● On May 22, Prime Minister Tan Sri Muhyiddin Yassin announced a tightening of the standard operating procedures (SOPs) under the Movement Control Order (MCO) 3.0, effective May 25 until June 7, as daily COVID-19 cases remain above 6,000 for five consecutive days.

- The tightened SOPs involve changes in business operating hours, work-from-home (WFH) directive and public transport capacity as listed in Table 1.

- The government has decided to not impose a full closure on the economic sectors, as it strives to balance the importance of health and economic survival.

- Nonetheless, in a situation where majority of the districts in Malaysia are categorised as red zones, we view that stricter measures for the economic sectors should be imposed. The resulting economic pain can be partly offset by distributing additional fiscal and credit measures at an accelerated pace to affected businesses and individuals. The impact on fiscal coffers can be managed by emphasising on non-monetary measures. Nevertheless, further rise in government debt level at this juncture is justifiable as long as the government swiftly embarks on a debt tapering initiatives as soon as the economy stabilises.

● Accelerated vaccinations and high SOPs compliance are Malaysia’s only hope to win the war against COVID-19

- As of May 23, the Ministry of Health (MoH) has confirmed that there are now a total of 512,091 positive cases,57,022active casesand2,248deathsin Malaysia. The nation’s seven-day average of daily new COVID-19 cases increased by more than 42.0% compared to a week ago, while daily COVID-19 related deaths increased to 49 deaths each day from 31 deaths last week. To note, the country first breached the 6,000 mark on May 19 and has recorded the highest increase in daily COVID-19 cases onMay23with6,976infections.

- Due to the record number of active COVID-19 cases, most hospitals are running beyond their capacity, with the general bed utilisation has once again exceeded the 100.0% capacity, now standing at 214.7% (n=25,456), while the intensive care beds and ventilator utilisations are currently at 74.9% (n=871) and 23.4% (n=1,581) respectively (source: Department of Social and Preventive Medicine, University of Malaya).

- Starting from May 12, all of the states in Malaysia are placed under the MCO 3.0, however, due to an unabated rise in new COVID-19 cases, the government has decided to impose a tighter MCO 3.0 measures, effective May 25. Looking at the local COVID-19 trend during MCO 2.0, the pandemic curve started to flatten after more than four weeks of being under the strict stay-at-home order. If MCO 2.0’s trend repeats, we may start to see a decline in the number of active cases in June, however, the emergence of new variants of concern coupled with poor adherence to standard operating procedures (SOPs) could exacerbate the spread of the COVID-19. 

- On the domestic vaccine front, after three months into the National COVID-19 immunisation programme, there are now more than 2.3m doses of COVID-19 vaccines that have been administered in Malaysia. In all, a total of 1,471,449 (4.5% of the population) Malaysians have received at least one vaccine shot and out of that total, more than half or 871,051 (2.7%) have received both doses. Even though Malaysia has picked up the pace of its COVID-19 vaccination drive, the potential delay of the third phase of the immunisation programme due to COVID-19 vaccines shortage, could make it challenging for Malaysia to achieve its target of vaccinating at least 80.0% (close to 27.0m) of the population by February 2022.

● Economic and Financial Impacts

- GDP: Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz announced that the tightened MCO 3.0 from May 12 to June 7 is estimated to impact 2021 GDP growth by up to 1.0%, bringing the growth range down to 5.0% - 6.5% from Bank Negara Malaysia’s earlier forecast of 6.0% - 7.5%. Nevertheless, he clarifies that this is a preliminary figure and will be confirmed later upon further analysis.

o We maintain our 2021 GDP growth forecast range between 6.0% - 6.5% and project 2022 GDP growth to range between 5.0% - 5.5%. Our initial forecast already took into account the implementation of a nationwide MCO 3.0 whilst remaining cautious regarding the rising number of local COVID-19 cases. We still expect 2H21 growth to be higher at 6.4% (1H21: 6.2%) supported by Malaysia’s ongoing vaccination drive, targeted policy support from the government, and a boost in exports growth amid higher crude oil prices and strong external demand for COVID-19-related items and semiconductors. Nevertheless, downside risks remain should the local COVID-19 pandemic worsen, vaccine progress slowdown, or domestic political situation create further uncertainty.

o The tighter SOPs will likely push our forecast to the lower end of the range, however by avoiding full closure of economic sectors, the current recovery momentum should be sustained. Of note, a survey conducted by the SME Association of Malaysia (SMEAM) found that nearly 40.0% of SMEs expected that a full lockdown, akin to MCO 1.0, would have reduced their revenues by over 50.0%, which would have potentially derailed economic recovery.

o We reckon the SMEAM study derived their conclusion based on MoF’s daily loss estimate of RM2.4b during the first MCO, which ran from March 18 to May 3, 2020. Meanwhile, during MCO 2.0 from Jan 13 to Feb 18, 2021, it was estimated to have cost the country RM300.0m to RM400.0m a day.

- Fiscal deficit:Deficit forecast maintained at 6.3% of GDP (2020: 6.2%) in anticipation of moderate revenue growth and higher fiscal expenditure due to the impact of prolonged movement control order since January. The overall balance of fiscal position as of March 2021 registered at -RM37.1b, a 31.6% YoY increase compared to the preceding year as the growth of expenditure (17.8%) outpaced revenue (9.3%). The projection also takes into account of potentially another round of fiscal stimulus and lower than expected GDP growth should the COVID-19 situation worsen or slower vaccination progress. In March, the Finance Minister stated that the fiscal deficit to reach 6.0% this year, adding that it would remain elevated as a result of the expansionary fiscal policy.

- Debt to GDP: Consequently, total government debt to GDP is revised marginally to 64.1% (2020: 62.1%, previous forecast: 64.2%), an increase of RM96.4b which is in line with the statement of the Finance Minister in early April that debt will rise to around RM975.0b this year (2020: RM879.6b). Based on the latest data from BNM, the federal government debt increased at a record high of RM37.9b on QoQ to RM917.5b as of March 2021. While federal government debt remains elevated, the statutory debt limit (domestic borrowing via MGS, MGII, MITB) stood at 58.3% in 2020, slightly lower than the 60.0% selfimposed statutory limit.

- Funding capacity: As the statutory debt nearly hit the 60.0% limit, we reckon the government still has room to raise an additional RM23.4b of domestic debt for this year. In addition, the government has room to raise another RM11.3b via offshore borrowing. In total, the government can officially borrow up to about RM34.8b for 2021, indicating that the government’s capacity to increase borrowing is invariably limited. With the emergency power in place, we expect the government could possibly breach its statutory limit as higher spending is required to bolster economic growth going forward. 

- Oilprice:The higher Brent crude oil prices are expected to support fiscal position. We maintain the Brent crude oil forecast of USD60.0/bbl, slightly lower than the EIA forecast of USD62.3/bbl but far above the MoF forecast of USD42.0/bblunder the 2021 Federal Budget. Year-to-date, the average Brent crude oil price traded at USD63.2/bbl (2020: USD43.2%), a USD20.0/bbl or 46.2% higher than last year. Oil prices are expected to remain high, underpinned by growth recovery among advanced economies on the back of wider vaccine rollout.

- MGS: Yields may move slightly lower in the near-term from around 3.20% currently, as MGS will likely find riskoff demand amid tighter MCO 3.0 restrictions and higher local COVID-19 cases. Nevertheless, we still expect MGS yields to return to an uptrend in the medium to long-term, driven by an expected recovery in domestic GDP growth and potentially higher United States Treasuries yields, with our end-2021 projection for the 10Y MGS yield at 3.40% (2020: 2.65%). o Furthermore, yields will likely trend higher as a result of increased MGS and GII issuances in 2021. With our fiscal deficit projection of RM95.6b (6.3% of GDP), and expected bond maturities of RM67.7b for MGS/GII and RM6.0b for SPK, we estimate that the government’s total funding need is RM169.3b this year. Considering the government’s recent issuance of a USD1.3b (RM5.4b) Sustainability Sukuk, we project a gross MGS/GII issuance of RM163.9b in 2021 (2020: RM157.3b) and a net supply of RM97.3b (2020: RM86.6b).

- USDMYR: In the near term, the worsening COVID-19 condition in Asia is seen to keep foreign investors away from riskier emerging market assets including those denominated in ringgit. Looking beyond the COVID-19 situation on deck, the direction of the local note could remain volatile and weakened by a potential rise in the US Treasury yields due to the expectation of a revival in the US economy in the 2H21. This coupled with a potential domestic political turmoil after the end of the nationwide emergency could weigh heavily on the ringgit. Due to these factors, we revised our end-2021 USDMYR forecast to 4.03 from 3.95 earlier.

- OPR: Though the probability of a rate cut has risen, we still expect the BNM to keep the OPR unchanged at 1.75% given sustained prospect of growth recovery, underpinned by stronger external demand and further progress in the global COVID-19 vaccination drive. This is also backed by expectation of a rise in inflation amid higher global commodity prices, as well as ample banking sector’s liquidity evidenced by an increase in the level of surplus liquidity placed with the BNM (1Q21: RM154.2b; 4Q20: RM147.0b).

Source: Kenanga Research - 24 May 2021