ASIA has a new public emergency: breathing life into moribund economies.
Months after severely curtailing social and commercial activity in a bid to contain Covid-19, governments are scrambling to reboot activity. They confront a coronavirus that isn't out of business but economies that very nearly are. The policy priority is shifting from suppressing infections at almost any cost to combating truly awful scenarios for jobs, prices and gross domestic product.
Malaysia has often been a poster child for Southeast Asia's booms and busts. The nation is again at the confluence of powerful trends. Its experience in the pandemic illustrates conditions around the region, and the choices that it now makes may be instructive. In times of tumult, the country has usually been a source of stability. Malaysia tends to avoid the sudden swerves in policy and coups that have characterized many of its neighbors. The route that Malaysia takes to recovery will be closely watched. A crash-and-burn here would bode poorly for the region.
Prime Minister Muhyiddin Yassin has declared that nearly all curtailed activities can resume, rightly fearing a deep recession will be exacerbated every day the country is mothballed. But some powerful provincial administrations are balking. State leaders fret about a spike in infections. Should life return too quickly to a semblance of normality, there's a legitimate concern that the lid keeping cases under control will be quickly blown. But should a nation wait to reopen for business until there is little or no chance of a renewed viral spread? That could take years.
Malaysia's thankless equation is part of a global conundrum. Goldman Sachs Group, Inc. and Morgan Stanley economists said in recent days that there's evidence that worldwide activity has bottomed and is starting to recover. But the rebound from a shockingly poor first-half is predicated, at least in part, on lockdowns easing. A jump in new cases from folks getting together again would prompt new closures.
Policy makers are contending with this great circularity. Vietnam called off its stay-at-home order last week. Singapore plans to gradually lift a few restrictions imposed during its "circuit-breaker" period. Indonesia, which for months denied the pandemic could penetrate its borders, has more Covid-19 deaths than anywhere in Asia outside China and India. Jakarta is taking a big hit to growth and may be running out of time to get ahead of the downturn.
For Malaysia, there are also homegrown political challenges. Just as the pandemic was rippling through the region, coalition intrigue felled Mahathir Mohamad's government, the first led by a long-suffering opposition since independence. The new cabinet restores much of the old power structure but has yet to face a session of parliament; its claims of having majority-backing have yet to be tested on the floor. These are consequential times for a team that lacks the stable mandate of a general election.
In a nod to the dire circumstances, Malaysia's central bank axed its benchmark interest rate by half a percentage point Tuesday, the biggest reduction since the Great Recession. Bloomberg Economics foresees the economy shrinking 6.7% this year. The bank said conditions will be "particularly challenging." Together with fiscal stimulus, officials aim to "offer some support to the economy.'' Bank Negara has monetary space — the main rate stands at 2% after the cut — so why not use it? This isn't the time to fret about the approach of zero. Across the world, borrowing costs are being pushed to rock-bottom levels.
The bank doesn't just have to worry about growth vanishing; consumer prices fell in March for the first time in a year. Malaysia could be heading for its first annual deflation since 1969, according to economists at United Overseas Bank Ltd. Presenting Bank Negara's annual report last year, Governor Shamsiah Yunus told journalists to put deflation out of their minds. It shows how the unlikely has become entirely plausible in the Covid-19 era.
The year 1969 was a defining moment in Malaysia's history. Communal violence devastated Kuala Lumpur and gave birth to policies that became a bedrock: The majority Malays would receive an array of preferences, especially in the public sector and education, over ethnic Chinese, who long controlled the bulk of private wealth. The framework has persisted, though critics contend it fosters rent-seeking and saps aspiration.
It hasn't been tested by economic circumstances like these. As in other countries, Malaysia's pre-existing conditions look more serious under Covid-19 pressure. A lot rides on how they're handled. This government wasn't voted into office, but it's the one Malaysia has. Reaching across the aisle to create a national unity team — Mahathir's cabinet, for all its shortcomings, did have physicians in its top two slots — would show seriousness. Few things matter now more than judgment and experience.
Huge forces are reshaping the global economy in which Malaysia has mostly prospered the past few decades. At the least, the pandemic will accelerate trends already in place. Long reliant on manufacturing exports, oil, and tourism, the country needs to retool, all the while managing an ethnically and geographically diverse populace. Does China, Asia's most recent commercial patron, become emboldened or retreat? How does Malaysia handle that shift?
If the right choices are made, Malaysia lives to fight another day. If not, Southeast Asia loses another piece of stability in a world that needs it.
Disclaimer: This article first appeared on Bloombeg, and is published by special syndication arrangement.