Prime Minister Tan Sri Muhyiddin Yassin has declared a nationwide Movement Control Order effective March 18 to March 31, the first in country’s history following a sharp rise in positive cases of COVID-19.

• The order restricts movements and public gatherings nationwide, leading to closure of government and private premises, houses of worship, nurseries, and educational institutions.
• However, there is an exception for essential government and private services such as those providing electricity, energy, telecommunications, transportation, banking, health, defence and food supplies.
• Travel ban will also be imposed whereby Malaysians are barred from leaving the country and borders are closed to all foreign visitors. Returning travellers are required to undergo health checks and a 14-day self-quarantine.

Malaysia reported its first two cases of death with a total of 673 infected cases as of 17th of March. Out of the total, 433 cases claimed to be linked to a mass religious gathering by the Tabligh missionary group from February 27 to March 1, attended by at least 16 thousand people. A total of 160 countries have reported 179,112 cases with 7,426 death, pushing the global death-to-case ratio to 4.15% compared to an average of 2.68% in February. Out of the 160 countries, Malaysia has the highest number of COVID-19 cases in Southeast Asia, while globally, the country has the 18th highest number of infections outside China.

Slowing the exponential growth by restricting mobility

In the face of a pandemic, movement restriction and social distancing would slow the contagion. China had implemented the harshest forms of social distancing and have flattened its virus growth curves to near-zero. Exponentially, we can expect a doubling of cases every 4 days if there is no strident measure taken by the government. As Malaysia imposed a more lenient measure compared to China, there is still a possibility that the growth curve will continue to accelerate unless a stricter social distancing policy is implemented to thwart the virus.

Fiscal Measures

The new Perikatan Nasional government announced additional stimulus worth RM0.62b or 0.04% of GDP on top of the RM20b stimulus package tabled earlier by the previous Pakatan Harapan government. The additional measures are as follows:

• RM120m benefitting 33k workers: financial assistance of RM600 per month for up to six months for employees who were given unpaid leave from March 1, contribute to the Employment Insurance Scheme and with a maximum monthly salary of RM4,000.
• RM500m benefitting 10m consumers: electricity discount of 2% for all commercial, industrial, agriculture and domestic sectors, effective April1 to September 30.

We expect more fiscal measures to be announced in the near term as the Economic Action Council decide on new policies on a weekly basis, incorporating latest evolvement of the pandemic.

• Measures may have a wider sector coverage, as the impact from the pandemic trickles down to non-tourism sectors, whilst minimising strain on fiscal coffers by tapping into government agencies’ funds.
• Likely to be framed surrounding two main goals, specifically to ensure that workers are able to secure jobs and income as well as to minimise the fixed cost incurred by businesses.
• Potential measures include financial assistance, preferably in the form of cash transfers, for workers in the informal services sector, further discount in utility bills, relaxation in bank’s loan instalment and deferment on employers’ statutory obligation payments (e.g. EPF, SOCSO).

As COVID-19 has been declared a global pandemic, an extraordinary fiscal expansion is essential to support the economy from slowing or prevent it from going into a recession. Hence, we reckon the government need to add at least another RM3.0b to the fiscal stimulus. Based on our forecast, this brings the fiscal deficit to 4.3% of GDP for 2020, from an earlier projection of 3.7% based on RM3.5b government direct contribution to the total RM20.0b stimulus package to address the COVID-19 impact (as about half or RM10bn is funded by a 4% reduction in employees’ EPF contribution and much of the balance by BNM’s balance sheet). The other assumption is that crude oil price would average around USD40 per barrel.

In light of the fast-spreading COVID-19, the house views that a nationwide movement restriction to contain the outbreak will adversely impact the economy on short term but would be limited

•  Given the fact that there is an exception for important government and business services to run as usual and the restriction will last for two weeks period, the full impact would depend on how fast the virus spread, and the period taken to combat the outbreak should there be an extension in movement restriction. Though the downside risk has somewhat elevated, we have factored in the potential economic consequences in our recent GDP forecast.
• Our base case forecast for GDP growth to moderate by 2.3% in the 1H20 (2H19: 3.6%) is mainly due to expectation of weaker growth in the services sector (4.6%; 2H19: 6.0%) as the virus will impact the transportation and tourismrelated industry the most. Similarly, the manufacturing sector slowdown (1.2%; 2H19: 3.3%) following supply disruption due to factory closure, and weak external demand from the key trading partner is expected to contribute to the slower growth momentum. On the demand side, we expect private consumption to ease further to 5.7% in 1H20 (2H19: 7.5%). This brings the overall GDP growth to moderate to 3.1% this year (2019: 4.3%).

Low global interest rate environment and subdued inflation provide more cases for monetary easing

• We retain our outlook for the Bank Negara Malaysia (BNM) to embark on another OPR cut of at least 25bps at the next MPC meeting in May. An unscheduled 100bps rate cut by the US Fed last Sunday and an almost synchronous monetary easing move of major and regional central banks has given BNM more scope to lean further towards an expansionary monetary policy. We believe the market has factored in another 50bps rate cut, bringing the OPR to 2.00%, its lowest since the Global Financial Crisis in 2008-09.
• Textbook rate cut is expected of BNM to support the financial system and the economy. Making sure the money market doesn’t seize up due to a liquidity crunch is next. Although the financial system’s liquidity remains ample, in time of crisis we do not discount BNM’s resolve to prevent a liquidity crunch. In the immediate term, the BNM may have the option to slash its Statutory Reserve Requirement (SRR) by 25-50bps from the current rate of 3.00% to boost liquidity in view of continued global financial market volatility and turbulence. A 25-50bps is expected to release an additional of RM3.7b to RM7.5b liquidity into the financial system.

Source: Kenanga Research - 18 Mar 2020