KUALA LUMPUR: Shoring up private consumption, the country’s main growth driver, is seen as the key in the current challenging economic environment, as the Covid-19 outbreak upends demand and supply chains worldwide, and sparks fears of a global recession.
Which is why Bank Negara Malaysia’s (BNM) decision last week to cut the overnight policy rate (OPR) again — its second cut in less than two months — was largely expected. The OPR is now at 2.5%, its lowest in 10 years.
The announcement came just days after Putrajaya announced a RM20 billion stimulus package to help mitigate the virus’ impact on the domestic economy.
Among the highlights was a reduction of minimum contribution by employees to the Employees Provident Fund to 7% from 11%, from April 1 till Dec 31, which is expected to potentially unlock up to RM10 billion worth of private consumption.
These measures are intended to place more residual income in consumers’ hands, to boost their spending power. But the question is, will consumers and businesses have the appetite to spend, given current economic conditions? There is also the added element of political uncertainty that has been hanging over the country since the end of February, which led to an abrupt change in government just a week ago.
According to Socio-Economic Research Centre executive director Lee Heng Guie, a 25-basis-point reduction in interest rate can usually contribute up to 0.2% gross domestic product (GDP) growth per year, “with a time lag of about two to three quarters”.
Lee explained that in a normal environment, lower interest rates will spur household expenditures on consumer durables like new vehicles. It also eases debt-service payments on existing loans and free up some cash, which really matters for highly leveraged borrowers and the B40 households. The same is true for small and medium enterprises, whose cash flow will be lifted by lower debt-service payments. It will also be cheaper for them to borrow for working capital or expansion.
But this does not mean purse strings will be loosened instantly in a low-interest environment. The responsiveness of consumers and businesses will be influenced by factors like income growth, employment stability, as well as perception about economic and investment prospects, said Lee.
Consumers also tend to spend if they are confident that government policies can revive economic growth. In other words, the economic climate is a key consideration.
So, if uncertainties prevail, there will be a tendency for people to hoard cash.
Under the current situation, UOB Global Economics & Markets Research senior economist Julia Goh believes Malaysians may be hesitant to spend, even with more cash in their pockets. And anecdotal observations, she said, suggest that spending tends to slow post-Chinese New Year and pick up only towards the next festive season, the Hari Raya Aidilfitri.
“I think consumers may defer . They will be more selective and defer unnecessary spending due to slower economic conditions. For some, they may wait for better deals because Malaysians always love a good bargain,” said Goh.
She also expects the Covid-19 impact to be temporary, and for consumption to rebound in the second half of this year.
“One key area to watch is employment, especially if Covid-19 becomes more protracted,” she added.
In the near term, she believes businesses will remain cautious as they monitor the outbreak’s progress, and the corresponding level of economic activity or recovery in China.
Sunway University Business School economics professor Dr Yeah Kim Leng, meanwhile, has been expecting consumption to “moderate strongly” this year amid the viral outbreak and dampen Malaysia’s economic growth, especially in the first half of the year.
Now, with the lower interest rate, together with the stimulus package and supportive credit conditions, he believes consumer confidence will be supported, which will help household spending to slow at a more moderate pace.
He also observed that low-income households tend to have a higher propensity to spend. “For every ringgit they have, they spend about 80 to 90 sen,” he said.
So, aside from the lower interest rate, the government’s announcement that the RM200 payment in May for all Bantuan Sara Hidup recipients will be advanced to this month, with an additional RM100 to be paid in May, will also boost low-income households’ spending.
In contrast, Yeah noted that those in the middle and high-income groups have a progressively lower spending ratio.
Besides Malaysia, central banks across the world have similarly made rate cuts to battle Covid-19’s impact.
The US Federal Reserve last Tuesday announced a 50-basis-point interest rate cut as part of emergency measures, on fears of slowing economic growth. The Bank of Canada followed suit a day later. Australia, Hong Kong, Thailand, Indonesia and the Philippines have all lowered their rates and some are considering more cuts.
Affin Hwang Capital chief economist Alan Tan, however, cautioned that monetary policy alone is not going to be sufficient.
“The intention is to revive consumer and business sentiments. And monetary policy alone will not do the job, it has to be complemented by fiscal stimulus,” said Tan, pointing to the respective economic boosters announced by Malaysia and Singapore. Australia is reportedly in the midst of preparing a US$5 billion (RM20.85 billion) booster too.
“I believe the RM20 billion (the stimulus package announced by Malaysia), if implemented fully and effectively, will complement BNM’s monetary easing,” said Tan.
“Both monetary and fiscal policies will work hand-in-hand to support the economy and therefore, we expect the Malaysian economy to be better in the second half,” Tan said, adding the country has room for further fiscal measures if necessary, given its recent fiscal deficit revision to 3.4% of GDP from 3.2%.
And while private consumption is still the pillar, Tan said it is important for the country to bolster private investment.
“A lot of approved investments have been received over the last one to two years and the realisation of these approved investments is expected to pick up this year. This will also provide some support to the economy and would also complement the so-called strength in private consumption. This is why we think the economic growth will be at 4%,” said Tan.
Timely execution of infrastructure projects and other planned development spending will also support the economy as they have very high multiplier impact, Tan added.
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