Keep a watchful eye on fiscal sustainability

Malaysia’s solid fiscal position and market liquidity are key reasons why the government was able to announce a massive fiscal stimulus (the Prihatin package) to the tune of RM250 billion on March 27 in response to the Covid-19 pandemic threatening the country and its economy.

As economists downgrade Malaysia’s GDP growth for 2020 due to the deadly Covid-19 outbreak, the government could find itself caught between a rock and a hard place – whether to keep spending, therefore reducing its fiscal space, or to implement austerity measures at the expense of the people and businesses.

Recession has already been globally projected for 2020. The World Bank lowered its projection for Malaysia’s GDP from 4.5% to -0.1% while saying a deeper economic policy response would be needed should the health crisis worsen and result in a longer spell of economic disruption.

The Malaysian Institute of Economic Research’s (MIER) forecast was even more pessimistic at -2.9%. Further MIER findings are as follows:

• The number of job losses (mainly non-salaried jobs) could amount to 2.4 million, of which 67% are unskilled workers.
• Household incomes are projected to fall by 12% relative to the baseline (RM95 billion).
• Such fall in household income is manifested in a sharp drop in consumer spending by 11%, despite the fall in general consumer price level by 4.4%.

This pandemic is more disruptive than the severe acute respiratory syndrome (SARS) and even the global financial crisis (GFC). Not only it is an unprecedented health crisis, the contagion has led to an economic crisis as fear of the virus dampens consumer confidence and movement restrictions (quarantines) to control the virus spread result in negative economic consequences.

CLSA, a Hong Kong-based capital markets and investment group focused inter alia on alternative investment noted in its March report that the pandemic represents a greater economic shock for Asian economies than the GFC where economies started to rebound quickly in 2010 after contracting in 2009.

In the era of global negative interest rates and quantitative easing pursued by central banks to fight the Covid-19 impact, the International Monetary Fund (IMF) is of the view that “it’s mostly fiscal” that does the magic.

US economist Jason Furman said, “In normal times, it takes a year or more for monetary policy to have its maximum economic impact. Most likely, the lower interest rates and depreciated dollar will provide modest relief after a substantial lag. Fiscal policy can act much more quickly by getting money into people’s hands within weeks or months.”

In Malaysia’s case, while Bank Negara Malaysia (BNM) has reduced the overnight policy rate (OPR) by 50 basis points cumulatively this year to 2.50%, the government has done well by introducing a generous second stimulus package of RM250 billion.

Although short-term, it consists of measures that fulfil the three objectives stated by the IMF: guaranteeing the functioning of essential services, providing resources for people and businesses hit by the crisis, and preventing excessive economic disruption. This is the most crucial initiative to go for as the movement control order (MCO) has been extended to April 14.

According to the IMF, Malaysia’s economic policy responses should be of two phases: during the war (health crisis and MCO), and the subsequent post-war recovery (after the MCO is lifted).

While the government has announced temporary measures to support households and businesses during the quarantine period, far-reaching measures should be thought of and introduced for the post-crisis period to lessen economic disruption.

The World Bank expects partial recovery to take place in the fourth quarter of this year (4Q20). The National Chamber of Commerce and Industry of Malaysia also said it is likely to take at least six-12 months from containment, stabilisation and recovery before everything goes back to normal.

In post-crisis policy planning, the first core question might be: how will the government fund its stimulus package during the post-Covid period?

Finance Minister Tengku Zafrul Tengku Abdul Aziz recently said the ministry already expects fiscal deficit to widen to 4% of GDP in 2020, up from 3.2% of GDP after taking into account the expansionary RM250 billion stimulus package.

In this challenging time, we have to respond to short-term shocks but we cannot be short-term in thinking, according to Christopher Choong of Khazanah Research Institute. Hence, expanding our revenue base should be the next step forward given that oil-based revenue is currently under threat due to the oil price crash (US$26.35 per barrel at the time of writing).

Here are some proposals that could be considered to expand our revenue base:

• Government to consider re-introducing the goods and services tax at an initial rate of 2% with appropriate coverage, as well as an enhanced mechanism in terms of collections and rebates;
• Government to ask for additional payments in the form of dividends from state-owned oil company Petronas on top of the RM24 billion it has committed to;
• Acquiring capital from various state-owned enterprises; and
• Government to tap into the National Trust Fund (Kumpulan Wang Amanah Negara, KWAN) as it collects wealth from oil and other natural resources.

Higher government spending by way of additional economic stimulus packages would undeniably increase economic activities so long as there are no movement restrictions imposed in the future.

This explains why the government is getting firm with the MCO with a more “stern” phase beginning today to ensure 100% compliance by the people so that the order can be lifted without rising infections.

Nonetheless, the awareness of fiscal constraint possibility signals that the government must ensure the sustainability of revenue stream by having resources put in place while ensuring transparency to the public. That way, the government will have more leeway to prescribe further stimulus packages if needed.

Nur Sofea Hasmira Azahar is a research analyst at think tank EMIR Research. - FMT