By Xavier Kong
FOLLOWING the announcement of the Prihatin stimulus package by Prime Minister Tan Sri Muhyiddin Yassin on March 27, research houses have shown mixed response to the package, though warnings of bearish markets for the year remain a mainstay from them.
AllianceDBS Research opines that there will be a Gross Domestic Product (GDP) contraction of 0.5% year-on-year (yoy) with a higher fiscal deficit of 5.4% of total GDP. This comes from a mixture of factors, other than the RM22.4 bil price tag of the latest stimulus package.
The research house guided that this would result in a higher fiscal deficit of RM74.2 bil, compared to the estimated RM51.7 bil of Budget 2020.
“The government is expecting a fiscal deficit at 4.9% of total GDP, assuming no growth compared to the preceding year. On the other hand, we are foreseeing an extra deficit of RM3 bil in revenue loss on the back of the lower oil price assumption of US$30 per barrel this year,” said AllianceDBS.
On the other hand, TA Securities has expressed positivity on the stimulus package, remarking that the FBM KLCI has already seen a positive knee-jerk reaction, with the research house noting that market movement for the week will likely be dictated by Covid-19 statistics and news flow.
“We view the stimulus package as a positive step to promote consumption and ease the burden of private companies, especially the small and medium enterprises (SMEs), whose sales are affected during the 28 days of the Movement Control Order (MCO) but yet have to bear their workers’ wages,” said TA.
However, TA has also guided that it predicts a flat GDP growth this year, which is a “significant downward revision” of its prediction of a growth of 4.2% from the announcement of the first stimulus package, which came at a time when Malaysia saw less than 30 confirmed Covid-19 cases.
Still, with the situation as it is, AmInvestment Bank sees lifelines to the construction and consumer sectors from the stimulus package, remarking that it will put more money back into consumer pockets, resulting in a boost for consumer companies (especially those producing staple food products).
For the construction sector, the RM2 bil allocation of the stimulus package will see contractors in Classes G1 to G4 benefitting from small-scale projects, thus generating lifelines for these companies to survive.
In terms of the telco, power, and financial services sectors, AmInvest sees minimal impact on them. For financial services, Prihatin’s moratorium will avoid any substantial increase in provisions that banks may need to set aside, as the allowance to restructure and reschedule financing, along with the moratorium, will prevent the spiking of non-performing loans.
For the telcos, the impact will be minimal, due to consumers being unable to switch providers even if they wanted to, due to the closed kiosks. Even the impact from the high migrant population with limited reload options, which would hit the number of prepaid subscribers, will be minimal, due to the MCO only expected to last 28 days.
The power sector will also see minimal impact, due to the original cost of the RM500 mil for electricity subsidy coming out of the Electricity Industry Fund (EIF), with Tenaga Nasional Bhd setting aside RM150 mil for the additional RM530 mil announced, of which the balance will be funded by the government and the EIF. The allocation of RM150 mil makes up about 3% of TNB’s forecast net profit for its 2020 financial year.
“The EIF is financed by TNB, which has to return excess savings from the renegotiated first-generation power purchase agreements (PPAs) and any excess return from higher-than-expected revenue under the price and revenue caps in the Regulatory Period 2 (RP2) guidelines every year. This is not new. TNB does this every year,” said AmInvest.
MIDF Research remains a little more optimistic, guiding a pace of 2.7% yoy for the Malaysian economy in 2020, which it notes is a “significantly moderated pace”, with private consumption continuing to be the main driver of growth on the back of the stimulus package.
“We foresee a rebound in consumer spending in 2H20 as the virus is expected to be contained. On top of that, inflationary pressure is set to hover at low levels due to cheap fuel prices and the job market to remain under full employment conditions with the unemployment rate below 4%, supporting consumption,” said MIDF.
However, while MIDF also notes that this is the largest stimulus package in history, it remains a necessary economic backstop, and as such will be insufficient as a general impetus towards general market sentiment.
“In spite of the mildly positive initial market response to the enlarged stimulus announcement, we reckon the package is a necessary economic backstop but it would not be able to provide a sufficiently strong impetus towards general market sentiment. In the immediate-term, market sentiment will continue to be dominated by the success and setbacks in containing the spread of Covid-19 infections both locally and worldwide,” added MIDF.
From Affin Hwang Capital, the opinion is that Malaysia faces unavoidable recessionary pressures, with the stimulus package unable to stop real GDP growth from reaching negative territory.
“Despite the stimulus packages, in view of uncertainty on the extent of the Covid-19 outbreak globally and domestically, we expect Malaysia’s real GDP growth to be in negative territory possibly in the first and second quarters of 2020, on the back of a sharp contraction in domestic demand and weak exports,” said Affin Hwang.
The research house predicts that real aggregate domestic demand is expected to contract by 4% for 2020 as a whole.
“In view of the negative impact on domestic demand and global supply chain disruption on Malaysia’s manufacturing and external sector, we have cut our real GDP growth projection down to -3.5% for 2020, from an earlier forecast of 3.3%,” said Affin Hwang, adding that the last recession in Malaysia took place in 2009 when real GDP contracted by 1.5%.
The research house also views that, in the short term, growth in private consumption will likely drop sharply due to the MCO, with private consumption expected to normalise only in late 2020.
“Until we see Covid-19 fading away and effective implementation of the stimulus packages, the revival of consumer confidence will likely only happen in late 2020. While Bank Negara Malaysia (BNM) has cut its policy interest rate (OPR), we believe lower interest rates will take time to feed through to the economy,” said Affin Hwang.
AmBank Research released a special report as well, noting that the stimulus package is a “caring response to the Covid-19 crisis”, but also that the economy is likely to report a “technical” recession, which is two quarters of negative growth.
“After taking into consideration the ‘technical’ recession, our estimation shows the economy should expand around 0.4% for 2020, although the government projects a flat growth,” said AmBank.
The research house also noted that, with most of the measures being non-fiscal, the focus will be on the off-balance sheet mode of funding.
“If we recall, over the period of 2009 and 2017, the government depended on government guarantees (GG) and public-private partnership (PPP) to fund key government projects. These raised the government’s contingent liabilities to RM238 bil from RM84.3 bil in 2009,” it noted.
Although the government’s exposure to the off-balance sheet slowed substantially in 2018 and 2019, room for it to pick up could happen, especially with the need for higher public spending. The implications on the medium-term corporate bonds credit spread will depend on the size the off-balance sheet funding used, added AmBank. — March 30, 2020
