THE coronavirus now called Covid-19 has become an epidemic. It has depressed China’s growth. Being the second biggest global economic power contributing close to a fifth of the world’s GDP, this dent in its growth rate will have implications for the rest of the world.
So, amid a business slowdown, Lim Guan Eng, the finance minister, is contemplating a stimulus package. We contend that it is rather early for a stimulus package for the following reasons.
First, doubtless the situation is dire. The SARS virus which terrorised the world for six months in 2002-2003 claimed 800 lives. The 2020 Covid-19 fatalities have exceeded the deaths from SARs. Notwithstanding, the percentage of deaths to confirmed cases is only two per cent in contrast to 10 per cent during SARS.
Further, the current crisis is in its second month. Thankfully, no deaths have occurred in Malaysia unlike one death in 2003 and 105 deaths and 265 confirmed cases during the 1998-1999 nipah-virus outbreak.
There are also promising signs of a vaccine to combat the pathogen. And able-bodied and otherwise healthy patients are quickly recovering after treatment. China has also shown resolve in overcoming this crisis.
The situation may well be controlled in the coming months. And consumption that has been put on hold, given people’s apprehension about visiting shopping malls, may well rebound when people are assured that the crisis is well under control.
Stock markets worldwide are surging on news that a vaccine may soon be found. And there is a pent-up demand to restart closed factories. These should give a tremendous boost to the economy once the crisis is reined in.
Indeed, Malaysia has been more proactive in its measures now compared with similar crises in the past. It has installed more thermal scanners at all entry points, isolated Covid-19 cases, and placed suspected cases under quarantine.
Second, oil prices are down by 20 per cent or about US$10 per barrel from their level in early January. If the oil price remains at the current level, that is US$55, government revenue shortfall from oil, whose price was estimated at US$62 in the 2020 budget, will amount to RM2 billion.
In 2003, the government introduced a stimulus package of RM8.1 billion to prop up the economy that was hit by the SARS pandemic. If a similar amount is targeted, the combined impact of a loss in oil revenue and stimulus expenditure will be to increase the budget deficit by 0.6 per cent to 3.8 per cent.
Further, the extra expenditure will most likely be sourced from debt, spiking the public debt. An increasing fiscal deficit and public debt will cause borrowing costs to rise with deleterious effects to the economy. It might even neutralise any salutary effect on economic growth from the stimulus package.
Not many expected Bank Negara Malaysia to cut its benchmark interest rate recently. But, that cut seems prescient in light of the Covid-19 crisis. It will surely assuage any opposition to the widening fiscal deficit and public debt.
Third, if one is required, it is best to defer stimulus spending to a later part of the year. In its stead, the government should first spend what it has budgeted for this year quickly. If the crisis persists then the government can launch the stimulus programme.
Fourth, the economy is not in recession to warrant stimulus spending. The Covid-19 crisis has overshadowed the Sino-American trade war. It brings hope that the two countries will put aside for good their tariff spat in the larger interest of world growth and in helping to sustain the Chinese economy as it fights this crisis.
If that happens, the salubrious effect of amity will counterbalance the negative impact of Covid-19 upon Malaysia. Should additional expenditure be required as a bulwark against a softening economy, rather than a blanket pump-priming the government could better target these additional expenditures to the affected industries — manufacturing, tourism, transport and retail.
The writer is a professor at the Putra Business School