Question
Is Malaysia prepared for the next recession? Warnings of an imminent global recession have been ringing louder than before. With key economic data worldwide continuing
Is Malaysia prepared for the next recession?
Warnings of an imminent global recession have been ringing louder than before. With key economic
data worldwide continuing to disappoint amid the novel coronavirus (Covid-19) outbreak, experts say
the worst is yet to come.
S&P Global Ratings expects the global economy to enter into recession in 2020, and says a recession
across Asia-Pacific is "now guaranteed." On the home front, Malaysia is highly vulnerable to the
global economic slowdown.
Being a trade-reliant country, with trade accounting for 131% of its gross domestic product (GDP) in
2018 according to the World Bank, Malaysia has minimal chance - if any - to escape a recession if the
world plunges into economic turmoil. After all, several major trading partners of the country have
been severely affected by Covid-19. These include China, the United States (US) and Singapore.
Speaking with StarBizWeek, Asian Development Bank's former lead economist Jayant Menon says
Malaysia has all the co-factors for a significant negative impact from Covid-19. "It is a small, open
economy, highly dependent on international trade, heavily integrated into regional and global supply
chains, and an oil exporter that relies on its revenue to fund a significant portion of government
spending.
The next recession will be unprecedented in modern history. The principal trigger of the downturn is a
virus outbreak that has since morphed into a pandemic and forced the halt of production activities in
many countries. This is in stark contrast with the Great Recession, the 2008 financial crisis that
transpired following the collapse of the subprime mortgage market in the US. Malaysia was dragged
into a recession in 2009, even though the cause of the crisis did not emerge from within the country.
However, this time around, Malaysia faces a bigger threat considering that Covid-19 is debilitating
the economy domestically and across the other countries. Alliance Bank's Manokaran warns that
Malaysia's GDP could likely decline in the second quarter of 2020 (2Q20), following a weak growth
of about 0.2% to 1% in 1Q20. "While we forecast a small positive growth in the first quarter, there are
chances for the growth to slip into negative territory. If that happens and followed by a decline in the
economic growth in 2Q20, Malaysia will enter into recession, " he says.
Generally, recession is defined as two consecutive quarters of declines in a country's real gross
domestic product.
So, looking at the cloudy outlook ahead, is Malaysia prepared for a recession?
Socio-Economic Research Centre (SERC) executive director Lee Heng Guie believes that the
country's economic and financial fundamentals are in a position of strength to confront the perfect
storms. Malaysia, he says, enjoys a diversified economic structure, significant natural resources and
human capital endowments. It also has a strong external position, backed by still unencumbered
foreign reserves accumulation. The financial institutions remain robust with strong capital backing to
support financial intermediation to households and businesses.
Generally, a country is deemed to be in a favourable position to better withstand a global recession, if
it enjoys a good current account surplus, which also mirrors a positive savings investment gap.
This applies in the case of Malaysia. In 2019, the country posted a healthy current account surplus of
RM49.7bil, the highest since 2012. It is worth noting that the ability of a government to mount
counter-cyclical spending is a key measure of the country's resilience in avoiding a deeper recession
as well as in rebounding quickly when economic conditions normalise.
Required:
(a) With the Covid-19 crisis, Ringgit Malaysia (MYR) is showing a depreciating trend with to
date (30 April 2020) exchange rate is at USD=RM4.35.
(i) Do you think we should reverse back to pegged exchange rate system that pegged
MYR at US$1=RM3.80 in September 1998? Discuss the rationale of your opinion.
(4 marks)
(ii) Should Malaysia impose capital control which is similar to the action taken in 1998 to
overcome the global financial crisis in 2007-2008? Discuss this statement. (4 marks)
(b) Based on the case study, Malaysia reported a current account surplus.
(i) Explain the impacts on the country's financial account and its position as a net
creditor or debtor. (4 marks)
(ii) Elaborate current account surplus relationship with positive savings investment gap
that mentioned in the above article. (6 marks)
(c) Based on the case study, Malaysia still unencumbered foreign reserves accumulation. Explain
how Malaysia's balance of payment surplus could lead to an accumulation of official reserve
assets. (7 marks)
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