Macroeconomic conditions in 2021 will improve or worsen?

Fitch Solutions “revised down [Malaysia’s] 2021 real GDP [gross domestic product] growth forecast to 10.0%, from 11.5% previously, to reflect the downside risks posed by the re-imposition of lockdowns in nearly half the country”. Not a worst-case scenario to be sure. But the point would be that the movement control order (MCO 2.0) has a stultifying impact on our GDP growth. In turn, this is due to the MCO 2.0’s impact on employment, investment, wages, private consumption, and aggregate demand.

Concomitantly, Fitch Solutions is of the view that this time there’ll be “less scope for fiscal support” given that our debt-to-GDP ratio of 60% has been stretched to the limit. According to Fitch Solutions, “government debt stands at 61% of GDP as of Q3 2020”. This is in line with the calculation of World Bank which in its Malaysia Economic Monitor: “Sowing the Seeds” (Dec 2020) had stated that Malaysian government debt stood at 60.7% (RM874.3 billion) as of Sep 2020 (i.e., 3Q) with domestic debt constituting 96.6% (RM845 billion) of the total outstanding or 56.6% of GDP (p. 37). And also in sync with projections of local research houses, e.g., Kenanga and Rating Agency Malaysia (RAM) which had expected government debt to increase to 62.6% and 62.2% of GDP, respectively, by Q4 2020.

Moody’s, on the other hand, had in late Jan this year reaffirmed Malaysia’s sovereign credit profile at A3 in contrast to Fitch Ratings as alluded earlier. Moody’s stated that, “Malaysia’s medium-term growth prospects will remain strong and its macroeconomic policy-making institutions will continue to be credible and effective, which provides resilience to the sovereign credit profile”.

From all of this, it could be inferred that government debt isn’t accelerating – despite the on-going Covid-19 epidemic and the necessity of imposing MCO 2.0. This together with a stable deficit level which according to the same report by World Bank is projected to be 5.4% by 2021 (driven by increase in output and hence revenue collection) that’s below the 6% of GDP threshold “set” by Finance Minister Tengku Zafrul Aziz – as the base from which the medium- to long-term fiscal consolidation would then kick in.

In addition, unemployment would seem to be more or less stabilising rather than on an upward trajectory with a marginal increase of 0.1%, i.e., from 4.7% in 3Q 2020 to 4.8% by 4Q 2020 (quarter-to-quarter), as per the same report by the World Bank (p. 30). This is confirmed by the Department of Statistics Malaysia (DOSM)’s monthly employment figures highlights of 4.7% for Oct alongside 4.8% for both Nov and Dec 2020.

But with the impact of MCO 2.0, unemployment might continue to inch upwards by 1Q 2021 and even beyond. This would be a drag on consumption and depress private investment and borrowing already reeling from the effects of MCO 2.0, particularly those sectors such as tourism that have barely recovered from MCO 1.0.

In looking at our country’s gross fixed capital formation (GFCF), a critical indicator of business sentiment, particularly in reference to domestic direct investment (DDI), an estimate by DOSM showed that GFCF had contracted sharply by an overall of 15.4% in 2020 following a decline of 2.1% of the same in 2019. DOSM also highlighted that Malaysia’s GFCF dropped by 11.6% in the 3Q 2020, although the figure was an improvement from the 28.9% decrease in the second quarter. Overall, our GFCF has been on a downward trend since 2019.

RAM Ratings’ Business Confidence Index released on Dec 7,2020 showed that business sentiment domestically will remain bleak for Q1 2021 – “with cashflow being a key concern”.

It might appear, therefore, that the macro-economic outlook is gloomy despite the stimulus packages, including the latest one in the form of Permai (Malaysian Economic and Rakyat Protection Assistance Package) worth RM15 billion underpinned by 22 spending initiatives as well as Budget 2021 which allocated RM322.5 billion translating into 20.6% of GDP and higher than Budget 2020 with RM297 billion.

If past track record is a guide, we can still pull through and rebound especially once Covid-19 is contained – sustainably reinforced by the vaccination rollout.

Due to our pragmatic, creative and unorthodox policies, we were able to recover from the Asian Financial Crisis/AFC (1998). Indirect semi-fiscal injection targeted at the financial sector in the form of Danaharta and Danamodal, selective and time-limited capital controls, etc. played their part in reviving domestic and foreign confidence in the economy.

And when the ringgit experienced a depreciation of up to 40% from Sep 2014 onwards due to the tapering-down policy of the Federal Reserve and drop in crude oil prices, ValueCap was once again tasked with propping up the stock market to indirectly support the financial sector (e.g., where shares have been pledged as collateral). The Special Economic Committee (SEC) was set up to advise on counter-cyclical measures such as exemption of import duties for the manufacturing sector (to cushion the impact of a depreciated ringgit). Bank Negara required that 75% of export proceeds (in USD) be exchanged or repatriated (off-shore accounts) for the ringgit (which applied to multinational companies also) and short-selling liberalised to support hedging activities (to “smoothen out” foreign exchange volatility, etc.)

The current government’s well-poised to pull off a policy feat that would circumvent fiscal policy constraints and enable the economy to recover from the third wave and paving the way for a post-Covid-19 growth era. Perhaps one of the policies the government should consider now is the development of an established and systemic digital currency of which the e-wallet concept is “work in progress” (WIP). A digital currency would bolster the low-touch economy and better in sync with digitisation of negotiable instruments (e.g., notes, bills), multi-currency credit cards (boosting regional economic integration), “complementary currencies” (e.g., creation of credits in exchange for time spent on voluntary activities) that will boost the circular economy, etc.

Returning now to the Fitch Solutions report, it’s also revisiting its hitherto expectation of an interest rate hike – from the current 1.75% to 2.25%, a 50bps (basis points – 10 bps = 1%) hike. Indeed, monetary policy will have to be loose not only in the short- to medium-term but for the long-term as well even as Covid-19 is expected to be endemic (i.e., remain within society for a very long time to come).

And fiscal policy needs to be coordinated with monetary policy – whereby liquidity management in terms of bank reserves need to be synchronised with debt issuance. This will also better serve the secondary bond market.

For now, in view of the Emergency, perhaps the government could consider imposing on the financial market flushed with ample liquidity of some RM150 billion strong to buy government bonds (Malaysian Government Securities/MGS, Government Investment Issues/GII, sukuk) which would also help in further buffering their capital adequacy ratio under Basel III which in turn might encourage lending and credit creation to distressed SMEs.

This isn’t to say the sky’s the limit as EMIR Research 4Q 2020 poll findings has revealed that 74% are “worried about rising level of national debt”. This means there must be some cut-off/inflection point in which no more stimulus packages are to be expected by ensuring effective implementation and execution of existing ones on the back balancing between policy reality and real-world politics (realpolitik).

Finally, the Fitch Solutions report is a timely reminder for the government to prove outsiders that our macro-economic conditions may still yet turnaround.

---

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.