• Fiscal stimulus not entirely unexpected. Malaysia’s interim PM unveiled a fiscal stimulus package worth RM20bn on Thursday to mitigate the impact of the Covid19 outbreak. The program is not entirely unexpected given daily media coverage on several sectors, ie tourism and retail, hardest hit by the impact of the disease. Please refer our separate commentary on the stimulus.
   
• Weak economic activity expected ahead, exacerbated global stocks decline. The KLCI has fallen by 4.3% the past month and 5.2% YTD. The fall is compounded by the ringgit that has weakened by approx. 4% this year to RM4.22 to the USD. The magnitude of the decline is exacerbated by net selling by foreign investors of about RM1bn the past 3 weeks. Moreover, the Covid-19 has pushed several countries in the region on the brink of a recession. Although Malaysia is not alone in seeing stocks declining, it has unique risk, i.e. political situation causing further angst to investors.

• What does the market need now? Covid-19 aside. Firstly, a government, and of course a permanent PM with mandate to chart a new and sustained course for the country – as soon as possible. Malaysia is now a rudderless ship. And as a country that has been known to offer political stability to investors, Malaysia is in danger of losing this edge – and long term. This needs fixing and it needs a strong leadership. Over the past several years, countries in the region have done much to improve their standings among international investors.

• Base case scenario new PM Monday, no fresh elections. We laud the effort taken to proceed with the fiscal stimulus announcement amid the collapse of the PH government recently. We think there is risk associated with execution of the entire stimulus particularly if the script to future leadership is altered. Parliament will convene a special meeting on Monday March 2, to decide on the prime ministership. Until then, expect the stock market to stay weak as several outcomes are still possible, in our view. This includes a fresh general elections and possibly a new PM backed by a new coalition. We think the former is unlikely. Our base case scenario is for a new PM to be selected at the special parliament seating.

Worst hit sector are retail and tourism-related, plus commodity-based

Under the stimulus package, the government will implement a three-pronged approach, 1) to ease the cash flow of affected businesses; 2) to assist affected individuals; and 3) to stimulate demand for travel and tourism. The assistance to business include 15% discount on electricity to malls, and exemption of 6% service tax on hotels, whilst BNM will provide Special Relief facility at 3.75% interest rate to SMEs.

The Covid-19 epidemic has now spread to several countries outside China. The outbreak will economically impact certain sectors, and Malaysia’s services sector could probably see the biggest hit. For now, tourism industry players estimated loss of businesses of RM6bn which prompted the Malaysian Association of Tour and Travel Agents recently stating that 95,000 hotel rooms have been cancelled due to Covid-19 concerns.

The Malaysian government targeted the Visit Malaysia Year 2020 to attract 30m tourists and tourist receipts to reach RM100bn this year, compared to target of 28m tourists and RM92bn receipt for 2019. During the SARS outbreak, tourist arrivals in Malaysia from China fell by 37% while tourist arrivals generally fell 21%, leading to a decline of 39% and 17% in tourist spending. Meanwhile, several retail associations indicated that sales have fallen by as high as 50% and expected to drop further over the next 3 months.

Although we do not expect to see a meaningful rebound in the worst hit stocks (refer table below) anytime soon, the comprehensive financial aid given to the related sectors will lessen the impact on business as well as cashflow, especially to unlisted SMEs

Source: BIMB Securities Research - 28 Feb 2020