By Chee Jo-Ey
IN response to the coronavirus disease (Covid-19) outbreak, the government is planning to introduce a fiscal stimulus package to mitigate any adverse repercussions as well as provide an additional impetus to support the domestic economy.
A similar stimulus package called “The Package of New Strategies” was tabled by the federal government back in 2003 and this involved an amount of RM7.3 bil. Under this package, the government injected funds to provide temporary relief to the economy in the wake of the Severe Acute Respiratory Syndrome (SARS) epidemic.
The objective of the package was to promote private sector investment, strengthen the nation’s competitiveness and develop new sources of growth and enhance the effectiveness of the delivery system.
According to AllianceDBS Research report, only 23% or RM1.7 bil of the stimulus package was funded by the federal government, with the balance contributed by Bank Negara Malaysia (BNM) and development financial institutions (DFIs) such as Bank Simpanan Nasional (BSN) and Bank Pembangunan, through micro credit schemes under various loan programmes.
As a result, the stimulus package did not materially impact the government’s fiscal position when it was implemented; and the government was instead able to meet the targeted fiscal deficit level of 5.4% of gross domestic product (GDP) (2002: 5.6% of GDP).
The initiatives in the 2003 Package of New Strategies included the waiver of income tax instalment payments for travel agencies, 5% discount on monthly electricity bills for hotel operators, tax exemptions for hotels and restaurants, 50% discount on road tax for taxis and the exemption of Human Resources Development Fund (HRDF) levy for a six-month period.
The global economic outlook had turned uncertain since the first month of 2020 owing to the outbreak of Covid-19 in Wuhan which is a vital industrial hub of China. Since China is the world’s second-largest economy, any deceleration in the country’s GDP growth could definitely weigh on global GDP growth in the medium term.
The 2003 SARS epidemic provides the best reference point to gauge any expected loss that could arise from the outbreak of the highly contagious novel coronavirus. In 2003, the global economic loss from SARS amounted to close to US$40 bil, mainly attributed to the loss of investment and the impact on confidence, therefore dampening spending during the year.
Nevertheless, the implications of the new outbreak is assumed to be at least no less than the loss incurred by SARS in 2003, given that China has now become a much larger economy and is way more connected to many economic regions via an integrated global value network.
Notably, while the Chinese economy accounted for about 4.0% of global GDP in 2003, it now makes up around 13.1% of total global output. Hence, a prolonged lockdown of major industrial hubs in China could disrupt manufacturing supply networks and consequently have a wide negative impact on China’s major trading partners.
Furthermore, there could be a potential decline in confidence with regard to investing in China, which has been a key recipient of FDI. It was the world’s second-largest recipient with a total FDI inflow of US$139 bil, or 16.9% of total global FDI inflows in 2018.
Overall, the outbreak of the Covid-19 has just offset the potential benefits of a trade truce between the US and China as well as the easing of geopolitical tensions, thus setting the stage for a global slowdown in business and economic activities.
Like SARS, the Covid-19 is expected to seep into the economy expansively through the confidence and demand channels with its adverse effects materialising in the near term. The fears induced by SARS had led to a decline in travel and retail sectors, as the rapid rate of contagion prompted people to avoid social interactions – likewise for the coronavirus outbreak.
Many countries have already imposed travel restrictions on Chinese tourist arrivals following the decision by the Chinese government to ban all outbound travel by its citizens. Thus, a significant decline in Chinese tourist arrivals may weigh on the economic growth of emerging Asian economies, especially Hong Kong, Cambodia and Thailand, which are the most popular destinations for Chinese tourists in recent years.
Since the Malaysian government too has halted all immigration facilities including visa issuances for Chinese citizens from the affected areas, and a significant drop in total tourist receipts may be seen during the first half of 2020, assuming that the outbreak persists at least until mid-2020.
China was Malaysia’s third-biggest source of foreign tourists at 12% of total tourist arrivals of 20.1 million after Singapore and Indonesia from January to September last year. In fact, Malaysia was targeting 3.2 million tourists (10% of total tourists expected) from China through several promotional campaigns in conjunction with Visit Malaysia Year 2020 (VM2020).
Thus, the imposition of travel curbs on Chinese tourists is likely to affect the campaign, which may, in turn, force the Ministry of Tourism, Arts and Culture to revise its initial target of 30 million tourist arrivals and tourist receipts of RM100 bil for 2020.
As of Feb 8, the Malaysian Association of Hotels (MAH) reported more than 95,000 room cancellations that incurred a loss in revenue of more than RM40 mil, in response to the outbreak and the resulting drop in tourist receipts. It is also noteworthy that most of the cancellations stemmed from China.
Malaysia’s tourism sector contributes around 5% of our total output; fuelling concerns that any adverse impact on the sector could directly translate into a slowdown in our GDP growth, at least in the first quarter.
To ascertain how big a fiscal stimulus package is needed to counteract the impact of Covid-19, we first identify what the government has in store for us in 2020.
Instead of pursuing prudent spending amid its commitment towards achieving fiscal consolidation, this year’s budget is considered an expansionary budget with higher targeted operating (RM241 bil, +7.0%) and development expenditures (RM58 bil, +8.0%). Within the development expenditure, allocation was directed to most major industries and sectors such as health, education, defence, home affairs, environment and rural development.
For the transportation sector, the government budgeted RM12.2 bil which is also the highest share of total development expenditure (21.8%). The projects involved are the targeted fuel subsidy, maintenance and upgrade of airports and public transport networks, maintenance of road works, and reduction of highway tolls, among others.
The government has also set aside RM188 mil (+88% year-on-year) for the Ministry of Tourism, Arts and Culture this year, with priority given to achieving the VM2020’s campaign objectives. Initiatives proposed include an allocation of RM90 mil to drive awareness, promotions and programmes for the campaign, various tax incentives for tourism and art sectors, and maintenance of various tourist attractions.
In terms of improving external trade, there are such initiatives as an in-depth feasibility study on the development of Pulau Carey, and an additional RM50 mil to stimulate public-private partnership for the Kota Perdana Special Border Economic Zone (SEBZ) to strengthen our trade ties with Thailand.
The government is also committed to supporting Malaysian SMEs to enable them to boost their exports, through increasing the Market Development Grant (MDG) ceiling for each company from RM200,000 to RM300,000, and allocating RM50 mil to encourage SMEs to engage in more export promotion activities.
According to AllianceDBS Research, possible measures under the new stimulus package are:
Temporary reduction of Sales and Service Tax (SST) on the cards. Reducing the SST by half to 3% across all sectors for six months could provide a huge impetus to private consumption. The estimated SST collection from the federal government this year amounted to RM28.3 bil, and cutting it by half for six months also means that it could inject an estimated RM7 bil into the domestic economy.
The government could consider increasing the tax claim for sponsorship of arts, cultural and heritage activities in Malaysia. The proposed legislation for 2020 revolves around the tax deduction limit for companies sponsoring such activities being increased from RM700,000 to RM1 mil. However, out of the RM1 mil, a company is allowed to claim up to RM300,00 per year, which has not been revised. An increase in tax claims for sponsoring such activities could further encourage private sector participation in local arts, cultural and heritage activities in Malaysia, thus spurring a higher number of tourist arrivals.
Besides, the government could instruct agencies and departments to hold conferences and meetings in hotels and resorts, especially those with 3- and 4-star ratings. With falling hotel occupancy rates from lower tourist arrivals, organising more conferences and meetings in local hotels could help to mitigate the loss of tourist revenue for hotels.
This could be done via collaborations between the government and Malaysia Association of Hotels, with regard to formulating an attractive package. This could ease the predicament of those that are worst hit in the tourism industry and at the same time, ensure that the government’s coffers are not overstrained.
Furthermore, the HRDF could also play an essential role during the period of the coronavirus outbreak by providing up-skilling or re-skilling training opportunities for existing employees, especially those in the virus-impacted sectors; re-skilling and basic living allowances for retrenched workers; as well as incentivising private firms to enhance the skills of their employees through training programmes that are approved by the HRDF.
Domestic private consumption remains the pillar of growth for the Malaysian economy. To boost household consumption, the government could consider providing a voluntary option to cut employees’ contribution by at least 2.0% to the Employees Provident Fund (currently at 11.0%).
For every 1% cut in EPF contributions by employees, it is estimated that up to RM2 bil net contributions could be added to the disposable income for households. Based on BNM’s estimate of household consumption multiplier at 1.5 times, we expect this move to translate into potential additional consumption of some RM3 bil.
Therefore, a higher disposable income coupled with a higher multiplier effect could act as a potent stimulus for boosting overall GDP growth.
In light of the already expansionary Budget 2020 and the impending announcement of a fiscal stimulus package, we believe that the Malaysian economy, whose domestic growth is mainly driven by private consumption, will continue to be well anchored. Hence, we maintain our full-year GDP forecast of 4.5% yoy for 2020. – Feb 12, 2020