By Devanesan Evanson
WHILE the re-imposition of Movement Control Order (MCO 2.0) on six key states which boast high COVID-19 infection rates was very much anticipated, the declaration of a state of Emergency till Aug 1 surely came as a shocker to say the least for the financial markets.
Despite assurances that Malaysia remains open for business – albeit strict adherence to the standard operating procedure (SOP) protocol – a combo of MCO 2.0-cum-Emergency will surely impact certain economic sectors severely than others, or even the perception of foreign investors with regard to Malaysia’s economic prospect.
In all probability, there is now a need to return to the drawing board to reassess when the country can expect to reopen its economy and borders – or to fully benefit from the dispensation of COVID-19 vaccines.
Below are some pointers for minority shareholders to ponder in the quest of safeguarding their investments:
No curfews: In the words of the Prime Minister, this is not the typical ‘Emergency’ as many would have envisaged.
To re-cap, the only nationwide declaration of Emergency under the Emergency Ordinance 1969 took place during the May 1969 racial riots which lasted 21 months (which thankfully, did not derail the country’s growth trajectory in subsequent years).
According to the Swiss-based Centre for Civil and Political Rights, about 79 countries have introduced varying degrees of emergency status since last year. They include the US, Australia, New Zealand, France, Finland, Indonesia, the Philippines and Thailand.
What will not take place during this six-month period will be Parliamentary sittings, by-elections or even a General Election.
In short, the Government wants to stay focused or empowered itself in its efforts to curb the COVID-19 pandemic without being distracted by political-related diversions.
Economic loss: CGS-CIMB Research estimates daily economic losses stemming from MCO 2.0 at RM750 mil/day which is significantly lower than the RM2.4 bil/day during MCO 1.0 from March 18 to May 3 last year.
As such, the research house expects each fortnight of MCO implementation to reduce its full-year gross domestic product (GDP) growth forecast of 7.5% for 2021F by RM10 bil, or 0.7%.
Affected businesses: At a glance, business which are not allowed to operate or negatively impacted under the MCO 2.0 include leisure-related industries, retailers of non-essential goods and number forecasting operators (NFOs).
Even as more businesses are allowed to operate, the services sector would generally have to endure a rather depressed sales as demand would be curtailed by the mobility restrictions and consumer confidence.
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.
Unemployment looms: With the above developments, a likely spill-over impact can be in the form of cost-cutting measures among businesses that would lead to wage cuts and layoffs of workers.
As it is, Malaysia has to deal with 764,400 people currently unemployed and possibly around one million new entrants to the job market (taking into account the 2020 cohort coming out of the education system (The Star, Jan 13, 2021).
Weak fiscal front: Deficit is expected to remain elevated with the MCO 2.0 and a state of Emergency put in place.
Despite the current tight fiscal condition, the Government has rolled out its fifth fiscal stimulus measures vis-à-vis the RM15 bil Malaysian Economic and Rakyat Protection (PERMAI) assistance package on Jan 18.
Thus far, RM305 bil has already been allocated to the funding of stimulus packages and recovery plans in 2020 (namely, PRIHATIN, PRIHATIN SME+, PENJANA and KITA PRIHATIN) in addition to the various COVID-19 measures under Budget 2021.
Low interest rate environment: For now, the central bank has maintained the rate at the current 1.75% level as per the latest outcome from its Monetary Policy Committee meeting.
But given the latest development, there is higher likelihood now for Bank Negara Malaysia (BNM) to slash the overnight policy rate (OPR) by another 25 basis points (bps) to 1.50%.
In fact, Kenanga Research does not discount the possibility of an additional 25bps cut to 1.25% if needed.
Market risks: The state of Emergency declaration could delay the potential return of foreign funds to Malaysia’s equity market on grounds of political uncertainty.
This is considering the recent withdrawal of support by two UMNO MPs for the Perikatan Nasional (PN) Government (thus leaving the Government with a backing of only 109 MPs out of 220 MPs currently).
In the same light, the MCO 2.0 will elevate corporate earnings risk, while the state of Emergency could negatively impact foreign investor sentiment on Malaysia.
In a similar note, there could also be indirect negative impact on the banking sector which is viewed as bellwether for economic resilience considering that (i) potential OPR reduction by the Malaysian central bank to cushion adverse effect from the MCO 2.0 could affect banks’ net interest margins; (ii) increase in non-performing loans; (iii) likelihood of loan moratorium extension or re-introduction should MCO 2.0 gets prolonged; and (iv) negative loan growth as MCO 2.0 could reduce business activities.
Delay in administration of COVID-19 vaccines: A potential delay now looms in the Government’s 18-month projection to inoculate 70-80% of the Malaysian population by end-2021.
Given the risk that the MCO has been extended to Feb 4, additional policy support may be needed to realise such expectation.
Conclusion
Fingers crossed, Malaysia will walk out unscathed from the MCO 2.0 and state of Emergency quagmire.
As of now, however, no economists nor stock market analysts could foretell the actual impact on the financial markets – or even the daily livelihood of Malaysians – given the MCO 2.0 can stretch for an indefinite period, subject to how soon the country is able to break the chain of COVID-19 transmission.
Only time will tell. – Jan 25, 2021
Devanesan Evanson is the CEO of the Minority Shareholders Watch Group, an independent research organisation to encourage good governance among public listed companies with the objective of raising shareholder value over time. He can be reached at [email protected].
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia
