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

April 15, 2020

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

A pandemic that has triggered a global recession

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

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Volatility in financial markets spiked significantly Large capital outflows from emerging markets

Emerging Markets Net Non-resident Equity and Bond Purchases – 4-week moving average, USD billion CBOE Volatility Index (VIX) Source: World bank staff calculations 10 20 30 40 50 60 70 80 90 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

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 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 Global Financial Crisis

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Energy prices have seen the sharpest declines Crude oil prices declined 40 percent in March

Nominal prices, percentage changes, March over February Major commodity price indexes (US$, 2010=100)

40 50 60 70 80 90 100 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

Energy Agriculture Metal

• 0.45
• 0.35
• 0.25
• 0.15
• 0.05

0.05 0.15

Crude oil, Brent Crude oil, Dubai Sugar, world Silver Palm kernel oil Palm oil Sunflower oil Rubber, TSR20 Lead Rubber, SGP/MYS Soybean oil Natural gas, US Tea, Mombasa Aluminum Sawnwood, Malaysian Maize Tea, Colombo Coconut oil Coffee, Robusta Gold Shrimps, Mexican Banana, Europe Sugar, EU Sugar, US Plywood Fish meal Soybean meal Urea Groundnuts Rice, Thai 5%

Source: World bank staff calculations

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10 20 30 40 50 60 70 Vietnam Singapore Cambodia Malaysia Thailand Fiji Philippines Mongolia Korea, Rep. Lao PDR Indonesia Japan Total Manufacturing Imports Manufacturing Imports from China 10 20 30 40 Mongolia Singapore Malaysia Vietnam Lao PDR Thailand Fiji Indonesia Hong Kong SAR, China Cambodia Korea, Rep. Philippines Japan Total Commodity Exports Commodity Exports to China

Manufacturing imports, percent of GDP Commodity exports, percent of GDP

The three main channels were through manufacturing, demand for commodities and tourism

5 10 15 20 25 30 Cambodia Thailand Philippines Malaysia Lao PDR Mongolia China Vietnam Indonesia Myanmar Estimated income from non-Chinese tourists Estimated income from Chinese tourists Tourism, percent of GDP Source: World bank staff calculations

7 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

Countries have taken bold measures to restrict movements in order to mitigate the spread of the virus, leading to domestic demand and supply shocks

100 80 60 40 20 No data Government Stringency Index (Higher Score indicates Higher Stringency level)

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Changes in GDP and exports under a global pandemic (deviation from the benchmark) Changes in GDP and exports under an amplified global pandemic (deviation from the benchmark)

• 3.5
• 3.0
• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

0.0 Developing countries Rest of High Income East Asia Rest of Developing East Asia World Total Europe & Central Asia European Union + UK Other High-Income countries Latin America & Caribbean United States Sub-Saharan Africa Middle East & North Africa Exports GDP

• 7.0
• 6.0
• 5.0
• 4.0
• 3.0
• 2.0
• 1.0

0.0 Rest of High Income East Asia South Asia Rest of Developing East Asia Europe & Central Asia Developing countries World Total European Union + UK Other High-Income countries Latin America & Caribbean United States Middle East & North Africa Sub-Saharan Africa Exports GDP

Source: World bank staff calculations

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Changes in GDP and export under a global pandemic (deviation from the benchmark) Changes in GDP and export under an amplified global pandemic (deviation from the benchmark)

• 5
• 4
• 3
• 2
• 1

China Cambodia Thailand Vietnam Philippines Laos PDR Malaysia Indonesia Exports GDP

• 8
• 7
• 6
• 5
• 4
• 3
• 2
• 1

Cambodia Thailand Philippines Vietnam China Malaysia Laos PDR Indonesia Exports GDP

Source: World bank staff calculations

1127 interviews

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Source: Gourinchas (2020), Flattening the Pandemic and Recession Curves, March 13, 2020.

Flattening the pandemic curve is the focus of containment policies… … and flattening the recession curve the focus

• f macroeconomic policies

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Boost health care capacity to meet what may be an

• verwhelming 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.

Malaysia’s economic outlook has been affected

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1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 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 3.40 3.60 3.80 4.00 4.20 4.40 4.60 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 FBM KLCI Index Exchange rate, MYR/ USD

Since January 2, the FBM KLCI has declined by about 17 percent… …and the ringgit has depreciated by nearly 7 percent in the same period.

Source: Haver Analytics and World Bank staff calculations

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Broad based decline in household consumption after implementation of MCO. Decline in trade activities beginning in February.

Employees who lost their job since MCO by sector, percentage 40 50 60 70 80 90 100 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

Merchandise Exports Merchandise Imports

3-month moving average in exports and imports, in RM thousand

Job losses seen across all major sectors.

Source: Department of Statistics Malaysia (DOSM)

• 95
• 89
• 86
• 72
• 71
• 69
• 65
• 58
• 55
• 39
• 38

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• 120
• 100
• 80
• 60
• 40
• 20

20 40 Clothing Transportation Restaurant & hotel Furnishing Recreation Miscellaneous Alcoholic drinks and tobacco Utilities Overall spending Supplies & services Health Communications Education Non-alcoholic food & beverages

Decline in consumption after MCO implementation, percentage Source: Haver Analytics and World bank staff calculation

22 15 7 5 10 15 20 25 Agriculture Services Industry

Source: Department of Statistics Malaysia (DOSM)

1127 interviews

15 2019 2020 2021 Real GDP Growth 4.3

• 0.1

6.4 Private Consumption 7.6 1.6 7.4 Government Consumption 2.0 2.4 2.3 Gross Fixed Capital Formation

• 2.1
• 4.0

3.8 Exports, Goods and Services

• 1.1
• 3.9

5.1 Imports, Goods and Services

• 2.3
• 3.6

4.2 Real GDP Growth 4.4

• 0.2

6.5 Agriculture 1.8 1.9 2.5 Industry 2.4

• 2.9

4.2 Services 6.1 1.3 8.5 Current Account Balance (% of GDP) 3.3 1.9 2.6 Low case scenario Real GDP Growth

• 4.6

4.1

Current baseline estimate puts Malaysia’s GDP growth for 2020 at -0.1 percent

• 0.1

6 5 4.2 5.9 4.7 4.3

• 4.6
• 6.0
• 4.0
• 2.0

0.0 2.0 4.0 6.0 8.0 2014 2015 2016 2017 2018 2019 2020 Baseline Low case

Source: Haver Analytics and World bank staff projections

Growth is expected to recover in 2021

Prolonged outbreak

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Limited fiscal space Political uncertainty

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An uncontained or further deterioration of the

• utbreak would result in

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

The fiscal impact of the policy response

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1127 interviews

18 RM billion

• 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 Total 260 (17.3% of GDP) Direct fiscal injection 35 (2.3 % of GDP)

Main elements of the Prihatin Rakyat Economic Stimulus Packages

State governments have also announced state-level economic stimulus packages to complement the Prihatin package

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Amount of package above RM500 million Amount of package between RM50-RM100 million Amount of package between RM5-RM20 million Amount of package not disclosed

Bulk of the packages were for cash assistance to lower income families, reliefs for small and micro entrepreneurs and deferment of land taxes and rentals.

Source: World Bank *As at 2 April 2020

The fiscal stimulus is relatively modest in terms of direct fiscal injection

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Modest amount of fiscal injection 1 Limited wage subsidies 2 Speed of implementation and disbursements 3

• The scale of the net fiscal

impulse and of the size of direct citizen transfers (Bantuan Prihatin Nasional, BPN) is relatively modest.

• The initial wage subsidy

scheme of RM600 is modest in scale and may not be sufficient to prevent employers from laying off workers.

• The recent revision has

expanded the wage subsidy scheme, though it may need to be re-looked if MCO is extended.

• The disbursements of the

cash transfer uses existing Bantuan Sara Hidup (BSH) framework.

219 212 220 233 234 100 120 140 160 180 200 220 240 2015 2016 2017 2018 2019 2020f (WBG) 115

• 222

Federal government will face a sharp revenue shortfall this year

• RM22.6 to

29.4 billion

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Projected shortfall in government revenue in 2020, RM billion

• 30
• 25
• 20
• 15
• 10
• 5

Personal income tax SST Others Petroleum related-revenue Corporate income tax Federal government revenue, RM billion

• RM22.6 to
• 29.4

billion

Current estimates show a marked revenue shortfall

• f over RM22 billion in 2020

Source: World Bank staff projections based on MOF data Source: World Bank staff projections based on MOF data

Bulk of the revenue decline is due to lower petroleum-related revenue

Larger government spending combined with lower revenue would lead to a wider fiscal deficit in 2020

1127 interviews

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2 1996 1999 2002 2005 2008 2011 2014 2017 2020f 10 20 30 40 50 60 1996 1999 2002 2005 2008 2011 2014 2017 2020f Overall fiscal balance, % of GDP Federal government debt, % of GDP Source: World Bank staff projections based on MOF data Source: World Bank staff projections based on MOF data

Without new revenue measures, the fiscal deficit would widen to around 7 percent of GDP Federal government debt would exceed its self- imposed limit of 55 percent of GDP

Government’s options to finance additional fiscal measures are constrained by its statutory limits

1127 interviews

23 Debt legislative Relevant debt instrument/ fiscal items Statutory limit Loan (Local) Act 1959 Operating expenditure Operating expenditure must be financed by revenue (not borrowing) Government Funding Act and Statute Paper 76 of 2009, Loan (Local) Act 1959 MGS, MGII and MITB 55 percent of GDP Federal Constitution Article 98(1)(b) Debt service charges (DSC) 15 percent of revenue Treasury bills (Local) Act 1946 Treasury Bills (MTB) RM10 billion Statute Paper 77 of 2009, External Loans Act 1983 Offshore borrowing RM35 billion

Source: 2020 Fiscal Outlook and Federal Government Revenue Estimates, MOF

Statutory limits on federal government debt

Government’s options to finance additional fiscal measures are constrained by its statutory limits

1127 interviews

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Option 1: The government could recalibrate selected items in the operating budget. However, the savings may not be sufficient to fund additional stimulus measures

Operating expenditure items 2019 Budget 2020 Feasibility Supplies and services 30.2 38.5 Yes Grants to statutory bodies 13.2 15.3 Yes Subsidies and social assistance 23.6 24.2 Yes Grants and transfers to state governments 7.6 7.7 Limited Emolument 82.0 82.6 Limited Retirement charges 26.6 27.1 Limited Refunds and write-offs 0.9 1.0 Minimal impact Asset acquisition 0.7 0.7 Minimal impact Debt service charges 33.0 34.9 No Others 7.5 9.0 No information

Source: 2020 Fiscal Outlook and Federal Government Revenue Estimates, MOF

Government’s options to finance additional fiscal measures are constrained by its statutory limits

1127 interviews

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Option 2: The government could raise additional non-tax revenue to fund additional stimulus spending

Revenue items 2019 Budget 2020 Feasibility Interest and return on investments from Petronas 54.0 24.0 Yes Interest and return on investments from Khazanah 1.0 1.0 Yes Interest and return on investments from BNM 2.5 2.0 Limited Others 2.0 1.6 No information Sales of physical assets 0.0 1.3 Yes

Source: 2020 Fiscal Outlook and Federal Government Revenue Estimates, MOF

Government’s options to finance additional fiscal measures are constrained by its statutory limits

1127 interviews

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Option 3: Parliamentary intervention to temporarily lift the statutory limits governing public debt management

➢The Loan (Local) Act 1959, the Treasury (Local) Act 1946 and the Government Funding Act 1983 collectively specify that the government’s operating expenditure must be financed by its yearly revenue, and the statutory limit of federal government

• utstanding debt instruments* must not exceed 55% of GDP.

➢It remains unclear whether the government could convene an emergency sitting of Parliament to temporarily lift these laws during the crisis period. The government would also have to carefully balance the need to relax these binding fiscal limits against the potential erosion of its medium-term institutional credibility in fiscal management.

* The outstanding debt financed via Malaysian Government Securities (MGS), Malaysia Government Investment Issues (MGII) and Malaysian Islamic Treasury Bills (MITB).

Beyond the crisis

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1127 interviews

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Economic

• Diversified economic

structure

• High level of digital

adoption

• Current account

surplus

• Sound macroeconomic

management

Financial

• Deep domestic capital

markets

• Resilient financial

institutions

• Past crisis response

experience

Public sector

• Strong health

institutions

• Economic stimulus

packages

• Early response

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Post crisis recovery

Investment Jobs Digital adoption Social protection

Review investment strategies and promotion efforts to attract quality investments and restore investor confidence Provide support to SME/ workers (e.g. reskilling and upskilling) to help them cope with the post-crisis environment Close the digital connectivity gaps and foster innovation and digitalization of SMEs Continuing income support during the recovery phase to safeguard livelihoods of vulnerable households

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For more information:

World Bank COVID-19 resource page https://www.worldbank.org/en/who-we-are/news/coronavirus-covid19 East Asia and Pacific in the time of COVID-19 https://www.worldbank.org/en/region/eap/publication/east-asia-pacific-economic-update Malaysia country page https://www.worldbank.org/en/country/malaysia

Please contact:

Richard Record, Lead Economist, World Bank Malaysia (rrecord@worldbank.org) Shakira Teh Sharifuddin, Senior Economist, World Bank Malaysia (stehsharifuddin@worldbank.org) Yew Keat Chong, Economist, World Bank Malaysia (ychong@worldbank.org) Mahama Samir Bandaogo, Economist, World Bank Malaysia (mbandaogo@worldbank.org)