But it is only March and the world is already grappling with one of its biggest economic storms.
Malaysia faces a triple whammy – global economic slowdown, the Coronavirus Disease (Covid-19) pandemic as well as extremely low oil prices.
Oil prices have dipped below US$30 (RM4.39 per dollar) per barrel. The country’s 2020 Budget tabled in October last year was based on oil averaging at US$62 per barrel.
Back then, Covid-19 had not reared its ugly head. The top economic concern was the prolonged US-China trade war which dented trade among nations. Oil was then hovering above US$55 per barrel.
At the time, the government was aiming to weather the economic challenges by increasing exports to China and other markets, boosting tourism in conjunction with Visit Malaysia 2020 (VM2020), hosting a year-long APEC meeting, and launching the National Automotive Policy to boost vehicle manufacturing, among others.
However, before the seeds planted could bear fruit, the coronavirus outbreak has semi paralysed major industries. The VM2020 campaign was cancelled along with many events, and APEC meetings were postponed. Thousands of jobs are at risk, and the nation’s growth is expected to be severely impacted amid an uptick in inflation.
In a special address on March 13, Prime Minister Tan Sri Muhyiddin Yassin announced that gross domestic product (GDP) growth for this year was expected to be lower – at 3.6 per cent to 4.0 per cent – compared with the 4.8 per cent projected in December.
Banks and research houses have revised their forecasts too, going as low as 2.5 per cent.
Earlier this month, Bank Negara Malaysia (BNM) reduced the Overnight Policy Rate by 25 basis points – the second time this year – to 2.5 per cent.
Three days ago, the central bank also lowered its statutory reserve requirement (SRR) ratio to two per cent from three per cent. This second SRR cut in four months took the SRR, a financial tool used by BNM to manage liquidity, to its lowest since the global financial crisis in 2009, when the ratio was brought down to one per cent.
More policy measures can be expected.
The FTSE Bursa Malaysia KLCI (FBM KLCI) has declined about 360 points or 22.4 per cent year-to-date, and institutional investors have suffered about RM60 billion in losses this year in the equity market alone.
Bursa Malaysia has lost more than RM150 billion in market capitalisation in 2020.
The rout happened not only in Malaysia but also in the US, South Korea, the Philippines, India and many other countries.
The Dow Jones Industrial Average (DJIA) has dwindled 29.61 per cent year-to-date, while the South Korean and Philippine equity markets triggered the circuit breaker multiple times as their main indices sank more than the daily average benchmarks.
As for the ringgit, its performance, along with other emerging market currencies, has been under intense pressure as investors conducted “currency liquidation” by shifting to the US dollar, which is the global trading currency.
On the bright side, due to managed float, the decline of ringgit was not as steep as other emerging currencies, especially those that conduct open market trading.
Year-to-date, the ringgit has declined 7.88 per cent against the greenback and has seen volatile trading between 4.0910 and 4.4137 to the dollar throughout the year.
On the oil front, global oil prices are expected to slip further in April after OPEC deal between Saudi Arabia and Russia tanked early this month, leading to a global oversupply amid declining demand.
The dip is not expected to end there, as analysts predict that the worst for the oil market is yet to come, expected to be in April.
As a nation that drafts its yearly budgets based substantially on oil prices, what measures must be taken to ensure that the Malaysian economy is safeguarded?
Bank Islam chief economist, Dr Mohd Afzanizam Abdul Rashid, said the government should be looking at revising the 2020 Budget as oil price has hit a new low, which would put extra burden on the government financials.
“In the past, we have seen the government responding to the sharp fall in crude oil prices in 2016 by recalibrating the existing budget,” he noted.
According to data from the Finance Ministry, Malaysia’s economic reliance on oil stood at 20.7 per cent based on the government’s estimation.
Mohd Afzanizam said that at this juncture, the government should spend more to boost the local economy as the credit rating agencies are more receptive to deficit spending to safeguard the growth momentum.
“In 2009, we could see the fiscal deficit being bumped up to 6.7 per cent of GDP from 4.6 per cent in 2008. That is about two percentage points higher. Perhaps, the fiscal deficit could be raised within such quantum,” he said.
To recap, in 2016, oil prices crashed to around US$24 per barrel, the lowest in nearly two decades. When the 2016 Budget was tabled in October 2015, crude oil price stood at US$48 per barrel.
The government subsequently revised the Budget to optimise the country’s development and operational expenditures amid falling oil prices and slower economic growth.
In the recalibrated Budget, the government revised the 2016 GDP growth forecast to four per cent, based on the assumption that average benchmark Brent crude oil price would be between US$30 and US$35 per barrel.
The revised Budget revision also incorporated 11 measures to optimise expenditure to reflect the economic situation, including steps to manage cost of living.
While the global economic situation, coupled with the decline in crude oil prices, was expected to lower the national revenue by RM7 billion to RM9 billion, the government then kept the deficit target at 3.1 per cent.
Mohd Afzanizam said a second stimulus package is also needed to address the prevailing economic situation, as the current stimulus package was designed to address the Covid-19 health crisis.
Citing the two stimulus packages announced in November 2008 and March 2009 due to the US sub prime crisis, he said the government had injected about RM67 billion into the local economy then.
However, as Covid-19 continues to erode market sentiment, the ripple effect from the main affected sectors would spread to other sectors as well such as finance.
According to Mohd Afzanizam, the three main sectors that need to be considered are the healthcare, informal and household debt sectors.
“The healthcare sector needs to be the main priority with a special allocation being directed straight to it. The healthcare sector is under an intense situation, which would lead them to use all of their initial allocation in a short period,” he said.
As for the informal sector, which involves workers who are self-employed or who work for those who are self- employed, Mohd Afzanizam said this would be the most vulnerable group once an economic downturn takes place, which would cause them to lose all their income in one go.
What is worse, they do not have a comprehensive social safety net.
People who earn a living through self-employment are in most cases not on payrolls with Employees Provident Fund (EPF) contribution or health coverage; thus they would experience a free fall.
From the taxation perspective, KPMG Malaysia views that with the drop in oil prices, coupled with the ongoing Covid-19 pandemic, Malaysians from all walks of life are looking to the government for ways to prevent the economy from sliding.
KPMG Malaysia head of tax Tai Lai Kok and its head of indirect tax Ng Sue Lynn said despite the prevailing situation, measures taken must also ensure that the government’s coffers are spared.
“The objective is to address the immediate economic situation. Perhaps it is better to look at more targeted measures for selected industries.
“With the oil revenue declining, it may be tough for the government to balance between reducing tax collections to spur the economy versus generating enough revenue to prevent the country’s deficit rate from increasing,” they said in an email to Bernama.
They added that targeted approaches such as selective tax exemptions for affected and vital industries such as manufacturing, healthcare and the small and medium enterprises, apart from tourism, could be more effective to match the incentives with those who would directly benefit from them.
“This could be seen with the recent Economic Stimulus Package (ESP) 2020 announced last month. Perhaps, such tax exemptions should also be accompanied with a return mechanism or scorecard measurement, so that such beneficiaries can contribute back to the country once the economy picks up,” they suggested.
For businesses, cash flow is a significant challenge at present.
“(Hence), the deferment of tax instalment payments for the tourism industry as announced in the 2020 Economic Stimulus Package is a good move, but it should be extended to other affected industries as there is certainly a ‘knock-on domino effect’,” they said.
The tax experts said re-introducing the Goods and Services Tax now, even at a lower rate, is a cost which is definitely not welcomed despite it being one of the most common request.
“The objective should be to lower the prices of essential goods and services to be more affordable in the current economic crisis,” they said.
Finally, the duo also stressed that at this juncture, taxing the black economy should be prioritised, particularly where tax-paying businesses are suffering but the underground economy is operating unchecked.
“It is said that the size of the black economy is unknown, and if the authorities can plug the tax leakages from this economy, it would definitely help alleviate the country’s budget deficit without burdening the rakyat,” they said.
A downturn is imminent, jobs are at risk, and some quarters may lose their income, but the storm will no doubt pass. The dark clouds will disperse, bringing the sun out once more.
It is time for Malaysians to put aside differences, be it personal or political, and give their undivided support to the government to strengthen the nation and economy.
Together, we can weather these challenges.