COVID-19 Outbreak: Is the Malaysian Economy in Trouble?
A pandemic occurs when there is an outbreak of a disease affecting a large number of people over a specific period of time. This fast-spreading disease crosses borders and countries, turning into a global crisis. The last time we have seen something like this was during the outbreak of Severe Acute Respiratory Syndrome (SARS) in 2002-2003. After more than a decade, we are experiencing a Pandemic outbreak once again called the Novel Coronavirus Disease (COVID-19).
The novel coronavirus originated from the wild animal market of Wuhan Province in China. On 31st December 2019, China officially reported to the World Health Organization (WHO) about the existence of the virus. The virus, with flu-like symptoms, has spread fast across nations and continents as the outbreak was during the holiday seasons.
As of 12th March 2020, 125,518 COVID-19 cases have been reported worldwide, with 158 people infected in Malaysia. The bright side is, if we take sufficient precautions, we have less chance of being infected by COVID-19. However, we cannot say the same for the current state of our economy.
Every time a Pandemic hits, our economy suffers. Businesses incur losses as people start taking precautionary measures such as refraining from traveling or going outdoors. Not only that, but people also hold off events, celebrations, and large expenditures like buying a car or a house. This is because both consumers and businesses want to minimize travels or contact with large crowds. So, how is COVID-19 impacting our businesses and the economy? Let’s find out!
Impact on Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the monetary value of all finished goods and services produced within the country during a specific period of time. It provides an economic snapshot of a country to estimate the size of our economic growth and value.
Malaysia’s economy was already enduring a lower GDP growth as a result of the Trade War between China and the United States since last year. Now with COVID-19, the economy threatens to become more volatile resulting in financial turmoil. The Malaysian Government previously predicted a GDP growth of 4.8% for the year 2020. Now, the Government predicts that the GDP will be lower due to the Covid-19 outbreak. It is estimated to be around 3.2%-4.2% only.
Impact on Business Industries
When we look into the business landscape, the Pandemic outbreak impacted several industries. However, the largest hit is taken by the tourism sector. 11.8% of our GDP comes from tourism. With COVID-19 at loose, the Visit Malaysia 2020 (VMY2020) campaign is at risk. The campaign is estimated to attract 30 million tourists out of which 10.6% is targeted to come from China. Depending on the current situation, this target will not be easy to achieve.
Previously during the outbreak of SARS, tourists’ arrival from China dropped by an alarming 37%. The overall tourists’ arrival dropped by 21%. We are yet to know how COVID-19 will impact our tourists’ flow at this time. Airlines, hotels and tour operators are seeing a significant drop in business since these industries are very much dependent on tourism.
The manufacturing industry is also impacted by the virus outbreak as China has already shut down many factories. These factories usually provide supplies to Malaysian manufacturers but now they are unable to do so. As a result, the manufacturing sector has a shortage of supply and are unable to manufacture their products on time. Other industries such as the commodity sector, supply chain, domestic exports, retail and service sectors are also impacted by the COVID-19 outbreak as China is the largest trading partner of Malaysia.
However, there are some industries which are benefitting from this global health crisis. COVID-19 has indeed put a monumental emphasis on hygiene. Gloves, masks, sanitizers, paper towels, and other hygienic products are on high demand in the market right now.
Malaysia is the main producer of medical gloves with approximately 180 billion pieces exported worldwide. When the news of COVID-19 became public, the demand for gloves from companies like Top Glove has escalated up to 14% in volume. Economists also expect a greater demand in Malaysia’s healthcare sector. Pandemic such as this helps in raising health awareness resulting in people making an extra effort to attend to their health.
Impact on Banking and Financial Services
In the world of Finance and Banking, S & P Global Ratings anticipates that Non-Performing Loan (NPL) will increase from 1.5% (as of 31st December 2019) to 1.7-1.8% as many businesses are dealing with economic instability due to COVID-19. Their sales growth will decline. As a result, they will not have sufficient funds to pay their loan installments.
Measures Taken to Restore Financial Stability
Introduction of Stimulus Package
The Government recently launched a RM 20 billion Economic Stimulus Package on 27th February 2020 to assist the businesses affected by COVID-19. The Government will unfold the package with 3 strategies to restore financial stability. It will run for a period of 6 months starting from April 2020.
Source: The Edge, 12th March 2020
The Stimulus package will primarily focus on tourism and tourism-dependent retail businesses, hotels, airlines, transportations, and tour companies. It will also provide aid to other affected industries bearing losses such as manufacturing and construction sectors. The Government hopes that this financial aid can help to sustain and catalyze business growth whilst encouraging quality investments through this measure.
Overnight Policy Rate (OPR) Cut
Now, market and consumer sentiment are low due to the COVID-19 outbreak. To boost consumer’s purchasing power, Bank Negara Malaysia (BNM) has recently cut the OPR for the second time this year on 3rd March 2020. This time, BNM reduced the OPR by 25 bases to 2.5%.
The decrease in OPR will impact both financing and investment rates. A decrease in OPR means businesses will now be able to obtain financing at a lower interest rate. However, the interest rates on savings and investment will also decline. To get better returns and to diversify the existing investments, businesses can opt for alternative investments such as Peer-to-Peer (P2P) Investment. This will give them the opportunity to earn a higher return, especially in the current volatile market.
Banks Deferring Loan Payment
Banks are anticipating that the COVID-19 outbreak will make the market more volatile. The S&P report also indicates an increase in NPL ratio as mentioned above. So, many banks such as Bank Simpanan Nasional (BSN), RHB and Maybank announced temporary deferment to repay the loans for those who are affected by the Pandemic. They are hoping that the deferral will give their consumers enough time to recover from the financial crunch and repay their loans again.
This is a difficult time for industries to sustain in the market. The turbulent market is a challenge for many businesses to raise funds to cover their expenses. The Government and banks are doing their best to aid the businesses, but industry players must also look into more versatile resources to cater to their funding.
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