Tong’s portfolio: We must now prevent a second wave of the ‘economic virus’

The Covid-19 outbreak in Malaysia hit a key milestone on July 1 when the number of new cases dropped to just one — a Malaysian returning from Turkey. There were zero new cases from local transmission — 3½ months after the implementation of stringent lockdown measures under the country’s Movement Control Order (MCO) on March 18. Indeed, the number of new cases has remained under control even after measures were gradually relaxed, starting May 4.

Malaysia currently ranks sixth out of 184 countries in the Global Covid-19 Index, a comprehensive, holistic and big-data-driven index on each country’s effectiveness in containing and mitigating the pandemic.

These developments, which reflect the successful flattening of the infection curve, are definitely something to cheer about. We attribute it, in no small part, to the early and decisive action of locking down all but essential parts of the economy.

The success in containing the health crisis, however, comes at an extremely high economic cost.

Even as stringent lockdown measures are lifted, things are far from normal. The Covid-19 virus remains an acute threat, with new infections still on the rise globally. Therefore, we must continue to be vigilant — maintain physical distancing and avoid mass congregations, wear masks in public and ensure personal hygiene at all times — until an effective vaccine is available.

These standard operating procedures (SOPs) are necessary to give people the confidence to resume life as it was. And importantly, if properly adhered to, they will prevent a second wave of Covid-19 infections. But this new reality also poses serious problems for businesses.

For instance, restaurants are required to maintain the necessary distance between tables and between customers. Factories and offices need to observe similar physical distancing for all their workers. Retail outlets can only admit a certain number of shoppers at any point in time, as can cinemas and gyms. There are additional costs to ensure compliance and sanitation.

Few businesses can break even at 50% or even 70% of pre-pandemic capacity. As a guide, the average pre-tax profit margin for all companies listed on Bursa Malaysia (except financials and real estate investment trusts) stood at only 8.1% in 2019. The buffer is very small.

Therefore, as things stand, it is almost certain that many businesses will fail over the coming months. This will without a doubt result in rising unemployment and potentially wipe out the life savings of many micro, small and medium-sized entrepreneurs. The economy will sink deeper into recession when consumption craters, which will lead to even more joblessness.

The Malaysian government has done much in terms of limiting the initial impact on businesses and households — in the form of wage subsidies, loan moratoriums and cash handouts. However, these measures have expiry dates. The wage subsidy programme has been extended by three months to September, which is when the loan moratorium for individuals and businesses will also end.

Unlike the Covid-19 virus, which can be stamped out with sufficient vigilance, the “economic virus” has a substantially longer tail. It has longer-lasting and cascading effects that are much harder to mitigate.

If nothing more is done, the country could be faced with a devastating fallout — business failures, unemployment, business and household loan defaults — after the initial measures expire.

How do we ensure there will be no second wave for the economic virus? Just like we did for the health crisis, by all means necessary. That includes a combination of extending moratoriums, deferring and rescheduling loan repayments, restructuring loans, extending loan tenures and lowering interest rates.

Ideally, we can implement all of these measures immediately, all at one go and not in a slow drip when the situation turns from bad to worse.

In short, we must do everything possible to protect productive capacities and jobs. The next few months, possibly year, will be critical in determining whether the Malaysian economy recovers or falls into a vicious-cycle trap.

Yes, some of these measures may give undeserving businesses a lifeline and take up resources better allocated to other more productive uses. Business owners must be held accountable for their decisions and the risks they take on, for instance, the decision to use leverage.

Less viable and poorly run businesses will — and must be allowed to — fail in every downcycle. New players will eventually emerge to take their place.

Competition will ensure a robust and efficient marketplace and the most productive allocation of scarce resources. Lower interest rates could also lead to asset price inflation — and perhaps even bubbles — and result in falling profits for the banks.

We understand all of these arguments. Truly, we do. And we agree with them all, conceptually. You would be hard-pressed to find a greater believer in free-market capitalism.

And yes, the country should focus on structural reforms — the crisis is an opportunity for a much-needed economic reset — and ways to reinvigorate investments in the right sectors. But it would be difficult to attract fresh investments if the country is mired in recession and confidence is low.

Plus, the measures do not need to be in place for very long — just long enough to tide businesses over the current difficult operating environment. We need to help viable businesses stretch their cash flows over the next year or so. Badly run and non-viable businesses destined to fail will still fail in time.

It is easy to continue debating the pros and cons, in theory and based on ideologies, while we still have our jobs. But there are real jobs and people’s livelihoods at stake. Needless to say, time is of the essence.

The truth of the matter is, the Covid-19 pandemic is anything but a normal economic downcycle. Far from it.

Businesses were forced to shut down and on reopening, observe stringent SOPs. They are operating at low capacities not because their products and services cannot sell. Cash flow becomes tight — or negative — because sales are well below pre-crisis levels. Recovery is slow, especially with the pandemic still raging in parts of the world.

International borders are closed, and could remain so for months. Businesses cannot travel to secure new orders and customers. There are significant supply disruptions and logistics issues to contend with.

None of these are by choice but, rather, forced upon by circumstances that are well beyond the control of any individual.

Businesses cannot survive on their own without additional help. That said, the government is not solely responsible for their survival either. Banks must realise that they are most profitable when the economy and demand for loans are growing, not when they are being inundated by business and personal loan defaults.

The people must also play their part — go back to work and resume daily routines while observing the SOPs. It is a shared responsibility. Inaction, or too timid an action, today will lead to a scenario too painful for the country, and the people, to bear.

The Global Portfolio gained 2.9% for the week ended July 8, boosting total portfolio returns to 21.7% since inception. This portfolio continues to outperform the benchmark index, which is up by 11.9% over the same period.

Mega caps and technology stocks led the rally. Alibaba Group Holding was the biggest gainer for the week, with its shares up 9.5%. Other notable gainers include Vertex Pharmaceuticals, Adobe, Alphabet, Microsoft,

Qualcomm and Apple. ServiceNow and Home Depot were the two losers in our basket of stocks last week.