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Posted Date: May 29, 2020

Another unprecedented global crisis is here. This time around, the trigger is the coronavirus disease (COVID-19). The chilling effect of both the disease and the measures to suppress its spread has been unparalleled. Going forward, long-term policy implications could decide the economic fate of nations.

In Malaysia, 1Q2020 GDP growth slowed significantly to +0.7% y-o-y, the slowest since 3Q2009. On a seasonally adjusted q-o-q basis, it came in at –2.0%. However, this slowdown had been expected, given that the manufacturing sector's performance which is based on the monthly headline IHS Markit Malaysia Manufacturing Purchasing Managers' Index (PMI), had been moderating over the quarter.

With the Movement Control Order (MCO) extended and its eventual conversion into a Conditional MCO, Bank Negara Malaysia (BNM) expects GDP in 2Q2020 to contract. This is not surprising as the longer duration of containment measures, both globally and domestically, had largely reduced economic activities. April's manufacturing PMI, which registered at a record-breaking 31.3 (March: 48.4), is already pointing towards that.

It is notable that Malaysia's 1Q2020 q-o-q GDP growth of –2.0%, when annualised, comes in at around 8.0%. What this basically means is that the economy in 2020 is on track to revisiting 1998's GDP growth pace of –7.4% if the growth remains status quo in the remaining quarters.

Of course, there have been some recent positive developments. For example, crude oil prices, which collapsed in early March, have rebounded from below USD20 per barrel to slightly above USD30 per barrel. Global equities have also recovered by more than 15% from their lows.

Meanwhile, deflation risk has risen. In April, Malaysia's Producer Price Index (PPI) came in at –5.1%, compared with March's -1.9% and February's +0.9%. It would not be too much of a concern had its downward trajectory been accompanied by a stable Consumer Price Index (CPI). Unfortunately, the CPI had also been tracing a similar path in the first quarter (March: –0.2%; February: +1.3%; January: +1.6%). It does not help that the just-released figure for April (–2.9%) shows consumer price growth remaining on a downward trend. Notwithstanding these developments, we should point out that core CPI, which excludes volatile price items, has remained positive (April: 1.3%).

Going forward, both PPI and CPI could likely remain on their current downward trajectories, particularly if weak global growth concerns continue to pressure oil prices. With economic growth expected to decline further, weak demand could also play an increasingly important deflationary role. As it stands, prices paid in April for raw materials and other inputs, according to the results of the IHS Markit Malaysia manufacturing survey, had already fallen q-o-q because of weak demand.

Many other countries have been similarly hit, some worse than others. In the US, the second estimate of 1Q2020 GDP growth shows it coming in at +0.2% y-o-y, much slower than Malaysia's +0.7%. At the time of writing, the total number of US workers applying for jobless benefits had reached more than 40 million.

Against this catastrophic global development, BNM has been very aggressive and timely in its policy moves to support the struggling economy. Over two consecutive Monetary Policy Committee meetings (March 3 and May 5), it had cut its overnight policy rate (OPR) by a total of 75 basis points to 2.0%. It also reduced the Statutory Reserve Requirement (SRR) ratio to 2.0% in March from 3.0% to support liquidity in the financial system.

Going forward, one favourite question will be the likelihood of more OPR cuts given the expectation of further economic decline. At MARC, we foresee the reduced likelihood for more cuts for several reasons. For one thing, lower borrowing cost will not necessarily induce further credit growth as there is also a rising risk aversion of banks. Additionally, it is acknowledged that fiscal policy, not monetary policy, should play the lead role in economic crises, especially in the current crisis that has been characterised by a rare supply-demand shock. After all, the overarching objective of most central banks, even if expressed in different ways, is price stability.

The likelihood of further fiscal spending to keep the economy going, on the other hand, is high. While the government will certainly want to do this, there is a limit to how much it can spend because of fiscal constraints. There is, nevertheless, still some fiscal leeway. We should note that the fiscal deficit, which we estimate to come in at between 5.0% and 5.5% of GDP this year, remains well below the 6.7% registered in 2009 during the Global Financial Crisis.

In any case, fiscal consolidation has been postponed and will remain so for a period even after the public health crisis ends because of the need to repair economic damage. While the postponement will affect Malaysia's credit profile, such policy moves should be seen in the totality of the government's efforts to maintain economic and financial stability, as well as preserve the economic fabric amid a disruptive pandemic.

It is important to note that current policy measures are necessarily short term and reactive in nature, much like social distancing and restrictions on movement sans a vaccine to neutralise COVID-19. Given the possibility that the coronavirus that causes COVID-19 could become endemic similar to the HIV (human immunodeficiency virus) and may never go away, there are important implications for Malaysia's long-term macro-development strategies.

For example, the implications for sectors that continue to rely on cheap, low-skilled migrant workers are dire. There are currently around two million documented migrant workers in the country, with most employed in the manufacturing, construction and plantation sectors. With successes at containing the pandemic patchy among countries that are important sources of documented migrant workers, the question of what the future holds for important economic sectors that are dependent on migrant workers has become crucial.

This issue of overdependence on cheap, low-skilled migrant workers has been raised many times before. This concern continues to weigh on efforts to raise productivity and create higher-skilled and better-paying jobs. This has, among other things, made it difficult for Malaysia to escape the middle-income trap. It is possible that the COVID-19 outbreak could increase the political will to reduce the country's dependence on foreign labour.

Going forward, globalisation will likely continue to retreat for a time even after the pandemic ends. Against this backdrop, Malaysia, a net food importer, could face food security issues with food protectionism expected to become the new normal in the post-pandemic world.

These are just some examples of the long-term implications of the pandemic on Malaysia. It is certainly not too early, maybe overdue in some cases, to firmly re-look our macro-development strategies.

Contact:
Quah Boon Huat, +603-27172931/ boonhuat@marc.com.my