Floods have been Malaysia¡¯s most frequent natural disaster, accounting for 85 percent of all natural disasters since 2000. Malaysia has experienced high and increasingly frequent rainfall, and projections indicate further increases in precipitation in Malaysia. If not mitigated, higher precipitation will expose the country to higher flood risks. Building resilience to floods is imperative for sustainable private sector development and growth in Malaysia. Yet, empirical evidence on the vulnerability of businesses to flood risks has been scarce in Malaysia.
This report is a step toward bridging this knowledge gap to shed light on how policy makers can support and foster private sector resilience to floods, emphasizing policies to strengthen the role of the financial sector in supporting business adaptation and resilience to flood risks.
- In a first attempt to assess the macroeconomic and financial sector impact of flood events, despite the limited availability of granular data, the estimations in this study show that a hypothetical 1-in-20-year flood can cost Malaysia up to 4.1 percent of GDP in 2030 and lead to up to a 2.2 percentage point increase in Malaysia¡¯s unemployment rate. A novel business-level survey conducted on 1,500 Malaysian businesses shows that small and medium enterprises (SMEs) are particularly vulnerable to floods in Malaysia, through both direct and indirect effects.
- Although flood impacts over the past three years were more prevalent among large businesses, SMEs were 50 percent more likely to report financial damages than large businesses. SMEs were also more likely to cite indirect losses due to the impact of floods on their customers and employees¡ªfor example, about 75 percent of small businesses stated that supply chain bottlenecks were the main cause for delays in return to operations.
- Limited access to finance for adaptation and resilience is a significant barrier for Malaysian businesses, especially SMEs, hampering their ability to manage flood risks. Businesses with limited access to financial resources for flood preparedness had three times greater revenue losses associated with floods than businesses that did not mention it.
- Limited access to insurance can also constrain recovery efforts as surveyed businesses, especially SMEs, noted that insurance payouts represent an important source of funding for such expenditures.
- Evidence from a survey of financial institutions in Malaysia (banks, insurers, and takaful operators) reveals that they face challenges in pricing, monitoring, and diversifying flood risks, partly due to marked data gaps and an inability to adequately quantify flood risks. These factors hinder their ability to serve Malaysian businesses, especially high-risk ones, adequately.
An integrated, coherent, and proactive approach by the public sector, the private sector, and the financial sector is paramount in building a flood-resilient economy. The estimations in this report indicate that adaptation efforts by both the public sector and the private sector could significantly reduce the macroeconomic and financial impact of floods.
- The public sector plays a pivotal role as the primary provider of large-scale flood control infrastructure, simultaneously ensuring the resilience of critical infrastructure and service delivery in the face of flood risks. The public sector is also responsible for a range of policies softer in nature, such as urban planning and land use restrictions in flood-prone areas, among other responsibilities.
- Hence, the actions by the public sector can significantly change the scale and the type of private sector investments. They also affect the incentives to undertake such investments by businesses and the financial sector alike by changing their risk-return profiles.
- While public sector efforts can markedly reduce the impacts of floods on businesses in Malaysia, residual risks would remain. Ultimately, the ability of businesses to reduce the impact of floods hinges on their capacity to adapt. But private sector efforts should build on and complement those of the public sector, which puts a premium on transparency about public sector policy priorities and strategies.
- The financial sector can be an important enabler. Access to financial products can support businesses in coping with floods by financing ex-ante adaptation efforts and enabling ex-post financial resilience. However, a range of financial market inefficiencies call for policy intervention to support greater access to finance and insurance for businesses, especially the most vulnerable such as SMEs.
This report outlines a range of complementary policy actions in six key areas, focusing on how policy makers in Malaysia can support and foster private sector resilience to floods:
- Enhancing data availability, accessibility, and affordability to support flood risk assessments, which are vital for risk management, informed investment decisions, and the development of financial markets.
- Developing a long-term flood risk adaptation strategy has first-order importance by establishing the level of risk retention by the public sector, thereby reducing policy uncertainty and facilitating the assessment of flood risks for the private sector.
- Strengthening the enabling environment for the financial sector, including mainstreaming flood risks to enhance accountability, ensure adequate risk management, and foster financing toward adaptation and resilience.
- Supporting access to finance for adaptation and recovery, through an evidence-driven approach for designing and implementing targeted policy support to ensure effective outreach to the most vulnerable businesses, such as SMEs.
- Deepening the insurance market to enhance the range of financial instruments that can support the financial resilience of businesses.
- Enhancing flood risk awareness and building capabilities to foster greater efforts toward adaptation and resilience.