Question

Describe TEN (10) factors financial systems adapt to the Covid-19 pandemic in Malaysia, (marks 50)

Elaborate in details please because it contain 50 marks.

Answer 1

Malaysia’s economic growth has slowed down to 4.3% in 2019, the lowest since 2016 and below the average 5.4% growth rate recorded since 2010. Economic growth in Q4 2019 was the lowest in ten years, at 3.6%.

Bank Negara Malaysia, which is the Central Bank of Malaysia, announced that the coronavirus outbreak will affect Malaysia’s economic growth in Q1 2020. The bank announced a cut in the statutory reserve ratio (SRR) by 100 basis points to 2% on 19 March. It also released 30 billion ringgit ($6.81bn) into the banking system.

The World Bank has cut Malaysia GDP growth rate from 4.5% to -0.1% in 2020. The revised growth rate takes into account the slower growth momentum owing to the coronavirus pandemic.

The small and medium enterprises in the country have announced that they expect zero cashflow over the next three months due to the lock-down.

PRIHATIN Economic Stimulus Package

On 27th March 2020, Malaysian Prime Minister Tan Sri Muhyiddin Yassin announced Economic Stimulus Package - PRIHATIN (Pakej Rangsangan Ekonomi Prihatin Rakyat) worth MYR250 billion. On 6th April 2020, Malaysian Prime Minister Tan Sri Muhyiddin Yassin announced PRIHATIN SME Packages, an economic stimulus package aimed especially at small and medium-sized enterprises (SMEs) during the pandemic. To date, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz mentioned PRIHATIN had helped to relieve Malaysia economic pressures in the past few months. The key takeaways in PRIHATIN package are as follow:

• Special Prihatin Grant (GKP) amounting to MYR 2.1bn, a Government initiative of providing an MYR3,000 worth one-off financial grant to support the micro-SMEs in terms of cash flow during the pandemic. As of 15th May 2020, over 640,000 micro-enterprises had applied for the GKP.
• Micro Credit Scheme: The Government will be abolishing the 2% interest rate for the MYR 500mil Micro Credit Scheme under Bank Simpanan Nasional. A loan under TEKUN Nasional with a maximum borrowing of MYR10,000 per SME at 0% interest.
• A 25% reduction in foreign employee’s levy payments is given for work permits expiring between the period of 1st April 2020 and 31st December 2020.
• MYR13.8 billion worth wage subsidy programme.
• MYR 500 million is allocated for a discount on electricity tariffs for commercial, industrial, and agriculture sectors (Effective date: 1st April 2020 to 30th Sept 2020).

Bank initiatives:

• Malaysia’s Central Bank - Bank Negara Malaysia (BNM) cut its Overnight Policy Rate (OPR)/ interest rates by 50 basis points (bps) to 2% on 5th May 2020 to encourage individuals and businesses to take new loans and theoretically will increase domestic trade transactions.
• The Commercial Banks have also introduced support packages that include emergency loans to support the SMEs, as well as flexibility for repayments of existing loans in addition to a decrease in the Policy rate.
• The banking sector will offer an additional MYR2 billion of funding to assist SMEs in sustain business operations at a concession rate of 3.5%, targeting new SME customers to Banks. (Effective date: Mid-June 2020)

2. National Economic Recovery Plan – PENJANA (Pelan Jana Semula Ekonomi Negara)

On 5th June 2020, Malaysian Prime Minister Tan Sri Muhyiddin Yassin noted that Malaysia is currently in the 4th Phase: Recovery, under the 6-Phase Plan (6Rs): Resolve, Resilience, Restart, Recovery, Revitalise and Reform. The Malaysian Government is planning to revive the economic activities by formulating a comprehensive Short, Medium and Long-term Economic Recovery Plan, which will complement the various announced economic stimulus packages.

On 5th Jun 2020, Malaysian Prime Minister Tan Sri Muhyiddin Yassin announced the Short-term National Economic Recovery Plan – PENJANA (Pelan Jana Semula Ekonomi Negara). PENJANA has 40 initiatives worth MYR35 billion, focusing on 3 key thrusts - Empower People, Propel Businesses and Stimulate the Economy. PENJANA is expected to stimulate Malaysia’s economy, save over 2.4 million jobs, reduced the cash flow burden of around 10 million people and support over 300,000 companies. The key takeaways in PENJANA plan are as follow:

• Investment fund worth MYR1.2 billion to support the digitalisation of Malaysian businesses by channelling funding from international investors into the local venture capital space.
• Allocation of MYR50 million to the Malaysian Investment Development Authority (MIDA) for promotional and marketing activities.
• Tax incentives for the Tourism sector, such as Tourism tax exemption, Income tax relief
• MYR600 million worth investment fund to drive the process of digitalisation of businesses and innovation.
• Attractive incentives for the Property Sector to stimulate the property market and provide financial relief to home buyers.
• 100% sales tax exemption on locally-assembled passenger cars and 50% on fully-imported passenger car

3. Malaysia Proposed Post-COVID-19 ASEAN Economy Recovery Plan

In the Special ASEAN Summit on Covid-19 held on 14th April 2020, Malaysia proposed to the members of ASEAN to formulate a post-COVID-19 Economic Recovery Plan for ASEAN which focuses on the financial, social safety nets, food security and education aspects. This is to ensure a robust supply chain of medical supplies, food and essential goods for the region’s over 600 million inhabitants.

Malaysia also supports the establishment of the COVID-19 ASEAN Response Fund, which aims to boost the existing emergency stockpiles for any future outbreaks. ASEAN should continue to develop the region’s reserves of medical supplies to support the needs of other member nations in public health emergencies.

d. Economic outlook

It is known that the COVID-19 pandemic has greatly impacted the Malaysian economy, more so, the Global economy. According to Malaysia’s Central Bank - Bank Negara Malaysia (BNM), Malaysia’s 1Q2020 GDP moderated sharply to 0.7% due to the impact of measures taken both globally and domestically to contain the spread of the Covid-19 pandemic. It is expected that the overall growth of GDP for 2020 to be as low as -4.7%. Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz mentioned that the country’s fiscal deficit will nearly double, rise to around 6% of annual economic output in 2020 due to the finance in the government's aid projects in regards to COVID-19 pandemic.

Economic recovery is dependent on public and private consumption which are dynamically intertwined, feeding into a virtuous cycle of social and economic benefit. During MCO alone, 66% of businesses experienced a drastic drop in demand that made it difficult to sustain a business. Malaysian Government has proactively taken many initiatives to stimulate and boost the economy, as well as increase private consumption, such as the PRIHATIN Economic Stimulus Packages and PENJANA plan. PRIHATIN is expected to contribute an estimated 2.8% to the GDP growth.

With international agencies forecasting Malaysia’s GDP growth to be between 4.7% and 9%, subject to the public health situation is under control. Malaysia’s economic performance is expected to gradually improve in 2H2020 and register a positive recovery in 2021, supported by the sizeable fiscal, monetary and financial measures and progress in transport-related public infrastructure projects.

e. Short term opportunities

1. Manufacturing Sector

Malaysia has a well-established manufacturing sector but has too much reliance on the oil and gas Sector. Malaysia remains an attractive investment destination, with the availability of well-educated labour, investor-friendly policies and incentives, well-developed Infrastructure and preferred gateway to enter the ASEAN market. Malaysia’s technologically-inclined economy is proven by the country's involvement in advanced industries such as E&E manufacturing, R&D, biotechnology, photonics, logistics, design, innovation, automotive and others.

The COVID-19 pandemic has triggered the Malaysian Government’s actions in ensuring smooth supplies of medicine, food and other essential goods. This shows short and long-term opportunities for the Manufacturing sector, especially for the Medical & Health industry and the Food & Beverages industry. The PENJANA Short-term Economic Recovery Plan announced on5th June 2020 has highlighted attractive tax incentives for a company relocating into Malaysia, including:

• 0% tax rate for 10 years for new investment in manufacturing sectors with capital investment between MYR300 – MYR500 million.
• 0% tax rate for 15 years for new investment in manufacturing sectors with capital investment above MYR500 million.
• 100% Investment Tax Allowance for 3 years for an existing company in Malaysia relocating overseas facilities into Malaysia with capital investment above MYR300 million.
• Special Reinvestment Allowance for manufacturing and selected agriculture activity, from YA 2020 to YA 2021.
• Manufacturing License approval for non-sensitive industry within 2 working days.

2. Food Agriculture (Agri-food) Sector

The COVID-19 pandemic has triggered Malaysian Government actions to address food security issues, as the country is highly relying on the imports of F&B products, animal feeds for livestock and poultry sectors and raw materials for further food processing. The emphasis on food security has opened up promising opportunities in the Agri-food Sector for FDI, such as knowledge exchange and assistance in modernising the Agri-food Sector. This has sparked Malaysia to invest in the R&D of the Agrifood Sector to develop a food self-sufficient nation. The available opportunities including potential collaboration between Malaysian and Flemish companies in Agri-related knowledge transfer, adoption or selling of advanced technologies and machinery to modernise the Sector.

The PENJANA Short-term Economic Recovery Plan announced on5th June 2020 has highlighted few supports for the Agriculture and Food sector, including:

• 100% exemption on export duty on Crude Palm Oil, Crude Palm Kernel Oil and Refined Bleached Deodorised Palm Kernel Oil (Effective date: 1st July 2020 – 31st December 2020).
• Incentives to pioneer companies to train and educate the people to venture into agriculture and plantation.
• Micro Credit Financing for Agropreneurs under Agrobank (including commodity players) totalling of RM350 million with an interest rate of 3.5%.

3. Drivers of the Logistics Sector

Malaysia has the 2nd highest e-commerce penetration rate in the ASEAN region. During the COVID-19 pandemic, Malaysia’s e-commerce industry has expanded at a fast pace. This accelerated growth is mainly due to the increase in the number of online shoppers. The growth has also triggered the transformation of the Malaysian retailers’ business strategy toward e-commerce and Internet-Of-Things (IoT). This has opened opportunities for the main logistics drivers in the country such as manufacturing, pharmaceuticals, food and beverages, e-commerce, and third-party logistics sectors.

The PENJANA Short-term Economic Recovery Plan announced on 5th June 2020 has highlighted few supports for the Agriculture and Food sector, including:

• 100% exemption on export duty on Crude Palm Oil, Crude Palm Kernel Oil and Refined Bleached Deodorised Palm Kernel Oil (Effective date: 1st July 2020 – 31st December 2020).

f. Long term opportunities

While Malaysia is concentrating on the immediate economic outcomes after COVID-19, TAPiO Management Advisory (a leading advisory company in Malaysia) has an alternative view that Malaysia should be seriously look into revamping future-ready sectors to stay competitive:

• Diversify and modernise the healthcare sector by investing in the R&D Sector and establish partnerships with key foreign stakeholders.
• Enhance the quality of Malaysia’s education system. Partnering with foreign higher education institutions to promote students’ international perspective.
• Diversify and modernise the sectors related to food, farming and agriculture from simply planting commodities to a new/existing commodity with wider job opportunities and downstream activities.
• Diversify the Foreign Direct Investments (FDI) into the country, which is mainly contributed by the oil and gas sector. This can be done by promoting the adoption of innovative and advanced technologies in all existing or new industries.
• Encourage foreign investors to establish or relocate subsidiary in/to Malaysia. Malaysia could take advantage of the current disruption in the global supply chain, as several Multinational Corporations looking to relocate their companies from China.
• Despite the current economic uncertainties, Malaysia is still firmly preparing for the implementation of the National Fiberisation and Connectivity Plan (NFCP), which aims to improve the country’s digital connectivity by rolling out 5G in Q32020. Minister of Communications and Multimedia mentioned that a reliable and affordable high-speed broadband connectivity is the key catalyst for bringing in FDI into Malaysia’s digital economy. The NFCP is also expected to have a positive impact on the Global Business Services (GBS) in Malaysia by empowering the employees to work from home.
• In the COVID-19 aftermath, the Malaysian Government is expected to improve the national competitiveness, in terms of FDI by introducing more investor-friendly policies and incentives