Malaysia may need deeper Covid-19 response, but fiscal space is limited

Uncertainty over the country’s political stability and the govt’s ability to manage the outbreak could pose further downside risks to Malaysia’s economy


MALAYSIA will need a stronger economic policy response should the Covid-19 outbreak worsen, but the country’s coffers may not be deep enough for such a move, the World Bank said.

“The large degree of uncertainty over the outcome of the Covid-19 outbreak presents a major downside risk to Malaysia’s economy,” it said in an April 2020 update on its East Asia and Pacific (EAP) economic report.

According to the World Bank, an uncontained or further deterioration of the outbreak would result in more severe or prolonged restrictions on overall economic activities, posing a further drag on growth into 2021.

Moreover, uncertainty over the country’s political stability following the recent change in the ruling coalition and the government’s ability to manage the outbreak could pose further downside risks to growth.

“The other major challenge is the limited fiscal policy space to respond to the crisis.

“While the recently announced stimulus package could help mitigate the immediate impact of the outbreak, a deeper economic policy response would be needed should the health crisis deepen and result in a longer duration of economic disruption,” it added.

The government has so far rolled out RM260 billion worth of economic stimulus packages largely aimed at helping small and medium enterprises and the B40 and M40 (bottom 40% and middle 40% of households) income groups.

Yet experts have said these initiatives may not be enough to cushion the economy against the damages arising from the Movement Control Order which began in mid-March and is slated to end on April 28.

Bank Negara Malaysia estimates Malaysia’s GDP to be between -2% and 0.5% in 2020 due to the global economic slowdown and Malaysia’s pandemic containment measures.

The World Bank also revised down its GDP forecast for Malaysia to -0.1% from 4.5% earlier.

Meanwhile, the growth outlook for developing EAP countries in 2020 has been sharply downgraded following the Covid-19 outbreak and increased financial volatility.

Financial systems across the region remain vulnerable to external shocks, especially in countries with high private sector debt.

“The rate of increase in China, Indonesia, Malaysia, Philippines, and Thailand (EAP-5) debt has been much faster than the rate of increase for the rest of the world so that EAP-5 share of total global debt increased from 3.4% in 2005 to 18% in 2019,” the World Bank said.

It projects growth in the developing EAP region to slow to 2.1% in the baseline and to a -0.5% in the lower-case scenario in 2020 from an estimated 5.8% in 2019.

Reflecting the effect of the pandemic, other country-specific circumstances have weighed on the outlook such as droughts (Thailand) and commodity shocks (Malaysia and Mongolia).

The Covid-19 shock will also have a serious impact on poverty reduction across the region.

Using a poverty line of US$5.50/ day (RM24.04/day), the report estimates that under the baseline growth scenario, 24 million fewer people will escape poverty across the region in 2020 than would have in the absence of the pandemic.

“If the economic situation is to deteriorate further, and the lowercase scenario prevails, then poverty is estimated to increase by about 11 million people,” it said.

Prior projections estimated that 35 million people would escape poverty in the region in 2020, including over 25 million in China alone.

Additionally, households linked to economic sectors affected by Covid-19 will face a substantially elevated risk of falling into poverty, at least in the short run.

These sectors include tourism and retail in Thailand, and manufacturing and textiles in Vietnam with informal workers in all countries are especially likely to suffer and will be the hardest to help.

As the pandemic is profoundly affecting the region’s economies, the depth and duration of the disturbance are unusually uncertain.