Written by Carmelo Ferlito, CEO of Center for Market Education

First published in Free Malaysia Today on 13 July 2021

The World Bank recently lowered its GDP growth projection for Malaysia for a second time to 4.5% for 2021, from 6% estimated in March and 6.7% in December 2020. Similarly, finance minister Tengku Zafrul Aziz announced that the government is revising its estimation, forecasting expansion around 4%.

Let us try to make sense of these figures and to understand if they are realistic and how eventually they can be achieved.

The first important point to be made is that we are talking about annual variations and, therefore, the fact that 2020 was an exceptionally bad year needs to be taken into account.

The pre-pandemic performances, then, have to be our reference point. We know that in 2020 Malaysia’s GDP declined 5.6% when compared to 2019. So, if we make 2019 GDP equal 100, the 2020 GDP was 94.4 (100-5.6).

If we assume that in 2021, the Malaysian economy will grow by 4%, we are saying that it will be 4% bigger than the economy in 2020, which means 94.4 + 4%, or 98.176. By assuming a 4% growth in 2021, we are assuming that the 2021 Malaysian economy will be just 1.824% lower than what it was in 2019 (100-98.176).

In a nutshell, finance ministry forecasts (and those by the World Bank, too) are betting on the fact that the economy is getting closer to its pre-Covid-19 size. I believe that this way of putting things is more useful than many sophisticated analyses when we want to answer the question: are these estimations realistic?

The question can be made more understood to the lay people if formulated in this way: is it realistic to assume that at the end of 2021 our economy will be pretty close to its pre-pandemic level?

Now, let’s take a look at the elements that drove the economy down by 5.6% in 2020. Last year, the economy started to freeze on March 18, with the announcement of the strong MCO 1.0, which lasted 47 days. For the other 37 days of CMCO and 126 days of RMCO, despite international borders being closed, the domestic economy was allowed to operate with a certain degree of liberty and, in fact, a good rebound was recorded in Q3-2020.

From October onwards, we experienced 91 days of CMCO, 51 days of CMCO 2.0, 63 days of CMCO 2.0, and 25 days of MCO 3.0. Since June 1, we have been under FMCO and, more recently, the most productive part of the country has been placed under EMCO.

Given these premises, it seems to me very difficult to imagine that the Malaysian economy in 2021 will score better than it did in 2020, and even to almost reach pre-pandemic levels. International borders are still closed, internal mobility is stricter than ever, and the war against the virus is far from over.

To these elements we need to add another factor that it is often disregarded by the typically static analysis of contemporary economists: time. Time is not just an interval between two different points on a line; rather, it is the river on which novelty is carried – over time, many things happen.

For example, many businesses that in 2020 embraced restrictions hoping for a
fast solution of the crisis are now closing for good, including restaurants, hotels and transport companies. Those pieces of the economy, with their content of human lives, are lost and it will take time to reabsorb them into the system.

Some multinational companies are thinking of relocating, and many expatriates have left, along with their businesses and their purchasing power.

Furthermore, those economists who are able to leave the lab and walk in the streets can see the rising number of “for sale” or “for rent” sign boards in commercial areas, not to mention the spectral atmosphere in once shining shopping malls.

Economics cannot be just a statistical exercise; qualitative observations need to be at the core of the analysis. So, now, what can we expect for the near future?

GDP is made up of private consumption, private investments, the difference between export and import and government spending. Obviously, we cannot expect private domestic consumption to be an important driver for growth; even where resources are still available, the closing of the economy makes it impossible even for the wealthy to spend. In the current climate of uncertainty, private investments are not expected to boom.

Some positive signals may come from export, while the government is trying to revive the economy with fiscal injections and relief packages. But, it has to be noted, subsidies and aid do not drive economic growth.

The economic performances of a country need also to be judged from a qualitative
perspective. Subsidies and aid can eventually help some businesses remain alive, but we cannot expect them to drive growth. On the other side, they can push up inflation and plant the seeds for a future economic crisis.

In a nutshell, “to spend big”, as some economists recently advocated, is not enough to put the economy back on track. The only way for businesses to generate an investment-led growth is for them to be allowed to operate within a more stable scenario (in the respect of the rule of law) and with a clear exit strategy ahead (the plan presented by the Center for Market Education is available here.

In conclusion, given the present circumstances, a 4% growth in 2021 seems pretty
unrealistic. On the contrary, at this pace, we can expect, at best, flat growth, or if lockdowns persist without a clear exit strategy, we will get close to replicate last year’s negative performance.

The path can be reversed, but this means to commit to a completely new strategy based on three pillars – an open economy, the rule of law, and virus containment – via mass, frequent and affordable testing and by targeted investments to strengthen the healthcare system.