by Xavier Kong
WITH how integrated and interdependent economies have become, economic destinies are intertwined and everyone needs to pull their weight.
These are the words of Dr Firas Raad, World Bank Group Representative to Malaysia, and Dr Richard Record, Lead Economist for the World Bank, with regards to how the Covid-19 pandemic is affecting the world.
According to the duo, Malaysia was already facing slower growth before the Covid-19 pandemic due to the trade tensions between China and the US, but is now harder hit as a result of the pandemic. This has resulted in significant economic impact to Malaysia in the short term.
However, they also noted that Malaysia has several key strengths in facing the impact. These include diversified sources of income from Malaysia’s diversified economy, the infrastructure to allow some industries to continue to function despite the Movement Control Order (MCO), and stimulus packages that reach the people who need it.
“In a prolonged pandemic, it is important to get resources to those who need them the most,” says the duo, who note that the recent Prihatin economic stimulus package has several right elements to it, such as getting medical support to the frontliners.
“It is the right medicine for Malaysia at this time, to protect incomes, consumption patterns, and the structure of the economy while freeing up resources for frontliners,” they add. However, should the crisis go on longer, more doses of this medicine will be needed.
Malaysia is also noted as a very open economy, and the impact of Covid-19 is also due to the supply shock which precipitates a recession. Recessions are also expected in all advanced economies, which will affect Malaysia’s export sector as well.
However, the effects of the MCO on Malaysia’s production cannot be denied, as an extended MCO will require further measures to be taken. The pandemic “represents an exceptional shock to the global economy, and justifies an exceptional response,” according to the two.
Moving forward, the duo believe that 2021 will depend on how the pandemic plays out. A baseline was shared with Malaysia seeing a V-shaped recovery by the fourth quarter of 2020, which would lead to growth of 6.4% in 2021.
In a worse case, the pandemic’s effects would spill over to 2021, which means slower recovery, “maybe the second quarter of 2021,” meaning 2021 will see a growth of 4.1%, with the Malaysian economy only expected to be back on its feet by 2022.
This comes after the World Bank had lowered its forecast for Malaysia’s gross domestic product (GDP) growth to -0.1% from a previous 4.5%.
“This marked reduction incorporates the slower growth momentum from the second half of 2019, but more significantly, it reflects the impact of the outbreak under a scenario where
the current large-scale disruption of economic activities would extend for most of the year, before a partial recovery toward the year end,” says the World Bank report released on March 31.
The large degree of uncertainty over the outcome of the outbreak presents a major downside risk to the economy, according to the report. An uncontained or further deterioration of the outbreak would result in more severe or prolonged restrictions
on overall economic activities, posing a further drag on growth into 2021, as mentioned above.
“Moreover, uncertainty over the country’s political stability following the recent change in the ruling coalition and the government’s ability to manage the outbreak could pose further downside risks to growth,” adds the report.
Another major challenge identified by the report is the limited fiscal policy space the Malaysian government has to respond to the crisis. A deeper economic policy response would be needed should the health crisis deepen and result in a longer duration of economic disruption, even as the stimulus package helps to mitigate the effect of the outbreak.
Raad and Record both note that there will be a need to mitigate the impact of the MCO, and get the nation to a point where production can resume. As such, they believe the stimulus package can help in this, pointing to the wage subsidy programme as a means to keep employment high so the economy is set to rebound after the MCO. – March 31, 2020