● On Mar 17, Prime Minister Tan Sri Muhyiddin Yassin announced a new stimulus package worth RM20.0b (1.3% of GDP). Known as PEMERKASA (or Strategic Programmes to Empower the People and Economy), this fiscal package aims to stimulate the country’s economic recovery, stem the transmission of COVID-19, improve the nation’s long-term competitiveness, as well as assist people and sectors still affected by COVID-19.

• Of the total package, RM11.0b (0.7% of GDP) will be in the form of direct fiscal injections, whilst the remaining RM9.0b (0.6% of GDP) will be indirect measures and reallocations from Budget 2021 and other fiscal packages. This brings the overall COVID- 19 fiscal stimulus (PEMERKASA, PERMAI, PRIHATIN, PRIHATIN SME+, PENJANA, KITA PRIHATIN, PERMAI) toRM328.6b (22.0% of GDP). As such, direct government injection stands at RM66.0b (4.4% of GDP).
   
• This package consists of 20 strategic initiatives with four main focuses, and a fifth overarching focus to transform the economy:
  • Controlling COVID-19 Transmission (3 initiatives): various measures to curb COVID-19 and support the National Immunization Program, with its allocation increased from RM3.0b to RM5.0b in order to achieve national herd immunity by December 2021.
  • Driving Economic Recovery (6 initiatives): to rehabilitate economic sectors affected by the pandemic by implementing development projects, employment incentives, tax incentives and micro credit facilities. The Wage Subsidy Program, Geran Khas Prihatin (GKP), and electricity bill discounts will be extended. ▪
  • Strengthening National Competitiveness (5 initiatives): attracting investment, strengthening foreign trade, encouraging digitisation, and ensuring sustainable growth in order to bolster national competitiveness. Loan facilities to SMEs have been increased by RM2.0b, with a further RM0.7b provided for automation and digitization. A further RM2.0b will be allocated to subsidise the purchase of smart devices for households with school children.
  • Ensuring an Inclusive Agenda (6 initiatives):safeguarding the welfare of the people, especially the vulnerable, the disabled, and those who have lost their jobs during the pandemic. RM1.2b will be allocated to 2.4m recipients in the form of direct cash assistance.
• PEMERKASA is a relatively small fiscal plan, but the RM11.0b direct injection, along with the gradual relaxation of movement restriction measures, will likely support an expected economic recovery in 2H21. The measures will ensure a long-term recovery by prioritising national herd immunity and improving the nation’s competitiveness by promoting digitisation and investment. Furthermore, these measures will help sectors still affected by the pandemic, such as tourism, whilst ensuring sustained support for businesses and the public by continuing several assistance programs (e.g.: Wage Subsidy Program).

● Malaysia is on trackto flatten the COVID-19 pandemic curve, thanks to the reintroduction of Movement Control Order (MCO) 2.0 and domestic vaccination drive

• As we enter the one-year anniversary of the implementation of MCO 1.0, the Ministry of Health (MoH) reported a total of 327,253 positive cases and 1,220 deaths, bringing Malaysia’s mortality rate to 0.37%.Based on aseven-day average, Malaysiarecords at least 1,362 new COVID-19 cases and at least four COVID-19 related deaths each day. To note, the country has recorded the highest increase in daily COVID-19 cases on Jan 30 with 5,728 infections.
• Starting from Mar 5 until Mar 31, all states are placed under either Conditional MCO (6 states) or Recovery MCO (10 states). Interstate travel is still not allowed except for RMCO states through the targeted travel bubble programme, effective Mar 10. Moving forward, we reckon that the government will continue to loosen the COVID-19 restrictions if the number of daily new infections dip below 1,000. Conversely, the loosening of government measures can be reversed if there is a sudden spike in the number of new cases.
• Since the National COVID-19 immunisation programme started on Feb 24, there are more than 300.0k doses of COVID-19 vaccines that have been administered in Malaysia. The government had secured at least 66.7m doses of COVID-19 vaccines, with the majority (32.0m) being the Pfizer-BioNTech vaccine. Besides the vaccine supply agreements withPfizer, Malaysia has also signed a deal with AstraZeneca, Gamaleya Research Insititute, Sinovac Biotech and CanSino. To note, the government is maintaining its target of vaccinating at least 80% (close to 27.0m) of Malaysians by February 2022.

● Economic and Financial Impacts

• GDP: We retain 2021 GDP forecast of 4.5% (2020: -5.6%)
  • The economy is expected to track a firmer recovery path from 2Q21 onwards, underpinned by sizeable fiscal measures and gradual reopening of the economy. The additional fiscal stimulus via PEMERKASA would support growth recovery and prevent further setbacks. This will be further bolstered by the wider rollout of COVID-19 vaccine, the continuation of mega infrastructure projects, and improve consumer sentiment. While growth is expected to remain pressured in the 1Q21 due to the reimposition of MCO 2.0, we expect the impact would be less severe given that more businesses are allowed to resume operation with tight standard operating procedures (SOPs).
  • Nonetheless, the downside to growth persists as the affected industries such as retail and tourism-related sub-sectors would remain under pressure due to prolonged interstate travel banned as well as the yearlong international border closure. Nonetheless, we expect the impact to be minimal as the government continues to provide support via various initiatives to revitalise the tourism and retail sectors. However, we remain cautious on the growth outlook mainly due to the potential resurgence of COVID-19 and the impact of political instability on the economy.
• Fiscal:We maintain our fiscal deficit projection of 5.8% of GDP (MoF: 5.4%; 2020: 6.2%) despite the additional RM11.0b direct fiscal injection under PEMERKASA. We believe higher Brent crude oil price for this year (KIBB: USD60/bbl), currently trading around USD67.6/bbl with a year-to-date average of USD60.9/bbl, provides higher oil-related revenue to the federal government. This will give the government fiscal space to increase its fiscal expenditure and boost economic growth. As fiscal policy stance is expected to remain expansionary, we expect the federal government debt to expand to 64.7% of GDP (2020: 62.2%) above the statutory limit of 60.0%.
• OPR: Given the growth recovery prospect driven by COVID-19 vaccine rollout, rising inflation, sizeable fiscal expenditure, and the extended stimulus package, we expect BNM to leave rates unchanged for the rest of the year. Nonetheless, we still believe there is ample room for BNM to cut the OPR by at least 25-50 bps if growth recovery is threatened.
• USDMYR: The newly announced RM20.0b stimulus package is expected to have little to no impact on the ringgit in the near term as the local note will continue to be pressured downward by the rising US Treasury yields and Fed’s policy stance. However, the ringgit may strengthen in the medium term on positive vaccination outlook, as the government increase the allocation for the National immunisation program to accelerate the inoculation progress and achieve herd immunity earlier in December 2021. At this juncture, we still retain our end-2021 USDMYR forecast at 3.95.

Source: Kenanga Research - 18 Mar 2021