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Posted Date: March 30, 2020

The PRIHATIN Rakyat Economic Stimulus Package (PRIHATIN) totalled RM250 billion (17% of GDP), of which RM25 billion (10% of PRIHATIN) will come from a direct fiscal injection. A big chunk is in the form of loan moratoriums (RM100 billion or 40% of PRIHATIN), while the other large component is withdrawals from the Employees Provident Fund (EPF) (RM40 billion or 16% of PRIHATIN).

A main feature of the package is direct income transfer to the rakyat. There are also measures to mitigate the economic and financial impact on the M40 and B40 families given that they are more susceptible to job and income losses. These include the RM10 billion (4% of PRIHATIN) handout for them and the RM5.9 billion (2.4% of PRIHATIN) wage subsidy programme.

Given the pressure businesses are facing during the Movement Control Order (MCO), the government has introduced several measures to mitigate the resultant economic and financial impact. The wage subsidy programme, for example, will encourage continued production of goods and services by firms that have suffered more than 50% income losses since the start of 2020. Another, which exempts contributions by employers to the Human Resource Development Fund (HRDF) for six months, would help relieve pressure on cash flows.

While we applaud the government's proposal to help struggling businesses through the wage subsidy programme, we feel that additional support for businesses would help sustain their cash flows and retain employees. For instance, the government could consider an extension for deferment of income tax instalments for all small and medium-sized enterprises (SMEs) until December 2020. This is because the current supply chain disruption in the economy will likely impact businesses over a longer time frame than is currently anticipated and SMEs, being the backbone of businesses in Malaysia, are financially fragile.

As the government is in a tight fiscal situation, it could use some support from the private sector. Note that the RM100 billion worth of loan moratoriums will only defer the burden shouldered by businesses. As such, the private sector, especially financial institutions, could play a role in ensuring businesses remain viable in the medium term. For example, more assistance through special funds could be provided by financial institutions to SMEs with good prospects to help them through this turbulent time.

The government could also look at measures to help the informal sector, in which employees are paid daily or are on short-term employment contracts. As such, they do not have access to financing and do not benefit much from the voluntary EPF withdrawals. In addition, measures to ensure the MCO does not contribute to existing problems in supply chains could also be introduced. We believe price monitoring alone to ensure price stability is insufficient, as this would only serve to further distort the market for essential food items.

Given the wider scope of assistance provided to the rakyat and businesses, we are now projecting a larger budget deficit by one to two percentage points higher than the recent estimate of 3.4% of GDP in 2020. We think the government has some room to partly finance this through debt issuances (another six-percentage point leeway before it hits the self-imposed 55% of GDP limit). In addition, deficits could be partly financed through one-off dividends from government-linked companies (GLCs) and reallocations of some of expenditures previously planned for other purposes (e.g. tourism activities).

We do not think that worsening fiscal and debt metrics will trigger negative rating actions by global credit rating agencies (Malaysia's fiscal balance: -3.4% of GDP; A-rated countries: -1.1% of GDP; general government debt: 56% of GDP; A-rated countries: 49% of GDP). This is because Malaysia's deficits are mainly financed by domestic resources. Also, history shows that during the last recession in 2009, Malaysia's sovereign rating was unaffected even though its budget deficit had surged to 6.7% of GDP from 4.6% the previous year.

In summary, PRIHATIN is a more comprehensive, rakyat-centric package meant to mitigate the impact of the COVID-19 outbreak which is increasingly being felt nationwide across all sectors and divides. It also serves to complement the Economic Stimulus Package 2020 announced earlier in February.

If the economic situation worsens, more measures should be introduced. This time, the focus should be on supporting private sector businesses given that the COVID-19 outbreak is not likely to be a short-term phenomenon. In any case, we think it is also important to ensure proper implementation of the PRIHATIN and any subsequent economic packages. This is because unsuccessful outcomes will lead to massive insolvencies, retrenchments and income losses, with dire socioeconomic implications at the national, employer, and household levels.

Contacts:
Nor Zahidi Alias, +603-2717 2936/ zahidi@marc.com.my;
Quah Boon Huat, +603-2717 2931/ boonhuat@marc.com.my.