These past few weeks have been particularly challenging for Malaysia on 3 fronts.

The first stems from the bleak political outlook due to the protracted US-China trade war that has been pulling the world economy down into an economic recession towards the end of 2019. We were given a breather when China finally agreed on a trade deal with the US, which will see China importing an additional USD200 billion of US products, including USD32 billion of agricultural products, over the next 2 years. This is on top of China’s existing purchase of USD170 billion from the US in 2017, which means a more than double increase in purchase commitments. While this is a great relief for both nations, it is devastating for the world economy as a whole, as China will buy less from other nations to fulfill its commitment to the US.

As the economy goes into slowdown, at around the same time in January 2020, the second calamity struck the global community. Starting from the city of Wuhan in Hubei Province of China, the Covid-19 strain of the Coronavirus started to wreak havoc around the world as it moved eastwards into Asia, and finally devastated the Western frontier of Europe and the US. As it stands, the virus has infected a total of 375498 people and 16362 deaths (as of 25 March 2020), with Italy, Iran and South Korea becoming global hotspots after China.

The impact on the world economy has been profound. Capital markets around the world are suffering greatly from panic selling, and social distancing and lockdowns are greatly impacting businesses around the world. As countries are imposing strict laws to shut businesses especially restaurants, hotels and the likes, some businesses are pushed to the brink of bankruptcy in just a short period of time.  

The third challenge is the political crisis in Malaysia, which saw the rule of the Pakatan Harapan coalition prematurely ended, and making way for a new coalition called Perikatan Nasional. The power transition took place through a loss of majority of the ruling coalition which rendered the government null and void. Malaysia is divided about the legitimacy and ethics of the power transition, and businesses and investors are worried about the stability of the newly formed coalition. This has reflected badly on the country’s capital market which saw some of the poorest performances, with the stock market suffering a capital outflow totaling $583.4 million over that period.

The new government took power just days before the Covid-19 cases spiked in Malaysia. From 27 February – 1 March, while the new Government was busy consolidating itself, 16,000 people gathered for a tabligh gathering in Sri Petaling, and from which 48 of them were tested positive.  As a result the government banned all mass gatherings on 13 March 2020, but the damage has already been done. Despite the ban, people are still gathering with impunity. A fishing competition was held in Port Dickson on 15 March 2020 where more than 1500 participants took part. A partial lockdown announcement which takes effect from 18-31 March 2020 was aimed at curbing the spread of the outbreak, but people are still congregating and moving about, leading to an additional 130 cases bringing the total cases of the country to 1,030 cases.

As part of the partial lockdown, all public gatherings including religious ones are banned. All businesses and places must shut down except for supermarkets, wet markets, grocery, convenience stores and other essential services. To mitigate the economic impact of the Covid-19, Malaysia placed certain safety nets in place to protect businesses during the period under the RM20 billion Economic Stimulus Package or PRE2020. These include a 15% discount on electricity for affected businesses especially the tourism sector, an a 2% discount on electricity for all other users from 1 April to 30 September 2020. A six-month deferment of monthly income tax instalment payments is also applicable to businesses in the tourism sector in the same period.

It is clear that PRE2020 is predicated on the assumption that the hardest hit sectors are SMEs and those in the tourism sector. Hence the provision of a RM2 billion special relief facility in the form of working capital for Small Medium Enterprises (SMEs) and a RM200 million in microcredit facility are provided to affected companies. Stimulation to the tourism sector and individual consumption are addressed through this package by income tax relief of up to RM1000 on expenditure related to domestic tourism, while Employees Provident Fund contribution by employees will be reduced from 11% to 7% (voluntary) with a period of 9 months. This potentially unlocks RM10 billion of private consumption into the economy. To complement this, Bank Negara Malaysia decided to reduce the overnight policy rate (OPR) by 25 basis points to 2.50% on 3 March 2020 to further spur borrowing and consumption.

All these measures are sincere efforts in boosting domestic demand. However, the massive uncertainties due to the triple whammy (US-China relations, Covid-19, Malaysia’s fragile political climate) are overwhelming for the Malaysian consumer even with more money to spend in the pocket. Sharp increases of Covid-19 cases and the resultant lockdown creates a psychological stress in society, which no amount of measures can effectively change. People are forced to reduce activities like gatherings for entertainment and holidays which overwhelmingly affects the service sector, and they are in no mood to purchase properties in these uncertain times.

Special relief and microcredit facilities for SMEs are great measures when the economy is expanding and people are consuming, but such measures in a depressed economy will not produce its intended results as entrepreneurs prefer not to borrow and invest during this high risk period. It also remains to be seen whether RM2 billion will be enough to facilitate more than 900,000 SMEs in Malaysia, 75% of which are micro-businesses. Based on the calculation by Laurence Todd of IDEAS, if this is applicable to all SMEs regardless of size, only 8% of them will be covered, and only for 25% of their sales turnover for one month.    

PRE2020’s heavy emphasis on the tourism sector is commendable as the sector will be hit the greatest in this period. But its measures such as discounts and tax relief is really scratching the surface if we look at our huge dependency on China, and other parts of the world for tourism flows. With lockdowns and travel bans happening indefinitely around the world with no end in sight, it is likely that this is not going to be a short ride for the tourism sector.

Malaysia’s leadership must therefore have the courage to call a spade a spade, and face the grim reality that we are about to face which is bankruptcy and retrenchments of these sectors. And this means investing far more resources in salvaging/bailing out businesses rather than mitigating their costs, and helping directly in easing the pain of those unemployed during these times. This might be a subtle nuance in policy approach, but it can make a critical difference in saving businesses who are pillars of economic resilience in our country.    

This decision is not going to be easy with Malaysia experiencing one of the worst currency performance, with the Malaysian ringgit standing at RM4.30 against the US dollar, and oil prices plunging nearly 10% on 6 March 2020 and suffering an historic collapse on 9 March 2020 which crashed almost 34% to a four-year low of USD27.34 a barrel (bearing in mind that Budget 2020 was designed based USD62 oil price). This is an overestimation of more than half the real figure, which will pose serious problems on Malaysia’s fiscal capabilities to weather the Covid-19 storm and whether it can really sustain the RM20 billion PRE2020.

It is really a tough time for Malaysia. Therefore, we as Malaysians need to unite, keep calm and be hopeful of good days ahead. Covid-19 is a devastation of not only our economy, but the whole global economy in general, and we have absolutely no control over it. But the only thing that can determine our survival as a nation and as a resilient economy is our political stability, which is the key factor for strengthening confidence of investors and consumers in this uncertain global environment. It is important for the new government to focus on economic growth and development, and make diversity of races and religion in the country as a powerful asset that can spur the country once again to greater heights. 

Our prayers go to the unsung heroes at KKM and Covid-19 frontliners, and to all Malaysians undergoing treatment from this ghastly disease. The nation is with you.