Malaysia is no stranger to external shocks affecting its macroeconomy. Over the past two decades, it was buffeted by the 1997 Asian Financial Crisis (AFC), the 2001 global slowdown after 9/11 and the 2008 Global Financial Crisis, each shock affecting the Malaysian economy in different ways. The first one resulted in the steepest economic contraction in Malaysia’s history – reversing growth to negative 7.35% in 1998. The country surmounted this massive crisis through prudent policymaking and drew important lessons to protect itself from the latter two economic shocks.
Prior to COVID-19’s global spread during the last two months, economic growth in almost all countries had already slowed on the back of trade tensions between the United States and China. Against this softening economic backdrop entered the COVID-19 virus.
What began as a localized epidemic in Wuhan, China has now transformed into an international public health crisis and an international economic crisis creating supply shocks and demand shocks in over 180 countries. Amidst this unfolding global pandemic, international oil prices, too, began to plummet in early March adding additional fiscal pressure on oil producing countries including Malaysia.
The public health shock created by COVID-19 first evolved slowly and then expanded rapidly in March of this year. Within four weeks after February 27, the cumulative number of infections skyrocketed upwards to 2,470 confirmed cases, and there were 35 deaths and 388 recoveries (as of March 29). These trends are already placing the Malaysian health system, particularly the public hospitals, under considerable strain. A third ‘tsunami wave’ in the words of Ministry of Health Director General Datuk Dr. Noor Hisham Abdullah, if not prevented through more expanded testing, case isolation and enforcement of public compliance, could easily flood Malaysian healthcare facilities and result in numerous fatalities not least among the elderly and persons with chronic health conditions.
Initially, the effects of the crisis were felt in the electrical and electronic products (E&E) sector which is closely tied to the Chinese market; and in the tourism and retail sectors due to a significant drop in incoming tourists. These effects widened recently resulting in broad-based disruption to all economic activities in the country including the financial and currency markets.
Looking forward, recent projections by the World Bank indicate that substantial economic pain will be inescapable in all countries in the region. In our latest regional economic update East Asia and Pacific in the Time of COVID-19 launched earlier this week, economic growth in developing East Asia and Pacific countries is estimated to slow to 2.1% in 2020 under a base case scenario; and to negative 0.5% in a lower-case scenario.
Along with significant economic retrenchment, the global pandemic will have a large impact on poverty in the region with 24 million fewer people escaping poverty in 2020 under the base case scenario than was forecasted in the pre-COVID-19 projections. These estimates were generated under continuously changing conditions and based on available data as of March 27.
The World Bank East Asia and Pacific Economic Update urges countries to take immediate action to strengthen containment, boost healthcare capacity and implement targeted economic measures to lessen the impact on Malaysian households, businesses and workers - including the injection of greater liquidity and repayment flexibility into the financial sector. The report also promotes the importance of countries adopting an integrated approach towards containment and macroeconomic policies, and international cooperation and public-private partnerships to ensure the production and supply of key medical supplies across international borders.
In line with these recommendations, the Malaysian government issued two economic stimulus packages and placed the country under a ‘Movement Control Order’ (MCO) for an initial two weeks – now extended to mid-April. The MCO, through banning public gatherings and mandating home-based learning and work for all students and workers (except those involved in essential services), seeks to limit further widespread diffusion of the virus. Public compliance with Ministry of Health testing policies and movement restrictions will be crucial to preventing a new and sweeping wave of infections from gathering momentum.
The economic stimulus packages, on balance, contain the right elements for mitigating the impact of the COVID-19 crisis. The second and larger economic package, announced on March 27, rightly prioritizes supporting front-line workers in the healthcare system and purchasing medical supplies. It also contains important additional measures to protect the income of vulnerable Malaysian households through cash transfers, help individuals and businesses smoothen out their debt repayments, and provide support and wage subsidies to Malaysian businesses. The goal of the wage subsidy measure is to encourage struggling companies in the private sector to retain their employees during this downturn.
Although this second package is prescribing the right economic medicine for the COVID-19 crisis, there may be questions about gaps in the medication and the appropriate dosage of some of the measures. Specifically, how best to support medium-sized, small and micro-enterprises will require further thinking and action, and the relatively modest size of the wage subsidy may prove insufficient to prevent job layoffs by firms in weaker financial positions. If the public health crisis continues unabated and requires an extension of movement restrictions, a third economic stimulus may be necessary.
In retrospect and taking the long view, Malaysia has seen many economic crises in its day. With enough determination, clear-eyed thinking, careful policymaking - and capitalizing on its prior experiences - it will be able to weather this unusual storm.