Summary

● Bank Negara Malaysia (BNM) expectedly leans towards a downbeat tone forits 2020economicoutlook, projectingtheGDP growth to be between -2.0% and 0.5% in 2020 (2019: 4.3%), signalling an economy on the verge of a recession. Earlier on, we have forecasted a negative GDP growth of 1.9%.

● BNM sees the unprecedented containment measures to curb the COVID-19 pandemic to have triggered a simultaneous demand and supply shock, evidenced by worseningoflatest economic indicators in many advancedand developing economies. Thisreflects the projected sharp decline in exports of goods and services (-13.6%, 2019:-1.1%)on the back of weak global demand, supply chain disruptions, and falling foreign tourist receipts, dragging the overall GDP growth to the brink of a recession.

● Though it is projected to slow to 4.2% (2019: 7.6%), BNM expects private consumption to remain an anchor of growth for 2020 supported by an aggressive policy measures including the RM250.0b stimulus package, monetary policy easing and continued progress of mega infrastructure projects.

● To cushion the downturn, BNM expects the economy to be supported by a rebound in public sector expenditure which is projected at 1.3% (2019: -2.7%) and to partly take up the slack from overall private expenditure which is projected to sharply shrink to 1.1% (2019: 6.2%). It sees the economic stimulus package to add 2.8 ppt to GDP growth in 2020.

● Against the grim growth outlook, BNM reiterates that it will flexibly adjust its broad range of policy arsenal surrounding the goal of hindering a lasting impact of COVID-19 on the economy. Though there is space for BNM tocut the OPR by 50 bps and the SRR by 100 bps, we view that the probability of doing so has been reduced, given the aggressive monetary and fiscal easing recently and that the BNM may want to save its bullets for future needs.

● The growth outlook for 2020 tilt the downside, as risk to recession is imminent

- In line with the house's expectation, BNM leans towards a bearish tone in its inaugural Economic & Monetary Review 2019 amid worsening and fast-spreading COVID-19 pandemic, which has severely disrupted both global demand and supply despite unprecedented measures globally to cushion the impact.

- BNM forecasts Malaysia's GDP to be between -2.0% and 0.5% in 2020 (2019: 4.3%), while house projects -1.9% closer to BNM's lower end projection, and lowest since the 2009 Global Financial Crisis (GFC). Similarly, the World Bank recently cut Malaysia's GDP growth to -0.1%, a sharp revision from its initial target of 4.5%. BNM’s forecast follows the previous official projection of 3.2%- 4.2% by the Ministry of Finance announced in February.

● Simultaneous supply and demand shock are expected to weigh on growth

- Demand Side: domestic demand supported by public spending to cushion growth downside

o Private consumption: BNM forecasts private consumption growth to slow to 4.2% (2019: 7.6%) a level last seen during the GFC, contributing 2.5 percentage points (ppt) to GDP growth (2019: 4.3 ppt) mainly due to weak labour market conditions, travel and movement restrictions imposed under Movement Conttrol Order (MCO), and subdued sentiments brought by the pandemic. The adverse impact would be partially cushioned by the government’s economic stimulus packages, which among others, aimed to boost household disposable income through flexibility in EPF withdrawal, cash transfer via Bantuan Prihatin Nasional (BPN) and amoratorium on bank's loan repayments. BNM expects these measures to lend support for recovery in private consumption. However, the house believes the measures will not be sufficient to induce market sentiment as households are likely to be in a cautious mode elevated by further uncertainties in the economy. While the unemployment rate is expected to rise significantly to 4.1% from an initial target of 3.5% versus BNM’s 4.0% (2019: 3.3%) and the prospect of lower-income growth, the house forecasts private consumption growth to moderate sharply to 3.7% in 2020(2019:7.6%) versus BNM’s 4.2%. Given that household debt had risen by 5.3% in 2019 or 82.7% of GDP (2018: 82.2%), shrinking income and rising unemployment would leave less room for consumer demand to contribute to growth this year.

Source: Kenanga Research - 6 Apr 2020