Prolonged MCO will push M’sia into recession

It remains to be seen if govt’s stimulus will be enough to prop up businesses already seeing cashflow drying up

by NUR HANANI AZMAN/ pic by BLOOMBERG

A PROLONGED Movement Control Order (MCO) to limit the transmission of Covid-19 will drag the country firmly into recession as domestic businesses struggle under containment conditions, commodity prices remain depressed and the risk of a global liquidity crunch looms, warned economists.

Though the government recently announced additional economic stimulus measures to help small and medium enterprises, it remains to be seen if this will be enough to prop up the business community, which is already seeing cashflow drying up.

AmBank Group chief economist Dr Anthony Dass said for now, there is a 40% probability for Malaysia to go into a full-fledged recession.

“Our GDP projection of -2% to +0.4% is based on the view that the MCO will end in April, followed by selective relaxation going forward.

“Even prior to the virus outbreak and fall in oil prices, the manufacturing sector was in recession, impacted by the US-China trade tensions,” he told The Malaysian Reserve.

Overall business confidence is weak due to the slow implementation and lack of clarity on policies, policy consistency issues, poor engagement between the authorities and businesses, and domestic political noises, he added.

Bank Negara Malaysia (BNM) is expecting Malaysia’s GDP at between -2% and +0.5% in 2020, dragged by weak global demand, supply chain disruptions and Covid-19 containment measures, both abroad and domestically.

The World Bank projects the domestic economy to shrink -0.1% this year, while OCBC Bank (M) Bhd economist Wellian Wiranto predicts a range of -2.5% to 1.5%.

Loans also grew slower than the economy last year at 3.9% against the full-year GDP growth of 4.3%, Dass noted.

Now, impacted by Covid-19, weak commodity prices and domestic challenges, the economy is expected to fall into a technical recession in 2020.

“We expect the second half of 2020 will be supported by the stimulus packages that are expected to come in full steam. So, our base-case GDP growth is at 0.4%,” he added.

The central bank also said any increase in credit losses from the current loan levels will be well within the capacity of banks to absorb, without impairing credit flows to the economy.

Most businesses have earnings buffers of over four times their debt servicing obligations, BNM deputy governor Jessica Chew added.

On that note, Dass said businesses need to check their liquidity ratios, to ensure the ratios are as high as they should be.

“If their value is not impressive, then it means the business does not have the ability to convert assets into cash quickly or the business is not able to buy and sell assets without affecting the prices.

“So, they need cash or assets that can be converted quickly to cash to operate their business as they will be faced with short-term obligations,” he said.

Businesses always have to prepare for unforeseen emergencies and unexpected expenses, he said, although Covid-19 is likely beyond what anyone could have anticipated.

In order to enhance businesses’ capacity to meet debt-service obligations, he advised firms to extend loan tenure, reduce overheads, request longer credit terms from suppliers and reduce capital expenditure.

“Do not issue dividends to pay back directors’ advances, cut staff salary cost by 20%, and listed companies should not perform share buyback, but instead raise equity,” Dass added.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes BNM would be ready to cut the Overnight Policy Rate by 50 basis points (bps) in order to ensure monetary policy remains supportive of growth.

“Similarly, the Statutory Reserve Requirement ratio could be reduced by another 100bps, to provide additional liquidity in the financial system and reduce the cost of funds.

“It’s official now — BNM is expecting the Malaysian economy to be in recession in 2020 following the global health crisis which is engulfing the forecast scenario,” he said.

Separately, MIDF Amanah Investment Bank Bhd senior analyst Imran Yassin Mohd Yusof echoed BNM’s view that Malaysia’s financial system and banks, in particular, are well positioned to support the economy due to the strong buffers built over the years.

“Returns on equity for banks have been on a downtrend, but we believe this does not signify decline in profitability. The downtrend was due to higher capital requirements and efforts by the banks to build up a strong capital position,” he said.

As a result, risks relating to the solvency of banks have been reduced.

In Malaysia, this is especially the case as banks increased their capital above the required regulatory levels, according to Imran Yassin.