• The Government announced the reimplementation of the Movement Control Order (MCO) from 13 January to 26 January, covering the states of Kuala Lumpur, Putrajaya, Labuan, Penang, Melaka, Johor, Selangor and Sabah.
• Based on our estimate, the renewed MCO could result in economic losses of roughly RM1bn per day, compared with losses of about RM2bn per day in previous year MCO.
• We are currently maintaining our real GDP growth forecast of 6.0% for fullyear 2021, (-5% estimated for 2020), but likely to be revised lower, subject to details of the MCO 2.0 SOPs and duration of the MCO as well as fiscal stimulus respond. We believe that the government will likely introduce new stimulus measures on top of the existing Budget 2021and targeted stimulus measures.

Five states and federal territories to be placed under MCO from 13 January

The Government announced the reimplementation of the Movement Control Order (MCO) from 13 January to 26 January 2020, covering the states of Kuala Lumpur, Selangor, Putrajaya, Labuan, Penang, Melaka, Johor and Sabah. Meanwhile, Pahang, Perak, Negeri Sembilan, Kedah, Terengganu and Kelantan will be placed under Conditional MCO (CMCO). Perlis and Sarawak will be under Recovery MCO (RMCO). Under the current MCO, in those states and federal territories affected, five essential economic sectors will be allowed to operate, which are manufacturing, construction, services, trading and distribution as well as plantations and commodities. Some other standard operating procedures (SOPs) include 30% of workers within the company’s management group be allowed to go into the office. Meanwhile, all the non-essential industries will be required to work from home. In addition, there will also be no interstate and interdistrict travels. States placed under CMCO, there will be no interstate travels and social gatherings (eg. weddings, conferences, meetings, seminars) allowed. States placed under RMCO, although there is also no interstate travel allowed, social gatherings will be allowed but under full compliance of the SOPs.

Details of the renewed MCO 2.0 SOPs remain sketchy, but the Health Ministry, International Trade and Industry Ministry, and Works Ministry will provide further information of SOP for sectors under their purview later today. Unlike the previous year Movement Control Order (MCO), which was in place nationwide from 18 March 2020 until 3 May 2020, only essential services were allowed to operate with very limited capacity. This time round, we believe the enforcement of renewed MCO from 13 January to 26 January may allow businesses to operate but subject to some standard operating procedures (SOPs), which will likely be less stringent as compared to previous MCO. We also expect MITI to likely allow most industries or factories to receive its approval and operate during the two-week MCO period ending 26 January.

The current MCO 2.0 covers 5 states and the federal territories of KL, Labuan and Putrajaya. These states placed under MCO accounted for 66.4% of Malaysia’s total GDP, which includes the two biggest contributors (Selangor and KL). Despite this, assuming that the duration of the current MCO is not extended, we also believe the impact on GDP may not be as severe as in 2Q20.

However, in view of the uncertainty, economic growth prospects in 2021 will still be weighed by the output loss from the renewed MCO, which will dampen domestic economic activity in 1H2021. Based on the monthly GDP growth estimates by DOS, the impact from last year saw the country’s real GDP growth contracted by -28.6% yoy in April 2020 during the MCO period, followed by -19.5% in May during the Conditional MCO (CMCO), and posted a smaller decline of -3.2% in June during the Recovery MCO (RMCO). It had earlier estimated that the losses each day to the economy from the implementation of previous CMCO was around RM300m, sharply lower compared to an estimated loss of RM2.0-2.2bn daily during the MCO from 18 March to 3 May 2020.

Nevertheless, with the renewed enforcement of MCO, whereby people's movements are somewhat restricted, with restrictions of people exiting/leaving homes, closure of some businesses, and restrictions still on entry of foreign tourists travelling into Malaysia, growth in private consumption growth will be impacted immediately as households will likely be impacted from possible shocks to their incomes, and also be cautious on their spending due to the uncertain employment situation. And if the MCO get prolonged and extended beyond two weeks, the possible shocks to household income and employment will weigh on consumer sentiment further, translating into weaker consumer spending. However, we believe economic losses to businesses and households from the reimplementation of MCO, but likely smaller losses compared to previous MCO period. Based on our estimate, the current MCO could result in economic losses of roughly around RM1bn per day, compared with losses of RM2bn per day in previous year MCO.

As a result, we believe the country’s real GDP growth will likely be dragged by between 0.8 to 1.0 percentage point during this MCO period. For full-year 2021, we will revisit our real GDP growth forecast of 6.0% (-5% estimated for 2020), but likely to be revised lower, subject to details of the MCO 2.0 SOPs, duration of the MCO as well as fiscal stimulus respond, in view of the uncertainty surrounding the resurgence of domestic Covid-19 cases.

Government to add on stimulus on top of existing targeted fiscal measures

We believe that the government will likely introduce new stimulus measures on top of the existing Budget 2021 and targeted stimulus measures such as Bantuan Prihatin Rakyat (BPR), the targeted loan moratorium and Wage Subsidy Programme 2.0 to assist SMEs. Previously, the Economic Affairs Minister guided that if there is a fourth wave of Covid-19, government may likely need to inject additional assistance and funds. Recall that the government has established a Covid-19 Fund in 2020 with an initial allocation of RM45bn for the implementation of programmes and projects under the economic stimulus packages and recovery plan. Therefore, with the potential for higher expenditure, based on our estimate, Malaysia's 2021 fiscal deficit target may likely rise by another 0.6 percentage points to 6.0% of GDP in 2021 compared with earlier projected deficit of -5.4% of GDP (-6.0% of GDP in 2020).

BNM Likely to Leave Rates Unchanged in January MPC Meeting

We believe Bank Negara Malaysia (BNM) will likely maintain its Overnight Policy Rate (OPR) at its current low of 1.75% at the upcoming Monetary Policy Committee (MPC) meeting on 20 January 2021. However, given the ongoing uncertainty from the possibility of a resurgence of Covid-19 cases on the global economic outlook, especially on Malaysia’s external demand in 2021, BNM may consider lowering its OPR and maintain accommodative monetary policy in order to further support domestic demand. Given that the US Fed has signalled that it will maintain its easing cycle and low interest rates until 2023, we believe this provides some flexibility for BNM on the likely decision to possibly cut policy rates, if necessary.

Rollout and administering of vaccines to support economic activity, if effective

In terms of vaccine, the government is expecting to receive the supply of Pfizer vaccine by end of February (likely administered to elderly, vulnerable group and front line workers). Based on the report, the Government has also signed agreements with Covax Facility, Pfizer and AstraZeneca and is also in final stage negotiation with Sinovac, CanSino and Gamaleya in order to procure vaccine supply increase of more than 80% of the population (26.5 million people). This was higher than the government’s initial target of 70% of the population. If the administration of vaccines is successfully done this year, we expect this would lead to less restrictive MCO SOPs and measures and in turn support improvement in economic activity.

Source: Affin Hwang Research - 12 Jan 2021