- The world is undergoing a potentially catastrophic pandemic which cuts across multiple dimensions- health, social, economic and markets. While the 2008 crisis started in the financial sector and then spread to the real economy, this crisis started in the real economy with potentially wide-reaching and unprecedented spillover effects to the other sectors. At the point of writing, there is no indication regarding its magnitude and duration.
- The utmost priority for governments currently is the containment of the pandemic and on minimising the economic and social dislocations. In doing so, Malaysia has responded with a breadth of policy responses including fiscal, monetary and financial regulation and stabilisation policies. For financial markets, both Bank Negara Malaysia (BNM) and Securities Commission Malaysia (SC) have also stepped in with a combination of both broad-based and targeted measures to increase accessibility to credit and provide liquidity and stability to the financial markets in order to reduce financial vulnerabilities in the economy, to the extent possible. We have included in the Appendix of this paper a summary of these measures, cognisant that policy measures and recommendations are ongoing and rapidly developing.
- In response to the immediate challenges of this unprecedented situation, we also need to keep in mind the constraints on the scope of capital market intervention as well as the need to delicately balance and manage urgency in the short-term and complexity for the long-term.
- This paper presents insights observed on Malaysia’s experience during this COVID-19 crisis with discussions around three main broad issues related to market-based interventions: first, the limited but growing access for SME’s financing beyond the banking sector; second, the need for critical investments in ecosystem support measures beyond financing alone; and third, the need for reforms in other areas for the longer-term such as infrastructure financing, a stakeholder-based model for companies and investors and the need to address the spillover effects on longer-term savings
- Key areas covered in this report are:
1. Addressing short term challenges faced by smaller businesses through market-based financing
One of the immediate responses to a crisis is to leverage existing market-based mechanisms which are already in place; even as bank financing remains front and centre for smaller businesses.
- For high growth start-ups with limited access to bank financing, the government had earlier announced a co-investment fund of RM500 million between the public and private sectors on a matching basis. This could be used to provide the critically needed financing for seed and early-stage entrepreneurs. However, given the cyclical downturn, greater flexibilities in terms of the matching ratios with less restrictive conditions may be required and with a need to review the funding parameters. In order to ensure greater effectiveness, the pool of funds for grants, seed and early-stage investments should be consolidated to reduce duplication of funds application across multiple agencies and for better tracking and evaluation mechanisms.
- Another option for deployment of co-funding for start-ups is for the government to issue convertible loans to provide bridge funding for the working capital needs of start-ups which are matched by private investors. A key feature would be for this to be executed through a partnership with an existing financial institution or agency already familiar with the risk profile of start-ups and can accelerate the disbursement process, such as Malaysia Debt Ventures (MDV) or similar institutions.
- The use of fintech platforms could also be explored further as another channel to provide funding to smaller businesses and start-ups. P2P platform operators could extend credit with some form of safety net for their issuers. In addition, a fast-track approval process could be considered for the other ECF/P2P platforms not yet eligible under the Malaysia Co-Investment Fund (MyCIF) initiative for funding on a matching basis for smaller businesses and start-ups who do not have access to bank financing.
2. Critical investments in technology, people and a collaborative model
As the impact of COVID-19 unfolds, the structural transformations needed for the drivers of future development are even more important now. In addition to increasing access to financial capital for smaller businesses, especially for those without access to bank financing, there are three other interrelated critical elements for longer-term policies.
Firstly, the need to address a narrowing scope for technological catch-up. Secondly, to immediately scale up the re-skilling efforts of our talent especially in areas aligned to the acceleration of digital adoption, and lastly, to minimise fragmentation through platforms which can facilitate greater coordination and collaboration. All three aspects are collectively needed as key drivers to ensure our recovery from COVID-19 is sustainable in the longer-term.
i. Accelerating digital adoption efforts
- As traditional business models will increasingly pivot their existing models to one which leverages greater digital strategies, an “Industry Partnership Incentive Programme” could be introduced as a co-investment structure to accelerate greater digital adoption between financial institutions, such as the smaller asset management companies and fintech or other start-ups in order to reduce “time-to-market” or enhance digital commercialisation.
- In line with this, a “Research and Training Incentive Programme” for specific research institutions or for smart partnerships able to provide local knowledge transfer of emerging and disruptive technologies in the financial sector can further accelerate applications of Artificial Intelligence (AI) and data analytics and facilitate the building of a research and training centre and a talent ecosystem for the future of financial services.
- These efforts can also be complemented by a government-led initiative for a “Market Access Platform” which links government agencies, government-linked companies and other private-sector partnerships as well as selected smaller businesses and start-ups to manage supply-side challenges related to COVID-19 with greater coordination, scale and reach. This can be further scaled-up to offer other types of non-financial support, from providing new market access and opportunities which smaller businesses and start-ups can offer government, government agencies and bigger corporates, to fast-tracked government procurement.
ii. Scaling up re-skilling efforts
- Having a “subsidy-based re-skilling programme” in the financial sector to help prepare low-mid-skilled employees in financial institutions to face the ongoing structural changes in the employment market, whereby such a training and re-skilling programme could offer a subsidy or cash incentive to the individuals who are able to complete a full certification or qualifications in selected Continuing Professional Education (CPE)-approved courses aligned for “future skillsets” that are needed in the financial sector.
- This can be complemented by a “COVID-19 talent-sharing platform” to support the transition of displaced workers from sectors impacted by COVID-19. This talent-sharing plan can be implemented over a centralised government platform or spearheaded as a “community-based initiative” by government agencies such as MAGIC or MDEC in partnership with the private sector, to collate a database of affected employees from their previous start-up employers and support alternative working arrangements with employers in other sectors with much-needed digital talent and expertise.
- At a national-level, the government could also consider leveraging e-wallets and education platforms to distribute subsidies for the purpose of re-skilling.
iii. Harnessing greater network coordination and collaboration
- The government could establish a one-stop centralised technology platform to champion the role of technology innovation. The platform, similar to Singapore’s GovTech can first act as the authoritative voice for information on the pandemic and be used to ensure transparency of information on digital surveillance (if implemented). More importantly, it can also be used to generate valuable data and insights on the pandemic issue and other national-level campaigns as well as provide other types of support for smaller businesses such as financial workshops, mentoring and technical assistance to assist brick and mortar businesses from offline to online.
- Malaysia needs to be part of the conversation which is shaping global consensus and views in terms of the frameworks and regulations related to the digital economy. In line with this, a regional digital communication platform will strengthen the level of coordination for collective action, facilitate greater knowledge-sharing and mobilise the regional business community for emergency situations such as the COVID-19.
Several of the recommendations involve the development of new platforms to address challenges in specific areas. These platforms can be and should be integrated for greater effectiveness and efficiency. For example, a platform providing financing, grants and advisory support to start-ups and enterprises could be linked to training and certification to ensure greater synergies. As a benchmark, Tamkeen Bahrain is a public agency that provides training and certifications for individuals, while also providing financing, grants and advisory support to start-ups and enterprises- which enables this single-agency model to have a holistic view of both industry needs and existing talent capacity. As such, other models that allow similar streamlining can be explored.
3. Laying the groundwork for greater infrastructure spending
- While infrastructure projects may not seem like an immediate priority during this COVID-19 crisis, it does not mean we should overlook the foundational investments needed to rebuild our economy post-crisis- one which can create a stronger and more resilient national infrastructure system for the future. Moreover, the COVID-19 situation has clearly highlighted the need for more robust physical and social infrastructure support across various sectors especially those that provide essential services to our society.
- Infrastructure financing is a critical area where Malaysia’s capital market can play an integral role to ensure adequate funding facilities are available; especially on the role of Islamic financing and the adaptation of the Public-Private Partnership (PPP) model. A newer PPP model could also increasingly evolve towards a more platform-based model as data becomes a more prominent asset for both the public and private sectors.
- In addition, given the unprecedented scale and impact of COVID-19 and the need for greater public spending to support our health systems and overall economy, it may be timely to conduct a comprehensive and careful assessment on the investment arguments for the unlocking of value from government-owned infrastructure assets, for instance through infrastructure listings as another potential source of financing for the government, cognizant of the timing, complexity and risks especially during a cyclical downturn.
- Post the COVID-19 crisis, the world will increasingly look towards China to take on a bigger leadership role and given that Malaysia is part of the Belt and Road Initiative network, we should further strengthen our ties with China to learn from their experience and tap on their technological capabilities as well as to offer our expertise in financing infrastructure projects through the capital market.
4. Ecosystem support through a stakeholder-based model
- The COVID-19 crisis is unique not least because the combination of supply and demand shocks amplify the interlinkages of firms to multiple stakeholders- their employees, outside contractors and suppliers, government relationships and creditors or financiers.
- We link a recent report by World Bank (Didier et al. 2020) which identifies these stakeholders of firms as an important intangible asset or “organizational capital” of a firm with the growing global call by prominent economists and institutions for reforming capitalism to a “stakeholder-based” model.
- The COVID-19 crisis presents us with an opportunity to fill the policy and/or implementation gaps in order to move the stakeholder-based model to the mainstream in which firms support all the stakeholders in their ecosystem and investors play an immensely critical role in providing the right signals as proper long-term stewards of capital in line with responsible investing.
- In tandem, the greater acceptance and reliance on technology platforms during COVID-19 will likely be part of the “new normal” post-crisis. Consumers will rethink traditional financial offerings, as technological platforms are able to offer a more integrated digital experience and a combination of financial and lifestyle services through partnerships with retailers and other service providers. Financial planning will also be transformed as it becomes more commonly integrated with online banking that offers personalized data tracking, further complemented by delivery of online financial literacy through social media and educational videos.
5. Addressing COVID-19’s spillover effects on long term savings
- The government has announced a slew of measures to address some of the key demand-side challenges that have emerged from this crisis, including one-off cash transfers, loan moratoriums, reduction in mandatory contributions to the Employees’ Provident Fund (EPF) and the ability to withdraw a portion of contributions from EPF and Private Retirement Scheme (PRS). While these short-term measures provide immediate financial relief, it has also brought to fore the bigger issue of the critical dependency of some individuals on their retirement fund as their primary savings for hardship and emergency situations. In the US and Australia, withdrawals from respective retirement funds have only been allowed for those who have been directly affected by the crisis. Without these specific qualifications and targeted flexibilities, it will not only lead to greater opportunity cost for individuals in the long term but will also inhibit reforms of the pension system from achieving a more inclusive and sustainable model.
- As Malaysia becomes a rapidly aging population, there is also a need to undertake a holistic review of the overall retirement and social protection framework with a view to strengthen social safety nets to ensure comprehensive retirement solutions which includes the need to critically close the gaps for the self-employed and informal workers. Currently up to 62% of working-age Malaysians are not covered by any retirement schemes and with the changing demographics and rising trend of gig economy and freelance jobs, this percentage will increase. These gaps can be addressed by greater coordination between different retirement schemes, improving access to retirement schemes, finding a way to mandate pension savings for this demographic group and making PRS a more attractive option.
- These efforts will have to be complemented by helping investors make better decisions. In order to increase participation in voluntary retirement schemes, there is a need to leverage on behavioural economics, for financial advisors to play a more significant role and for employers to play an active role in providing impartial financial wellness programmes for their employees.
Within the broad framework above, we recognise that some of the recommendations put forth are firstly, interconnected elements and can have greater impact if combined and secondly, can be initiated as a near-term intervention but can evolve and be scaled into a medium to longer-term programme in a timely manner. For the latter, we recommend the use of the “design-thinking’ process common for start-ups, where measures are developed expeditiously as a prototype or minimum viable product (MVP) to provide “small-scale” solutions which can be tested and modified as the situation evolves, highly relevant in this current situation.
For the full report, please click here.