Restoring confidence. Prime Minister Datuk Seri Najib Tun Abdul Razak announced a slew of measures to support the domestic economy, stabilize the capital market, and in the due process restore investor confidence and ringgit’s strength. The PM, who is also the Finance Minister, reassured that there is no need to re-introduce capital controls and re-peg the ringgit, adding that the current economic conditions were far better than during the Asian Financial Crisis of 1997/98. Both the banking system and the capital market, the PM added, are now more resilient and able to cope with economic uncertainty.

Hitting the right spot. Cutting through the rhetoric and numerous stimulus measures, the announcement of ValueCap’s re-activation, the government’s equity investment arm, and its RM20.0b new fund got the most attention, triggering a small rally in the stock market (the KLCI jumped 2.17%) and the ringgit regain slightly against the US dollar. The USDMYR settled around 4.31 yesterday compared to last week’s high of 4.35. Though there was no mention where the government would source the fund from it is evident that it would mainly come from its key shareholders namely Permodalan Nasional Berhad (PNB), Employee’s Provident Fund (EPF) and Khazanah Nasional Berhad and Retirement Fund (Incorporated) or KWAP. Set up in 2002 it received an initial injection of RM5.0b to invest in undervalued companies on the Kuala Lumpur Stock Exchange. Now that the new fund size is four times bigger and backed by its successful track record along with its 13-year experience there is little doubt the objective to add liquidity and volume to the market would be met.

Shoring up investment. All in the measures were largely focus on stabilizing the capital flows by shoring up domestic investments. This is mainly achieved by urging Government-linked companies and local companies to use their profits gained from investments abroad to re-invest in high multiplier projects at home. To further encourage domestic investments, manufacturers are exempted from import duties on parts and research equipment which would benefit over 900 firms with operational cost savings of between RM100k-RM500k.

Helping small businesses. The small and medium sized enterprise (SME) will get an additional RM2.0b of loan guarantee on top of the current RM5.0b. There will also be support for SMEs to restructure their loans with an additional RM1.0b allocation under the 11th Malaysia Plan to help them transition towards higher value-added industries.

Promoting tourism. For the tourism industry, an additional RM80m will be allocated for promotional activities, and visa exemptions for China group tourist arrivals between 1 October this year and 31 March 2016, as well as simplifying the visa application process via the e-visa system. Meanwhile, the government would allocate RM1.1b for uplifting selected key tourist attractions in KL and improving connectivity with KL Sentral, and RM4.5b for phase 1 of the integrated tourism development project of the Desaru Coast Destination Resort.

To address the rising costs of living, the government will increase the number of affordable “grocery stores” or “Kedai Rakyat 1Malaysia”, public clinics and speed up the construction of affordable homes or PR1MA. The government will also provide a monthly RM200 incentive for two years to married couples aged between 25 to 40 years, with household monthly income less than RM10k, who had bought properties valued between RM100k to RM500k to cover their monthly loan repayments.

Boosting training and employability. With an accumulated RM1.4b under the Human Resource Development Fund the government plans to use it for retraining of employees who have been laid off by registered employers so that they would learn new skills or for skill upgrading to improve labor employability. This is especially timely given that a few big local banks have begun to lay off workers in large numbers which ironically did not happen during the AFC with the exception of foreign banks or brokers.

Resolving 1MDB issue. Realising the magnitude of the 1MDB issue and the importance in restoring investor confidence the PM said Malaysia remains committed to complete the investigations into 1MDB’s investments and to carry it out in full transparency. All dealings conducted by 1MDB from now on will be “market friendly” and done through an open tender process to reflect appropriate market prices.

Prelude to Budget 2016. Obviously the new “pro-active” measures cobbled up by the newly-formed Economic Committee, the second this year after the one announced in January, is more likely a prelude to the upcoming Budget 2016 to be tabled on 23 October. While measures announced in January focusses on consolidating the operating expenditure to save RM5.5b amid a sharp drop in oil and gas revenue so that it could achieve a lower fiscal deficit of 3.2% of GDP for this year (3.4% of GDP in 2014) the main objective of the new economic measures is to stabilize the capital market and the ringgit while boosting domestic investments. We expect more measures to help the middle and lower income group to cope with the rising cost of living as well as small businesses to be announced in Budget 2016.

Source: Kenanga Research - 15 Sep 2015