Sunway University Business School ECN1014 i Decem ber 2020 Emminalion Section B Read the extracts and then answer all questions. Extract 1 Malaysia's GDP growth stumps to 0.7% as relaxed Iockdewn Irags on Malaysia's economy grew 0.7% in the rst quarter of 2020. well off the 4.5% pace recorded a year earlier, as the impact of the coronavirus pandemic begins to show up in the numbers. After a steady expansion in the rst two months of the quarter. economic activity came to a sharp downshift with the implementation of the nationwide coronav'irus lockdown. or movement control order in mid-March. The central bank explained that the growth of services and manufacturing sectors moderated. while other sectors contracted and external demand and investments declined. By one estimate. almost half the working class has faced retrenchment or salary cuts, undermining purchasing power and domestic demand. Fearing the dire economic consequences. the government made the call to reopen many sectors in early May. but it remains reluctant to lift the restrictions entirely and risk another coronavirus wave. At the same time. weak external demand. low crude oil prices and severe disruptions to tourism. aviation and manufacturing have battered the trade-reliant economy. The central bank is projecting growth for the full year to come in somewhere between 2% to 0.5%. Since the coronavirus crisis hit. the government has been forced to serve up about US$60 billion worth of stimulus measures. The central bank aiso slashed its benchmark interest rate for the third time in as many meetings. bringing it down to a historic low of 2% to ease liquidity pressure in the money market. It also reduced its statutory reserve requirement Source: Adapted from Nikkei Asian Review. 13 May 2020. Extract 2 Covid-19 slaps a stress test on the Malaysian economy With the coronavirus outbreak, and given the sudden and forced economic slowdown globally, Malaysia, like most countries across the world, may be heading towards a sharp recession. The Malaysian government has responded swiftly with two monetary easing and economic stimulus packages. However, given Malaysia's fiscal constraints, the policy tools available to promote economic growth are limited. Further stimulus also may not fundamentally resolve underlying factors of slower growth and areas of weaknesses, such as high debt levels. The Malaysian economy is highly leveraged, with the household debt-to-GDP ratio significantly high at 82.8 per cent in June 2019, a figure surpassing that of high-income nations, including the US (75 per cent) and Japan (58.2 per cent). Residential property loans was a key driver of debt growth. Surging household debt has been a longstanding concern, and more so now. Doubts have grown over how average Malaysians can continue to service their loans in difficult times. Corporate debt levels are equally alarming. Total credit to the non-financial private sector as a percentage of GDP stood at 134 per cent by end-2018. Shutdowns on economic activity and weak external demand for goods and services will clearly hurt corporate profitability. If companies are unable to service their debts, bankruptcies could be on the rise. With businesses struggling to hold on to their bottom line, job losses could reach 2.4 million, while household incomes are projected to fall by 12 per cent. As unemployment rises, so will default rates on household debt, while consumer spending could plunge by as much as 11 per cent. Page 15 of 16Sunway University Business School ECN1014/ December 2020 Examination The Malaysian government recognises the risks that closure of businesses and job losses could pose to its economy. It has introduced an US$57-billion economic stimulus package to provide cushion for businesses and households. Much of this package will be financed through other means apart from direct government funding, such as through allowing Malaysians to withdraw from their savings held by the Employees Provident Fund (EPF), thereby easing the stress on Malaysia's fiscal position. There were also some modest cash injections which, however, are unlikely to have a multiplier effect on household consumption. Overall, Malaysia's budget deficit is expected to widen to as much as 4.5 per cent of GDP in 2020. Malaysia has consistently run a budget deficit every year since the Asian financial crisis in the late-1990s. The collapse in oil prices is already testing Malaysia's fiscal position amid declining tax revenue in preceding years. For the current fiscal year, oil and gas were projected to contribute about 21 per cent of the total revenue but this was premised on an oil price of US$62 per barrel. Stiff competition among Russia, Saudi Arabia and Qatar has threatened to push the oil price down to below the average OPEC production cost of US$30 a barrel. Although business owners and some economists have argued for more targeted fiscal stimulus to be directed at small and medium-sized enterprises and other groups, this will only be achieved at the cost of delaying medium-term fiscal consolidation and triggering negative reactions from credit rating agencies. Source: Adapted from Channel News Asia, 6 April 2020.(a) Using the above articles, identify and explain four determinants of private consumption. [8 marks] (b) With reference to the term 'floating exchange rate', analyse the respective impact of (i) a reduction in the rate of interest, (ii) poor macroeconomic prospect and (iii) weak external demand on the value of Malaysia's currency on the foreign exchange market. [8 marks] (c) Using diagrams, describe how an ease of 'liquidity pressure in the money market' (Extract 1) is supposed to support economic recovery in Malaysia. [12 marks] (d) How far do you think fiscal stimulus during a recession is justifiable in the face of persistent and rising budget deficit? [12 marks] [Total: 40 marks]