Brace for impact

Photo by Azlan Baharudin on Unsplash

By Dr Mohd Afzanizam Abdul Rashid

Little that we know, micro-organism such as novel coronavirus disease or famously known as Covid-19 has a severe impact to humanity globally. It all started in Wuhan City, China, whereby the first cases reported was on 31 December 2019.  

When the World Health Organisation (WHO) commenced their Situation Report on 21 January, the number of infected countries was just four and they were namely China, Japan, Republic of Korea and Thailand. Total number of confirmed cases stood at 282 while the total number of fatalities was 2.  

Fast forward, more than 200 countries have been infected by Covid-19, cumulative cases soared to 1.21 million and total deaths stood at 67,841 as of 7 April 2020.  

The International Monetary Fund (IMF) has called for global output contraction on 27 March while the World Bank says that the prospect of global financial shock and recession would hurt the developing countries.  

About 193 countries have begun injecting the economy with cash and financial assistance in order to expand the healthcare facilities and capacity, safeguarding jobs and businesses cash flows. Not to mention the major central banks like the US Fed and the European Central Bank have dialled back their Quantitative Easing (QE) measures.  

The move was none other than to flood the system with cash so that the economy would keep going.  

In a nutshell, the global economy is expected to experience its recession this year. The last time the world economy went into recession was in 2009 whereby the global GDP fell by 0.1 percent. Back then, it was originated from the US following the proliferation of toxic assets also known as Sub Prime Mortgage crisis which have been held by various countries and institutions.  

The Bank Negara Malaysia (BNM) could not agree more too.  

In their latest communique, the central bank is of the view that Malaysian economy would contract by as much as 2 percent or the GDP could grow by a maximum of 0.5 percent in 2020. The net exports are expected to fall by 27 percent while domestic demand would only grow by a paltry 1.1 percent 

The Federal Government has also announced the total fiscal stimulus amounting to RM260 billion. The focus has been to ensure employers will keep their employees by subsidising their workers’ wages for three months commencing April. Maintaining a healthy cash flows are also the immediate priority with various financing packages with super low rates are being poured in.  

Indeed, the scale of the public health crisis is unprecedented.  

Kudos to BNM which has implemented an unconventional means to address the current predicament. The six months loan moratorium is by far the largest stimulus in our view. The RM100 billion bandied around the measures are, perhaps quite conservative.  

Total loans repaid in February 2020 stood at RM97.5 billion while in January, the figure was RM109.8 billion. This should give us a monthly average of RM103.7 billion. Last year, the monthly average of total loans repaid was RM101.1 billion.  

Assuming if its RM100 billion per month, we are looking a total of RM600 billion worth of savings by the businesses and households. If its 50 percent take-up rate, that would put the figure at RM300 billion. Still that’s a 20 percent of GDP, give or take.  

In that sense, the potential economic recovery is enormous. The BNM has estimated that it would yield 2.8 percentage points of impact to the economy. That, too, is still conservative.

From our estimates, the economic impact from the loan moratorium could be more than 5 percentage points should all segments of the economy opted for the six months instalment deferment.  

Imagine if someone is paying RM500 per month for car financing and monthly instalment of house financing of RM1,000, that would give RM9,000 worth of savings. Assuming 30 percent savings from that amount, that would leave him or her with RM6,300 to be spent on other stuff.  

This year, the average loans repaid by the households stood at RM30.6 billion between January and February. That’s RM183.7 billion worth of savings to be made by the households if all of them decides to take on the six months loan moratorium. Applying 53 percent of Marginal Propensity to Consume (MPC), that would translate into RM97.4 billion worth of spending and that is equivalent to 6.6 percent of GDP. It’s massive indeed.  

Notwithstanding that, it is easier said than done. All the permutation and hypothetical estimates are hinges upon the duration of Movement of Control Order (MCO) and the success to contain and to break the chain of Covid-19 spread.  

The economy is almost at a standstill. That is what it is.  

Therefore, it is imperative for everyone to adhere the MCO ruling. Otherwise, all of us will have to pay the economic cost that is so dearly and most importantly, our lives. So folks, please stay at home!

 

Dr Mohd Afzanizam Abdul Rashid is Chief Economist of Bank Islam Malaysia Berhad

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