The second stimulus package (SP2) of Covid-19 amounting to RM250 billion (17% of GDP, with 1.7% of GDP as direct fiscal injections) should support growth and provide the much-needed support in areas like liquidity, consumption and employment without putting to much strain on the fiscal deficit. In today’s environment, underpinned by the global economic crisis due to Covid-19, our national revenue will be impacted.

Besides, our national revenue will also be affected due to the oil price war between Russia and Saudi Arabia. With the government lowering the oil price projection to US$35–US$40 per barrel for Brent, it would translate to an oil revenue loss of between RM6.6bil and RM8.1 billion. Looking at the SP2, the government has come out with two scenarios. The first, “no intervention” where the fiscal deficit is at 6.6% of GDP and shows a RM22.4 billion drop in revenue to RM222.1 billion. The second is the “intervention“ scenario with a fiscal deficit of 4.9% of GDP and able to achieve its targeted revenue of RM244.5 billion. With only a direct injection of RM22–25 billion and the balance coming from “non-fiscal” measures, it is likely for the fiscal deficit to reach RM74 billion or 4.9% of the GDP, which is lower than the 6.7% reported in 2009. Besides, a fiscal deficit of below 5% of GDP would not put a strong pressure to the re-rating of Malaysia by international ratings agency, currently at “Stable” i.e. A3/A-.

At the same time, the federal government debt is expected to reach 55% of GDP from previously 52%. It is within the 55% statutory threshold. And the good point is that the government has also committed to maintaining fiscal discipline of not borrowing to fund operating expenditure.

Furthermore, with the direct spending amounting to RM22–25 billion, we have revised our MGS + GII supply to RM145 billion from previously RM125 billion. It is based on 4.9% fiscal deficit with RM71.6 billion of financing needs. It does not, however, take into consideration of potential debt switch by BNM and foreign debt issuance. BNM’s switching will lower gross issuances. And foreign debt issuance is limited at RM29.4 billion (outstanding) against the RM35 billion statutory cap. Hence the government only has a RM5 billion limit to issue foreign currency debt.

Meanwhile, the demand for government bonds will be influenced by the lower contribution from the EPF, the flexibility given to life insurance/takaful policyholders as they can now defer the payment of insurance premiums for 3 months between April and December, and the tendency of large pension funds to invest counter-cyclically with a preference to riskier assets like equities when asset prices are on a down cycle.

Besides, with greater measures being non-fiscal, our focus will now be on the “off-balance sheet” mode of funding. If we recall, over the period of 2009 and 2017, the government depended on government guarantees (GG) and public private partnership (PPP) to fund key government projects. These raised the government’s contingent liabilities to RM238 billion from RM84.3 billion in 2009. Although the government’s exposure to “off-balance sheet” slowed substantially in 2018 and 2019, room for it to pick up could happen, especially with the need for higher public spending. Implications on the medium-term corporate bonds credit spread will depend on the size the off-balance sheet funding used.

We expect the economy to report a “technical” recession — two quarters of negative growth. After taking into consideration of the “technical” recession, our estimation shows the economy should expand around 0.4% for 2020 although the government projects a flat growth.

A. Economic Impact

• The second stimulus package (SP2) of Covid-19 amounting to RM250 billion (17% of GDP, with 1.7% of GDP direct fiscal injections) should support growth and provide the much-needed support in areas like liquidity, consumption and employment without putting too much strain on the fiscal deficit.

• In Budget 2020 that was tabled in the Parliament on 11 October 2019, the government allocation on expenditure was RM297bil compared to revenue of RM244.5bil, which brings the fiscal deficit to 3.2% of GDP. The nominal GDP projected was 6.2% or RM1,607.9bil (see Table 1).

• Looking at the SP1, the total government allocation on expenditure rose to RM299 billion while holding revenue remained unchanged at RM244.5 billion, bringing the fiscal deficit to 3.4% of GDP. The nominal GDP projected was 4.2% or RM1,574 billion. And in the SP1, there was a direct injection of RM3.5 billion (see Table 1).

• In today’s environment, underpinned by the global economic crisis due to Covid-19, our national revenue will be impacted. The rapid spread of the virus outside China has prompted sharp declines in travel and tourism, and the cancellation of business and leisure events worldwide as “social distancing” takes hold. Containment efforts of this virus outbreak involve quarantine and widespread restrictions on labour mobility and travel, resulted in a sudden economic stop and sharp cutbacks in the overall economic activities.

• Adverse consequences of these developments include the direct disruption to global supply chains and shipping as well was exports, weaker final demand for imported goods and services, and the wider regional declines in international tourism and business travel. Risk aversion rose in financial markets while commodity prices suffered sharp declines. Business and consumer confidence fell. A huge fall in GDP in the coming months can be expected. Thus, our national revenue is expected to drop as we expect lower tax revenue from individuals and corporates.

• Besides, our national revenue will also be impacted by the oil price war between Russia and Saudi Arabia. At the point of formulating Budget 2020, the projected oil revenue was based on US$62 per barrel for Brent. The oil outlook was maintained at US$62 when the SP1 was unveiled. However, in the SP2, the government has lowered the oil price projection to US$35–US$40 per barrel for Brent. This would translate to an oil revenue loss of between RM6.6 billion and RM8.1 billion. For every US$1 per barrel drop in oil price, oil revenue will fall by RM300 million (see Table 2).
• Looking at the SP2, the government has come out with two scenarios. The first,“no intervention” where the fiscal deficit is at 6.6% of GDP and shows a drop of RM22.4 billion in revenue to RM222.1 billion. The second is the “intervention“ scenario with a fiscal deficit of 4.9% of GDP and able to achieve its targeted revenue of RM244.5 billion (see Table 1).
• In GDP terms, the RM250 billion stimulus measures comprise: (1) the SP1 of RM20 billion or 1.3% of GDP; (2) RM100 billion of borrowers’ debt repayment moratorium for 6 months by financial institutions or 6.7% of GDP; (3) RM10 billion cash handouts to the M40/B40 segments for 5.1 million households or 0.7% of GDP; (4) RM50 billion to support SMEs under the government guarantee scheme (Danajamin) or 3.5% of GDP; (5) RM50 billion savings from the EPF or 2.8% of GDP; and others. There is a direct injection of RM22–25 billion which should translate to around 1.8% of GDP (see Table 3).

• With only a direct injection of RM22–25 billion, this is unlikely to cause much strain on the fiscal deficit. Assuming total government revenue rises by RM22 billion, the fiscal deficit should reach RM74 billion or 4.9% of GDP, which is lower than the 6.7% reported in 2009. And the fiscal deficit could possibly reach as low as 4% of GDP from offsetting revenue initiatives. With deficit likely to stay below 5%, that should provide some comfort on Malaysia’s international ratings where we currently sit in “Stable” i.e. A3/A- (see Table 4).

• At the same time, the federal government debt is expected to reach 55% of GDP from previously 52%. It is within the 55% statutory threshold. And the good point is that the government has also committed to maintaining fiscal discipline of not borrowing to fund operating expenditure (see Chart 1).

• Furthermore, with the direct spending amounting to RM22–25 billion, we have revised our MGS + GII supply to RM145 billion from previously RM125 billion. It is based on 4.9% fiscal deficit with RM71.6 billion of financing needs. It does not, however, take into consideration of potential debt switch by BNM and foreign debt issuance. BNM’s switching will lower gross issuances. And foreign debt issuance is limited at RM29.4 billion (outstanding) against the RM35 billion statutory cap. Hence the government only has a RM5 billion limit to issue foreign currency debt (see Chart 2).
• Meanwhile, the demand for government bonds will be influenced by the lower contribution from the EPF and the flexibility given to life insurance/takaful policyholders as they can now defer the payment of insurance premiums for 3 months between April and December. It will depend on the take-up rate and the timing. Also, important is that large pension funds tend to invest counter-cyclically with a preference to riskier assets like equities when asset prices are on a down cycle. This could affect their demand for safe but relatively lower-yielding government bonds.
• Besides, with greater measures being “non-fiscal”, our focus will now be on the “off-balance sheet” mode of funding. If we recall, over the period of 2009 and 2017, the government depended on government guarantees (GG) and public private partnership (PPP) to fund key government projects. These raised the government’s contingent liabilities to RM238 billion from RM84.3 billion in 2009. Although the government’s exposure to “offbalance sheet” slowed substantially in 2018 and 2019, room for it to pick up could happen, especially with the need for higher public spending. Implications on the medium-term corporate bonds credit spread will depend on the size the off-balance sheet funding used (see Chart 3).

• Looking at the YTD total issuances, these are at RM38.8 billion in 1Q2020. It means that there is still space for an additional RM106.2 billion based on our projection of RM145 billion. With another 24 auctions, this would mean an average size of RM4.4 billion can be expected.

• Meanwhile, the SP2 measures should provide some meaningful positive impact on the economy. For instance, the consumer sector is expected to benefit from the latest initiatives under the SP2. The measures are expected to put money into the pockets of consumers and this would help sustain their cash flow. Besides, it is also expected to improve the cash flow of individuals who are not affected severely by the virus Impact. Benefits are likely to been seen in areas of business focusing on staple food and basic necessities.

• Besides, small players in the construction sector are expected to benefit from the RM2bil allocation for small-scale projects such as the upgrading of roads, schools (in Sabah and Sarawak), places of worship, police stations and tourism facilities. This will benefit contractors in Classes G1 (project value cap of RM200,000) through G4 (project value cap of RM1mil to RM3mill).

• These RM2bil worth of new projects are in addition to the RM2bil of small projects already announced during the first stimulus package. The first RM2bil projects are scheduled to hit the ground running in April 2020, including infrastructure in Felda settlements (RM600mil), the refurbishment of schools in Sabah and Sarawak (RM350mil) and the refurbishment of housing for the poor (RM150mil). As a result, these projects will provide lifelines to the sector, as well as generate positive multiplier to the economy through “forward” and “backward” linkages.

• The measures introduced to the financial sector will provide reliefs to individuals, SMEs and corporate borrowers whose cash flows are tight due to the Covid-19 outbreak. The moratorium to defer repayments as well as initiatives to restructure and reschedule borrowers’ financing will prevent banks’ impaired loans from spiking up significantly for at least the next 6 months, thus avoiding any substantial increase in provisions that banks may need to set aside. This should lift up any pressure on the NPLs from flaring up.

• Meanwhile, the relief facilities and guarantee schemes are expected to provide some comfort to the SMEs and retail businesses which contribute significantly to the economy.. These measures may partially assist the SMEs and retail businesses who are already experiencing strong challenges to keep their business afloat given the loss of sales revenue and avert a sharp rise in unemployment. Should downside pressure on the SMEs and retail businesses rises, we believe there will be more measures rolled out to assist this key segment of the economy.

• We expect the economy to report “technical” recession — two quarters of negative growth. After taking into consideration of the “technical” recession, our estimation shows the economy should expand around 0.4% for 2020 although the government projects a flat growth (see Chart 4).

Source: AmInvest Research - 30 Mar 2020