Rethinking the ‘new normal’

FOLLOWING a sudden resurgence in cases since earlier this year, Malaysia is currently placed under a full movement control order (FMCO) with the economy now stuttering to a slowdown as most businesses are either not operating or operating below normal.

More dishearteningly, the nation began recording more than 10,000 cases per day, with the highest being on July 15 at 13,215 as at writing.

However, it is worth noting that as at July 16, 2021, 4.3 million people in Malaysia or approximately 13.2 per cent of the population have received two doses of the Covid-19 vaccines.

As the nation intensifies its nationwide vaccination roll-outs and with experts now saying that Covid-19 will likely be here to stay as an endemic disease, is it time now for Malaysia’s government to rethink its strategies and approach towards handling this virus, especially now, as more people in Malaysia are being vaccinated?

Currently, World Bank Group (World Bank) suggested that the immediate focus should be on effectively containing the pandemic and saving lives.

“Increasing the capacity for smart containment, including the adoption of an effective testing and tracing strategy, is essential to ensure a safe and gradual reopening of the economy. In parallel, the vaccination rollout must be accelerated, to help slow down the spread of the pandemic,” World Bank recommended in its latest Economic Monitor report for Malaysia.

Over the medium term, however, it pointed out that deep structural reforms are needed to achieve higher rates of more inclusive and sustainable growth.

“While in the near term, focus will be to weather the surge; to reduce poverty and ensure shared prosperity, growth that creates a greater number of more productive jobs is needed.

“Economic transformation through deeper structural changes and market integration that catalyse business opportunities is needed to create an environment in which workers are able to shift into higher productivity activities, resulting in higher incomes as they generate greater returns on their labour and other assets,” it said.

Malaysia’s economic recovery hinges on policies to promote immediate relief and on clear, accessible and targeted support programs to enable firms to preserve liquidity.

“Recovery efforts should include the extension of conditional wage subsidies, improving the predictability of Standard Operating Procedure (SOP) regulations, and expediting approvals and disbursements for existing loans. In the medium and long term, however, deep and structural reforms will be required for a private-led post-pandemic economic recovery,” it added.

“As a post-pandemic recovery will largely be driven by the private sector, efforts should be made to enhance the resilience of this sector over the medium-to-long term,” World Bank vice president for the East Asia and Pacific Region Victoria Kwakwa remarked.

Meanwhile, Economic Club Kuala Lumpur chairman Tan Sri Abdul Wahid Omar pointed out the need for customisation of policies and programmes to enable the identification of sectors or regions that need more support at this time.

“The pandemic has had an asymmetric impact on sectors and regions. For example, the food and beverage sector experienced higher closure rates, particularly in the Northern states, where vendors largely rely on tourists from Kuala Lumpur and Selangor to patronise their food trails.

“Other manufacturing sectors have experienced particularly high closure rates in East Malaysia. I believe there is a need for the customisation of policies and programmes to enable the identification of sectors or regions where more support is needed,” Abdul Wahid, who is also Bursa Malaysia’s chairman, said in his opening address for ‘Spurring Malaysia’s productivity and growth after the Covid-19 pandemic’ Malaysian Economic Summit 2021 hosted by KSI Strategic Institute for Asia Pacific (KSI).

‘Change the way we look at economy’

At the same event, Khazanah Research Institute senior adviser and economist Jomo Kwame Sundaram commented that Malaysia needs to learn and rethink basic assumptions about the economy for it to move forward and help people in distress.

“It’s very important for us to be open to rethinking our views about many things, especially in these very challenging times,” he said.

“There is no normal, so we need to adopt an all-government approach, and have whole of society’s involvement. Unfortunately you have a top down approach, which is not going anywhere. It is important for us to recognise that you cannot just turn on and off an economy. You can’t just turn on and off enterprises, that is disastrous. And especially when you have an open-ended approach,” he said.

“What we have now is a slowdown which is induced by government policy, and therefore you need to deal with it, recognising its problems, you have a downturn induced by your own policies, and you need to have counter cyclical policies,” he added.

“If we’re going to learn anything about from this pandemic I think we need to really learn and rethink our basic assumptions about the way the economy operates and rethink what is needed in order for us to move forward.

“We have to recognise counter cyclical fiscal policies besides vaccinations, to improve economic performance,” he stressed.

To keep the people’s welfare and the economy afloat, during the FMCO, the government has announced several economic packages since March 2020.

These packages are collectively worth RM530 billion. According to Abdul Wahid, out of this amount, a significant RM83 billion are in the form of direct fiscal injections.

“The government has been prudent and introduced initiatives that do not unnecessarily put strain on our fiscal position but at the same time, cushion the rakyat from the worst effects of the economic downturn. It is a delicate balancing act.

“But too wide a fiscal deficit and high government debt level may risk a downgrade in credit rating resulting in higher borrowing cost and potentially weakening the currency.

“Having said that, the saving grace is that our current account in our balance of payments for 1Q21 remains healthy at RM12.3 billion or 3.3 per cent of GDP, our BNM international reserves of US$111 billion is sufficient to finance 8.2 months of retained imports and the banking system remains well capitalised with core equity tier one ratio of 14.8 per cent, sufficient buffer against unexpected risks.”

As such, he pointed out that the next few months will be absolutely crucial for our economy.

“Achieving the milestones of the National Recovery Plan will be pivotal for an economic rebound.

“Transitioning between the four phases will not be easy with the recent wave of Covid-19. But I am optimistic we can – and we must – achieve it.

“On the financing side, Malaysia’s banking system remains resilient and will continue to serve as a pillar of strength to support our domestic economic recovery,” he added.

Analysts take on Malaysia’s NRP

IN mid-June, Malaysia’s government announced the National Recovery Plan (NRP) as its post-pandemic exit plan and re-opening of the economy following the FMCO.

The NRP consists of four phases with the transition between each phase is subject to achieving substantive progress in three main thresholds which are; the number of daily cases of Covid-19 infections, the capacity of the healthcare system, based on the usage of beds in ICU wards, and the level of the population vaccinated, based on the percentage of people that have received two full doses of the vaccine.

Phase 2 was initially mooted to start in July. However, at the current rate of infections, a nationwide implementation of Phase 2 could be further ahead than expected.

Nevertheless, several states including Sarawak, have recently announced that they have moved on to Phase 2 of the NRP plan, given the decreasing number of cases or the high number of vaccinations.

Analysts believe that the downside risks could continue to weigh on the growth outlook despite exit strategy outline under the NRP.

In a report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) said: “This includes slower-than-expected progress in vaccination and an unabated surge of Covid-19 cases made worse by the emergence of a more infectious Covid-19 variants such as the Delta variant.

“For example, the Delta variant, which first found in India, is now dominant and currently rising in the UK despite more than 70 million or 80 per cent of the population receiving at least one dose of vaccine.”

It also noted that the growth outlook might further be weighed by the possibility of a domestic political wrangling following the expectation that the parliament may reconvene in September or October should the Covid-19 situation come under control.

“Ultimately, if the political situation deteriorate, it may disrupt the tabling of the Federal Budget 2022,” it added.

The timeline of the transition from Phase 1 to 4 is also viewed as longer than expected.

Hong Leong Investment Bank Bhd’s research team (HLIB Research) noted that for comparison, last year’s migration from MCO (started March 18, 2020) to CMCO (May 4, 2020) to RMCO (June 10, 2020) took a total of 2.75 months.

“Nonetheless, the longer duration of this transition is understandable considering that cases are now much higher compared with last year,” it added.

“While the market may see some near term weakness owing to this longer reopening transition, we reckon that this more structured plan with objective thresholds should help control the pandemic in a more sustainable manner.

“Coupled with an expected significant increase in vaccination rates in 2H21 (due to back loaded supply deliveries), we are hopeful for a more permanent return to normalcy by year end. On a brighter note, businesses should experience a gradual recovery from July onwards (Phase 2) owing to increased headcount capacity to 80 per cent from 60 per cent and expansion of the “positive list” permitted to operate,” it opined.

Economy: Towards recovery in 2H21

WHILE the economy might appear bleak at the moment, under the shadows of the current FMCO, analysts are optimistic on Malaysia’s outlook in the second half of 2021 (2H21).

“We will not be perturbed by any further extension to the nationwide lockdown that started on June 1, 2021 as we believe it is the right thing to do to break the chain of the Covid-19 spread. Similarly, we are not overly concerned about the seemingly stubbornly high new daily infections, which shall eventually come down thanks to the lockdown and the accelerating vaccine rollout,” AmInvestment Bank Bhd’s head Equity Research Malaysia Joshua Ng commented in a strategy report on Malaysia’s 2H21 Market Outlook.

“While clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks, we take comfort that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors,” he added.

The research team at AmInvestment retained its view that the underperformance of the local market in 1H21 due to the resurgence in Covid-19 infections makes it an even more compelling recovery play in 2H21.

Sector-wise, it noted that while clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks, it pointed out that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors.

“Other key sectors that are poised to benefit from the recovery are power (increased demand for electricity, particularly, from the commercial and industrial segments), oil & gas (higher crude oil prices), seaport (higher throughput on further recovery in global trade), airport (the eventual reopening of international borders), consumer (cash handouts and recovery in the job market to sustain consumption) and REIT (reduced rental rebates, recovery in footfall and occupancy),” it added.

It also highlighted that while the availability of effective vaccines has greatly brightened the recovery prospects of the air travel sector, it remained mindful of the need for airlines to recapitalise their balance sheet after massive losses during the pandemic.

Overall, according to World Bank, the global economy is projected to expand by 5.6 per cent in 2021, its strongest post-recession growth rate in 80 years. Following a 3.5 per cent contraction due to the impact of the Covid-19 pandemic in 2020, global economic activity has gained significant momentum.

With the reopening of economies, global demand is expected to recover and with that, Malaysia is set to see its export growth gaining momentum.

Nevertheless, with the FMCO in place, lasting longer than expected, analysts are cautious on Malaysia’s GDP growth for this year.

The World Bank has lowered its GDP growth outlook for Malaysia for the second time to 4.5 per cent in 2021 – down from the six per cent growth forecast in March 2021.

While Maybank Investment Bank Bhd’s research team (Maybank IB Research) expected a slower 2021 GDP rebound on weaker services and private consumption growth.

“We continue to expect the Malaysian economy to rebound but by a slower 4.2 per cent compared with 5.1 per cent previously (minus 5.6 per cent in 2020).

“We assume current FMCO or Phase 1 of NRP to be between one-and-a-half to two months. Our forecast applies the official estimate for daily GDP losses of RM1 billion which is less then the official figure of RM2.4 billion incurred during MCO1.0 as more sectors, industries, businesses and companies are allowed to operate, as well as are better prepared and well-adjusted to the lockdown this time around,” it explained.

It noted that its downward revision in this year’s GDP growth mainly due to slower services sector and private consumption growth forecasts.

“We lowered the growth forecasts for services sector (2021E: to 4.2 per cent from 5.1 per cent previously; 1Q21: down 2.3 per cent y-o-y; 2020: down 5.5 per cent) on the supply side and private consumption (2021E: to 3.9 per cent from 5.9 per cent previously; 1Q21: down 1.5 per cent y-o-y; 2020: down 4.3 per cent) on the demand side.

“Both are the largest component of supply-side and demand-side GDP which are 58 and 59.5 per cent of 2020 GDP respectively, and most sensitive to, and most impacted by, tighter movement restrictions and lockdowns,” it added.

Overall, World Bank pointed out that Malaysia’s growth recovery hinges on length and severity of movement restrictions, the effectiveness of pandemic containment measures, and the pace of the rollout of the vaccination programme.

“An ongoing cycle of on-and-off closures and re-openings of the economy or any further unexpected disruptions or delays to the vaccination rollout could exert further negative pressure on growth.

“Furthermore, an increase in the number of vulnerable households could affect consumer spending, posing additional downside risk to the projection,” it said.

“On the upside, the effective management of the pandemic and increased vaccination rates could lead to higher-than-projected growth,” it added.