MALAYSIA Surviving the Storm ECONOMIC MONITOR JUNE 2020 Malaysia’s economy has been dramatically affected by COVID-19 and is expected to contract sharply in 2020. The government’s response has helped to blunt the impact of the crisis, but key gaps remain and there has been a distinct narrowing of fiscal space. Policies in the near term should focus on protecting the most vulnerable, and in the medium term on preparing the economy for recovery in a ‘new normal’ environment. The pandemic provides a window of opportunity for Malaysia to enhance its social protection system. PART ONE Recent Economic Developments and Outlook The COVID-19 pandemic has triggered a collapse in global and regional economic activity The COVID-19 pandemic has resulted in a synchronized Economic conditions in East Asia and Pacific have also collapse of global economic activity deteriorated sharply GDP, y/y, Percentage GDP, y/y, Percentage 6 8 5 6 4 4 3 2 2 0 1 -2 0 -1 -4 -2 -6 -3 -8 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Developing EAP Thailand China World Advanced Emerging and Economies Developing Economies Indonesia Vietnam Philippines Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects Falling global demand has resulted in significant declines in commodity prices, with particularly sharp falls in energy prices Commodity prices has declined in recent months... ...with particularly sharp falls in energy prices Changes in Nominal Price Indexes, May over January 2020, Percentage Major Commodity Price Indexes, US$ (2010=100) 100 Energy Metals & Minerals 80 Food Non-energy 60 Agriculture Raw Materials 40 Fertilizers Beverages 20 Precious Metals 01/2018 04/2018 07/2018 10/2018 01/2019 04/2019 07/2019 10/2019 01/2020 04/2020 -50 -40 -30 -20 -10 0 10 Energy Agriculture Metals & Minerals Source: World Bank Group Source: World Bank Group Malaysia’s economy has been dramatically affected by restrictions on movement to flatten the pandemic curve The MCO has been effective in flattening the curve of ...through a significant decline of mobility in public the COVID-19 outbreak... places New Daily Con rmed Cases, 7-Day Moving Average Percent Change in Mobility from January 2020, 7-day Moving Average 175 40 155 20 135 0 115 95 -20 75 -40 55 -60 35 MCO CMCO -80 15 21-Feb 27-Feb 04-Mar 10-Mar 16-Mar 22-Mar 28-Mar 03-Apr 09-Apr 15-Apr 21-Apr 27-Apr 03-May 09-May 15-May 21-May 27-May 02-Jun -5 31/12/2019 09/01/2020 18/01/2020 27/01/2020 05/02/2020 14/02/2020 23/02/2020 03/03/2020 12/03/2020 21/03/2020 30/03/2020 08/04/2020 17/04/2020 26/04/2020 05/05/2020 14/05/2020 23/05/2020 01/06/2020 10/06/2020 Residential Workplaces Retail & Recreation Grocery & Pharmacy Parks Transit stations Source: World Bank staff calculations based on European Centre for Disease Prevention and Control data Source: World Bank staff calculations based on Google data Economic activity slowed down markedly in recent months Malaysia’s economic growth weakened sharply in Q1 ...weighed down by negative investment and net 2020... export growth GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 7 8 6 6 4 5 2 4 0 3 -2 2 -4 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 1 0 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Net Exports Private Consumption Public Consumption GFCF Change in Inventory Real GDP, y/y Source: DOSM Source: World Bank staff calculations based on DOSM data Exports have continued to see negative growth due to weak external demand Negative export growth continued amid plunging A smaller goods surplus and a larger deficit in services external demand led to a narrower current account surplus Real Exports of Goods and Services, y/y, Percentage Current Account Balance, Percentage of GDP, 4-quarter Rolling Average 10 10 5 5 0 0 -5 -5 -10 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 -10 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Goods Primary & Secondary Income Account Services Current Account Source: World Bank staff calculations based on DOSM data Source: World Bank staff calculations based on DOSM data Inflation turned negative in recent months, reflecting a marked decline in fuel prices Headline inflation turned negative in recent months... ...due primarily to sharp declines in petrol prices In ation, y/y, Percentage Contribution to In ation, y/y, Percentage 3 4 2 2 1 0 0 -1 -2 -2 -3 -4 -4 01/2018 03/2018 05/2018 07/2018 09/2018 11/2018 01/2019 03/2019 05/2019 07/2019 09/2019 11/2019 01/2020 03/2020 10/2018 12/2018 02/2019 04/2019 06/2019 08/2019 10/2019 12/2019 02/2020 04/2020 Headline In ation Core In ation Others Transport Headline In ation Housing, Water, Electricity, Food and Non-alcoholic Gas & Other Fuels Beverages Source: DOSM Source: World Bank staff calculations based on DOSM data Labor market conditions softened noticeably in recent months Unemployment rose to its highest rate in March... ...driven by a rise in unemployment for the 15-24 age group Unemployment Rate, Labor Force Participation Rate, Unemployment Rate, Percentage Percentage Percentage 5 70 12 10 4 69 8 3 68 6 2 67 4 1 66 2 0 65 0 01/2015 05/2015 09/2015 01/2016 05/2016 09/2016 01/2017 05/2017 09/2017 01/2018 05/2018 09/2018 01/2019 05/2019 09/2019 01/2020 Q1-2017 Q2-2017 Q3-2017 Q4-2017 Q1-2018 Q2-2018 Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q1-2020 Labor Force Participation Rate Unemployment Rate Overall 15-24 25-34 35-44 45-54 Source: DOSM Source: World Bank staff calculations based on DOSM data Heightened uncertainty has caused a decline in the performance of the domestic financial markets Increased investor demand for safe assets led to large ...and the ringgit depreciated against the US dollar, in portfolio outflows... line with regional currencies Non-resident Portfolio Flows, RM Billion MYR/Currency, Rebased to January 2018=100 (Upward Trend Indicates MYR Depreciation) 10 110 5 105 0 100 -5 95 -10 90 -15 85 -20 80 06/2017 08/2017 10/2017 12/2017 02/2018 04/2018 06/2018 08/2018 10/2018 12/2018 02/2019 04/2019 06/2019 08/2019 10/2019 12/2019 02/2020 04/2020 04/05/2017 12/07/2017 18/09/2017 22/11/2017 29/01/2018 05/04/2018 14/06/2018 17/08/2018 26/10/2018 03/01/2019 13/03/2019 16/05/2019 24/07/2019 02/10/2019 05/12/2019 11/02/2020 14/04/2020 Equity Corporate Bonds Government Bonds USD EUR GBP IDR and Sukuk and BNM Bills THB VND PHP Source: BNM and Bursa Malaysia Source: World Bank staff calculations based on BNM data The financial sector remained resilient in Q1 2020 despite the turmoil caused by the outbreak In the period from January Financial institutions have to May, BNM lowered the remained profitable, and capital OPR by a total of 1 percent, and liquidity ratios were well from 3 percent to 2 percent above the minimum statutory It also lowered the Statutory Reserve requirements Requirement from 3 percent to But impaired loans have grown faster in 2 percent to ensure ample liquidity in Q1 2020, indicating deteriorating debt service the financial system capacities of households and businesses Higher government spending to cushion the impact of COVID-19 coupled with declines in revenue have led to a narrowing of fiscal space Costs associated with the With projected increases in expenditure Prihatin package and the and downward pressures on revenue, Penjana plan are expected the fiscal deficit is expected to widen to result in an increase to considerably in 2020 government expenditure of • The fiscal deficit could widen to as high as 7 percent RM35 billion in 2020 of GDP if measures to reduce non-core spending or to raise additional non-tax revenue are not adopted Falling global oil prices have placed additional downward pressure • The government’s options to finance additional fiscal on already declining federal measures are constrained by statutory limits, which can government revenues only be lifted through legislative amendments The global economy is projected to experience a major contraction this year Global GDP is projected to contract sharply in 2020... ...with growth in Developing EAP projected at its lowest rate since 1967 GDP, y/y, Percentage GDP, y/y, Percentage Latest Estimates (June 2020) Latest Estimates (June 2020) Previous Estimates (January 2020) Previous Estimates (January 2020) 8 8 6 7 6 4 5 2 4 0 3 -2 2 -4 1 0 -6 -1 -8 -2 2019e 2020f 2021f 2019e 2020f 2021f 2019e 2020f 2021f 2019e 2020f 2021f 2019e 2020f 2021f 2019e 2020f 2021f World Advanced Emerging Market Developing Developing EAP China Economies & Developing EAP excl. China Economies Source: World Bank Global Economic Prospects Source: World Bank Global Economic Prospects Malaysia’s economy is expected to contract sharply in 2020 Malaysia’s economy is forecast to contract by 3.1 ...reflecting a broad-based decline in private sector percent in 2020... activity GDP, y/y, Percentage Contribution to GDP, y/y, Percentage 8 8 6 6 6.9 5.7 4 5.1 4 4.7 4.4 4.3 2 2 0 -2 0 -4 -2 -6 -3.1 2015 2016 2017 2018 2019f 2020f 2021f -4 Net Exports Private Consumption Public Consumption 2015 2016 2017 2018 2019e 2020f 2021f GFCF Change in Inventory Real GDP, y/y Source: World Bank staff projections Source: World Bank staff projections The COVID-19 pandemic has exacerbated downside risks to growth Higher number of Narrowing fiscal policy space vulnerable households Further narrowing of fiscal space given The pandemic’s outcome remains existing statutory limits could restrict uncertain; hence there is a risk 5 further economic recovery measures that the number of vulnerable households could increase 4 Domestic political uncertainty 6 Ongoing political uncertainty Modest roll-out of could complicate policy response packages implementation and dampen Risks to An insufficient economic investor confidence response by the government 3 growth could lead to a slower-than- expected pace of recovery Upside risk on 7 effective containment Effective containment and pent-up demand Second wave The occurrence of a 2 could lead to faster-than- expected recovery in consumer confidence second wave could lead to the return of stricter movement restrictions 1 Global economic downturn Many advanced and developing economies are facing the prospect of a sharp economic downturn, affecting Malaysia’s external demand Source: World Bank staff elaboration Policy considerations in the short, medium, and long term Short-term: Medium-term: Long-term: Protecting vulnerable Preparing the economy Laying the foundations households and under a ‘new normal’ for transition to businesses high-income status Containing the risk of Restoring fiscal buffers Implementing structural another outbreak. through a more progressive reforms in six broad areas tax framework, improving including raising female labor Creating temporary fiscal spending efficiency, and force participation, space through legislative reducing fragmentation in improving human capital, amendments. social protection programs. boosting competitiveness, creating quality jobs, Increasing the quantum Upskilling and retraining of modernizing institutions, and and delivery of financial the workforce. promoting inclusion. assistance to the vulnerable in the Prihatin package. Enhancing competitiveness in attracting quality investments. Accelerating the digital agenda and bridging the digital divide. Source: World Bank staff elaboration PART TWO Surviving the Storm Against the backdrop of the COVID-19 pandemic and the changing world of work, Malaysia needs an enhanced social protection system In the short run, most cash transfer recipients indicated ...while aging is fast and non-standard jobs are that they need additional support... becoming more common, especially among women Share of Respondents Who Need Additional BPN Beyond MCO Phase 1, Share of Own-Account Workers Population Aged 65 and Percentage Among Women, Percentage Above, Percentage 20 7.5 19 7 18 17 6.5 No 18% 16 6 15 5.5 14 13 5 12 Yes 4.5 82% 11 10 4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Share of Own-Account Workers Among Women Population Aged 65 and Above Source: DOSM Source: World Bank (2019a) and DOSM An enhanced social protection system can foster equity, resilience, and opportunity Equity through Resilience through Opportunity for all protection against insurance against through investements in destitution shocks human capital and jobs Social assistance Social insurance Labor market programs programs programs Private sector retirement Publicly financed skills-building BSH cash transfers savings by EPF programs Social assistance benefits and Levy-financed skills-building Public sector pensions services by JKM programs Disability, survivorship, and Employment services by Education assistance unemployment insurance JobsMalaysia and others ••• ••• ••• Today, the coverage of publicly financed social assistance is high but benefits amount to a small share of per capita income The coverage of social assistance is high across all ...but social assistance benefits amount to a small share income groups, especially among the B20... of per capita income Share of B20 Receiving Social Assistance, Latest Available Year, Percentage Social Assistance as Share of B20 Income, Latest Available Year, Percentage 100 40 98.2 35 80 34.6 30 25 60 65.9 66.2 56.8 20 21.2 40 15 10 13.0 20 10.1 5 7.8 12.7 0 0 Malaysia Low Lower Upper High Malaysia Low Lower Upper High (2016) Income Middle Middle Income (2016) Income Middle Middle Income Income Income Income Income Source: World Bank staff calculations based on HIS (DOSM) and ASPIRE database Source: World Bank staff calculations based on HIS (DOSM) and ASPIRE database As the level of spending is low as well, impacts on poverty and equity are modest Malaysia’s social assistance spending is low compared ...resulting in modest impacts on the poverty to other countries... headcount and inequality Social Assistance Spending as Share of GDP, Latest Available Year, Poverty and Inequality Impacts of Social Assistance, Latest Available Year, Percentage Percentage 2.5 14 12 2.0 12.1 2.0 10 10.1 1.5 9.3 1.6 8 1.4 1.5 6 6.5 1.0 1.0 4 0.5 3.2 2 2.5 2.3 1.2 1.3 0 0 Malaysia Lower Low Upper High Malaysia Low Lower Upper High (2018) Middle Income Middle Income (2016) Income Middle Middle Income Income Income Income Income Inequality Reduction Poverty Headcount Reduction (B20) Source: Ministry of Finance and ASPIRE Database Source: World Bank staff calculations based on HIS (DOSM) and ASPIRE database Coverage of contributory social insurance is far from complete Malaysia’s coverage of retirement savings institutions is ...especially among lower income households far from complete... Coverage by Retirement Savings Institutions, 2019, Percentage of Labor Coverage by EPF, 2016, Percentage of Working Age Population Force 45 40 41 38 35 36 37 33 30 39.2% 31 48.9% 25 28 25 20 21 15 11.9% 13 10 5 EPF Contributors 0 1 2 3 4 5 6 7 8 9 10 Civil Servants and Armed Forces Uncovered Income Decile Source: World Bank staff calculations based on LFS (DOSM), EPF and KWAP Source: World Bank staff calculations based on HIS (DOSM) Policies should support COVID-19 recovery efforts and the development of an enhanced social protection system Instrument Short- and medium-term policies Long-term policies i. Continue to provide COVID-19 emergency cash i. Formulate a Social Protection Masterplan based on a transfers until income of B40 recovers functional review of the social protection system ii. Deepen social assistance: ii. Further deepen social assistance: • Use BSH/BR1M as a platform for human capital • Strengthen core social assistance programs in line accumulation and productive welfare with fiscal space Publicly • Reduce exclusion error through proactive outreach/ • Promote productive employment and the capacity of financed social enrolment social/care workers assistance • Replace nontargeted fuel subsidies by a targeted iii. Address increasing demand for non-cash support allowance services, especially for older persons iii. Improve the delivery of social protection programs: iv. Reverse the downward trend in government revenues: • Move toward a more standardized and commonly implemented targeting system • Increase the progressivity of the personal income tax framework • Achieve deeper integration or interoperability of information systems • Expand the capital gains tax • Consolidate front-end service delivery • Restrict items that are SST zero rated or exempted iv. Update benchmarks for monetary and non-monetary • Focus the use of tax incentives deprivation Policies should support COVID-19 recovery efforts and the development of an enhanced social protection system Instrument Short- and medium-term policies Long-term policies i. Strengthen the coverage of old-age income i. Further strengthen the coverage and adequacy of protection: old-age income protection: • Broaden the scope of contributions to cover the • Unify registration requirements and contribution self-employed, possibly with auto enrollment and an collection for EPF, SOCSO, and HRDF option to opt out • Further increase the EPF minimum withdrawal age Contributory • Work with aggregators, like gig economy platforms with increased life expectancy social insurance ii. Strengthen the adequacy of old-age income • Consider lowering EPF contribution rates and protection: capping covered wages subject to mandatory contributions • Gradually increase the minimum withdrawal age to for EPF Account 1 balances to 65 • Offer age-based portfolios, longevity insurance, and annuitization options • Convert contributions to EPF Account 2 to retirement savings ii. Further improve social assistance for older persons through a higher coverage or adequacy of social • Mandate a phased withdrawal for EPF balances pensions in line with fiscal space iii. Improve social assistance for older persons through a modest, broadly targeted social pension CONNECT WITH US Thank you wbg.org/Malaysia @WorldBankMalaysia Download the MEM: @WB_AsiaPacific https://bit.ly/memstormmy http://bit.ly/WB_blogsMY