There are three major theses that we ought to know. First, the coronavirus-induced recession is expected to place both the global economy as well as the Malaysian economy into technical recession. It is causing both supply and demand shocks. In our view, the impact from this virus should taper by end 2Q2020. Normalisation of both the global and domestic economy should take place in 2H2020.

Next, the liquidity concern is more on the real economy as opposed to the financial institution which is far more regulated. These other economic sectors lack the same protection, especially businesses with limited cash in hand and are exposed to a high degree of leverage. The same goes to household debts. Although our banks may have the liquidity coverage ratio, things are moving so fast and in such a big way that it is almost impossible to rule out the possibility of a lack of liquidity proving to be problematic for some institutions. And also, the types of disruptions and whether these could occur not just in the real economy but also in banks are hard to know.

Plunging oil prices from the “twin” unexpected shocks i.e. the price war between Russia and Saudi, and the coronavirus impact resulted in a global recession. With the oil price dropping well below US$30 per barrel, it will reduce our oil revenue significantly. The estimated loss in oil revenue is between RM0.6 billion (at an average at US$60 per barrel) and RM12.6 billion (at an average at US$20 per barrel). Hence, pressure on the fiscal deficit/GDP would hover 3.6%–4.2%, pending the outlook of nominal GDP and expenditure.

Our strategy is focused on the need to stabilize the domestic economy which will then stabilize the markets. It should not be a situation of trying to stabilize the markets with the expectation that it will then stabilize the economy. This is where the government stimulus could play a role in providing much-needed relief to the affected economy and businesses as well as workers. Hence, fiscal stimulus is ultimately going to have to play a bigger role than monetary measures.

Given the limited flexibility of our fiscal policy, the government should look at “money creation” to finance the budget deficit. Through money creation, the government can mobilize resources to drive economic growth by financing the budget deficit. It will allow the government to spend as much as it wants with the aim of supporting the economy to its full capacity, boost private sector activities, reduce unemployment and finance major programmes like construction/infrastructure, healthcare and green initiatives. If the government spending creates a deficit, it is not a serious problem. It is because the government’s deficit is by definition a surplus to the private sector.

There is no real risk to currency devaluation or economic chaos or fuelling inflation. According to our assessment, a 1% increase in money supply will improve the economic growth by 0.5%. At the same time, it supports the local currency with an appreciation of 0.6% against the dollar. Inflation is expected to rise by 0.25%.

In our view, the Stimulus Package 2 (SP2) should be more ambitious than the SP1 of RM20 billion in terms of reaching at a wider range of target groups and covers a broader range of economic activities. It must address six strategic issues: reducing unemployment and increasing job opportunities; easing the economic burden of the people, particularly those in vulnerable sections of society; supporting the private sector; undertaking capacity building for the future; supporting the SMEs; and supporting the informal business activities and those working in this sector. The focus should be on the transportation sector given the rising urbanisation, tourism, green initiatives, education, health, the halal sector, develop new technologies (particularly biotechnology), and upgrade human resource development (with an emphasis on private tertiary education).

Source: AmInvest Research - 26 Mar 2020