Fighting Covid-19, we see more restrictive measures have been put in place. Global economy is in deep a recession. As tourist arrivals plunging to record low, tourism and aviation sectors are the worst hit. Scandinavian airline SAS will temporarily lay off up to 10,000 employees, or 90% of its workforce. Exports will be badly affected by weak global demand. Supply chain disruptions and panic buying already driving food prices higher among other. Alarm bells are ringing across Asia that such an occurrence of the 2007/08 crisis is once again on the horizon. During 2007/08 crisis, benchmark Thai white rice rose from US$350 a tonne to US$1,000. As at now, the benchmark price is currently hovering at US$560-570 – a seven-year high.

With collapse of oil prices, U.S. corporate bonds that yield at least 10 percentage points above Treasuries, as well as loans that trade for less than 80 cents on a US dollar, have swelled to US$533 billion up from US$214 billion on March 6, according to Bloomberg. Narayana Kocherlakota, ex-president of the Federal Reserve Bank of Minneapolis from 2009 to 2015, expects this drag lasting well into next year and it’s going to take a much larger fiscal infusion to make up for that shortfall — something more on the order of US$2.5 trillion. In the case of China, almost half of China’s listed consumer companies don’t have enough cash to survive another six months and could cost China’s migrant workers a combined 800 billion yuan (US$115 billion) in lost wages.

Is Malaysia doing enough facing this headwind?

To-date, the government of Malaysia has unveiled stimulus packages worth a total of RM260 billion, US$59.8 billion (about 17-18% of GDP). If we break it down, direct fiscal injection only amounted to no more than RM30 billion (less than US$7.0 billion), or less than 2.0% of GDP. Majority of this came from non-fiscal stimulus - loan moratorium (RM100 billion), Danajamin credit guarantee (RM50 billion) and EPF-related schemes. The Star reports that the stimulus could widen the budget deficit by 1.7 percentage points to 4.9% of GDP. Government is estimating fiscal outlays will add about 1.5% percentage points to GDP growth. The latest RM10 billion to support SMEs, which make up 75% of workforce and contribute more than 30% to GDP, is unlikely to have desired multiplier effects, is procedurally heavy and not an earning booster.

I take the view that liquidity enhancement and OPR cut by BNM would have a neutral impact on business’ cashflow at best while banks would have to grapple with margin contraction, further loan slowdown and potential rise in gross impaired loans. If Covid-19 outbreak persists beyond June 2020, leading to a prolonged supply chain disruption, the Government may need another round of fiscal injection and monetary stimulus. Ringgit Malaysia could face another round of depreciation adjustment, which is inflationary in nature.

In comparison, Singapore put forth a fiscal support of SGD$59.9 billion (US$41.9 billion) (12% of GDP) which will bring the overall fiscal deficit to SGD44.3 billion (8.9% of GDP). Indonesia raised raising state spending by IDR$405 billion (US$25 billion), which effectively raise the 2020 deficit target to 5% of GDP and temporarily suspending the statutory limit of 3% of GDP. In addition to two prior packages, Thailand indicated that an additional THB$500 billion (US$15 billion) might be unveiled in April. Japan Prime Minister Abe said the stimulus package worth JPY$108 trillion (nearly US$1 trillion), equivalent to 20 per cent of Japan’s GDP will be rolled out in April as well.

Chee Seng, Wong

CIO, Athena Advisors