KUALA LUMPUR: Further easing of monetary policy, acceleration or reinstatement of sensible infrastructure projects and the expansion of the RM20 bil stimulus package are among the most effective counter-cyclical supports to the country’s economic growth, said Kenanga Research.
The research house cautioned that fiscal deficit would weaken sharply without extraordinary incomes, amid economic challenges brought about by the COVID-19 outbreak, crude oil price collapse and a change in government.
“Current account surplus would come under stress as international tourism collapses and net exports weaken, which set to weaken the ringgit.
“Funding will remain a challenge, with the government possibly calling for another special dividend from Petronas, asset sales or even reinstatement of the goods and services tax (GST),” it said in its economic impact outlook report released today.
GST to be reinstated?
Kenanga Research estimates that the move to replace the GST with sales and services tax (SST) by the previous government had impacted the government’s coffers by some RM20 bil.
Hence, it believed the current government may consider reinstating the GST which is a broader-based tax system compared to the SST.
“We estimate that GST implementation at 6% could have fetched the government around RM48.6 bil in revenue for a whole year (based on pro-rating what was earned for the five months when it was in force in 2018) versus RM26.8 bil in SST.
“Hence, the surplus revenue that the government could potentially earn is RM22 bil if GST was implemented at 6%, which is some 1.3% of GDP (contribution) by our estimates,” it said.
However, the research house pointed out that as the GST had been a major source of dissatisfaction among the electorate in the last election, reinstating the tax system needed to be handled with more empathy.
“Perhaps on a reduced scale, but not below 3.3% which we estimate is the break-even rate,” it said.
In terms of the timing of GST’s reinstatement, Kenanga Research opined it should come when the current state of the country’s economy is much improved with the COVID-19 outbreak contained and the government more stable.
“Because of the propensity for vendors to profiteer if GST is reinstated, chances are that the consumer price index (which measures inflation) rate will rise more than we currently expect (2020 base case of 1%-1.5%),” it said.
Further OPR cut
Kenanga Research also said that should the global or domestic economy suffer further weaknesses, it would not come as a surprise if Bank Negara Malaysia (BNM) undertakes another 50 basis points (bps) cut to the Overnight Policy Rate (OPR).
“A cut of 25 bps may inject around RM3 bil into incomes of households and in a worst-case scenario of a full 100 bps cut this year (from where it started at 3%), this could increase spending power by as much as RM12 bil or 0.7% of gross domestic product (GDP),” it said.
The research house’s view is that BNM still has space for a further rate cut, backed by subdued inflation in the absence of demand-pull pressure, the impact of supply-side shock from the sharply lower oil prices as well as the potential economic downturn due to the COVID-19 impact.
Another special dividend by Petronas
Kenanga Research also projected this year’s budget deficit to range between 4% and 4.6% (with 4.3% the base case) which were the level experienced in 2011/2012, if there is no special dividend from Petronas or other extraordinary sources of incomes,
The government, it said, may once again call on Petronas to pay a special dividend above the usual RM24 bill a year.
“The special dividend of RM30 bil announced in 2018 was paid in 2019 and such sum could narrow the deficit by 1.8% of GDP.
“We believe that Petronas is financially in a comfortable position to pay (the special dividend) given its net cash position of RM82 bil,” it said, adding that besides Petronas, other government-linked companies would likely be encouraged to pay higher dividends as well.
Government engaging investors
Kenanga Research noted that the change in government, a lack of clarity on policies as well as the risk of greater uncertainties if fresh polls are called, bode badly for investors’ (both portfolios and direct investments) confidence which could deter inflows of foreign direct investments.
“The government could do well to provide policy clarity or even engaging investors via roadshows abroad to regain some lost confidence.
“This comes at a critical time when FTSE Russell decides on whether to exclude Malaysia from the World Government Bond Index in April,” it said.
Based on Malaysia’s weight of around 0.4%, with US$2 tril (RM8.61 tril ) passive funds tracking the index, its exclusion may lead to an outflow of as much as US$8 bil, it said.
The ringgit, according to the research house, is thus vulnerable to the risk of outflows given that BNM’s foreign exchange (FX) reserves are relatively low at around US$100 bil in terms of gross reserves.
“Excluding short-term FX liabilities, net reserves may fall to just US$86 bil – a minimum level of the International Monetary Fund’s assessing reserves adequacy level.
“This poses downside risk to our US dollar/ringgit exchange rate forecast of 4.30,” it said.
Speed up project implementation
Meanwhile, Kenanga Research noted that the construction sector is one of the major sources of employment in the country. The sector employed 1.3 million workers and has a high multiplier impact on the economy.
It said large scale infrastructure projects currently suspended will probably come back into focus, namely the KL-Singapore High-Speed Rail (HSR), Johor Bahru-Singapore Rapid Transport System (RTS) and the Mass Rapid Transit Line 3 (MRT3).
“Reviving at least one of them, the funding which is not beyond means as it comes under the 12th Malaysia Plan, will inject much confidence to an already moribund construction sector.
“Given the limited fiscal room to manoeuvre, we reckon that instead of direct funding, at least a significant part will be via the Public Private Partnership in which the federal government will provide the debt guarantee,” it said.
Counter-cyclical measures
Kenanga Research believed the government will likely come up with several counter-cyclical measures soon to jump-start the economy.
It said an expanded stimulus package could perhaps include an emphasis on workers’ welfare, especially those in the B40 and M40 categories, in the form of temporary financial assistance for those whose wages are affected by cost cuts or unpaid leave.
“The government may also inject additional grants for SMEs as they are a major source of employment in the country,” it added.
2020 GDP growth forecast drops to 3.1%
Meanwhile, the research house has revised downward its forecast for Malaysia’s 2020 gross domestic product (GDP) growth to 3.1% from 4% projected earlier.
With the external demand expected to remain weak in the immediate term, the local GDP growth, it said, is projected to slow sharply by 2.3% in 1H20 from 3.6% in 2H19 before gradually rebounding to 3.9% in 2H20.
“This brings the overall average 2020 growth to slow further to 3.1% from 4.3% in 2019, (down) from our initial forecast of 4%,” it said.
It added that the revision to the GDP forecast was mainly attributable to the potential economic fallout in the services sector as transportation and the tourism-related industry will be the most substantially hit from the coronavirus outbreak as well as the impact of crude oil supply shock.
Stimulus package widens Budget deficit
Following the World Health Organisation’s (WHO) declaration that COVID-19 is a global pandemic, Kenanga Research reckoned that fiscal expansion is crucial to support growth trajectory from suffering further setbacks.
“Hence, we reckon the government needs to add at least another RM3 bil to the fiscal stimulus.
“As a result, the budget deficit is expected to widen by 0.6% to 4.3%, which poses a challenge to fiscal consolidation and raises the risk of sovereign ratings downgrade,” it said.
On the RM20 mil COVID-19 stimulus budget announced on Feb 27, the research house estimated that it would be partly funded by a budget deficit which is set to widen from to 3.7% from 3.3%.
While some of the measures under the stimulus package are designed to relieve the burden of those most directly affected by a drop in tourism activities, the research house projected that up to RM10 bil from the reduced Employees’ Provident Fund (EPF) contribution could potentially be released for private consumption or contribute 0.6% to the GDP.
Every US$10 drop in Brent reduces oil-linked revenue by RM7 bil
On Saudi Arabia’s recent decision to boost crude oil production in a battle for market share against Russia and the United States’ shale-oil producers would adversely impact and severely reduce Malaysia’s oil revenue which currently accounts for 20%-25% of the fiscal revenue.
“However, after factoring in savings from lower subsidy, the impact on the revenue is closer to RM5 bil. Hence, each US$10 drop in the price of Brent crude oil would widen the budget deficit by close to 0.3%,” it said. – March 16, 2020, Bernama
