Additional stimulus needed as Covid-19 risks rise

There are expectations the govt might have to pursue even looser fiscal stance in general to help support growth


THE government must have the flexibility to prescribe additional fiscal support should there be any further deterioration in the global economy.

Under the current circumstances, proactive expansionary fiscal policies are advisable and lauded as the private sector — businesses and households — is expected to hold back expenditure.

“Therefore, if the risk aversion continues, the government would need to step in via additional stimulus in order to resuscitate growth,” Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid told The Malaysian Reserve (TMR).

He said while the central bank also has the leeway to reduce interest rates, it would all depend on the evolving economic outlook amid the spread of the Covid-19 globally.

Thus far, survey data through Purchasing Managers’ Indices (PMIs) have been weak with JP Morgan Global Composite PMI fell to 46.1 points in February 2020, the lowest in 129 months.

“It could lead to wider fiscal deficits, but this happens during extraordinary time which requires the government to deviate its plan for fiscal consolidation,” Mohd Afzanizam added.

With 125-basis-point (bps) cut in Overnight Policy Rate (OPR) and statutory reserve requirement since May 2019, along with the current weaker ringgit, monetary conditions have eased considerably.

The economic stimulus package also contains Bank Negara Malaysia’s funding measures. The dovish monetary policy statement implies continued easing bias, hence, the prospect of further OPR cut could be as soon the as next Monetary Policy Council (MPC) meeting on May 4 and 5.

Meanwhile, OCBC Bank economist Wellian Wiranto said there is indeed an increasing risk of slower growth that might result in higher fiscal deficit away from the 3.4% of GDP that former interim prime minister announced a few weeks ago.

“Lower tax receipts from reduced economic activities, as well as higher expenditure from relief measures would bring higher deficit (numerator effect).

“Lower growth, potentially around 3.6% of GDP growth this year, if the situation does not stabilise soon, would result in larger denominator effect,” he told TMR.

Wiranto said there are some expectations that the government might have to also pursue even looser fiscal stance in general to help support growth.

“Potentially, another package beyond what was announced by the outgoing government (will be revealed) if the situation drags on and more industries are affected,” he added.

Maybank Investment Bank Bhd senior chartist Nik Ihsan Raja Abdullah said recent fiscal stimulus should be enough to boost the nation’s economy, navigating the current setback caused by Covid-19.

“If required, the government has a capacity to inject an additional of up to RM15 billion without exceeding self-imposed debtto- GDP ratio of 55% and maintain budget deficit at -3.2%,” he told TMR.

AmBank Group chief economist and head of research Dr Anthony Dass said the current global economic environment is clearly pointing towards more downside risk following slower growth and the uncertain trade environment.

For the first time since the 2009 global recession, the world economy is expected to grow below 3% in a challenging environment, and is likely to expand between 1% and 2%.

As opposed to 2019 when the US-China trade tension took centre stage besides political and geopolitical issues, today, the biggest challenge comes from the outbreak of Covid-19.

“If the Covid-19 outbreak is declared as ‘pandemic’, that means every human in this world will be exposed to it.

“China has clearly shown that it is not needed for such declaration, with everyone taking the necessary actions collectively to address the spread of Covid-19 quickly,” he said.

He added that clearly, this virus is now a “black swan” with unpredictable effects on local and global companies and businesses.