On Fri, the PM announced a RM250bn economic stimulus in response to Covid- 19. This is 17% of GDP, larger than GFC’s stimulus (RM67bn, 8% of GDP). FM said the budget deficit will now be -4% (from -3.4%), but we think this is a tall order. With the onslaught of Covid-19, we cut 2020 GDP to -2.0% (from +2.3%) and expect another -50bps OPR cut in 2020 to 2.0%. While the stimulus targets aid at those most vulnerable to Covid-19 (B40 & M40 and SMEs), direct market impact seems limited. Sectorial wise, it is positive for consumer and healthcare but slightly negative for Tenaga. Maintain KLCI target at 1,350; we would be sellers into this bear market rally.

NEWSBREAK

On Friday, PM Tan Sri Muhyiddin Yassin announced a RM250bn economic stimulus plan (called PRIHATIN) to combat the negative ramifications of Covid-19.

HLIB’s VIEW: ECONOMICS

Major headline stimulus. At 17% of GDP, this massive stimulus is more significant than (i) the GFC economic stimulus of RM67bn (8% of GDP) and (ii) to other major economies’ stimulus budgets that have been announced of late (US: USD2.3trn at 9.7% of GDP and Singapore: SGD54bn at 10.6% of GDP). The package is divided into 3 main parts: (i) maintain people’s livelihood (RM128bn), (ii) provide business support (RM100bn) and (iii) strengthening the economy (RM2bn). The Covid -19 fiscal package that was announced on 27th January 2020 amounting to RM20bn was also included in this headline figure of RM250bn.

Direct fiscal injection at RM25bn Although the headline figure stands at RM250bn, direct fiscal injection is much lower at RM25bn (1.6% of GDP). Government has allocated total of RM1.5bn to MOH for the purchase of additional equipment and services. On the economy, a significant portion of government’s fiscal injection will be cash handouts for B40 & M40 recipients ranging from RM200-RM1600 amounting to RM10bn, and wage subsidy of RM5.9bn for workers whose income is less than RM4,000/month. Other notable contributions consist of loan moratorium for households and businesses (RM100bn), Danajamin guarantee (RM50bn), EPF account withdrawal facility (RM40bn) and other initiatives.

Weaker fiscal deficit. To the best of our knowledge, the government has revised its Brent oil price assumption to USD35-USD40/pb from USD62/pb. For every USD1/pb drop in oil price, this will negatively affect government gross revenue by RM0.3bn which leads to RM6.6-8.1bn in lost revenue. In addition, government revenue could also be hit due to weaker economic activity in the tune of c.RM7bn. Taken together with the additional direct government injection of RM25bn, this could potentially result in government fiscal deficit to rise to as high as c.-6% of GDP, based on our calculations. Nevertheless, during an interview, Finance Minister Tengku Zafrul said budget deficit is c.-4% of GDP. This potentially means the additional fiscal outlay of RM25bn could be financed by a mixture of reallocation from other ministries (RM2- 3bn), increase dividend revenue and increased borrowing. Based -4% budget deficit, this will entail RM7.9bn of additional borrowing. In PM Muhyiddin’s speech, he also noted that operating budget would remain in surplus and also called for ministries to re-examine their budget allocation to find savings. However, in this weak global and domestic environment, we feel that meeting the c.-4% deficit target may be a Herculean task. The government reiterated that these measures are one-off and will take steps to consolidate the budget over the medium-term.

Source: Hong Leong Investment Bank Research - 6 Apr 2020