Good morning. I wrote the following article for The SJ Echo (the local monthly community paper for Subang Jaya) on Saturday. Am reproducing the article here:
You can read The SJ Echo here: https://sjecho.com.my/
The New Normal and Accountability to Parliament
As I am writing this article, the conditional MCO is set for review in the next few days. Further relaxation of the MCO is expected, with schools possibly re-opening soon.
My office focuses quite a bit on economic and fiscal policy matters. As such, in this article, allow me to broadly address some basic economic policy issues which will likely emerge dominant in the next 12 months. This new dominant economic system has been referred by many as the “new normal”. However what exactly is the new normal, is debatable. I will try to give my version of it.
When discussing the economy, I usually start by dividing it into three specific sectors; (a) the public sector (government to non profit bodies), (b) the private sector involved in the production of goods (manufacturing, mining to farming), and (c) the private sector involved in the provision of services ( hotel, airline, restaurant to hairdresser). All three different sectors of the economy are affected albeit in different degrees by the Covid-19 pandemic.
A new normal is about to replace the old ways of doing business. The question is for how long will this new normal, last? The answer to that is highly dependent on the speed of a Covid-19 vaccine development and deployment. Most experts expect a timeline of 12 months to 24 months for a global deployment of a vaccine. However, upon such a successful deployment, we may risk the return of the old unsustainable economic model. However, I am hopeful that the Covid-19 new normal can be a positive “nudge” that leads to a more permanent eco-friendlier economic system. In that context, I see this Covid-19 crisis as a potential platform to better prepare us to face the existential threat of climate change. But we have to act now and take hold of the guiding narratives.
The new normal for the public sector will see the government fiscally challenged by a drop in all forms of revenues, across the board. I expect corporate tax and oil dividends to suffer the biggest drops. In short, an inevitable recession coupled by low oil prices will likely put deep financial strains on the government. While rich and powerful countries can deploy even larger quantitative easing programs, smaller countries like Malaysia, do not have the full luxury to do so. So how big is the projected fiscal problem? By my estimates, the Malaysian government could be looking at a revenue shortfall of somewhere between RM40 billion to RM70 billion. The exact quantum of this shortfall will depend largely on oil and gas prices and whether companies can quickly recover to profitability within the financial year.
Noting that the annual government fiscal budget averages around RM300 billion, a RM40 billion drop in revenue represents a 13.3% cut and a catastrophic RM70 billion drop, will be a massive 23.3% cut. To counter this projected fiscal strain, the government will have to double the issuance of the usual government bonds from RM50 billion to about RM100 billion. The EPF will likely be asked to buy more of these bonds.
So for this financial year and the next, the government will likely be forced to go into austerity and reduce development spending. The only silver lining to this difficult situation is the opportunity for mega corruption from mega projects will also be greatly diminished. If the revenue shortfall is very severe, we may even see cuts in government operational spending. The civil service will be forced to be leaner with civil servants asked to do more for less pay. Unfortunately, the new normal for the public sector will be greater austerity, when what is really needed is greater economic equality.
Now, let us ponder the new normal for the private sector that is involved in production of goods. Global demand for goods has decisively dropped during the global lockdown period. The best available current indicators are from China, simply because China was the first to be infected by Covid-19 and the first to “recover” from the same. Initial numbers indicate that China’s average export production numbers were down around 17% in Q1 2020. In the coming months, we may see China’s production numbers climb, however it is unlikely to go back to pre Covid-19 normal. My guess is production will maintain around a 10% drop for the year on the back of slower global demand for goods. Lower demand and supply of goods will be the short term new normal for production of goods.
Companies will have to invest more in efficiency, automation, better quality products in order to compete in a tougher and shrinking global market. At the big global stage, I expect China to flex its industrial muscles more, to try to take more of the shrinking market share from countries that are struggling to contain Covid-19. This may lead to trade conflicts and greater protectionism. The US-China trade war is set to resume and become even more intense. By the same token, Malaysia will do well to analyse how our regional competitors are handling Covid-19. There are market shares to be gained if we act fast and decisively. In addition, we will most likely see two large production trends in the coming decade; (a) localisation of production as opposed to globalisation, and (b) the greater use of robotics, less reliance on human labour in manufacturing.
Lastly, we look at the private sector that provides services. This sector currently faces the most challenges. By my estimate, the recent lockdown and social distancing rules may have wiped out 50% to 80% of all tourism related activities. Recovery is coming but is expected to be slow. While restaurants are now operational, around 20% of the customers will permanently opt out of dining outside their homes. Sporting events and conferences will not recover at all any time soon. Overall, the new normal for this sector is expected to be very bad.
If we don’t plan and act now, this sector is going to be the main contributor of unemployment. By my best estimate, I think the unemployment rate will settle around 5% to 8%, noting that before Covid-19, the unemployment rate was 3.3%. A more enlightened wage support approach will need to be deployed to curb unemployment. We will also need to quickly deploy more social safety nets and re-training programs.
All the above leads back to the fundamental issue of accountability of government policy making, and that is precisely why Parliament needs to be re-activated to enable MPs to do their policy work, as soon as possible. It is not enough for the government to use the “new normal” as a catchy phrase; the real work lies in the articulation, planning and implementation of policies to counter and adjust to the new normal. These crucial policy works will need to be transparent and accountable, under the full scrutiny of Parliament.
Saturday, 30th May 2020