Political instability and the ensuing uncertainties in the government’s policies are critical factors in determining investors’ confidence in Malaysia, said the World Bank.
The impact of Covid-19 on the economic situation in Malaysia
The pandemic has disrupted global supply chains, resulting in economic activities to slow down in many countries in the world. Even as Malaysia eased lockdown measures for most economic activities in May, it remains vigilant of a resurgence of Covid-19 as new infection cases continued to be recorded daily.
For the last decade from 2010 to 2019, the economic growth rate in Malaysia ranged from 4.5% to 7.4%. However, the advent of the Covid-19 pandemic is creating devastating ramifications on the Malaysian economy. In fact, the nation’s economy suffers from influences from both outer elements (global supply and demand shocks) and inner elements (MCO). Smaller businesses and helpless groups such as lower-income individuals and workers have been among the most affected groups.
Bank Negara Malaysia (BNM) even estimated that Malaysia’s economic development will be in the -2.0 per cent to +0.5 per cent range. It additionally assessed that 951,000 people will lose their jobs. Another organization, the Malaysian Global Innovation and Creativity Centre also anticipated that about 40 per cent of local small-and-medium-sized enterprises will need to shut down their businesses if the COVID-19 chain of infection persists.
The recent political turmoil in Malaysia
Political instability and the ensuing uncertainties in the government’s policies have tremendously affected the economic outlook in the country. This is due to the fact that political changes often lead to policy uncertainties and unpredictability. In fact, these are the crucial factors in determining investors’ confidence in Malaysia. Moreover, the recent political conundrum has further strained the already debilitated economy before the beginning of the global Covid-19 outbreak.
Another key risk is the current government’s shaky grasp on power. Prime Minister Tan Sri Muhyiddin Yassin’s meagre parliamentary majority has raised impression of political instability, which affected the confidence of many investors.
The World Bank representative to Malaysia and country manager Dr Firas Raad noted at a press conference after the World Bank launched its latest report on “World Bank East Asia and Pacific Economic Update, October 2020: From Containment to Recovery” that the World Bank encourages elections at different levels and good governance. In fact, the presence of political instability represents part of democratic life. However, the consistency of the policies in place is the main concern for economic sectors and the business communities. Contrary to popular beliefs, the business communities did not put too much weight on whether the election happens or whether there is a change in government, but rather whether it leads to significant policy uncertainties.
The response from the investors in Malaysia
Apart from that, Firas also noted most investors prefer high predictability to secure their investments. They also tend to avoid circumstances that they had not approached previously. Firas also made a remark that economic policymakers were facing increasingly stringent trade-offs with a tighter fiscal space. This situation is exacerbated by the drastic increase in expenditure on relief or a consumption-supporting stimulus. As a result, the indebted government will also be unable to invest in infrastructure construction in the country.
On the other hand, Firas said the government’s debt maintained at a manageable level notwithstanding the recent rise in public expenditure to fight Covid-19. It was predominantly denominated in local currency and has medium to longer-term maturities. However, private debt, such as household or corporate, has risen relatively. The situation continues to pose risks to the national financial system. Fortunately, Firas noted that high household financial assets and sound banking sector profitability had managed to mitigate these burdens.
Efforts taken by the Malaysian government
The World Bank Group lead economist Dr Richard Record said Malaysia had already gone into the crisis with an elevated level of fiscal deficit.
This is in spite of the fact that on March 27, the government announced the second RM250 billion economic stimulus package PRIHATIN, which includes the RM20 billion from PRE 2020. PRIHATIN’s main objective is to protect the welfare of the people, support local and foreign businesses as well as strengthen the economy.
Due to the unprecedented nature of the crisis, the Malaysian government is able to respond by relying on both monetary and financial measures injected into the economy for helpless households and firms. This had actually helped to minimize the financial burden on the lower-end income distribution. In addition, countries in advanced economies can only do provide stimulus packages for a short period of time. The government is also distributing the burden of public debt through indirect taxes, income and profit taxes.
The government is also taking measures to gradually provide structural changes in the economy with gradual effort in the next couple of years. This is based on the assumption that the economic recovery and return growth, and private sector investment. Gradual efforts such as rebuilding the amount of fiscal space, including measures in both expenditure and revenue sites are also in the process of planning.
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Prepared by: Chun Wai