An epidemic for Malaysia’s economy — Felicia Chong

APRIL 16 — According to JPMorgan analysts, the Covid-19 pandemic in Malaysia will peak in mid-April 2020 with a serious impact on the country’s economy. Several economic activities expected post-outbreak include decrease in domestic consumption and national production followed by reduction in investments. Furthermore, business confidence and entrepreneurial activities will also be reduced, negatively affecting future business development.

Reduction in Chinese travellers causing worldwide tourism crisis

Contributing to 5.9 per cent of the GDP, tourism is an important sector in Malaysia for which, international tourism accounts for a significant percentage of the national income. However, the decline in Chinese travellers have an adverse effect in Asian economies, including Malaysia. Asian Development Bank estimated that the number of outbound tourists from China increased from approximately 10 million in 2003 to close to 87 million in 2018 with an average expense at RM8,500. For Malaysia, more than 3.1 million Chinese tourists visited the country in 2019.

The Covid-19 does not only affect Chinese tourists. Majority of flight bookings to Asia Pacific area have decreased by 98 per cent between January and March 2020 given the fact that Singapore, Indonesia and Thailand respectively account for more than 10; 3.6 and 1.8 million visitors in Malaysia, the tourism sector has taken a big hit.

Local tourism has also taken a hit with the Restricted Movement Order. During the outbreak, reservations in restaurants have decreased significantly (between 80 per cent and 95 per cent depending on the country and Malaysia is not immune to this. To illustrate the impact of this outbreak, it can be comparable to SARS in 2003 which caused a 17.42 per cent decline in Chinese tourists, leading to an estimated loss of RM4 billion. Looking at Covid-19, the Asian Development Bank estimated that the tourism industry will expect a loss between RM 2.3 to RM 5.7 billion.

A hole in the workforce

As a result of the Restricted Movement Order (RMO), most businesses have been forced to temporarily shutdown as a precaution. If the RMO situation continues for several weeks, it can cause a major disruption in the manufacturing sector.

The industrial production in China, for instance, dropped by 13.5 per cent in the beginning of January. Similarly, Malaysia will also face a similar issue. With factories being shutdown, workers may be layed-off. Primarily, the hard labour workforce will take the biggest hit – this is not good news for many B40 families. It is estimated that this pandemic will bring about 2.4 million job losses in Malaysia.

Travel bans and other general restrictions will limit the movement of goods and capital. Such situation may lead to the reduction of business investment in the country and corporate bankruptcies, increasing the pressure on the banking and financial system.  

Fall in domestic consumption

Due to a change in consumer behaviour, domestic consumption will also experience a sharp but temporary fall. Based on past observations of SARS outbreak, specialists (Asian Development Bank) estimated that retail sales growth could decline by approximately 3 per cent per quarter. However, depending on the length of the Covid-19 outbreak, this negative shock could eventually be bigger than what was observed in 2003. The Malaysian car industry (contributing up to 4 per cent in GDP) might also face a difficult year in 2020.

Given the severity of the current outbreak and by integrating the fact that the RMO will be extended until mid-April, the MIER projected that the domestic demand might sharply decrease by 12 per cent for 2020.

Short-term and long-term stimulus package is needed

Amid difficult situation facing the country’s economy, there are several rooms for actions in the short and long run to adapt to the lasting impact that has taken place on all sectors. These short- and long-term actions will have to deal with a list of key for the Malaysian economy: the community, technology, healthcare, science, governmental roles, economy and lifestyle. For instance, a short run monetary stimulus could be given to assist the economy. About a week since the movement control order, the government evoked a list of measures to ease the economic situation of individuals, SMEs and corporates in terms of credit management; loan restructuring and debt management options through partial EPF withdrawals for debt or early loan settlements.

Further reduction in interest rate and tax exemption needed

The major objective of the recent government’s stimulus plan is to protect households and to generate a context in which SMEs will have enough liquidity to ensure a fast recovery of the economy in the short-term. To alleviate temporary decline in consumer spending, the government availed EPF reduction options to contributors so that this is reflected in additional take home income in their pockets.  A way of keeping investments attractive during this period and after is to reduce the interest rate and ease processes for small loan applications. This makes capital accessible for companies and SMEs in need of cash to proceed with their short-term operations. In relation to that, the government recently offered a package to aid the SMEs while Bank Negara reduced its interest rate.

The central bank might have to reduce further depending how long the situation will be. Tax exemption/ reduction for some sectors (tourism and education) is a good way to keep the economy on track in the short run. The global domino effect arising from reduced investment and consumer spending is effectively a chain led by people having lesser money in their pockets, hence the minimized aggregate spending and investment. Focus should be given to efforts that would have an impact on the amount of cash the population carry in their pockets. That is why a combined action on consumption and investment is required.

More can be done for education sector

In a context of Covid-19, traditional ways of schooling are obviously inappropriate – Social distancing requires more flexible and personalized way of learning. Distance learning and online instruction therefore became a must. To support such evolution, the government could consider supporting all actions and initiatives in that direction by:

(1)          Providing economic incentives (tax exemptions, grants or no interest loan etc.) to education providers developing such online instruction; and

(2)          Improve internet infrastructure and coverage in the country. The former point would also require the development of new educational standards by the ministry of education. The government mentioned its desire to support the second point.  

Long-term economic policy can include contingent plans for pandemic situations like the covid-19 and SARS. Future economic blueprints could give more emphasis to potential interruptions and revival plans in health, education, and businesses. The Government’s stimulus integrates such aspect since it includes public investment in internet coverage and digitalization of companies. Clearly, the drastic state of situation caused by Covid-19 has given a flavor of what could reshape our society. 

What used to define real activities driving economic functions and outputs are challenged and have to be redefined. Throughout this crisis, the way people consume and invest have changed tremendously. It is necessary for the traditional economy to explore alternative/innovative way of doing business. In the context of the lockdown, digital activities, online business and fintech appear to be a way of perpetuating the economic activities. More generally, the situation forces companies and SMEs to think about their digitization emphasizing therefore the urgent need to embrace the best standards as possible to go for digital economy 4.0. When this outbreak is under control, long-term economic alternative can be explored to include innovative entrepreneurial/economic activities to face such unprecedented situation.

* Felicia Chong — Lecturer in Finance at Taylor’s University.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.

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