Malaysia cannot escape recession

There is an urgent need for more foreign investments, clear administrative policies and more govt spending to help people and businesses crippled by the pandemic


THE coronavirus pandemic is pushing just about every economy into serious decline and two-time former Finance Minister Tun Dr Daim Zainuddin (picture) said Malaysia will not be spared from a recession with GDP likely to contract much higher than 2% in 2020.

The former chairman of the Council of Eminent Persons, who has twice rescued Malaysia’s economy from near collapse, described the current crisis as a more complex inter-linkage of shocks between health and economic annihilations which have devastated millions of lives and most industries.

With the shortfall of tax revenues and unemployment backlog, Daim underlined the need for more foreign investments, clear administrative policies and for the government to increase spending to help people and businesses crippled by the coronavirus pandemic.

“I strongly believe that the government can afford a higher deficit to save jobs and firms. When the economy recovers, we can and must pare the deficit down.

“We have done this many times, during the 1980s crisis, 1998 crisis and 2008 crisis. Once the economy recovered, we had managed to reduce the deficit,” Daim said in response to questions by The Malaysian Reserve.

Malaysia has reported over 7,000 confirmed coronavirus cases and more than 110 deaths but says it has now contained the outbreak. The government has since lifted most curbs on business activities to help jump-start the economy.

Putrajaya has also unveiled a RM260 billion stimulus package which has provided some short-term relief for households and businesses.

However, actual direct fiscal injection is only RM35 billion, or about 2% of GDP which Daim described as too small to make a meaningful impact.

He said Malaysia has been running on fiscal deficits for 23 consecutive years since the 1997/98 Asian Financial Crisis, implying that not much of reserves have been accumulated.

Some trust funds can be mobilised and Petroliam Nasional Bhd can contribute either through a higher petroleum income tax or dividend payment. However, the slump in global crude oil prices will affect the federal oil-related revenue, hence exert fiscal pressure, Daim said.

To help the government increase its spending, Daim said it has to consider options that are “out of the box” which will require some reprioritisation and reordering of expenditure.

They include revenue enhancement through the disposal of assets (although the timing is crucial); privatisation; the listing of government-linked company assets; and the reintroduction of Goods and Services Tax (GST) at a much lower rate.

“I had advocated GST a long time ago, but the rate introduced was too high and the monies collected were not spent on the rakyat and not refunded back to the companies and cost of living went up.

“However, with proper implementation, GST can be fair, efficient and workable,” he said.

Daim added that borrowings through the issuance of domestic securities as the investors’ appetite for Malaysian bonds are still strong.

He said there was no foreign-exchange risk exposure and the cost of borrowing is cheap given the prevailing low interest-rate environment.

Under the External Loans Act 1963, foreign currency debt is restricted to RM35 billion. The estimated outstanding debt as of March 2020 is at RM29.4 billion.

The government could also review its self-imposed administrative limit of 55% of GDP, Daim said. The last time the government raised the ratio was in July 2009. Before that, the government had raised it to 45% in June 2008 from 40% in April 2003.

Alternatively, the government could consider borrowing from Bank Negara Malaysia, which is provided under Part X (Relations with Government), Section 71 of the Central Bank Act.

“These are extraordinary times and it requires extraordinary policy measures. We cannot be confined to orthodox and business as usual thinking. Those in charge must think outside the box,” he said.