● On 23rdSeptember, Prime Minister Tan Sri Muhyiddin Yassin announced the PRIHATIN Supplementary Initiative Package, also known as the Kerangka Inisiatif Tambahan Prihatin (KITA PRIHATIN). The RM10.0b package (0.7% of GDP) aims to provide additional assistance for the B40, M40, workers and micro enterprises towithstand the challenging economic recovery phase.

− Alongside the PRIHATIN and PENJANA stimulus packages deployed in March, April, and June of this yeartotaling RM45.0b, the additional fund brought by KITA PRIHATIN would bring the total direct government injection toRM55.0b (3.9% of GDP)to combat the impact of COVID-19 pandemic. Including the various fiscal packages totalling RM305.0b, the total government stimulus as a ratio of GDP now registers to about 21.5%.

− This new fiscal package consists of three initiatives:

▪ Wage Subsidy Program 2.0 (RM2.4b): a three-month wage subsidy of RM600 per employee (max 200 employees) for businesses that are still facing a minimum of 30% drop in revenues compared to last year. The implementation is expected to reach 1.3m employees.

▪ Geran Khas PRIHATIN (GKP)(RM0.6b): applications will be reopened on 1st October to allow more microenterprises to benefit from government grants intended to ease their financial burden owing to the pandemic. This initiative targets to help more than 200,000 microenterprises.

▪ Bantuan PRIHATIN Nasional(BPN) 2.0 (RM7.0b):additional cash handoutsof RM300-RM1,000 channeled to around 10.6m of B40 and M40 households and singles.

− KITA PRIHATIN is a relatively small but focused fiscal plan that will fairly support an already recovering GDP growth rate (Jun: - 3.2%; May: -19.5%). The measures will help to safeguard jobs in areas that are still affected by the pandemic (e.g.: tourism sector), support businesses that may have missed out on the initial PRIHATIN assistance and encourage local spending in an economy still encumbered by a high unemployment rate of 4.7% (Jul-20) and a period of technical recession.

● Malaysia’s COVID-19 pandemic situation is still under control despite increasing number of new clusters in Sabah

− As of 23rd September, the Ministry of Health (MoH) reported that there is now a total of 10,505 positive cases and 133 deaths with 1.27% mortality rate which is relatively lower compared to approximately 3.1% globally.

− Since the implementation of the Movement Control Order (MCO) on 18th March, Malaysia managed to reduce the number of daily infections from three-digit figures to singledigit count with most of the states declared as green zones. However, with multiple clusters being reported in Sabah and Kedah recently, the number of new infections has climbed to double and triple digits for the past few weeks.

− Following the extension of the Recovery MCO until 31st December 2020, coupled with stringent Standard Operating Procedures (SOP) such as mandatory mask-wearing (effective 1st August) and social distancing in public, we expect there will be no new major clusters reported in Malaysia except for in Sabah and Kedah. Nevertheless, poor SOP compliance rate could amplify the threat posed by the COVID-19. If this happens, Malaysia could experience a second wave of COVID-19 infections, leading to reinstatement of a nationwide lockdown, similar to what the UK and most European countries did recently.

● GDP forecast retained, while the fiscal deficit and government debt are expected to widen

− Following the additional stimulus, the fiscal deficit forecast has been revised to 7.5 % of GDP (previous estimate: 6.8%; 2019: 3.4%), which is expected to be financed via domestic borrowing, predominantly through the issuance of Malaysian Government Securities, Government Investment Issues, and Malaysian Islamic Treasury Bills. The recent Goldman Sachs1MDB settlement worth RM16.6b will only partially offset the shortfall in government revenue (2020F: -6.9% YoY; 2019: 13.1%; Global Financial Crisis: -0.7%; Asian Financial Crisis: -13.7%), as a portion of the proceeds would be used to repay the outstanding 1MDB debt.

− Given the higher fiscal deficit, the government debt is estimated to increase to 62.6% of GDP by end-2020 (previous projection: 61.9%, 2Q20: 59.0%; 2019: 52.5%), further exceeding the statutory limit of 60.0%. We opine that the spike in debt ratio is justifiable in an environment of economic turbulence, so long as the government commits to taper it down once the economy stabilises.

− The additional stimulus is timely as it would partly cushion the impact of expected slower consumer spending following the end of loan repayment moratorium on 30th September. Given the rather elevated level of uncertainty in the global economy and the risk of further rise in the COVID-19 infection globally, we maintain our GDP forecast for 2020 at -5.9% (2019: 4.3%). Nevertheless, we still expect a gradual recovery in the 2H20 supported by the accommodative monetary policy and expansionary fiscal measures. However, risks remain arising from elevated geopolitical tension and concerns over rising risk premium on the domestic political front.

− Meanwhile, we expect the impact of the additional stimulus would likely have a bigger spilloverimpact on the economy in 1H21. Hence, we have slightly revised our GDP growth projection for 2021 to 5.3% from 5.1% earlier.

Source: Kenanga Research - 24 Sept 2020