• Despite CMCO, we believe any other stimulus measures will only be unveiled in the 2021 Budget
• The latest update showed BNM's SME Soft Loans Funds, as of 2 October, that banks have approved loans worth RM10.73bn for 23,078 SMEs, an increase of RM0.06bn from 22,984 SMEs in the previous week.
• Applications approved in the Wage Subsidy Programme (WSP) increased to 2.636mn workers as at 2 October, as compared to 2.633mn workers in previous week, where RM11.967bn was approved (RM11.93bn in the previous week).

Economy Is Expected to Recover and Expand by Between 5.5-8.0% in 2021

In the latest 25th update of the PRIHATIN and PENJANA stimulus packages, Ministry of Finance (MOF) highlighted the implementation rate and status of PENJANA. In particular, measures to help SMEs through BNM's SME Soft Loans Funds as of 2 October, banks have approved loans worth RM10.73bn for 23,078 SMEs, an increase of RM0.06bn from 22,984 SMEs in the previous week. Further measures to assist local businesses from PENJANA SME financing, as of 2 October 2020, a total of 3,617 applications have been approved (from 3,351 in the previous week), worth RM833.6mn (RM795.3mn in the previous week). This was equivalent to 42% from the RM2bn allocation. Applications approved in the Wage Subsidy Programme (WSP) increased to 2.636mn workers as at 2 October, as compared to 2.633mn workers in previous week, where RM11.967bn was approved (RM11.93bn in the previous week). Recently, WSP was extended under KITA PRIHATIN package to a period of 3 to 6 months. The current approval to date equivalent to about 74% of the total RM16.2bn overall allocation.

Under PENJANA package, the one-off cash assistance such as e-Penjana assistance to the affected groups, one-off grants to registered nursery and kindergarten operators, and others, received an amount of RM655mn with 69% implementation rate. Meanwhile, for the 3-6 months initiatives such as My30, PEKA B40, extended wage subsidies (phase 1), they involved RM4.38bn, with an implementation rate at 44%. MOF believes the progress was encouraging, as the number of PENJANA initiatives were rolled out in stages between June and September. Details on progress and achievement of other initiatives can be found in the Appendix I and II.

From our perspective, following the recent announcement of enforcement of Conditional MCO (CMCO) for Selangor, KL and Sabah, from 14 to 27 October 2020, there are some concerns of possible deterioration in business activity and slight uptrend in unemployment, which may pose some downside risk for the economy. Selangor, KL and Sabah account for 41.4% of the country’s total employment and about 50% of Malaysia’s GDP. Based on monthly GDP estimates by DOS earlier in 2Q20, the country’s real GDP growth contracted by -28.6% yoy in April during the MCO period, followed by -19.5% in May during the Conditional (CMCO), and posted a smaller decline of -3.2% in June during Recovery MCO (RMCO). However, we believe the negative impact on domestic demand this time round may not be as sharp as in 2Q20, as this will not be a state-wide CMCO, where most essential services and business activities are allowed to operate in these three states, with restriction mainly on non-essential services. We believe the current CMCO restrictions in these states will not impact negatively on business sentiment and investment intentions.

Nevertheless, the current CMCO will likely cause a drag of around 0.5 ppt to GDP growth. Our estimate shows that real GDP will decline at a pace of around -2.0% yoy projected for 2H20 (compared to earlier estimate of -0.8%), from -8.3% in 1H20. We are revising our real GDP growth projection for full year 2020 to an average of around -5.0% (adjusted lower from our previous estimate of -4.5%), compared with the official forecast of between -3.5% and -5.5% for this year.

For 2021, we are maintaining our real GDP growth forecast of an increase of 6.0%, compared to the official forecast of between 5.5% and 8%. The domestic economy will be supported by fiscal stimulus packages, possible further monetary policy easing as well as recovery in global economy. Improvement in economic activity has been reflected in manufacturing PMI, leading index, export growth and stable unemployment rate.

Source: Affin Hwang Research - 18 Oct 2020