Extra stimulus possible, but at the risk of ratings
KUALA LUMPUR: With a second movement control order (MCO 2.0) and a state of emergency declared, analysts expect the government to introduce further stimulus measures to boost the economy, but this will be at the risk of affecting the country’s sovereign ratings.
To note, RM305 billion had so far been allocated to the funding of stimulus packages and recovery plans, including the various fiscal packages of 2020 and the Covid-19 measures of Budget 2021.
Given the expected economic impact of the new MCO, the research wing at Kenanga Investment Bank Bhd (Kenanga Research) said the government will likely need to expedite the distribution of Covid-19 funds within the first half of the year (1H21).
“Despite the current tight fiscal condition, we believe more stimulus measures will be required over the year should restriction measures be extended,” it opined.
“Recent economic indicators reveal that the recovery momentum has already been hindered by the Conditional MCO measures reimposed towards the end of 2020. Given the greater restrictions of the new MCO, economic recovery is expected to be further weighed down.
“Additional fiscal stimulus will likely need to come from forgone revenue, in an effort to keep government debt within a manageable level, and focused on measures that could be executed speedily, reaching the pockets of the final consumers in an efficient manner.”
Echoing this sentiment are researchers at Affin Hwang Investment Bank Bhd (AffinHwang Capital) who also believe that there is high likelihood that the government will announce further fiscal stimulus measures to mitigate the negative impact of the current MCO.
Despite the current tight fiscal condition, we believe more stimulus measures will be required over the year should restriction measures be extended.
Kenanga Research
“With the potential for higher expenditure, based on our estimate, if necessary, Malaysia’s 2021 fiscal deficit target may likely rise by another 0.6 percentage points to six per cent of Gross Domestic Product (GDP) in 2021 compared with our earlier projected deficit of minus 5.4 per cent of GDP.
“In terms of sovereign ratings, although the persistent budget deficit since 1998 continues to be a weak link to the country’s sovereign credit rating profile, we are of the view that in light of the pandemic, it is understandable that the government needs to implement large fiscal spending plans in order to boost the country’s recovery.
“We believe that the current account surplus will continue to be the feature of economic fundamentals in Malaysia.”
In early December 2020, Fitch Ratings downgraded Malaysia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BBB+’ from ‘A-’. Fitch revised Malaysia’s ratings outlook from negative to stable after the downgrade to BBB+, signalling current sovereign rating will likely remain in the immediate term.
Both Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service (Moody’s) have maintained the country’s long-term foreign currency issuer default rating at A- and A3 respectively.
However, S&P assigned Malaysia’s outlook long-term foreign currency issuer default rating from stable to negative on June 26, 2020.
“The Malaysian banking system is still on sound capital footing, and with improving economic prospects, sustainable current account surpluses, steady foreign exchange reserves and given the country’s manageable external debt, we believe agencies like Standard and Poor’s and Moody’s will unlikely follow suit to revise the country’s sovereign rating,” AffinHwang Capital continued.
“While we are hopeful that the sovereign rating agencies would be more forgiving of a more stretched fiscal position given current circumstances, we are nevertheless of the view that any sovereign rating downgrade will result in further portfolio outflows.
“That said, judging from the sharp outflow of funds over the past 10 years, we believe that any hot money flows exiting the country would also likely be limited.”