.

“Added with MCO 3.0 and lack of clarity over HIDE, the risk of more businesses falling into insolvency or winding up could not be ruled out.

“It will also add pressure on household income and employment, especially those in the Bottom 40 per cent (B40) group and to some degree the lower end of Middle 40 per cent (M40).”

On that note, AmBank Research lowered its 2Q21 GDP projection to around nine per cent to 12 per cent.

“Hence, we have reduced our 2021 GDP outlook by 0.5 per cent to 5.5 per cent (base case) while our upside has been slashed by one per cent to six per cent. Our downside to growth has also been revised to 4.5 per cent from five per cent previously.”