● On 11 January, Prime Minister Tan Sri Muhyiddin Yassin announced the implementation of varying degrees of movement restrictions across states effective 13 January until 26 January, following a sharp rise of COVID-19 cases. This was followed by the King’s declaration of a national state of Emergency on 12 January up until 1 August

• Penang, Selangor, Kuala Lumpur, Putrajaya, Labuan, Sabah, Johor and Melaka will be placed under strict Movement Control Order (MCO). Meanwhile, Pahang, Perak, Negeri Sembilan, Terengganu and Kelantan will be under Conditional MCO (CMCO). Perlis and Sarawak will be under a more relaxed Recovery MCO (RMCO).
• The orders generally restrict mobility such as via the limitation of travelling up to 10km from home, with only two people being allowed to go out under the MCO. Inter-state and inter-district travels will be banned under MCO and CMCO. At the same time, tourism and social activities will be prohibited. Nonetheless, 36 types of businesses (Appendix 1) in five essential sectors, namely industrial & manufacturing, construction, services, trade & distribution, and plantations & commodities are allowed to operate under the MCO.
• Meanwhile, according to the Palace official statement, the national state of Emergency was approved as a "proactive move to curb and flatten daily positive cases of COVID-19 that have been on a four-digit figure continuously since last December". The emergency proclamation was made under Article 150(1) of the Federal Constitution, with the government to continue its usual functions, no military coup and no curfew. It can be ended earlier or later depending on the COVID-19 situation.
• The tightening of COVID-19 curbing measures are necessary, though the effectiveness could be questioned, given that most of the economic sectors are allowed to operate with standard operating procedures (SOPs). As for the emergency declaration, we view that it helps to remove the political noise, but only temporarily and stands to damage foreign investors’ sentiment, resulting in delayed investment decisions.

● Malaysia taps the economic brakes again by restricting mobility in an effort to slow the spread of COVID-19 as infections rise unabated

• Malaysia recorded its first four-digit COVID-19 cases on 24 October 2020 and there is now a total of 141,533 number of cases with 559 deaths. Even though Malaysia has one of the lowest mortality rates (0.4%) worldwide, it should be highlighted that 75.7% of the total deaths were seen during the third wave of COVID-19 pandemic in Malaysia (Oct to latest). To note, on Tuesday, the number of daily COVID-19 cases hit a record high of 3,309 cases.
• Since Malaysia’s COVID-19 infections surpassed the 100.0k mark, the number of active cases has continued to accelerate to more than 30.0k cases. According to the department of social and preventive medicine, University of Malaya, the general bed utilisation has breached the 100% capacity, now standing at 119.4% (n=25,456). Nevertheless, the intensive care beds and ventilator utilisations are only at 21.8% (n=871) and 5.2% (n=1,581) respectively.
• Based on the data, Malaysia healthcare system has not yet reached its breaking point, however, the Ministry of Health (MoH) should open more field hospitals or quarantine centres and continue to practise home care isolation for patients in stage 1 and 2 to decongest the hospitals and create more space for critical COVID-19 patients (stage 3 to 5).
• On the vaccine front, Malaysia has signed a supply deal for a total of 25.0m doses of Pfizer-BioNTech vaccines which is estimated to cover 39.0% of all Malaysians. The first 12.8m doses is due to begin at the end of February 2021, aiming to inoculate 20.0% of the population who will each receive two doses. The government has planned to vaccinate at least 60.0-70.0% of Malaysians and has set aside MYR3.0b for COVID-19 vaccine purchases.
• Based on Malaysia’s COVID-19 pandemic trend, our model suggests that Malaysia’s daily COVID-19 infections could be less than 100 by the end of June 2021 if we manage to significantly bring down the COVID-19 transmission rate. We estimate that at least six weeks (until 23rd Feb) of MCO is needed in the red zones for the daily cases to return back to three-digit figures before we can implement a more lenient measure (CMCO and RMCO). However, the COVID-19 infections could worsen if the SOPs are ignored and there is a major outbreak involving the new strain of COVID-19 from the UK and South Africa.

● Economic and Financial Impacts

• USDMYR: In the immediate term, the local note is expected to linger around the 4.05-4.10 range as the declaration of emergency and reimplementation of MCO has dented investors’ confidence in Malaysia. Nevertheless, we still maintain our USDMYR year-end forecast of 3.95 on the back of effective vaccine rollouts, higher Brent crude oil price and broad USD weakness.
• GDP: We downgrade our 1Q21 GDP forecast from 3.9% to -0.4% (4Q20F: -1.7%) and 2021 GDP forecast from 6.1% YoY to 3.9% (2020F: -5.1%), further below the MoF’s initial projection of 6.5-7.5%. While the current lockdown measures are relatively less stringent (MCO is not imposed nationwide, broader list of essential businesses, clearer SOPs) than those imposed between 18th March to 3rd May 2020, the tightened measures are still expected to shave off around RM29.0b (2Q20 GDP: down by RM54.7b) or 2.2 percentage points from our initial GDP forecast. Our base case projection stands on the fact that the MCO states contribute to a substantial 66.4% of the nation’s GDP and assumes a six-week MCO, before transitioning to CMCO and RMCO in the 2Q21 onwards.
  • Though more businesses are allowed to operate, the services sector, especially retail sub-sectors would have to endure a rather depressed revenue flow, as demand would be hindered by the mobility restrictions and soured consumer confidence. This would then result in cost-cutting measures among businesses, including via wage cuts and layoffs of workers.
  • As for the external sector, the recovery in trade activities may soften in the near term, weighed by the tightened COVID-19 curbing measures abroad, creating further hurdles to the restoration of global supply chain. However, with factories continuing its operation during the MCO phase, albeit not at full capacity in order to abide to social distancing measures, the positive spillovers from the mass COVID-19 vaccine rollout, recovery in commodity prices, relative strength of China’s economy and support from technological trade, we retain a cautiously optimistic outlook for exports performance, especially in the 2H21.
  • On the flipside, we expect the best-case scenario would probably be achievable on a speedy removal of the MCOs and better-than-expected exports on the expectation that global demand for high-tech continues to strengthen on a more aggressive global adoption of 5G technology in addition to a stronger demand for consumer technology products such as new 5G mobile phones, gaming consoles and personal computers. Higher prices of commodities (e.g. crude oil, liquefied natural gas, crude palm oil, rubber) amid improved global demand would also help to support a stronger export growth. As a result, GDP growth forecast for this year, at best, could reach 5.4%. For now, the probability of achieving this is relatively low at 15%.
• Fiscal: Deficit is expected to remain elevated over the new year, with our projections showing it will marginally narrow to 5.6% in 2021 (2020F 6.3%). As such, government debt is estimated to fall between 57.0% - 59.0% of 2021 GDP (2020F: 62.2%), slightly below the new statutory limit of 60.0% set by the Temporary Measures for Government Financing Act 2020.
  • To combat the impact of COVID-19, RM305.0b has been allocated to the funding of stimulus packages and recovery plans, including the various fiscal packages of 2020 (PRIHATIN, PRIHATIN PKS+, PENJANA, KITA PRIHATIN) and the COVID-19 measures of Budget 2021. Crucially, given the expected economic impact of the new MCO, the government will likely need to expedite the distribution of COVID-19 funds within 1H21.
  • Despite the current tight fiscal condition, we believe more stimulus measures will be required over the year should restriction measures be extended. Recent economic indicators reveal that the recovery momentum has already been hindered by the CMCO measures reimposed towards the end of 2020. Given the greater restrictions of the new MCO, economic recovery is expected to be further weighed down. Additional fiscal stimulus will likely need to come from forgone revenue (e.g. tax exemptions), in an effort to keep government debt within a manageable level, and focused on measures that could be executed speedily, reaching the pockets of the final consumers in an efficient manner.
• OPR: Given the new development, we pencil in a higher probability for the BNM to slash the overnight policy rate (OPR) by 25 basis points to 1.50%. In fact, we do not discount the possibility of an additional 25 bps cut to 1.25% if needed. Nevertheless, while this would help to ease the burden of existing borrowers, we doubt that it will help much in enticing new borrowers as rates are already at record-low. As such, we opine that greater emphasis on fiscal stimulus and incentives would be a better option in spurring demand in the real economy

Source: Kenanga Research - 13 Jan 2021