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 affecting the economy in different ways.
The AFC resulted in the steepest economic contraction in the country’s history — reversing growth to negative 7.35 per cent in 1998. The country surmounted this crisis through prudent policymaking and drew important lessons to protect itself from the latter two economic shocks.
Before Covid-19’s global spread during the last two months, economic growth in almost all countries had slowed on the back of trade tensions between the United States and China.
The public health shock created by Covid-19 first evolved slowly, and then expanded rapidly last month, placing the country’s health system, particularly the public hospitals, under considerable strain. A third “tsunami wave”, in the words of Health director-general Datuk Dr Noor Hisham Abdullah, if not prevented, could flood 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 tourism and retail sector due to a significant drop in incoming tourists. These effects widened recently, resulting in broad-based disruption to all economic activities.
In our latest regional economic update East Asia and the Pacific in the time of Covid-19, launched earlier this week, economic growth in the region is estimated to slow to 2.1 per cent under a base-case scenario, and to -0.5 per cent in a lower-case scenario.
For Malaysia, economic growth this year is forecasted to drop to -0.1 per cent under the base-case and -4.6 per cent under the lower-case scenario. Along with significant economic retrenchment, the pandemic will have a large impact on poverty in the region, with 24 million fewer people escaping poverty this year than was forecasted in the pre-Covid-19 projections. These estimates were generated under continuously changing conditions and based on data up to March 27.
The World Bank update urges countries to take action to strengthen containment, to boost healthcare capacity and to implement targeted economic measures to lessen the impact on households, businesses and workers. It also promotes the importance of adopting an integrated approach towards containment and macroeconomic policies, international cooperation and public-private partnerships across international borders.
In line with these recommendations, the government issued two economic stimulus packages and placed the country under a “Movement Control Order” for an initial two weeks, now extended to April 14, seeking to limit the diffusion of the virus. The second and larger economic package announced on March 27, rightly prioritises supporting frontline workers in the healthcare system and buying medical supplies.
It contains important additional measures to protect the income of vulnerable households through cash transfers, help individuals and businesses smoothen out their debt repayments, and provide support and wage subsidies to 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, 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 layoffs by firms in weaker financial positions.
If the public health crisis continues and requires an extension of movement restrictions, a third economic stimulus may be necessary. Malaysia has seen many economic crises in its day. With enough determination, clear-eyed thinking, careful policymaking — and capitalising on its prior experiences — it can weather this unusual storm.
The writer is World Bank country manager for Malaysia
The views expressed in this article are the author’s own and do not necessarily reflect those of the New Straits Times