[COMMENTARY] Principal: What Malaysians can expect from stimulus packages

KUALA LUMPUR, 9 April 2020 – The Prime Minister recently announced the PRIHATIN Rakyat Economic Stimulus Package amounting to RM250 billion (inclusive of the RM20 billion in the initial package announced on 27 February) and the SME incentives in a bid to soften the impact of the COVID-19 Movement Control Order (MCO) and increase cashflow to prevent the collapse of Malaysia economy.

The RM250 billion stimulus is equivalent to 17% of GDP compared to the 8% of GDP (or RM67 billion) package introduced during the 2008 Global Financial Crisis. Direct injection from the Federal Government amounted to RM35 billion or 2.3% of GDP. Bank Negara Malaysia (BNM) projected for the stimulus package to add 2.8% to GDP.

(Please refer to the Appendix for a complete breakdown of the stimulus package and direction of spending.  Points on key policy considerations and focus are also stated)

Chart 1: Focus of Spending

The primary focus of the stimulus package is as follows:

1. RM126 billion to sustain private consumption and confidence. This will provide much needed financial assistance to segments of the economy which are vulnerable to the impact of the COVID-19 outbreak. Cash handouts and loan moratorium will provide meaningful assistance to low to middle-income households who are experiencing cash flow problems due to curtailed economic activities during the period under MCO.
2. RM111 billion to preserve the viability and alleviate insolvencies of domestic business entities, with focus on small and medium sale enterprises (SMEs). SMEs will also receive various assistance such as loan moratorium, wage subsidy and SME financing. Whilst not be able to fully mitigate contraction in economic activities, it can help to alleviate small businesses’ challenges and keep them running.
3. RM3 billon to strengthen the domestic economy.  Impact to the Malaysian economy will not just be lower domestic consumption during the MCO period but also weaker investment and external trade until consumer and business confidence is restored by the containment of COVID-19.

Larger budget deficit

The Minister of Finance highlighted during an interview that the budget deficit would be capped at 4% of GDP[1]. This is lower than the estimated 4.9% of GDP in the information released by the Prime Minister Office. In the Budget 2020 announcement in October 2019, the projected budget deficit was 3.2% of GDP.

The lower budget deficit of 4% of GDP is due to mitigating measures such as:

1. Redirecting RM2 to RM3 billion from the original Budget 2020, previously provisioned for Visit Malaysia Year 2020, etc., and,
2. Potentially higher dividends from Government-Linked Corporates (GLCs).

The reallocation exercise will have to go through due process as the Parliament has passed Budget 2020 at end of 2019. Rating agency, Standard & Poor, on 26 Mar 2020 reaffirmed Malaysia’s “A-” sovereign rating and maintained a stable rating outlook, indicating acceptance of temporary fiscal expansion.

Fitch and Moody’s, however, have yet to release their opinion on the matter. Risk to fiscal outlook now is the duration of COVID-19 pandemic and its economic impact.

What is our investment strategy?

BNM when it released its Annual Report for 2020 on April 3, guided that GDP growth for the year will range from +0.5% to -2.0%[2]. It would be reasonable to expect a contraction in GDP especially in 1H2020. This would capture the impact from the COVID-19 outbreak globally and Malaysia’s containment policy.

The Government is likely to fund a portion of the RM25 billion direct injection from the domestic bond market. The rest would come from higher dividends from GLCs and spending reallocation. This is a balance that policymakers would need to strike with an eye on future funding and responses from rating agencies.

In addition, the probability of BNM cutting rates in 2Q2020 has increased. This is because fiscal measures need up to 6 months to take effect.

Malaysia, to some extent, has some room to maneuver because:

1. Interest rates could be lowered further,
2. Balance sheets of corporates are generally healthy,
3. No presence of any asset price bubbles, and
4. Little mismatch between foreign debt and cash flows

Strategy for fixed income

The positioning of our fixed income portfolios after taking into consideration the latest developments are as following:

1. Domestic bond market supported by expectations of lower interest rates and ample liquidity in the system after BNM cut its statutory reserve requirement (SRR) by 100 basis points.
2. Maintain a defensive portfolio, focusing on high-grade names for credit protection and target government bonds and government related bonds’ in view of the recent correction but with preference on the shorter end of the curve to take advantage of further Overnight Policy Rate (OPR) cuts.
3. Credit selection remains the key for portfolio returns and will continue to ‘cherry-pick’ issuers with stronger and more resilient credit metrics.
4. Prefer short to neutral benchmark duration in view of the market uncertainty.

Strategy for Equity

We believe the stimulus package is neutral on the Malaysian equity market as large corporates are not the main beneficiaries of the stimulus package. However, there will be consensus earnings downgrade in the short term as corporates assess the impact of the COVID-19 outbreak.

We advocate taking a defensive equity stance in order to preserve capital. Will continue to adopt a barbell approach of buying high yield and growth stocks but will be more selective on quality names with resilient earnings and track record.

Will be looking out to identify the turning point (flattening of epidemic curve) for domestic COVID-19 cases to reposition the portfolios.

 What should investors do?

We believe there are always opportunities in every situation.  Investors can make informed decision depending on their risk tolerance, investment goal, consider dollar cost averaging and make the best of opportunities due to  market correction.

• We would recommend investors to consider the following:

1. Invest across diversified asset classes
2. Dividend generation
3. Long-term focus

• For conservative clients, we recommend funds in mixed assets with a combination of growth and income either globally or locally diversified.
• For clients with higher risk tolerance, we would recommend them to focus on growth-oriented funds that offer exposure to growth areas in Asia, China and Global REITs.

Appendix

Chart 1: Breakdown of RM250 billion stimulus package

Chart 2: Key consideration and focus

Principal will continue to closely monitor the situation and its investment impacts. To find out more about Principal and its knowledge center, visit their website or call 603-7718 3100.