By Lee Heng Guie
YEAR 2020 was an intense and volatile year as the unprecedented COVID-19 pandemic has ravaged the global economy, leaving a trail of massive socio-economic destruction and business damage.
The ensuing Great Lockdown worldwide and devasting impact of pandemic has catalysed the most severe global economic contraction since the Great Depression.
The starting of a mass vaccine distribution and vaccination process in some advanced economies injects a greater sense of optimism that the global economy will bounce back this year.
However, the global economy yet to be completely out of the woods. We see four key risks that might derail the global recovery which are:
- The multiple waves of the new virus strains mutation, which are difficult to control, may require renewed national lockdowns in many countries;
- Inadequate policy support due to the limitation of monetary policy and fiscal space or the fading effect of fiscal stimulus;
- While investors expect a more predictable US policy trajectory under the Joe Biden administration on trade, it is too early to assess the Biden administration’s stance on the US-China relationship, a technology war between the US and China remains a risk;
- Geopolitical flashpoints.
In Malaysia, the movement control order (MCO) and pandemic have sent the already slowing economic growth trajectory into a heavy tail-spin, suffering a historic sharp economic output decline of 17.1% in the second quarter of the year (2Q 2020) before narrowing to a smaller contraction of 2.7% in 3Q.
However, the emergence of a third wave in late September, which resulted in high three-digits and four-digits new infection cases daily have tempered consumer and business sentiment.
With a slower improvement in 4Q 2020, we estimate the full-year 2020’s gross domestic project (GDP) to decline by between -5.5% and -5.8%.
The unemployment rate has re-ticked higher to 4.7% (748,200 unemployed persons) in October after stabilising at 4.6% for two months.
The domestic economy has yet to be restored to a full capacity as the pandemic has disproportionately impacted the services industry versus the manufacturing industry due to social distancing measures and changes in consumer behavior.
The travel, tourism and aviation industry as well as retail sector are slowly on the mend until the vaccine is distributed and at least 50% of population get vaccinated as well as international travel resumes.
As the difficult 2020 has ended on a hopeful note with the welcome news of COVID-19 vaccines starting distribution and are being inoculated in the advanced economies, it is believed that the Malaysian economy will continue to heal through 2021 and beyond.
The Government has indicated that the first batch of vaccines will arrive in February-March 2021 amid in the process of securing a portfolio of vaccines throughout the year.
The Government had secured supply for 40% of population (12.8 million people) for next year through joint agreements with Covax, Pfizer and AstraZeneca.
What is needed is a national plan to build people’s confidence in the COVID-19 vaccines, tailoring to different segments of the Malaysian public, each with different reasons for skepticism, different levels of trust in different people and institutions, and different attitudes and behaviours toward how they protect themselves.
According to the World Health Organization (WHO), 60% to 70% of the population need to be vaccinated to reach the protection that comes from community-wide immunity.
Institutional reforms now!
We recognise that the shape of Malaysia’s economic growth this year is dependent on the development of vaccines inoculation and infection rates, the effective implementation of Budget 2021’s spending programmes, including cash assistance, consumer and business confidence as well as the economic performance of Malaysia’s major trading partners.
Our base case scenario projects real GDP growth of 5.0% for this year assuming that the global economy continues to recover, albeit unevenly and at a slower pace.
We remain wary of the Budget 2021’s implementation capacity risk as well as the lingering policy and political risks.
For an upside scenario, 6.5% for this year on an assumption of accelerated vaccination, supported by a more robust rebound in services with the resumption of international travel.
It is also assumed that the effective implementation of the largest ever fiscal stimulus (total expenditure of RM322.5 bil), equivalent to -5.4% of GDP budget deficit enhances a faster domestic demand driven recovery.
This year will witness the roll out of key development plans, starting with the 12th Malaysia Plan (2021-2025), followed by the New Industrial Master Plan (NIMP).
The 12th MP would chart the broad direction and strategies of the country’s socio-economic development based on the Shared Prosperity Vision 2030 while the NIMP will accelerate the industrial transformation as Malaysia continues its quest to become a high-income nation by 2030.
What will fundamentally transform the Malaysian economy?
The Government needs to undertake bold and decisive fiscal and economic reforms to strengthen our economic resilience and business prospects for the future.
We need to chart a roadmap for restoring public trust in the Government by making immediate and tangible improvements to the institutional and political system. The focus points over the next five years are as follows:
- Address structural weaknesses and vulnerabilities as Malaysia still remain trapped in the high middle-income trajectory, limited fiscal space to counteract economic shock, low investment in information and communication technology (ICT), slowing productivity growth, enhance greater exports capacity, and the shortage of skilled manpower and brain drain.
- Reviving economy and ensuring sustainability (Environmental, Social, and Corporate Governance (ESG)), digitalisation, education and skilled human capital development to prepare our workers to have skill set to excel in the jobs of the future will be central.
- A major overhaul of redistributive policies and design an inclusive social protection system safety to reduce income inequality and regional economic development gaps.
- Redefining the role of the Government, government-linked companies (GLCs) and government-linked investment companies (GLICs). Reforming public sector delivery services to become an effective facilitator. GLCs should focus on building strong institutions, spearheading new growth areas to open up for private sector as well as developing areas based on policy needs.
- Competitiveness, innovation and environmental sustainability in ensuring our businesses and industries are able to compete in an increasingly complexity global marketplace. – Jan 2, 2021
Lee Heng Guie is the executive director of the think-tank, Socio-Economic Research Centre (SERC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
