Sixth Stimulus Package to Aid Recovery, No More Blanket Movement Control Order
The government announced a fiscal package (PEMERKASA or People and Economic Strategic Empowerment Program), on 17 March, worth RM20 billion (1.3% of GDP), of which RM11 billion is a direct fiscal injection from the government. This brings total fiscal assistance to RM340 billion over six packages since the start of the pandemic last year.
The PEMERKASA package aims to jumpstart the economy with four focus areas and 20 initiatives. The four focus areas are, to control the spread of COVID-19, accelerating the economic recovery, strengthening Malaysia’s competitiveness, and ensuring inclusivity. Some of the key initiatives announced include,
- Control the spread of COVID-19 – Higher allocations for the COVID-19 vaccine program (RM2 billion), tax deductions for companies conducting the COVID-19 test, and tax incentives for companies participating in the Safe@Work initiative.
- Accelerating the economic recovery – Higher allocations for small projects nationwide (RM2.5 billion), special grants for SMEs (RM1.0 billion), microcredit facilities (RM0.5 billion), an extension of a wage subsidy scheme (RM0.7 billion), tax exemptions for tourism sectors, tax relief for tour packages, an extension of electricity bill discounts for another 3 months (RM0.135 billion), higher fundraising limits for equity crowdfunding, lower indebtedness thresholds, free business registration fees for B40 group and local higher- learning students, financing incentives for cooperatives, matching grants to promote sustainable palm oil cultivation, and digitalisation grants.
- Strengthen Malaysia’s competitiveness – Higher allocations under BNM’s Targeted Relief and Recovery Facility for SMEs (RM2 billion), facilities for automation and digitalisation (RM0.7 billion), financing for digitalisation (RM0.2 billion), Universal Services Provision (USP) fund to improve quality of broadband services (RM3.2 billion), subsidies for smart device purchases for B40 households (RM0.5 billion), and promotion of sustainable financing through Sukuk Lestari (more than USD1bn or RM4.12 billion).
- Ensuring inclusivity – Cash handouts for the B40 households (RM1.2 billion), and e-wallet credits for youths (RM0.3 billion).
- Fuel subsidies of RM3 billion to cap domestic fuel prices (RON95 at RM2.05/litre, diesel at RM2.15/litre) to manage the cost of living and inflation risks.
Given that the economic recovery is dependent on vaccine rollouts, the package includes efforts to accelerate the national vaccination program to reach herd immunity earlier by end-2021 (vs. previous targeted time by February 2022). Since the domestic vaccination program started on 24 February, more than 346 thousand front liners have received their first dose and over 5 million people have registered for the vaccine (as of mid-March).
The government said that with the vaccine program underway, there would be a more targeted COVID-19 containment strategy to alleviate the negative effect on the economy. Going forward, the government is unlikely to impose any further blanket restrictions or movement control orders.
Instead, targeted movement control restrictions will be implemented based on localities and specific clusters. Although the Conditional Movement Control Order (CMCO) remains across key economic states and interstate travel is broadly restricted the except of selected travel bubbles and for tour vehicles, there are significantly lesser restrictions to allow the reopening of schools, inter-district travel, and resumption of most economic sectors.
Economy to Improve from 2Q21
The economic recovery hit a speed bump in 4Q20 amid the reinstatement of the CMCO last October to contain the spread of COVID-19 infections. Real GDP contraction widened to 3.4% in 4Q20 (2Q20: -2.6%). For the full year, real GDP fell 5.6% in 2020 to mark the weakest GDP performance since the Asian Financial Crisis in 1998.
2021 started on a challenging note as containment measures were tightened further in mid-January under the Movement Control Order (MCO 2.0) and a state of emergency was announced as part of wider efforts to contain the pandemic after a resurgence of infections.
As such, the speed bumps on the recovery path are likely to persist with another quarter of contraction in 1Q21. The latest key economic indicators in January showed that the industrial production index rose 1.2% y/y (December: +1.7%) mainly due to further expansion of manufacturing output (January: +3.5%, December: +4.1%) while mining and electricity output contracted further by 4.5% y/y and 4.6% y/y respectively (December: -5.4% and -0.2%).
Services activity remains muted with declines in wholesale trade by 0.1% in January (December: -0.5%), retail trade down by 3.2% y/y (December: -2.9%), and motor vehicle sales contracting 13.1% y/y (December: +5.9%). Meanwhile, agriculture production was weighed down by declines in palm oil output of 14.2% y/y in February (January: -3.8%), and rubber production fell 31% y/y in January (December: -14.7%).
However, the negative impact is moderated with more economic sectors allowed to open subject to strict operating procedures while higher adoption of digitalisation facilitated more consumption and business activities. Mobility and social recreational indicators signal improvements in March.
The growth trajectory is expected to improve from 2Q21 onwards aided by a low base effect, further improvement in the global economy, and gradual normalization in domestic activity. This would be further supported by the vaccination program that is underway, signs of the downtrend in infections, and ongoing fiscal and monetary support. We project 2021 GDP growth at 5.0% (2020: -5.6%).
Temporary Spike in Inflation
For the full year, headline inflation averaged at -1.1% in 2020. We expect inflation to return to positive territory by 1Q21 after registering a narrower decline of 0.2% y/y in January (December: -1.4%) on the back of higher fuel and food prices. We are likely to raise our 2021 full-year inflation target of +2.1% amid higher global oil prices above our current projection of USD50-55/ bbl.
To manage upside inflation risks, the government announced a price ceiling on domestic fuel prices. Despite the expected uptick in inflation and negative real interest rates in the near-term, we do not expect BNM to adjust its neutral monetary policy stance given that underlying demand pressures remain muted amid an uneven economic recovery and labor market weakness (link for details).
Government’s Fiscal Position and Deficit Target
We think the latest RM20 billion fiscal package will be financed through a combination of debt issuance, reallocation of unutilised existing funds, and higher oil-related revenue. Based on previous estimates, the government can collect an additional RM300 million for every USD1/ bbl increase in average Brent oil prices.
We estimated RM6 billion-7 billion of additional oil-related revenue based on Brent oil price of USD65 (vs. budget assumption of USD42). However, this is partly offset by fuel subsidies of RM3 billion.
To recap, the COVID-19 Fund was established under the Temporary Measures for Government Financing (COVID-19) Act 2020, which was gazetted on 23 October 2020. The Fund plans to spend RM17.0 billion in 2021 (2020F: RM38.0 billion), mainly on wage subsidy programs and small-scale projects.
The key purpose is to implement economic stimulus packages and recovery plans. The Act allows proceeds from borrowings to be transferred into this Fund to finance the various fiscal stimulus packages. The ceiling for the Fund was raised by an additional RM10 billion to RM65 billion. The COVID-19 Fund is a temporary fund that spans over three years until end-2022. We maintain our fiscal deficit projection of 5.7% of GDP in 2021 (official forecast: -5.4%; 2020: -6.2%).