Whither the Malaysian economy?
Published on: Sunday, March 15, 2020
By: Datuk John Lo
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These depressing circumstances started when Trump picked to start a trade war against the world, with China as his main target. The world economy started to weakened, trade volume began to shrink. He was very confidently boasting USA would emerge the winner, trade wars are easiest to win. Little did he know that there is no winner in any trade war. No even the mighty USA with her “shoot first talk later” culture, can win. USA, China and whole world have become losers.
With the Trump trade war slowing the world economy, the demand for oil dived with the biggest importer China taking the lead in reducing consumption. Compounding the situation, corona virus came, created a countrywide locked down with factories coming to a screeching stop. China’s no-nonsense approach has brought the situation under control. But the virus has spread worldwide, spreading panic and economic stop-work. Italy has imposed total country lockdown on 10 March 2020.
Trying to stop the economic meltdown, central banks in the advance countries lowered interest rates with some countries down to 0.1pc pa. Will this help is yet to be seen? For sure, the effectiveness of interest rate as a tool to arrest global decline will have limited positive effects.
Worthy to note is that despite after this lowering of interest rate regime, world stock market and oil dived to lowest in the last 10 years. Therefore, a partial recovery is temporary at best as the economic prospects for next several years are not bright.
More on the oil price slump by 30pc on 8th March. Saudi Arabia, through OPEC, tried to arrest declining demand by lowering output. Russia which has co-operated as a member of the OPEC+ consortium in recent times, has refused to go along, not wanting USA’s shale oil to dominate the oil market. As of today [10 March 2020], there is a price war in oil, in addition to the trade war, interest rate war and corona virus. This oil price war is expected to drag on for years as USA has enforced sanctions on Russia’s NORD-STREAM 2 gas pipeline to EU.
Trump has stopped boasting about winning the trade war, no more the bully because US stock market has plummeted and the invasion by Corona Virus, chaotic stock market are giving him sufficient headaches for his re-election.
What about Malaysia’s economic health?
One-word apt description, “precarious”. Firstly, the on-going political chaos which is self-inflicted, is the most troubling uncertainty in the country. This is really unnecessary if the political leaders are truly sincere in wanting to work for King and country. Right now, this is the furthest from their mind. Without strong economic leadership, the current stormy scenario may take months, if not years, to stabilize. I hope the natural leadership vacuum will be sorted out ASAP.
The economic team of TS M will require time, even if it is the best, to work together, get the feel of things, look into the implementation of the stimulus package. Lucky if they can get up and run within 3 months.
Global conditions have worsened considerably since presentation of the stimulus package. My gut feel is the PH stimulus package will be insufficient to keep the economic momentum going without severely slowing down. Malaysia’s growth rate will be below 4pc—-high 3pc is good. Low 3pc or even 2pc can be expected, reason being that all economic sectors are being badly affected. We need a supplementary stimulus package soonest from PN.
Reflection of the worsening global conditions, staring from 11th March 2020, major countries and central banks are producing new measures and/or coming up with supplementary ones to arrest economic decline.
What about Sabah’s economic health?
More serious than the national economy. Sabah’s economic health can be summed up with these 2 words “extremely precarious”. Nothing political. It is pure economics. All Sabah’s 3 economic engines have little firing power left—-[a] oil/gas is very down. The recent oil price war will last for a pretty long time. [b] oil palm down. Some recovery will depend on how soon PN government can secure back the Indian market. [c] tourism very down.
Looking at the current circumstances and time line for commencement of recovery, we can assume economic global conditions + the virus may taper off within 12 months, allowing time for remobilization and confidence building, Sabah can look for some recovery within 24 months if lucky.
Sabah does not have some very important policy options that federal government has. i.e. deficit financing, financial and fiscal instruments and policies.
Sabah cannot rely solely on the federal stimulus package to keep our economy going. Most of the package, like everything else, is W Malaysia centric. This being the case, I am happy that Sabah government will produce our own stimulus package [as per CM’s announcement 12 March 2020]. I hope it can give priority on assisting the small and medium enterprises. The big companies especially the large plantation companies should not receive assistance/concessions because they have already made huge profits. In fact, it is time for them to dig into their reserves to repay Sabah at this critical time.
Some policy suggestions for Sabah’s stimulus package.
Not being privy to official economic data, these suggestions are mere suggestions.
Main objectives are—-[a] to enable SME to ease cash flow burdens so that they can sustain their business until normality has returned. [b] The SME can continue to employ people. SME employ the largest number of Sabahans. [c] If SME can continue operation, the multiplier effects [or spin offs] will keep the economy going for Sabah’s most affected/vulnerable people by the current conditions. [d] Directing the stimulus package through SME can be more effective, faster than large corporations.
To achieve the foregoing, let’s look at some radical ideas—-[a] Present government has inherited more than RM2 billion reserves. Very good time to dig into these reserves to keep the economy going. That is what reserves are for—-the rainy day is upon us now. [b] Divert and/or reduce government expenditure. With the savings, reduction can be used on land assessment, trading licences, etc which can be used to ease SME’s cashflow-burden. [c] The worsening economic conditions many justify for the government to either postpone or cancel some large projects so as to conserve cash to assist SME. [d] Notwithstanding Sabah has become an opposition state, we are entitled for federal government to inject cash into Sabah’s economy. [e] Time to call large plantation companies to show their appreciation—- inject a fraction of their past profits derived from Sabah.
Tough time ahead for at least next 24 months. Time for Sabahans to unite to see through this period of great economic difficulty. This bad time will not last forever.
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