BNM expects negative growth in 2Q20 and recovery in 2H20. It continues to see downside risks to forecast of -2% to +0.5% YoY in 2020. While unemployment has spiked to 3.9% in Mar 2020, BNM anticipated unemployment levels to increase further and peak in Apr/May 20, consistent with the trough in 2QGDP. On policy instruments, BNM has been utilising all policy levers to ensure policy action is timely, targeted and has the efficacy to address specific issues.

Downside risks to BNM GDP projection -2% to +0.5%. During the Annual Report 2020, BNM forecasted that 2020 GDP growth is expected to be within a range of - 2.0% YoY to +0.5% YoY. While BNM did not provide a new forecast estimate, they hinted that there is downside risks to this forecast as assumptions have altered significantly to reflect the deterioration of global and domestic conditions (previous assumptions: global GDP -0.5%; MCO: 4 weeks; some form of border closure; latest: global GDP: -3% YoY; MCO 7 weeks; border closures). BNM expects 2Q20 GDP to be the trough and record negative growth, with a recovery in 2H20 and rebound in 2021. BNM expects GDP to return to 4Q19 levels by end-2021. Given the fluidity of situation, BNM may only update GDP projections in 2H20, after the release of 2Q20 GDP (Aug 2020).

Higher operating capacity. Based on industrial engagement, BNM estimated that operating capacity during Phase 1- Phase 3 MCO (18th March – 28th April) is higher at 55-65% of GDP (RM2.0-2.4bn loss per day) instead of 45% of GDP (loss of RM2.4bn/day). This could also be due to opening up of some industries.

Be prepared to see record unemployment in Apr/May 2020. While private consumption registered robust growth of +6.7% YoY in 1Q20 (4Q19: +8.1% YoY), BNM anticipates consumption to weaken as unemployment may peak to record levels in April/May 2020 consistent with the trough in GDP economic activity.

Economic recovery plan. Expect the government to announce the plan by end-May or early-June. Two different workstreams are ongoing, with one focus on implementable actions within 6-12 month period and another on the medium-term plan. Some of the measures are expected to be included in Budget 2021 as well. BNM is part of the recovery plan discussion and is focused on getting companies to embrace digitalisation and improving investors’ confidence towards Malaysia. Meanwhile, the focus of the 12th Malaysian Plan has been varied to include post Covid-19 recovery implementation measures over the medium-term.

Policy levers. In the past 2 months, BNM has been utilising all policy levers to ensure policy action is timely, targeted and has the efficacy to address specific issues. In terms of OPR impact, BNM estimates that 25bps cut will contribute 0.2ppt to GDP over 1-year period. While current conditions (e.g. loan moratorium) may blunt the impact of OPR, it is still estimated to be positive. In terms of liquidity measures, BNM has released a total of RM58bn since March 2020 (SRR reduction, flexibility for banks to use MGS and MGII = RM46bn; reverse repo operations = RM4bn and outright purchase of Government securities = RM8bn). BNM saw overwhelming demand for the RM5bn Special Relief Facility. Consequently, BNM has increased the fund size by another RM5bn which will benefit 21,000 SMEs. However, going forward, businesses are encouraged to seek other alternative funding platforms (Government guarantee scheme, automation and digitalisation facility, agrofood facility). On loan moratorium, a total of 90-95% of individuals and companies have adopted the flexibility.

On whether BNM will need to provide temporary financing to the government under section 71 of the Central Banking Act, BNM says no as the government continues to have access to financial markets at competitive rates.

Maintain 2020 GDP at -6.0%. While BNM did not reveal their latest GDP forecast, it was clear that there was significant downside risks to -2.0% to +0.5% GDP forecast. While the economy is expected to increase the capacity utilisation over time, significant uncertainties remain on the success of virus containment measures and the strength of recovery in global and domestic demand in the subsequent quarters. IMF has also said that the global economic outlook has worsened since its April 2020 global growth forecast of -3% YoY and point towards potentially worse scenarios. Hence, for now we maintain our 2020 GDP forecast at -6.0% YoY.

Source: Hong Leong Investment Bank Research - 15 May 2020