World Bank cuts GDP forecast

Malaysia needs deeper economic policy response should pandemic results in longer economic disruption

PETALING JAYA: Uncertainties arising from the large-scale disruptions to economic activity due to the Covid-19 pandemic, has resulted in the World Bank slashing Malaysia’s 2020 GDP growth projection to negative 0.1%.

This is a sharp downward revision from its previous expectation of GDP growth of 4.5%.

The World Bank, in a report, said the revision incorporated slower growth momentum from the second half of 2019, but more significantly, the impact of the pandemic under a scenario whereby the disruptions to economic activities would extend for most of the year, before a partial recovery in the fourth quarter.

It, however, noted that the estimate had a large degree of uncertainty, conditional on domestic and global developments, and subsequent policy responses to the pandemic.

In a video conference, the World Bank Group’s Macroeconomics, Trade and Investment Global Practice’s lead economist for Malaysia, Richard Record said they also see a 3.9% decline in Malaysia’s net exports this year, reflecting a combination of the direct impact from the pandemic on supply chains and networks, the impact on production outages during the movement control order (MCO) period, and the anticipated sharply lower regional and global growth.

At the very best, Record said a very modest growth in east Asia is expected, while in a lower-case scenario, a recession is anticipated in the region.

“This will result in a contraction in demand for all of Malaysia’s export tradeables.

“Malaysia has to try to preserve as much of the structure of the economy as possible, so the export industry is able to bounce back when we see a recovery, hopefully in 2021,” he said.

The MCO, he said, was a “painful but necessary medicine” to flatten the curve of the pandemic, and will result in a lot of damage to the economy, across most sectors.

“The challenge, through the economic stimulus measures, is to try to mitigate the impact of the MCO as much as possible, and hopefully get us to a point where production can be restarted across the economy,” he said.

On the recently announced Rm250bil economic stimulus package, Firas Raad, the World Bank’s country manager for Malaysia, who also spoke to reporters during the call, said there are concerns about how much of it actually came from the fiscal coffers.

“A large part of it involves withdrawal from retirement accounts, and loan deferments by banks,” he said, noting that the amount from the fiscal coffers was not as much as it was built up to be.

Secondly, he said, the amount allocated for wage subsidies for the private sector, may not be sufficient to prevent job losses.

He added that additional focus may be required for the informal sector or the self-employed, and micro enterprises.

He said while the overall stimulus package should be able to help to mitigate the immediate impact of the pandemic, a deeper economic policy response would be needed should the crisis result in a longer duration of economic disruption.

Record also noted that Malaysia was going into the pandemic crisis at a time when it faced revenue pressures due to the crash in crude oil prices. The crude oil price assumption in Budget 2020 was at US$62 per barrel, and oil prices are now at about US$30 per barrel.

“Malaysia’s challenge is creating more space on the operating side to inject cash into the economy, while facing pressure on the revenue side. This is why we saw that a large share of the stimulus package was accounted for by non-fiscal measures,” he said.

On concerns about the outlook for Malaysia’s credit rating, Record said the shock caused by the pandemic was exceptional, and required an exceptional response.

“Worrying about Malaysia’s credit rating would not be at the top of the list of priorities right now.

“Of course, any fiscal spending measures must be executed prudently and in a targeted way – but clearly this is a time for exceptional measures,” he said.

On the biggest risks for Malaysia, Firas said this would be a lack of compliance to the MCO, and insufficient resources within the healthcare system to treat all patients.

“In this scenario, a prolonged crisis will obviously affect the economy,” he said.

On the outlook beyond 2020, Record said depending on how the pandemic played out, its baseline assumption was for a recovery in the fourth quarter of 2020, and for the economy to bounce back in 2021 with a GDP growth of 6.4%

In their lower-case scenario, however, the pandemic continues until the second quarter of 2021, and growth would not be back to fullspeed until 2022.

On a more positive note, Firaz noted that Malaysia was no stranger to shocks to its macro economy, having been affected during the Asian Financial Crisis in 1997, the global slowdown in 2001 and the global financial crisis in 2008.

“Thanks to its leadership, it was able to surmount these crises, and learnt important lessons about how to protect itself.

“With the right type of policies, clear thinking and determination, Malaysia can also get over this unusual crisis,” he said.