Covid-19 Exclusives: Rebound is Slower than Expected despite Fiscal Measures

2021 WILL BE a year fraught with economic challenges and uncertainties. The spike in Covid-19 cases since September 2020 continues to see Malaysia’s economy in distress, despite the implementation of stage-by-stage mitigation measures over the past nine months.

Although a reduction in human activities is the most effective in curbing the viral outbreak, limiting human mobility equally slows down the economic recovery process. Therefore, businesses are to remain cautious.

This is notwithstanding the additional stimulus packages of up to RM10bil announced by Prime Minister Tan Sri Muhyiddin Yassin on September 23, which include cash handouts, wage subsidy and special grants for small- and medium-sized enterprises, in a bid to boost economic recovery.

The good news is that Malaysia’s economy experienced a significant rebound in Q3 of 2020, registering a smaller contraction rate of 2.7%, compared to Q2 at 17.7%. Although all economic sectors saw improvement in rates of growth, they are still lacklustre, with the exception of the agriculture and manufacturing sectors. The construction sector was the hardest hit in Q3; it contracted by 12.4%.

Uneven Paths to Recovery are Likely

In spite of economic activities such as information technology, electronic manufacturing services and food processing industries operating at full capacity, the new wave of Covid-19 cases is estimated to hamper the economy further. Malaysia’s Industrial Production Index (IPI) and distributive trade stumbled again by 0.5% and 0.8% respectively in October 2020 after showing a positive growth in the last three months for IPI, and in September 2020 for wholesale trade and retail sales.

While the agriculture sector contracted by 0.7% in Q3 of 2020 from a positive growth in Q2, the manufacturing sector made a healthy rebound to a positive growth rate of 3.3% compared to a double-digit contraction of 18.3% in the previous quarter of 2020. This rebound was supported by increased export demand in electrical, electronic and optical products, as well as vegetables, animal fats and food processing products.

Tourism-related businesses are set to record a severe contraction. Penang’s private hospitals are expected to suffer the biggest loss in income due to the shortfall in foreign medical tourists. This has resulted in hospitality services, F&B and retail trade such as pharmacies experiencing reduced demand. On the other hand, a reverse situation is seen in technology-driven activities in the areas of electronic manufacturing services, software services, information technology and e-commerce.

At this point in time, a K-shaped recovery aptly describes the resurgent paths of Penang’s economy. The manufacturing sector, which is highly technology-driven, is expected to grow positively; while the construction and services sectors, particularly in accommodation services, wholesale trade and retail sales are estimated to trend downward for a period of time. As a state that produces high-value aquaculture products, Penang’s agriculture sector, which contributed only 2.2% of the state’s GDP, is predicted to grow moderately in 2021.

High-tech Manufacturing Sector Remains Resilient

As the main manufacturing hub for Malaysia’s electrical and electronics (E&E) products, Penang is estimated to have contributed to the strong revival in the manufacturing sector nationally, despite supply chain disruptions during the MCO, from March 18-May 12, 2020.

As the second largest national GDP contributor to the sector, the state’s manufacturing industry made up nearly 43% of Penang’s GDP in 2019. Even with the state’s GDP growth rate moderating at 3.8%, the growth rate for the manufacturing sector was halved in 2019 from 5.4% in 2018, while the services sector increased at a lower rate of 5.5% in 2019 (Figure 1).

Increased global demand is indicative of a positive recovery for Penang’s manufacturing sector. It was responsible for about 31% of Malaysia’s exports; the Penang International Airport (PIA) accounted for 26%, and the remaining 5.1% was contributed by the North Butterworth Cargo Terminal. For the first nine months of 2020, rapid recovery was seen in the former channel, with a hike of 9.1% (RM184.4bil) as compared to the same period in 2019 (RM169.1bil).

For states with a high concentration of medium- and high-tech manufacturing industries, Penang performed outstandingly compared to Selangor, Johor and Kedah for value created by employees hired in the manufacturing sector. A large segment of Penang’s workforce is involved in highly value-added, more capital-intensive and less low-skilled operations. Data published by the Department of Statistics show that each worker in Penang produced about RM140,000 worth of value in the manufacturing sector compared to RM124,000 in Selangor and RM84,360 in Johor in 2017. This is despite Selangor creating the largest value in Malaysia.

The significance of a high value-added sector in Penang is recognised in the Federal Budget 2021. A special incentive package worth RM1bil for high value-added technology is allocated to support R&D investment in aerospace and electronic cluster at Batu Kawan, Penang and the Kulim Industrial Park. More generally, to support high-technology and innovation companies, a provision of RM500mil is also provided by Bank Negara Malaysia.

The financial support and incentive package are able to assist small-and medium-sized companies to move up the value chain. Besides monetary support, technical assistance in the form of knowledge transfer should also be offered to SMEs in Malaysia. SMEs are responsible for 5.9% of Penang’s total manufacturing establishments, contributing 13% of total value add to the state’s economy and employing about 16% of the workforce in the state.

2019 marked a historic record for Penang’s capital investment, amounting to nearly RM17bil. This will see gradual materialisation in 2020 and 2021 despite unprecedented economic challenges brought on by the pandemic. Foreign and local companies continue to invest in new projects and to expand their existing facilities in the state, with a majority of the investment concentrated in the Batu Kawan Industrial Park (44.3%). For the first nine months of 2020, a total of 108 projects worth RM10.6bil was approved, which is set to create more than 9,000 employments (Table 1). Of this, about 83% were foreign investments, and Machinery & Equipment (M&E) and E&E industries accounted for nearly 70% of the total investment.

Global Business Services a Booming Industry

Penang has established itself as a highly acclaimed Global Business Services (GBS) hub, and is ranked second in the country after KL. In 2018 the GBS sector contributed as much as 50.6% share to the services sector – a 9.4% increase compared to the 41.2% from a decade ago. Reputable multinational companies (MNCs) such as B. Braun, Osram and Intel have already put into motion plans to establish their base for the next 20 years.

The spike in Covid-19 cases since September 2020 continues to see Malaysia’s economy in distress...

Furthermore, intelligent operations through digitalisation have been adopted by several companies in the last few years. Advanced services such as ICT and software development and creative multimedia have been pulling in foreign investment for Penang’s GBS investment hub. Digitalisation and automated service delivery through digital value-added analytics, alongside a full integration of business and technology services, are seen to be the future of Penang’s GBS sector.

The resulting uncertainty from Covid-19 will see international companies becoming more cautious in the undertaking of offshore investments. In a bid to encourage investment, the Budget 2021 has proposed tax incentives for companies relocating their business operations in Malaysia, with a specific aim towards companies in the services sector that focus on digitalisation technology. The Principal Hub incentive1 has also relaxed and extended its tax incentive conditions. It is hoped that these tax incentives – among which is the imposition of an income tax rate of 0%-10% for a period of up to 10 years – will attract new companies to invest in Penang’s GBS sector, in addition to maintaining existing business operations.

Tourism Sector is the Hardest Hit

The pandemic has been especially devastating for the tourism sector. With the indefinite closure of international borders and recurrent bans on interstate-travel, international tourism has been non-existent since March, while domestic tourism suffers from substantial disruptions. As one of Malaysia’s top travel destinations, to say that Penang has been disastrously affected may even be an understatement. In looking at the statistics by PIA, international travellers decreased by 37.8% in Q1 of 2020, and domestic travellers saw a 25.7% drop in the same quarter. Subsequently, the month of April saw 35 international passengers departing, and domestic travellers declined by 98.3%.

Penang businesses that are dependent on tourism and tourists reported severe decline in revenue, with hotels seeing close to zero revenue, especially in the early months of the lockdown. With the gradual lifting of movement restriction orders nationally, Penang has been looking towards domestic tourism as a first step towards recovery. But the sector’s recovery has been slow, and is expected to be further affected following the pandemic’s third wave during which intermittent interstate-travel bans were again reinstated.

Similarly, the health tourism sector – one of Penang’s most profitable and important sectors – has been severely impacted. This sector is heavily reliant on international patients, more specifically those from Indonesia which accounted for more than 95% of Penang’s total health tourists in 2018. With Indonesia’s ballooning Covid-19 cases placing it on Malaysia’s travel ban list until the foreseeable future, this further complicates and prolongs the sector’s recovery.

Budget 2021 has granted the Malaysia Healthcare Travel Council (MHTC) a sum of RM35mil to enhance the local health tourism industry, and to rejuvenate its international counterpart once international travel restrictions are lifted. The federal government has also decided to extend income tax exemption for the export of private healthcare services until the 2022 assessment year. As the country’s leader in the aforementioned industry, Penang will stand to benefit from these measures. All the same, a complete revival of the sector will not be possible until international travel bans are lifted.

Unprecedented Loss of Employment in the Tourism Sector

A total of 10,167 employments were lost from January 1 to December 4, 2020. Retrenchments peaked in June 2020 during the Recovery MCO, and the number of employment losses was raised again – albeit slightly – in November 2020 during the second Conditional MCO (Figure 2).

While the manufacturing sector still led in retrenching workers, the pandemic also resulted in severe employment losses in tourism-related activity. As of December 4, tourism-related activity was responsible for a quarter of the total employment loss, with a majority of them having been in the earning range of RM1,000-RM2,499 a month. This included accommodation and F&B, as well as wholesale and retail trade.

The extended Wage Subsidy Programme detailed in Budget 2021 is expected to take a targeted approach for the tourism sector, which will bring relief to businesses and employees in the industry. However, self-employed freelancers such as tour bus operators and tourist guides, as well as small tourism businesses such as souvenir shops are seemingly left out. The welfare of these tourism players needs to be deliberated upon since they are integral contributors to the industry. With Budget 2021 setting aside RM50mil for employees in the aviation industry to be retrained and upskilled, similar measures must be considered for retrenched workers in other tourism-related industries, as well as the freelancers.

Public Health Sector Equipped to Handle the Pandemic

The pandemic in Penang was relatively well-handled until before the onset of the third wave, with the state reporting zero new cases between April 15 and August 6. This changed in October, when outbreaks in Penang’s prisons resulted in a high number of new cases. Community transmissions soon followed, with the state currently witnessing new cases recorded daily.

Penang’s hospitals held a bed occupancy rate (BOR) of 73.86% in 2018.2 The two hospitals responsible for treating Covid-19 patients – the Penang General Hospital and Seberang Jaya Hospital – had a BOR of 71.03% and 96.08% respectively in 2018. If these percentages somewhat held in 2020, the former’s BOR is considered healthy, while the latter’s is concerning and it may face difficulties as a Covid-19 hospital if adjustments are not made.

In terms of Penang’s public health personnel ratio, there were 15 doctors per 10,000 population in 2018. The nursing ratio in public health was 20 nurses per 10,000 population. Observing the trend of previous years, the number of doctors in public service was projected to have increased by 2020. However, it is harder to make the assumption for nurses in public health as the numbers fluctuate. Nonetheless, the current ratios of health personnel are considered sufficient in serving the Penang population.

Budget 2021 has increased the allocation for the Ministry 0f Health by 4.25%, in addition to setting aside RM1bil in efforts to combat the third wave. Part of this allocation will be used to purchase test kits, equipment, supplies and personal protective equipment for frontliners. The Penang General Hospital and Seberang Jaya Hospital are expected to receive the assistance and allocation as outlined in the budget.

It is hoped that the successful development and procurement of Covid-19 vaccines will contribute greatly towards the recovery of the global economy. However, with persisting uncertainties worldwide, the economic challenges faced in 2020 are expected to be carried forward to 2021.

1The Principal Hub incentive offers a concessionary income tax rate to companies that make Malaysia a centre to conduct business and regional and/or global operations for the purposes of management, control and support functions, decision-making, strategic business activities, commerce, finance and human resource management.
2The Australian Medical Association, Irish Medical Association, and the Australasian College for Emergency Medicine regard a bed-occupancy rate greater than 85% to be detrimental towards the safe and efficient operation of a hospital.

Ong Wooi Leng heads the Socioeconomics and Statistics Programme at Penang Institute. Her work lies in labour market analysis and socio-economic development.
Yeong Pey Jung is a senior analyst with the Socioeconomics and Statistics Programme at Penang Institute. She is a reading enthusiast and is surgically attached to her Kindle.

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