April 15, 2020 1 The supply shock that started in China has now - PowerPoint PPT Presentation

April 15, 2020

1 The supply shock that started in China has now become a pandemic and 1 global economic shock 2 Malaysia and countries in the region now face the prospect of an 2 economic contraction The Malaysian government has taken decisive actions to contain the 3 3 spread of the virus and mitigate its economic impact The challenges facing Malaysia include a prolonged outbreak, limited 4 fiscal space and political uncertainty 4 1

A pandemic that has triggered a global recession 2

Total confirmed Covid-19 cases Source: European CDC. Last updated April 15, 2020 3

Volatility in financial markets spiked significantly Large capital outflows from emerging markets Emerging Markets Net Non-resident Equity and Bond Purchases – CBOE Volatility Index (VIX) 4-week moving average, USD billion 90 1.5 80 1.0 70 0.5 60 0.0 50 -0.5 40 -1.0 30 -1.5 20 Global Financial -2.0 10 Crisis 0 -2.5 Feb-07 Dec-07 Oct-08 Aug-09 Jun-10 Apr-11 Feb-12 Dec-12 Oct-13 Aug-14 Jun-15 Apr-16 Feb-17 Dec-17 Oct-18 Aug-19 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Source: World bank staff calculations 4

Energy prices have seen the sharpest declines Crude oil prices declined 40 percent in March Major commodity price indexes (US$, 2010=100) Nominal prices, percentage changes, March over February Rice, Thai 5% Groundnuts 100 Urea Soybean meal Fish meal Plywood 90 Sugar, US Sugar, EU Banana, Europe Shrimps, Mexican 80 Gold Coffee, Robusta Coconut oil Tea, Colombo Maize 70 Sawnwood, Malaysian Aluminum Tea, Mombasa Natural gas, US 60 Soybean oil Rubber, SGP/MYS Lead Rubber, TSR20 50 Sunflower oil Energy Palm oil Agriculture Palm kernel oil Silver Metal Sugar, world 40 Crude oil, Dubai Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 Crude oil, Brent -0.45 -0.35 -0.25 -0.15 -0.05 0.05 0.15 Source: World bank staff calculations 5

The three main channels were through manufacturing, demand for commodities and tourism Commodity exports, percent of GDP Manufacturing imports, percent of GDP Tourism, percent of GDP 30 70 40 Total Manufacturing Imports 60 25 Estimated income from Total Commodity Exports Manufacturing Imports non-Chinese tourists from China 30 Commodity Exports to Estimated income from 50 China 20 Chinese tourists 40 15 20 30 10 20 10 5 10 0 0 0 Vietnam Singapore Cambodia Malaysia Thailand Fiji Philippines Mongolia Korea, Rep. Lao PDR Indonesia Japan Mongolia Singapore Malaysia Vietnam Lao PDR Thailand Fiji Indonesia Hong Kong SAR, China Cambodia Korea, Rep. Philippines Japan Cambodia Thailand Philippines Malaysia Lao PDR Mongolia China Vietnam Indonesia Myanmar Source: World bank staff calculations 6

Countries have taken bold measures to restrict movements in order to mitigate the spread of the virus, leading to domestic demand and supply shocks Government Stringency Index (Higher Score indicates Higher Stringency level) 20 40 60 80 100 No data Source: Oxford University COVID-19 Government Response Tracker (https://www.bsg.ox.ac.uk/research/research-projects/oxford-covid-19-government-response-tracker) Data as at 8 April 2020 7

Changes in GDP and exports under a global pandemic Changes in GDP and exports under an amplified global pandemic (deviation from the benchmark) (deviation from the benchmark) Sub-Saharan Africa Middle East & North Africa Middle East & North Africa Sub-Saharan Africa United States United States Latin America & Caribbean Latin America & Caribbean Other High-Income countries Other High-Income countries European Union + UK European Union + UK World Total Europe & Central Asia Developing countries World Total Europe & Central Asia Rest of Developing East Asia Rest of Developing East Asia Rest of High Income East Asia South Asia Developing countries Rest of High Income East Asia -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 Exports GDP Exports GDP Source: World bank staff calculations 8

Changes in GDP and export under a global pandemic (deviation from Changes in GDP and export under an amplified global pandemic the benchmark) (deviation from the benchmark) Indonesia Indonesia Laos PDR Malaysia Malaysia Laos PDR China Philippines Vietnam Vietnam Philippines Thailand Thailand Cambodia Cambodia China -8 -7 -6 -5 -4 -3 -2 -1 0 -5 -4 -3 -2 -1 0 Exports GDP Exports GDP Source: World bank staff calculations 9

… and flattening the recession curve the focus Flattening the pandemic curve is the focus of containment of macroeconomic policies policies … 1127 interviews Source: Gourinchas (2020), Flattening the Pandemic and Recession Curves, March 13, 2020. 10

Boost health care capacity to meet what may be an overwhelming demand for a sustained period. Adjust fiscal and monetary policy to meet the COVID-19 crisis. Ease access to credit for households and liquidity for firms to smooth consumption and ease hardships. Trade policy must stay open . Boost international cooperation and develop public private partnerships , particularly to ensure the supply of key medical products. 11

Malaysia’s economic outlook has been affected 12

…and the ringgit has depreciated by nearly 7 percent in Since January 2, the FBM KLCI has declined by about the same period. 17 percent… FBM KLCI Index Exchange rate, MYR/ USD 2000 4.60 1900 4.40 1800 1700 4.20 1600 1500 4.00 1400 3.80 1300 1200 3.60 1100 1000 3.40 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 Source: Haver Analytics and World Bank staff calculations 13

Broad based decline in household consumption after Job losses seen across all major sectors. implementation of MCO. Decline in consumption after MCO implementation, percentage Employees who lost their job since MCO by sector, percentage 25 40 27 20 22 20 15 0 0 15 0 10 -20 5 7 -40 0 -38 -39 Agriculture Services Industry -60 -55 -58 Source: Department of Statistics Malaysia (DOSM) -65 -69 -80 -71 -72 Decline in trade activities beginning in February. -86 -89 -100 3-month moving average in exports and imports, in RM thousand -95 100 -120 Clothing Transportation Restaurant & hotel Furnishing Recreation Miscellaneous Alcoholic drinks and tobacco Utilities Overall spending Supplies & services Health Communications Education Non-alcoholic food & beverages 90 80 70 60 50 Merchandise Exports Merchandise Imports 40 Mar-2015 Jun-2015 Sep-2015 Dec-2015 Mar-2016 Jun-2016 Sep-2016 Dec-2016 Mar-2017 Jun-2017 Sep-2017 Dec-2017 Mar-2018 Jun-2018 Sep-2018 Dec-2018 Mar-2019 Jun-2019 Sep-2019 Dec-2019 Mar-2020 Source: Department of Statistics Malaysia (DOSM) Source: Haver Analytics and World bank staff calculation 14

Current baseline estimate puts Malaysia’s GDP Growth is expected to recover in 2021 growth for 2020 at -0.1 percent 1127 interviews 2019 2020 2021 8.0 Real GDP Growth 4.3 -0.1 6.4 6 5.9 6.0 Private Consumption 7.6 1.6 7.4 5 4.7 Government Consumption 2.0 2.4 2.3 4.3 4.2 4.0 Gross Fixed Capital Formation -2.1 -4.0 3.8 Exports, Goods and Services -1.1 -3.9 5.1 2.0 Imports, Goods and Services -2.3 -3.6 4.2 0.0 Real GDP Growth 4.4 -0.2 6.5 -0.1 Agriculture 1.8 1.9 2.5 -2.0 Industry 2.4 -2.9 4.2 Services 6.1 1.3 8.5 -4.0 Baseline Low case Current Account Balance (% of GDP) 3.3 1.9 2.6 -4.6 Low case scenario -6.0 2014 2015 2016 2017 2018 2019 2020 Real GDP Growth -4.6 4.1 Source: Haver Analytics and World bank staff projections 15

2 3 1 Prolonged outbreak Limited fiscal space Political uncertainty Uncertainty over the An uncontained or further The government’s limited country’s political stability deterioration of the fiscal policy space to following the recent change outbreak would result in respond to the crisis is in ruling coalition and the more severe or prolonged further complicated by the government’s ability to restrictions on overall plunge in commodity prices manage the outbreak could economic activities, posing a which would put additional pose further downside risks further drag on growth. strain on government to growth. revenue. 16

The fiscal impact of the policy response 17

Main elements of the Prihatin Rakyat Economic Stimulus Packages RM billion 1127 interviews 1. Protecting the people 126 National Caring Aid Cash Transfer Program 10 Wage subsidy 13.8 Cash aid for government servants and pensioners 1.7 Special grants to micro enterprises 2.1 EPF Account 2 withdrawal 40 6-month moratorium on loan repayments 63 Special fund to strengthen health care system 1 2. Supporting the business community 101 6-month moratorium on loan repayments 35 Corporate loan guarantees from Danajamin 50 6-month freeze on EPF contributions and HRDF contributions by employers 10 3. Strengthening the economy 3 260 Total (17.3% of GDP) 35 Direct fiscal injection (2.3 % of GDP) 18