Could Malaysia and Thailand be heading into a bout of classic stagflation?

The legacy of the Covid endemic

Medical experts around the world are beginning to say that the Covid-19 crisis is heading into an endemic stage with the emergence of the Omicron variant. The world is experiencing drags within supply chains, a lethargic recovery in international tourism, and continued pressures on the cost of living from high oil prices. Countries will need to transition from heavy restrictions to protect public health to a basket of measures to kickstart their respective economies. However, coming over the economic horizon in both Malaysia and Thailand is the prospect of stagflation hitting these respective economies, presenting policymakers with new challenges.

Classic stagflation was a phenomenon that hit the world in tandem with the oil supply shocks of 1973-74 and 1978-79. Stagflation is a condition where the economy is experiencing high inflation, recession, and high unemployment, all at the same time. It was perplexing to economists at the time because the remedies for each of the major conditions making up stagflation, would aggravate other symptoms. For example, boosting economic activity in the economy would be inflationary and fighting inflation with raising interest rates would adversely affect economic activity and increase unemployment.

Back in the early 1980s, stagflation was solved by increasing supply through privatisations and deregulation. At the time, rising wages was a contributory problem, which eventually led to partial deregulation of labour markets. This also led to the catch-cries of Reaganomics and Thatcherism at the time.

In 2022, Malaysia and Thailand may face similar problems with some differences, requiring more skilful remedies.

Both Malaysia and Thailand are in what can be described as deep recessions. Malaysia’s GDP declined by 4.5 percent in the 3rd quarter of 2021, while the Thai economy at the same time dropped 1.1 percent, according to official figures from both countries.

Malaysia’s unemployment was 4.7 percent during the 2nd quarter of 2021 and 2.25 percent in Thailand. Both these figures grossly under-represent unemployment in the both countries due to large informal sectors, particularly Thailand.

Both countries have seen a rapid increase of inflation, initially spurred on by rising oil prices which jumped from US $20 plus per barrel mid 2020 to nearly US $70 per barrel at the end of 2021. This together with the rising costs of imported inputs for food production left Malaysia with a 3.3 percent inflation rate in 2021 and Thailand with 0.8 percent. However, media reports in Malaysia and Thailand are currently highlighting the rapid rise in food staples, indicating that inflation for the first quarter of 2022 may be much higher than 2021.

Economists in the region are cautiously optimistic that there will be an economic recovery in 2022. This is especially the case where so far, the pathological effects of the Omicron variant of Covig-19 appear to be milder than previous strains of the virus. Secondly, oil prices are expected to remain stable, if not ease during 2022, bringing some downward pressure on imported inflation.

A major cause of inflation is growing money supply. The United States money supply is expected to grow rapidly until 2023. The money supply in both Malaysia and Thailand have also been growing, especially over the last quarter of 2021. Although economists claim Malaysia with public borrowings of 62.1 of GDP, and Thailand at 58.9 percent of GDP at not overly concerning, it’s the growth in money supply that will potentially fuel inflationary pressure in at least the first half of 2022.

The Malaysian and Thai governments are priming their economies and promote economic activity. Here the most important policy factor is raising economic activity, which requires rising demand. This means in Malaysia’s case putting funds into the hands of consumers, and freeing up the credit squeeze currently putting SMEs under great strain just trying to survive. This is true to a slightly lessor extent in Thailand, which has the international tourism industry to kickstart many regions of the country, if the Covid-19 situation in the near future allows this.

There are two major differences between the period of stagflation back in the 1970s and 80s to that of today. Any increase in production, construction and other general economic activities in Malaysia and Thailand will attract foreign rather than local workers into jobs. Therefore’ policy makers in both Malaysia and Thailand must find ways to employ their respective pools of local unemployed and under-employed to soak up unemployment.

Malaysia’s traditional option of opening up more places within the civil service and other quasi-government jobs is now severely limited. Thailand has the international tourism industry that can soak up one million workers plus, if tourist numbers could return to half the 2019 visitor figure of 40 million. This is probably overly optimistic for 2022.

The final part of the stagflation equation is poverty. Poverty wasn’t a major policy factor back in the 1970s and 80s. Poverty in Malaysia was 8.6 percent in 2019 before the effects of Covid-19. Thailand was 6.4 percent in 2020, according to the World Bank. Both these measurement lag behind the reality on the ground in both countries today.

This means rethinking any national economic resurgence plans. A major focus on poverty eradication, once again is required. This may mean revisiting the old development policies of twenty years ago which focused on creating agricultural jobs for small holders and other rural development initiatives. Given the Covid crisis has also increased the incidence of poverty in major urban areas, innovative income producing programs will be needed to assist a middle class in crisis.

This year will be extremely challenging for policy makers in Bangkok and Putra Jaya. Regulation on imports is hampering the supply of chicken in Malaysia where major retailers like Mydin’s and Lotus have been refused APs or import permits. Likewise in Thailand, restrictions on the import of animal feeds are increasing production costs. Both governments will have to give priority to economic over political considerations.

Both countries have small export booms currently. Traditionally foreign workers fill those jobs. Malaysia may have to forgo their policy aspiration of filling those jobs with locals, as most locals are unwilling to take them up. Any delays in permitting the return of foreign workers may jeopardize supply chains. There needs to be a major effort put into Micro and SME growth.

Whether Malaysia and Thailand slip into stagflation will depend on the growth of the money supply, the future pricing of oil, and how quickly there can be a return to normality and resulting increases in demand and supply.

Unlike the 1970s and 80s, interest rates today are very low and therefore not effective to utilize stimulating economic activity. However, its absolutely vital interest rates remain low. However, in addition the institutional credit squeezes on the SMEs of both Malaysia and Thailand need to be eased. The circulation of money is much more important than the stock of money in economic recovery.

The incidence of poverty, rather than the level of unemployment has created a new strain of stagflation. Any recovery will not be about aggregate recovery, but rather the increase of economic activity in sectors that will benefit those in poverty. Just as governments recognized the seriousness of Covid-19, the seriousness of this new potential strain of stagflation must be recognized and treated accordingly.

This could be the legacy or rather hangover from the pandemic.

Originally published in the Eurasia Review 25th January 2022

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