• On 18th January, Prime Minister Tan Sri Muhyiddin Yassin announced a stimulus package worth RM15.0b (1.0% of GDP). Dubbed as PERMAI (Perlindungan Ekonomi & Rakyat Malaysia), the package aims to improve the existing initiatives and expedite policy execution, whilst major states (accounting for over 68.1% of the GDP) undergo the second round of the Movement Control Order (MCO)
   
  • Of the total RM15.0b, only RM3.6b (0.2% of GDP) is considered as fresh measures, while the remaining RM11.4b (0.8% of GDP) are accounted by measures that have been announced under the 2021 Budget and other fiscal packages. This brings the overall COVID-19 fiscal stimulus (PRIHATIN, PRIHATIN SME+, PENJANA, KITA PRIHATIN, PERMAI) to RM308.6b (21.7% of GDP). However, direct government injection is estimated to remain at RM55.0b (3.9% of GDP) as the PERMAI package will be funded via reallocation of existing funds and a more prudent spending.
     
  • This package consists of 22 initiatives framed around three objectives:
    • Combating the COVID-19 outbreak (4 initiatives): majority of the allocation (80.0%) is designated for the Ministry of Health. Main initiatives include recruitment of healthcare workers, extension of allowance for frontliners and tax relief for COVID-19 test.
       
    • Safeguarding the rakyat’s welfare (8 initiatives): target vulnerable groups and those working in the informal sector. Encompassed of measures that could swiftly reach the pockets of the final consumers, resulting in higher disposable income (e.g. accelerate distribution of the Bantuan Prihatin Nasional 2.0, allow advance withdrawal of up to RM1,000 from the amount applied under the i-Sinar Category 2 facility, extension of targeted moratorium facility).
       
    • Supporting the business continuity (10 initiatives): alleviate fixed cost burden and ease business financing, among others by broadening the Wage Subsidy Program to cover all employers operating in the MCO states, aiding SMEs through PERMAI Prihatin Special Grant and enhancing the Danajamin PRIHATIN Guarantee Scheme.
       
  • While the measures are expected to soften the economic blow of MCO 2.0, we opine that the size of the new fiscal stimulus is relatively small compared to the estimated impact of the tightened COVID-19 curbing measures on the economy. Greater fiscal injection is needed should the government extend the MCO to more than four weeks. Nonetheless, amidst the tight fiscal condition, we view that the emphasis on accelerating distribution of existing measures, providing a targeted assistance and expanding measures that exert less strain on the fiscal coffers (e.g: forgone revenue, guarantees, statutory bodies’ funds) as preferable.
     
• COVID-19 pandemic continues to ravage the nation’s economy and healthcare system
  • As of 18th January, global COVID-19 cases topped 95.7m, of which Malaysia’s COVID-19 cases totalled to 161,740 (38,791 active cases) with 605 deaths. Based on a seven-day average, it records at least 3,359 new cases and at least 7 related deaths each day. To note, the country recorded the highest single day COVID-19 cases on 16th January with 4,029 infections.
     
  • When announcing the MCO 2.0 measures on 11th January, only 6 states were placed under the stringent Standard Operating Procedures. However, following the sudden spike in the number of daily COVID-19 infections in certain Conditional MCO (CMCO) and Recovery MCO (RMCO) areas, the entire state of Kelantan, Sarawak (only Sibu, Selangau and Kanowit districts) and Negeri Sembilan (only Seremban and Port Dickson) have now been placed under the MCO. The MCO is to be effective from Jan 16 to Jan 26 in Kelantan, Jan 16 to Jan 29 in Sarawak and Jan 19 to Feb 1 in Negeri Sembilan. Moving forward, we reckon that more CMCO and RMCO districts that have an exceptionally high number of daily cases will be placed under the MCO.
     
  • Since the start of the global vaccination campaign in the 4Q20, there has been more than 42.2m doses of COVID19 vaccines successfully administered worldwide. Lagging in the COVID-19 vaccination roll out, the first batch of the Pfizer-BioNTech vaccines is expected to only arrive in Malaysia at the end of February this year. It will initially receive 1.0m doses, with the first batch (prioritised recipients) expected to be inoculated by early March. As of now, Malaysia has signed an agreement to procure a total of at least 37.8m doses of Pfizer-BioNTech (25.0m) and OxfordAstraZeneca (12.8m) vaccines from Pfizer, AstraZeneca and COVAX. For the time being, Malaysia is still in the midst of finalising additional vaccines agreements with Sinovac, CanSino and Gamaleya. All in all, the Prime Minister announced that Malaysia is expected to meet its target of vaccinating more than 80.0% (close to 27.0m) of its total population by 1Q22.
     
• Economic and Financial Impact
  • GDP: Our base-case growth projection (6-week MCO) for 1Q21 is -2.2% and we have revised the 4Q20 estimate to -2.5% from -1.7% to take into account the impact of CMCO. For the whole of 2021, we have revised our growth forecast to 3.9% (MoF: 6.5-7.5%) and adjusted our 2020 projection to -5.3% from -5.1%.
    • Nonetheless, retail and tourism-related sub-sectors would remain under pressure as demand would be hampered by the mobility restrictions and soured consumer confidence. This would result in cost-cutting measures, including wage cuts and retrenchment, prompting the unemployment rate to remain elevated. However, the impact would be cushioned by the enhanced version of Wage Subsidy Program 3.0.
    • As the government has highlighted that “growth will continue to be supported by the strong export-oriented sectors and global trade recovery”, we retain a cautiously optimistic outlook for export performance, especially in the 1H21. This is premised on the recent resurgence of COVID-19 cases among major economies that may prompt longer-than-expected movement restrictions and lockdowns, hence weighing on foreign demand.
       
  • Fiscal: Deficit is projected to widen to 5.8% of GDP from an initial forecast of 5.6%, lower than the 2020 projection of 6.3%. In addition, the government debt is projected to expand to 64.6% of GDP (revised 2020F: 62.0%), above the statutory limit of 60.0%.
    • The government has stated that the fiscal package will be financed through the reallocation of existing funds and prudent spending. Despite this, fiscal deficit and debt to GDP ratio are still expected to widen, due to the greater tax exemptions and the recent downward revision in 2021 nominal GDP. Note that the government debt has increased by RM81.3b within the three-quarters of last year (2019: +RM51.9b) and is expected to increase further amid the modest economic recovery.
       
  • OPR: Due to the potential economic impact of the renewed MCO and the announcement of a state emergency, we expect this new stimulus package to be followed up with a 25-basis point (bps) cut to the overnight policy rate (OPR) at this Wednesday’s (20 Jan) Monetary Policy Committee meeting, bringing it to a new low of 1.50%. Moreover, we believe that BNM would still have room to cut the OPR to 1.25% if necessary, although the probability is lower given the additional fiscal stimulus.
     
  • USDMYR: The newly announced RM15.0b stimulus package is expected to have a minimal impact on the ringgit as the local note will continue to be driven by the domestic COVID-19 situation, BNM’s policy stance, Brent crude oil price movement, China’s economy strength and USD trend. At this juncture, we are maintaining our end-2021 USDMYR forecast at 3.95 (end-2020: 4.02).

Source: Kenanga Research - 19 Jan 2021