Reopening Malaysia’s economy in a new normal

The economic impacts of the coronavirus (COVID-19) pandemic on the private sector, industry and jobs is expected to be large in Malaysia. This is particularly the case for small medium enterprises (SMEs) as they constitute 98.5% of total firms and are likely to be severely affected with less resources to absorb the shock. 

After 47 days of the Movement Control Order (MCO), most businesses were allowed to resume operations on May 4. As Malaysia’s economy emerges from the shutdown, which has been effective in arresting the spread of the coronavirus (COVID-19), the days ahead will look very different. The economy is reopening to a new normal.

We enter with a grim picture at the beginning, facing an expected economic loss of RM 63 billion from the MCO, as announced by the prime minister. Many people have lost their jobs. Most firms, both large corporates and small medium enterprises (SMEs), have not escaped unscathed, with many of them facing insolvency. The negative effects on credit markets, supply chains, and worker productivity will only dissipate gradually. 

The policy objective now is to ensure firms return to their pre-crisis production and employment levels as rapidly and safely as possible , setting the foundations for productivity-driven growth, resilience, and competitiveness over the longer term.

A detailed plan for the next phase will require close coordination between the private sector and the government. The unprecedented scale of the pandemic means that the return to work will need to be gradual and phased, and heightened caution is necessary to prevent further waves of infection. It is also important to ensure that the burden of COVID-19 prevention is not placed disproportionately on SMEs, who are already struggling to stay in business. 

The government, in recent days, has been working to provide information with Standard Operating Procedures for employees to follow social distancing norms as a means of ensuring safe work conditions. This support is especially important for SMEs as such companies are likely to have lower capacity than larger ones to scale up the kind of management response necessary and to put in place adequate mitigation measures. 

For many industries, getting employees back to offices may remain the preferred manner of work. Until effective treatment or a vaccine becomes widely available, targeted scaling up of testing to identify infections may help alleviate some of the uncertainty and lack of confidence from workers and customers as businesses seek to reopen. Support to SMEs could also include co-financing for professional cleaning of premises where there are confirmed COVID-19 cases and access to business continuity insurance.

While clear before, the current crisis has further increased the benefits that Malaysia’s SMEs could derive from using new technologies, for instance through remote work and online business platforms . Going forward, further measures should be identified to increase their levels of digitization. Subsidized or free broadband access and direct technical support could be provided to accelerate the transition to digital platforms, including business-to-consumer (B2C) and business-to-business (B2B). Renewed efforts to support workers’ reskilling and upskilling will be particularly important as will the provision of employment services that match job seekers and job openings through digital platforms.

Once businesses can safely operate, efforts should focus on boosting demand and reactivating supply chains. Adopting a broad-based fiscal stimulus consistent with available fiscal space can help lift aggregate demand. Notably, measures announced to accelerate and increase allocations for large public investment projects and programs (e.g., the East Coast Rail Link, Mass Rapid Transit 2, and the National Fiberization and Connectivity Plan) should have a positive impact on demand during construction and could benefit growth in the longer run. 

Without support, the country’s SMEs tend to be disadvantaged from accessing public procurement contracts, which may limit their capacity to benefit from the investment projects mentioned above. Hence e-procurement could also be encouraged to further level the playing field for SMEs to compete for tenders with larger companies. 

With regards to foreign direct investment, immediate efforts should focus on the retention of existing foreign investors, and the preservation of supply chains connecting foreign and domestic suppliers. With supply chains and client relations disrupted by the crisis, government agencies can help SMEs reintegrate into supply chains and find new domestic and export markets to help reduce the time to recovery.

Special attention should be placed on ensuring support for firms in the electrical and electronics industry, retail, and tourism sectors that are exposed to demand and supply shocks. This is key to preventing an exodus of investments and subsequent job losses. 

The government will need to communicate how the financial support measures for firms will evolve as the reopening phase continues. It is critical to avoid removing support measures too soon, and some key measures may have to continue even as firms restart their operations. Close dialogue with representatives of different segments of the private sector, especially SMEs, can help inform the government in their decisions.

The measures adopted and the way they are implemented should continue to reduce physical transactions or unnecessary face-to-face interaction. Measures should also be scalable and timebound, allowing the government to increase the scope of assistance provided, reduce it as the crisis subsides, and increase it again should there be new waves of the virus.

Already, the economic damage has been significant. Recovery is unlikely to be uniform, with different parts of the global economy moving at different speeds, which in turn will determine the recovery of specific sectors that are integral to global value chains. 

However, hope remains. The crisis provides not only a sense of urgency but also an opportunity to reduce Malaysia’s vulnerability to external shocks.  The response can accelerate the country’s transformation toward a high-income economy built on a stronger and more resilient and competitive private sector. 

This blog post was adapted from its original version published on The Star.