Covid-19 outbreak and movement restriction order places Malaysia in a tight spot, economically

This handout from Malaysia's Department of Information taken and released on March 1, 2020 shows Malaysia's incoming Prime Minister Muhyiddin Yassin (2nd R) waving outside his residence in Kuala Lumpur before his swearing-in ceremony as the country's new leader. (Photo by Nazri RAPAAI / various sources / AFP) / -----EDITORS NOTE --- RESTRICTED TO EDITORIAL USE - MANDATORY CREDIT "AFP PHOTO / MALAYSIA'S DEPARTMENT OF INFORMATION / NAZRI RAPAAI" - NO MARKETING - NO ADVERTISING CAMPAIGNS - DISTRIBUTED AS A SERVICE TO CLIENTS

Prime Minister Tan Sri Muhiyiddin Yassin’s two week Movement Restriction Order (MRO) in order to curb further outbreak of the Covid-19 virus will have severe impacts on businesses and on the country’s economy, economists say.

As the number of cases continue to increase every day, with current numbers amounting to 790 positive cases, possibility of an extended period has been warned.

“We will see major impact on the retail sector. We are talking about small medium enterprises that make up for more than 90 percent of the businesses in Malaysia and a great majority of them are in retail,” said Lau Zheng Zhou, Research Manager in Economics and Business at the Institute for Democracy and Economic Affairs (IDEAS).

Lau told Business Today Malaysia that the small medium enterprises (SMEs) will be badly affected in terms of cash flow as many of them may not have reserves saved up. Lau points out that prior to the Covid-19 outbreak, businesses were already feeling the impact from the US-China trade war in 2019 and the pandemic will only add to the burden.

In the longer run, Lau says bigger companies involving factories that has employed more people especially manufacturers will be affected as well. Previously, the main concern for local business owners were the political uncertainties the country faced that had affected the confidence of business owners on the country’s economy.

This followed by the trade war and the Covid-19 outbreak,  further impact included disruptions in terms of supply chain.

“Private investments in the country had also started slowing down since 2018 and public investment on the other hand had seen a decline,” Lau said.

According to Lau, public sector investment fell by 5 percent in 2018 and 0.8 percent in 2019 compared to a meagre 0.3 percent growth in 2017. Meanwhile, private sector investment grew more slowly at 4.3 percent in 2018 and 1.5 percent 2019  compared to a strong 9 percent in 2017.

The lack of investments has resulted in a lag effect that begun in 2018 and following a series of events that had impacted the economy, Lau pointed out that the country is currently experiencing the consequences and the announcement of the partial lockdown will go on to impact investor confidence.

“Many of these firms were affected by the trade war and with supply chain disruptions, they will face serious cash flow issue,” Lau told Business Today Malaysia.

While former Prime Minister, Tun Mahathir Mohammad had announced an economic stimulus package and the government of the day had come up with their own economic stimulus package, Lau highlighted that both are quite similar in objective; to increase consumption drive.

“Private consumption makes up almost 60 percent of our Growth Domestic Product (GDP), which is huge,” Lau said.

“Our consumption has grown quite encouragingly and this has helped to compensate for the decline in investment,” he added.

According to Lau, private consumption grew by 7.6 percent while investment and exports declined by 2.1 percent and 1.1 percent respectively last year.

In order to prevent the first quarter to fall into a negative growth, Lau agrees that stimulating private consumption is key. While the data in January has proven to be very encouraging, Lau suspects the Chinese New Year played a vital role, the same cannot be said for February and March.

“We will be fortunate if we had mild growth in the first quarter because if the government doesn’t stimulate the economy now, the first quarter will be weak and the second quarter will be weaker,” Lau said, adding on that this could lead a recession.

However, Lau believes that the government of the day has shown that they have the fiscal space to stimulate the economy and doing so in stages may provide some cushion to the impact so that consumption can stay relatively healthy so the first quarter will experience growth although milder.

“The government has to balance its policies and not only look at its economic policies but also at the health issues and the best interest of the society,” Lau stressed.

He also pointed out that if the government doesn’t take action to alleviate the movement of the people, the country will end up with a sudden escalation of a very exponential rate like what had taken place in the western European countries.

This inevitably will lead to a burden on the country’s healthcare system in the form of overcapacity which will then create a different set of cases in the form of capacity constraint.

Lau points out that lessons and case studies from other countries would show that restricting human movement, better detection and awareness will limit and slow down the spread. While it may create short term impact, not doing so may cause mid to long term problems.

A silver lining

While the outbreak had brought upon severe impact on businesses around the globe, Lau says companies with factories based in China would probably realise their dependence on the country and how one crisis could impact production and this situation presents an opportunity to diversify and get into different sectors.

“A lot of companies are moving out of China and into Vietnam and Malaysia,” said Lau.

However, while the opportunity may arise for Malaysia to see potential companies make their base in the country following the outbreak, the government had to have policies that would attract foreign companies into the country that would create jobs.

“The government of the day must recognise that they must continue with institutional and economic reforms. Any decision to develop protectionist measures will only see foreign opportunity move on,” Lau told Business Today Malaysia.

“Foreign investors are watching this government very closely, if they witness any signs of reverting back to the old ways, investors will lose confidence,” Lau said.

He further added that currently it is an investors’ market and they will assess Malaysia’s competitiveness depending on the policies that are in place.

As for domestic players, Lau believes that the political uncertainty remains a key concern. With the possibility of a no confidence vote and the possibility of going into an election that may not produce a conclusive result will affect confidence.

With current changes in the state governments, this could even cause a lot of disruptions in all those states, triggering a need for an institutional reform.

Impact on trading partners

Following the movement restriction order that was announced, travel bans were put in place as well. As a result, as many of the 300,000 Malaysians who commute daily to neighbouring country, Singapore for work had to pack their suitcases from home and cross into Singapore before the borders were sealed.

While Malaysian workers in Singapore refuse to risk a possibility of losing their jobs, the restriction order will have an economic impact on both countries.

Dr Jayant Menon, Visiting Senior Fellow, ISEAS-Yusof Ishak Institute, Singapore told Business Today Malaysia that the movement restriction order will have a negative economic impact on Malaysia and its trade commercial partners including Singapore.

“The strong economic ties between Malaysia and Singapore, which includes the movement of about 300,000 workers across the border daily, suggests that the impact on both countries will be significant in the short run,” said Dr Menon.

He added that the industries in Singapore employing Malaysia workers will be disrupted, while Malaysians who work in Singapore will be inconvenienced, although measures can be put in place to avoid worst case scenarios.

“For instance, Malaysian workers may have to be temporarily domiciled in Singapore, which would add to costs but would reduce disruption,” Dr Menon pointed out, adding on that this could work as a stop-gap measure as long as the restriction on movement is temporary.

“Only time will tell if such drastic measures will be justified in terms of its impact in curtailing the spread of COVID-19, and how they stack up against less draconian measures,” Dr Menon said.

By Poovenraj Kanagaraj

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