Due to rapid changes in the global and domestic environment, BNM organised a meeting to provide further clarity on its economic projections. While BNM had forecasted GDP growth of -2.0% to +0.5% in 2020 during the Economic and Monetary Review, we opine that latest external and domestic developments pose downside risks to their forecast. On fiscal projection of -4.4 to -4.7% of GDP, this is expected to be financed by a mix of revenue measure, reallocation of savings from expenditure and increased domestic borrowing.

Downside risks to BNM GDP projection -2% to +0.5%. Two weeks ago, BNM forecasted that 2020 GDP growth is expected to be within a range of -2.0% YoY to +0.5% YoY. This was based on the assumption that global growth would contract - 1.0% YoY and MCO would take place over a 4-week period. However, events have changed since, as latest IMF projection shows global growth is forecasted to decline by -3.0% YoY and MCO has been extended for another 2 weeks, bringing MCO period to a total of 6 weeks. Nevertheless, BNM reiterated their expectation for the economy to rebound in 2021, in tandem with other multinational forecast for the global economy recovery to take place in 2021 as well.

Unemployment rate projected to be at 4%. This projection assumes that bulk of retrenchment would take place in 2Q20 and rehiring would happen in 4Q20. BNM clarified that this projection did not include the wage subsidy scheme, which may result in some employers retaining the workers.

BNM confident of CA remaining in surplus position. Despite the weaker global environment, BNM opines that the contraction in exports will be offset by drop in total imports due to weak domestic demand. This is also in line with BNM’s prognosis of weak investment prospects as they shared that foreign firms who had FDI approvals in 2019 are now reluctant to undertake capacity expansion plans.

Monetary policy will remain accommodative. During the upcoming MPC meeting, the Committee will re-evaluate the GDP prospects in light of weaker global economic prospects and extension of MCO. BNM shared that given the already low inflation prospects, the primary focus will be on growth outlook. In terms of policy measures, BNM said that they will continue to review the effectiveness of existing measures to ensure it achieves its original goal and targeted audience. Going forward, BNM will continue to assess the economic and financial situation and will be pragmatic in addressing the issues.

Fiscal deficit target to be -4.4 to -4.7% of GDP. To date, the government has announced an economic package of RM35bn (2.3% of GDP). In addition to that, as oil price assumption has dropped to USD35-40/pb, this would lead to revenue loss of RM6.6-8.1bn. Assuming income loss of additional RM8-10bn (GFC: -RM10.4bn) due to recessionary pressures, this could bring the fiscal deficit to -6.6% of GDP. Nevertheless, FM Tengku Zafrul said that fiscal deficit will be circa -4.7% of GDP. Hence, the difference between the projected fiscal deficit of -6.6% of GDP and MOF’s fiscal deficit target of -4.4% to -4.7% of GDP is expected to be financed by a mixture of revenue enhancement, reallocation and savings expenditure as well as ringgit bond financing.

Revenue enhancements will originate mainly from GLC companies. In terms of revenue enhancement, we understand from official guidance that this could be contributed by increased dividend from PETRONAS (in 2019, it was reported that PETRONAS raised ~RM6bn after selling some of its stake in MISC Bhd, Petronas Dagangan and Petronas Gas Bhd), BNM, Khazanah as well as spectrum revenue from Malaysian Communications and Multimedia Commission (MCMC) and additional  funds from KWAP. From our understanding, when MCMC sold the spectrum bands in 2017 (~RM3-5bn), the proceeds were not used for fiscal revenue enhancements then.

Reallocation of spending, due partly to MCO and lower oil price. In terms of spending, we understand that government is reallocating a sizeable amount of expenditure from other ministries, partly due to the slow progress of projects or deferments of programs arising from MCO. In addition, government will see additional savings from oil subsidy programme (~RM3bn).

Ringgit bond financing estimated at RM18.0-22.5bn: As government is targeting - 4.4 to -4.7% of GDP, this would imply additional ringgit bond issuance of RM18.0- 22.5bn. In PM Muhyiddin’s speech on 27 Mar, he iterated that operating budget will remain in a surplus position. Consequently, the additional bond financing of RM18.0- 22.5bn will be used to finance development expenditure. To the best of our knowledge, government has classified RM23bn (66%) of economic stimulus package under development expenditure and RM12bn (34.3%) under operating expenditure. With fiscal deficit expected to widen to -4.4 to -4.7% of GDP, this would lead to higher Federal government debt of 54% of GDP, still within the 55% statutory limit.

Maintain 2020 GDP at -4.0%. We maintain our 2020 GDP forecast at -4.0% and expectations for BNM to cut the OPR by -50bps this year to 2.0%. Retain fiscal deficit forecast at -4.7% of GDP.

Source: Hong Leong Investment Bank Research - 16 Apr 2020