The government can spend more

By Dr Mohd Afzanizam Abdul Rashid, Chief Economist, Bank Islam Malaysia Berhad

The Malaysian economy is recovering quite decently although the level of pessimism are still prevalent. For starters, the monthly GDP series saw smaller contraction in June at -3.2 percent from 28.6 percent in April. This is understandable as the Movement Control Order (MCO) was in full blast from March 18 to early May. The total industry volume (TIV) for the automotive sector jumped from an all-time low of 141 units in April to 22,960 units in May and accelerated further to 56,444 units in September.

The unemployment rate also fell from 5.3 percent in May to 4.7 percent in August with the number of unemployed person dropped from 826k in May to 741k during August. The Leading Index which shows the future direction of the economy grew 7.6 percent in August, the fourth consecutive months of positive increases, suggesting the economic activities are picking up its speed in the immediate terms. The JP Morgan Global Composite PMI rose to 52.1 points during September and it has stayed above 50 point demarcation line which separate the expansion (>50) and contraction of business activities, for three months in a row.  

Despite that, the latest RAM Business Confidence Index (RAM BCI) fell dramatically to 33.7 points for the third quarter of this year which is significantly below the 50-point threshold. Almost 90 percent of the survey’s respondents indicated that fragile economic conditions as their main challenges in the next three months. According to the RAM survey, loan moratorium is the highly sought after assistance with 86 percent of the respondents have taken up the offer.

Out of this, a total of 90 percent respondents suggested that they need the loan moratorium to be extended beyond the Sept 30 dateline as cashflows remain scant. Apart from that, wage subsidies, loan subsidies and grants are also critical to keep the SMEs and microenterprises afloat.

As such, the role of the government is extremely crucial to ensure that the recovery process will not be disrupted. At the current juncture, setting the right priorities will determine the success of reviving the economy alongside with strict adherence to the Standard Operating Procedure (SOP) to keep the Covid-19 spread at bay. Some would argue that the active intervention by the government would result in wider deficits and would make their financial position become highly unstable.

While such claims cannot be totally discarded, the government has a unique feature which other economic agents (firms and households) may not have. Some may call it money printing – government ability to raise money via borrowings and these liabilities will be funded by the financial institutions and investors. It may sounds somewhat confusing but the reality is, if the borrowings is in local currency, therefore the government has the ability to do so because it is within their control.

If the borrowings are in foreign currency, then the government might have a problem since the supply of foreign currency are beyond their control. This is especially true when period of economic uncertainty become extremely heightened, the government may not be able to source foreign currency as investors would fear for the default risks.

The statistic shows 96 percent of total federal government debt is in ringgit denominated as of June 2020. Further breakdown showed, the EPF and KWAP owns 22.8 percent and 3.5 percent of total outstanding for government Securities while banks, insurance and central bank holds 23.4 percent, 5.7 percent and 2.3 percent respectively. Meanwhile, the foreign investors accounted the lion share of 37.1 percent in June. This goes to show a vote of confidence to Malaysian government credit risks as the recent numbers have gone up to 39.2 percent as of August.

In that sense, the government can spend a little bit more to secure a strong economic growth. True enough, the government has announced the KITA PRIHATIN totalling RM10 billion worth financial assistance to the businesses and the B40 and M40 income group. The measures were targeted and purpose driven as businesses especially the SMEs and microenterprises are the one that are still struggling following the pandemic shocks.

However, the government needs to ensure an effective communication strategy to the rakyat given that at some point in the future, the expansionary fiscal policy would need to be unwind. The last thing that we need to see is to have a large government presence in the economy which could stifle growth as the private sector may not be able to function effectively. Government is just an enabler and presently, the priority is to revive the economy as the private sector is not willing to spend. For now, the government can spend more.   

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