1010 Words|4 Mins Reading |31/3/2020
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Source: 21 March 2020, The Star Online, Exempt EPF contributions to save jobs by Tan Thiam Hock

For people of age around 60 and above, they have experienced three recessions, one financial crisis and one Coronavirus (SARS) epidemic in our lifetime. 

We are about to witness the biggest (three-in-one) economic disaster ever if the world is not able to contain the transmission of Covid-19 within three months.

Covid-19 is easily transmitted and has now spread to more than 200 countries (as of 30 Mar 2020). The only way to stop it is via social distancing, which means a lockdown – basically staying at home and closing businesses.

The whole economy will come to a standstill as the supply chain and economic activity is disrupted. The global economy is now at a standstill as each country carries out different levels of a lockdown.

Even though the global stock market was due for a major correction after 13 years of an extended bull run, the coronavirus fear exacerbated its severity.

Again, depending on the severity and length of the Covid-19 crisis, this could be the mother of all stock market crashes. Watch it unfold. Trillions in economic value can disappear, impoverishing individuals and corporate entities in the process.

In times of crises, exchange rates worldwide become erratic and massive devaluation adds unique problems to countries. 

As industrial and economic output plummets, severe cash-flow deficits and non-performing loans (NPLs) will increase. All factors point to a financial crisis in the making.

A global recession is definitely on the way. Just like how Covid-19 made its way to Malaysia, we are seeping into an economic and financial crisis as our financial institutions become plagued with NPLs from failed businesses and unemployment.

Quite a grim scenario for Malaysia, assuming the February announced stimulus package is our only solution to fight the imminent recession.

Fortunately, Malaysia launched a second Economic Stimulus Packages on March 27 to assist more businesses and save people's jobs.Malaysia will go broke this time around if we undergo a severe recession. Limited Petronas dividends, a much lower company and individual income tax rate if many businesses go bankrupt and paycuts will add on to a high unemployment rate.

We might not even have sufficient revenue to cover our high operating expenses and civil service wages.

Remember a bankrupt Greece some years ago having to cut civil servants’ pay by 40%?

Keeping Malaysians employed must be the main consideration. I have no clue what we can offer the illegal immigrants, who are a burden to our health system and the social fabric of our society.

To ensure employment for Malaysians, we need to ensure employers can survive this recession. The biggest employers are the SMEs. How can we help them?

For the service industry, normally, the biggest operating expenditure is salaries plus the 12% employer EPF contribution. When any business suffers a sales decline of more than 30%, it starts slipping into a loss position unless it cuts cost.

The Covid-19 affected industries are suffering from a sales decline of 50% to 80% and no company can survive this beyond six months.

The best solution is to exempt EPF contributions by both employer and employee for six months starting April 1,2020. This is direct help to preserve cash flow.

The most severe paycuts are normally in the range of 30% to 50%. For employers, a paycut of 30% plus 12% in EPF savings would mean saving cash flow by 42% instead of retrenching 42% of employees. For the more severe cut of 50%, the savings would be 62% of total payroll.

For employees who suffer paycuts of 30%, their take-home pay will only decline by 21% (EPF not deducted), which can still sustain their current lifestyle, albeit with some tightening of the belt.

Despite losing six months of savings in the EPF, it is still a better option to be employed, as it would be extremely difficult to look for another job in a recession.

Employers are advised to retain their staff strength, as when consumer confidence returns in six months’ time, there will be a boom in traveling, shopping and eating. Pent-up demand will be met by a fully experienced team.

Employers who make decent profits at the end of the year can always make it up to the employees by paying higher bonuses to replace lost savings.

There are some industries which are displaying Covid-19 symptoms – respiratory problems and difficulty in breathing, with some already in the intensive care unit suffering from severe no sales-no cash flow syndrome. The aviation, tourism and retail industries need a direct injection of immediate help in cash flow.

I believe the government needs to set up a Covid-19 rescue fund of at least RM20bil to tide things over. Khazanah Nasional Bhd, famed for its generosity, could pump another billion into Malaysia Airlines Bhd perhaps.

This fund should be implemented with full transparency and be fully recoverable from the beneficiaries. It should not be diverted into unintended pockets.

Perhaps, Bank Negara could cut the overnight policy rate by at least 50bps. The coronavirus does not wait and see. Everything is falling off the cliff. It is best to cushion the fall.

The first quarter of the year has been disastrous for business and individuals. Sales have fallen off the cliff, as Covid-19 hit the nation like a tsunami, leaving everyone with no time to prepare for a soft landing.

Brave and immediate decisions are needed to help employers save jobs.

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