The governments and central banks around the world are shifting from rescue to recovery mode as the deepest slump since the Great Depression shows signs of bottoming out. After rolling out trillions of dollars worth of measures to prevent their economies and markets from collapsing, they are now doubling down with even more spending to backstop a recovery as coronavirus lockdowns ease.

And Malaysia is no exception. The economy is now on the fourth phase of the 6R strategy which is the shortterm recovery. We have moved from triage to recovery, and have realised that more fiscal support will be needed to households and small businesses to prevent this liquidity crisis from turning into a solvency crisis.

The new wave of stimulus has both the government and Bank Negara move in sync to continue flooding lenders, markets and companies with cheap credit at an unprecedented pace. It should result in 3Q2020 GDP to improve modestly with 2Q2020 expected to unveil the worst quarterly growth. While we expect growth to be around -1.1% to -2.0% as the base case, the downside is around -5.0%.

On the fiscal front, even at 6% fiscal deficit/GDP, it is still below the fiscal deficit of 6.9% in 2009 during the global financial crisis. Hence, the economy still has room to expand its fiscal deficit if the need arises. Likewise, if there is a need, the government could raise the self imposed debt ceiling of 55%.

And the increase in fiscal deficit should, in principle, not impact our credit given that the world including Malaysia are experiencing an unprecedented time. What would be important is to have the fiscal discipline to lower the deficit once the economy is out of the woods.

On the monetary side, from the initial view of 60%–80% probability for a rate cut in July by 25–50bps from the current 2%, it has now been lowered to 40%. The short-term recovery measures, added with some of the numbers unveiled in the month of May such as the manufacturing PMI showing signs of improvement although it is still in the contraction region, the further relaxation of the MCO (now in the stage of recovery CMO), the strengthening of the ringgit and ample liquidity suggest there is little room for a rate cut in July.

Source: AmInvest Research - 9 Jun 2020