By Ragananthini Vethasalam – 31 May 2021
Calvin Cheng was quoted in The Malaysian Insight article.
THE government must come up with a “large” economic aid package to help businesses and individuals who would otherwise be at risk of losing their livelihood as the country prepares to enter a fresh round of full lockdown, said experts.
Retrenchment, bankruptcy and business closure may increase as a result of the stringent lockdown which starts on June 1, they added.
They told The Malaysian Insight that the lockdown will be especially damaging to hard-hit sectors such as small traders and those involved in the retail, food and beverage, and tourism-related industries.
They also said that Putrajaya has the fiscal amplitude to put together an impactful economic stimulus package.
Sunway University Business School professor of economics Dr Yeah Kim Leng said those already reeling from the economic downturn as a result of the previous rounds of MCO will experience prolonged pain as domestic activities are curtailed once again.
“The disproportionate impact on SMEs and low-income households, especially the self-employed and those linked to the hard-hit sectors such as retail, hotels and restaurants, entertainment and tourism-related industries will be accentuated,” he told The Malaysian Insight.
“Although the economic recovery remains on track as shown by the smaller GDP contraction of 0.5% in the first quarter, the prolonged impact on vulnerable households and businesses in the hard-hit sectors would merit further mitigation measures to be undertaken by the government.”
“A loan moratorium would be one of the relief measures,” he added.
Yeah said the government still has fiscal range to put together an economic stimulus package by increasing deficit spending and accommodating a higher debt level.
“An increase in deficit spending or debt level of less than 1% of GDP is within the government’s fiscal capacity. Alternatively, the government could look at redeploying budget allocations from lower priority areas,” he added.
“As soon as the economy returns to normal, the government could undertake a more aggressive fiscal consolidation strategy to compensate for this unexpected Covid-19 shock more than a year into the pandemic,” he added.
Since the start of the pandemic, Putrajaya has allocated a total of RM340 billion through several economic aid packages. In addition to that, RM322.5 billion was allocated under Budget 2021.
Analyst Calvin Cheng, meanwhile, said the socio-economic impact from the lockdown would be deeply destructive and long-lasting without an economic stimulus that can deliver meaningful support to the vulnerable segments of society.
Cheng, who is a part of the Economics, Trade and Regional Integration programme at ISIS Malaysia, said the vulnerable and marginalised segments of the rakyat will bear the inevitable economic cost in the absence of decisive fiscal stimulus and income support measures.
“From data over the past year, we’ve already seen that small businesses and microenterprises are far more likely to face serious impacts from the economic shocks of Covid-19 and the ensuing economic containment (lockdown) measures,” Cheng said.
“Likewise, marginalised worker groups like the youth, women workers and less educated lower-wage workers have been hit far worse than the average white collar, male, professional worker.
“My past research suggests that young females in particular face employment declines and labour force exits at rates many times higher than the average worker – and ditto for the less educated workers in lower-wage occupations,” he added.
Cheng agreed with Yeah that the government still has room for fiscal stimulus, which can be financed through borrowings.
“Ministry of Finance statements suggest that debt is currently at 58% of GDP, which is two percentage points lower than the statutory debt limit of 60% – which translates to about RM20-30 billion – though even that limit is a naecessary, but it is an arbitrary limit set by policymakers,” he said.
He said the government could increase fiscal space in the medium-term by increasing revenue sustainability and reforming expenditure.
“Plus, public finance wizardry means that untapped sources of revenue, including through higher contributions from GLCs or budgetary reallocations from other expenditures, are viable sources of finance,” he added.
Cheng also suggested that the stimulus package should include a new round of Bantuan Prihatin Nasional (BPN) cash aid and the unemployment insurance under the Employment Insurance System must be expanded.
He said the BPN must be more narrowly targeted to a tighter income band this time around.
“As a ballpark estimate, my estimates suggest this would cost about RM6 billion for a flat transfer amount of RM2,000 per household for the bottom 40% of the income distribution using rough approximations based on latest household income data,” he said.
“Surveys by UNICEF and others suggest that these income support initiatives are precisely the types of assistance that are most useful to households at the lowest end of the income distribution. Cash transfers literally help families survive,” he added.
He also called for increased spending on infrastructure.
GDP growth depends on severity of lockdown
Yeah said the performance of the economy will depend very much on the stringency and duration of the lockdown.
All economic and social sectors, except for essential services, were not allowed to operate under the first MCO.
He said if the lockdown is as stringent as the first MCO, then the effects may be similar to the second quarter gross domestic product (GDP) performance, where Malaysia recorded a contraction of 17.1%- which is its worst performance since the Asian financial crisis.
“However, due to the low base effects, growth may still be positive but far below the rebound expected earlier.
“The prolonged pain will likely cause a spike in retrenchments, bankruptcies and business closures, unless the government mounts a large support package.
“With the total lockdown we could see 2-3 percentage points lopped off the 6.0-7.5% GDP growth projected for this year,” he said.
The MCO 1.0 in March 2020, which saw a complete shutdown of the economic and social sectors, resulted in economic losses amounting to RM2.4 billion a day.
Cheng, on the other hand, is of the view that the GDP contraction in the coming quarter is likely to be bigger than that during MCO 2.0.
“Using MoF’s estimates, the GDP declines during MCO 2.0 (RM700 million per day) would cost about 1.3-1.4% per month (using 2020 GDP). This full lockdown is likely to have GDP declines higher than that of MCO2.0,” he said.
He is looking at a growth rate of closer to 5%, in the absence of any decisive stimulus measures.
“Something that is often underappreciated is that the Malaysian economy will need to grow about 5.9% this year (according to my estimates) just for Malaysia’s GDP to recover to 2019 levels of output,” he said.
“So any 2021 GDP growth of less than 5.9%, which is looking increasingly likely, will mean that we will only recover to pre-Covid-19 levels of GDP sometime in 2022,” he added.
A total lockdown will be imposed from June 1 to 14, to rein in the pandemic. Phase two will then continue for four more weeks depending on the success of the lockdown.
Putrajaya announced the move after active cases in the country crossed the 70,000 mark. – May 31, 2021.
This article was first published by The Malaysian Insight on 31 May 2021.