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PEMERKASA+ may not be enough to bear brunt of lockdown, say economists

FMM In The News: THE EDGE MARKETS, KUALA LUMPUR, Tuesday, June 1, 2021 - Economists have opined that the RM40 billion PEMERKASA+ stimulus package will have limited impact on the country’s economy, due to the smaller fiscal injection as compared to previous stimulus packages.

RHB Research Institute’s economist Ahmad Nazmi Idrus said in a note today that while the PEMERKASA+ measures are expected to cushion the blow of the full lockdown, the impact will be limited.

“Comparatively, the direct fiscal injection this time around is much smaller relative to RM11 billion in the first PEMERKASA package announced on March 17, 2021,” he said.

According to him, the extension of several popular measures such as the vehicle sales tax exemption and the property stamp duty exemption will boost the segment but at a diminishing rate.

However, he opined that the cash handouts to the B40 and small and medium enterprises (SMEs) should have a high impact on consumption.

“In our view, the swift reopening of the sectors post the two-week mandated lockdown is the key. This will ensure that the economy can get back on track,” he said.

While the stimulus has limited impact and the lockdown poses a downside to his growth estimate, he believed the economy is already on a recovery path. Thus, he maintained his gross domestic product (GDP) growth projection for this year at 5.4%.

Meanwhile, CGS-CIMB’s economist Michelle Chia said despite a RM40 billion price tag, PEMERKASA+ is underwhelming and comprises largely liquidity and credit assistance (RM35 billion) versus fiscal injection (RM5 billion).

“Fiscal reticence means inability to bring Covid-19 wave under control within the six-week target will exert a heavier toll on the economy and vulnerable sectors,” she said in a note.

With the budget deficit expected to breach 6% of GDP in 2021, she said, the government is caught between the rock of a persistent Covid-19 wave and the hard place of fiscal reticence.

She also estimated the six-week Phase 1 and 2 lockdown will lower Malaysia’s GDP growth in 2021 to 4.4% from 5.7% previously.

“Each passing fortnight of Phase 1 will cost a further 0.9% point, hence the stakes are high for Malaysia to make this full lockdown the final one, while ramping up progress on vaccinations,” she said.

She also expects Malaysia's central bank to hold the overnight policy rate at 1.75% this year, especially if the transition to Phase 2 goes as scheduled in two weeks, given diminishing returns on further monetary easing and the emerging inflation dynamics abroad.

While the recent stimulus package would offer some help amid the full lockdown, TA Securities economists Shazma Juliana Abu Bakar and Farid Burhanuddin believed it is not enough to mend the damage.

“While we applaud the measures, we found nothing new as most of them had been announced previously. We opine it is a matter of increasing the allocation amount or extending the current measures/aid from past packages to a certain period of time,” they said.

With the movement control order 3.0 (MCO 3.0), which was implemented from May 3 (for several states) to May 31 (all states), coupled with the new full lockdown for 14 days, they assume a potential loss of approximately RM38.4 billion in the second quarter.

“That could drag the economy lower in the second quarter, with real GDP to chart a single-digit growth of 8.5% year on year (y-o-y) to RM314.48 billion (previous forecast +14.5% y-o-y).

“Assuming 3Q21 and 4Q21 real GDP to increase by 4% and 5.4% y-o-y, respectively, our 2021 full-year economic growth will only increase by 4.2% y-o-y, versus our previous projection of 5.5%,” they said.

They also projected the extra RM5 billion direct injection from this PEMERKASA+ package will increase the country’s fiscal deficit by 0.3% point, ceteris paribus, bringing it to -6.3% of GDP for this year.

Hong Leong Investment Bank’s analysts Jeremy Goh, Felicia Ling and Goh Khing Mae also said the market is unlikely to be excited by PEMERKASA+ stimulus as it dwarfs in comparison to last year’s PRIHATIN (RM250 billion).

With the total lockdown imposed from June 1 to 14 posing downside risk to the official forecast of 6% to 7.5% of GDP (HLIB forecast: 4.6%), they opined this could lead to a higher fiscal deficit ratio which is estimated at 6% to 6.3%.

“While this fiscal injection would provide some respite to businesses and consumers, should there be a wider fiscal deficit target, this may cause downside risk to S&P Global Ratings’ decision on Malaysia’s credit rating, expected by end-June (now on negative outlook),” they said.

Meanwhile, Public Invest Research economist Rosnani Rasul said the latest package is less generous than before as the government is prioritizing its resources toward accelerating the Covid-19 vaccination programme which is the safest bet to revive the economy.

She opined that the latest round of containment measures, with an assumption to last for a four-week cycle before a gradual opening, may push 2021 GDP to below 5% from her current expectation of 6.2%.

“There could be downside risks to this if the total lockdown period prolongs,” she said.

At the time of writing, the FBM KLCI shed 0.76 points to 1,582.79.

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