The government’s decision to announce an economic stimulus package is indeed a timely initiative given the urgent requirement to mitigate an economic fallout as a result of the Covid-19 outbreak. In line with our expectation, the stimulus measures introduced are more focused instead of broad-based. The size of the stimulus package is RM20 billion, which is considerably larger than the RM7.3 billion stimulus introduced in May 2003 in response to the 2003 SARS outbreak.

The targeted fiscal measures of deferring monthly income tax instalment payments for businesses impacted by Covid-19, allowing companies to revise profit estimates for 2020, providing a discount on monthly electricity bills for hotels, travel agencies, airlines, shopping malls, convention and exhibition centres will help reduce the cost of doing business.

Besides, the special relief facility of RM2 billion as working capital for affected small and medium enterprises (SMEs), RM200 million in microcredit facility and the SME Automation & Digitalization Facility of RM300 million will assist the affected businesses and support the domestic economy. Furthermore, there is also the call for all banks to enforce a payment moratorium, allowing affected borrowers to restructure or reschedule loans. Some banks have already started implementing temporary payment deferment for affected customers since early February.

Providing personal income tax relief and digital vouchers for domestic tourism is a welcome move. The additional savings from the optional reduction in individual Employees Provident Fund (EPF) contribution by 4% in 2020 to 7.0% that will free up RM10bil for private consumption as well as the supplementary Bantuan Sara Hidup (BSH) payments will likely be spent on consumption items. This in turn will spur business activities and the overall economy. These measures are expected to provide a positive booster to both consumer and business confidence while easing cash flow issues.

The government has lowered its growth target for 2020 to 3.2%–4.2% from 4.7% presented in Budget 2020. The new growth target is slightly above our projection of 3.0% (our upside is 3.8%, our downside is 2.5%) after taking into account the current political tension besides Covid-19. The new fiscal deficit/GDP target of 3.4% compared to 3.2% projected under Budget 2020 (-3.4% in 2019) with an additional injection of RM3.0bil are unlikely to add any strong downwards pressure on the ratings, assuming the current political tension is resolved in the near term.

Additional funding for the stimulus package is expected to come from monetary operations. An SRR reduction is in our cards. A 50-basis point cut in the SRR should release around RM8.0–9.0bil. Room for the SRR to be reduced as much as 100bps cannot be ruled out. Likewise, while we have factored in a 25bps OPR cut in March which is currently at 2.75%, the possibility for a 50bps cut is on the table.

A. More focused measures

• The government’s decision to announce an economic stimulus package is indeed a timely initiative given the urgent requirement to mitigate an economic fallout as a result of the Covid-19 outbreak. In line with our expectation, the stimulus measures introduced are more focused instead of broad-based.

• The size of the stimulus package is RM20 billion, which is considerably larger than the RM7.3 billion stimulus introduced in May 2003 in response to the 2003 SARS outbreak. This is partly because the Chinese economy has become an indispensable part of global business, besides growing to become the globe factory since the 2003 SARS outbreak.

• Our total trade exposure to China in 2003 was 12% compared to 74% now. The process of globalization has encouraged companies to build supply chains that cut across national borders. It has made economies become more interconnected. Businesses are becoming more reliant on Chinese factories today than they were during the SARS outbreak in 2003.China now accounts for one-third of global GDP compared to only 4% during the 2003 SARS outbreak.

• Hence, our economic vulnerability today is not only from tourism-related business activities, but also from the supply chain disruption. Exposure to China’s supply chains grew following the business strategies to lower costs by keeping stocks at low levels with the confidence that they can replenish their stocks “just in time”. Such confidence is now being misplaced. Thus, we are vulnerable to slower investment, weaker discretionary spending and financial market volatility.

• Apart from the virus impact, our economy is also vulnerable to ongoing external headwinds from the after effects of the trade tension, global tech down cycle and political/geopolitical tension. Domestic challenges, in particular the ongoing political tension, will further impact the already weak overall business and consumer confidence. The drag on the domestic economy will be strong following the increasing rebalancing towards private consumption (59% of GDP) and services (58% of GDP) as both are playing a bigger role compared to manufacturing (22% of GDP).

B. Fiscal measures

• The targeted fiscal measures of deferring monthly income tax instalment payments for businesses impacted by Covid- 19, allowing companies to revise profit estimates for 2020, providing a discount on monthly electricity bills for hotels, travel agencies, airlines, shopping malls, convention and exhibition centres will help reduce the cost of doing business for those affected.

• Among the initiatives to stimulate the tourism industry are: (1) personal income tax relief of up to RM1,000 on expenditure related to domestic tourism; (2) digital vouchers for domestic tourism of up to RM100 per person for domestic flights, rails and hotel accommodations for all Malaysians.

• Additional matching grants for tourism promotion will be provided. An allocation of RM500mil is provided for the vouchers and tourism promotion; (3) service tax breaks for hotels will start earlier on Mar–Aug 2020; (4) a 15% discount of monthly electricity bill for hotels, airlines, tourism agencies and retail industries from April to September 2020; (5) Malaysia Airports Holdings (MAHB) to provide rebates on rental for premises at the airport as well as landing and parking charges; and (6) a one-off payment of RM600 each to taxi drivers, tourist bus drivers, tourist guides and registered trishaw drivers.

• Investment activities will continue to complement growth as the government will expeditiously implement small-scale infrastructure repair and upgrading projects nationwide worth RM2.0bil; development expenditure projects; and large scale projects in the pipeline. Apart from that, the package also includes various incentives for private sector to invest in high value added projects.

• Besides, the special relief facility of RM2 billion as working capital for affected small and medium Enterprises (SMEs), RM200 million in microcredit facility to affected businesses and the SME Automation & Digitalization Facility of RM300 million will assist the affected businesses and support the domestic economy. Furthermore, there is the call for all banks to enforce a payment moratorium allowing affected borrowers to restructure or reschedule loans. Some banks have already started implementing temporary payment deferment for affected customers since early February.

• Providing personal income tax relief and digital vouchers for domestic tourism is a welcome move. The additional savings from the optional reduction in individual Employees Provident Fund (EPF) contribution by 4% in 2020 to 7.0% that will free up RM10bil for private consumption as well as the supplementary Bantuan Sara Hidup (BSH) payments will likely be spent on consumption items. This in turn will spur business activities and the overall economy. These measures are expected to provide a positive booster to both consumer and business confidence while easing cash flow issues.

• The government has lowered its growth target for 2020 to 3.2%–4.2% from 4.7% presented in Budget 2020. The new growth target is slightly above our projection of 3.0% (our upside is 3.8%, our downside is 2.5%) after taking into account the current political tension besides the Covid-19.

• As for the fiscal deficit/GDP, the government projects it to increase from 3.2% under Budget 2020 to 3.4% (-3.4% in 2019) now, with an additional injection of RM3.0bil. This will still keep us in a commendable position and unlikely to add any strong downwards pressure on the ratings, assuming the current political tension is resolved in the near term.

• Additional funding for the stimulus package is expected to come from monetary operations. An SRR reduction is in our cards. A 50-basis point cut in the SRR should release around RM8.0–9.0bil. Room for the SRR to be reduced as much as 100 bps cannot be ruled out. Likewise, while we have factored in a 25bps OPR cut in March which is currently at 2.75%, the possibility for a 50bps cut is on the table.

Source: AmInvest Research - 28 Feb 2020