The market had largely expected this. In MARC's last publication Opinion: A Monetary-Fiscal Policy Mix Likely in 2020, we mentioned that "another policy rate adjustment by BNM is now looking more certain". We also opined that a fiscal-monetary policy mix is required to help cushion the economic impact from the COVID-19 outbreak. This latest rate cut complements the government's fiscal stimulus package worth RM20 billion that was announced on February 27. Measures in the stimulus package include cash handouts and a RM2 billion relief facility for small and medium-sized enterprises. The last time the OPR was reduced to the current level was during the Global Financial Crisis (GFC) in 2009.
This time around, the epicentre of the storm is closer to home. The impact of the COVID-19 epidemic on China's economic growth, which is already weak following slower manufacturing and services growth, is also expected to significantly affect global growth. Our estimates show that a 0.5 percentage point (pp) moderation in China's GDP growth will likely reduce Malaysia's GDP growth by 0.2pp. Meanwhile, Malaysia's GDP growth could moderate by roughly 0.3pp, if as currently estimated by the IMF, world economic growth falls from 3.3% to 3.0%. If the COVID-19 outbreak is prolonged and turns pandemic, the impact on the Malaysian economy could be pronounced.
The expected significant impact of the epidemic has also caused the US Federal Reserve (Fed) to slash its Federal Funds Rate (FFR) by a whopping 50bps in an emergency move on March 3. The last time the US Fed reduced its FFR by the same quantum was during the last global recession in 2008-2009. In 2009, the US' real GDP contracted by almost 3%. The recovery took place only after the US Fed aggressively reduced interest rates and embarked on a quantitative easing policy. The global economy also took a hit in 2009 with growth falling to -0.1% from 3.0% in the preceding year.
The Chinese economy was not spared of the crisis as real GDP slowed drastically from 14.2% in 2007 to 9.4% in 2009. As a result, the Chinese government launched a massive stimulus package worth CNY4 trillion (USD586 billion) to mitigate the economic impact.
The latest FFR cut on March 3, 2020 did not stem the downturn in the financial markets. In the aftermath of the cut, the US dollar index (DXY) continued its losing streak. The decline was partly explained by the expectation of a more aggressive move by the US Fed following rising concerns over the impact of COVID-19 on the economy. In addition, the anticipation of a narrower interest rate differential between the US and Euro has weakened the USD vis-à-vis the euro currency. The DXY closed on Tuesday at 97.2, the lowest since early January. In the equities market, the S&P 500 index (SPX) fell by 2.8% while in the bond market, the 10-year US treasury yield (UST) slid to below 1.0% for the first time in history.
In the local financial markets, the FBM KLCI recovered slightly by 0.8% to 1,478.64 following BNM's latest OPR cut. However, market sentiment remains weak despite the recent government stimulus measures announced for 2020. The FBM KLCI had fallen by 8.2% from its peak of 1,611.38 back in early January 2020. Meanwhile, the Malaysian Government Securities (MGS) closed mixed yesterday with gains concentrated on the short-end of the curve as a result of the OPR cut. Overall, MGS yields remain at very low levels compared to 2019 with both the 3-year and 10-year MGS at 2.58% and 2.83%.
Contact:
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my.
