Posted Date: June 08, 2020

The government unveiled the National Economic Recovery Plan (PENJANA) on June 5, 2020, outlining measures to rehabilitate the domestic economy that has been severely affected by the COVID-19 pandemic. As these are short-term measures, they are aimed at supporting the economy for the rest of the year by helping to improve consumer, business and investor confidence.

The total PENJANA package amounts to RM35 billion, of which RM10 billion will come from direct government fiscal injection. The plan comprises three key thrusts to support the economy in the era of the 'new normal' – empower people, propel businesses and stimulate the economy.

Overall, measures to support the labour market such as the extension of the wage subsidy programme, upgrading of National Employment Services as well as reskilling and upskilling programmes are commendable as the country's unemployment rate has yet to peak, despite rising to the Global Financial Crisis (GFC) high of 3.9% in March 2020. The Department of Statistics Malaysia (DOSM) has even anticipated the jobless rate to surge to 5.5% in 2020 due to increasing business closures in some industries.

Supporting the labour market would help re-energise consumer spending which, despite having grown at a respectable pace of 6.7% in 1Q2020, is expected to moderate significantly in the following three quarters of the year. Hence, other measures to entice consumers to shop on the high street came as no surprise (among others, the national "Buy Malaysia" campaign, the inclusion of ePenjana credits in e-wallets and tax incentives for the purchase of passenger cars). Malaysia's growth is highly dependent on private consumption which normally contributed more than 70% of headline GDP growth in the past 10 years.

Despite the proposed actions being commendable, it will take time for the labour market to recover as workers need to be reskilled and possibly absorbed into different industries than they were in previously. This is because some SMEs in the affected industries may have to unwind their businesses, forcing their workers to seek other jobs in totally different industries. Hence, it will take time for these workers to restore their income back to pre-crisis levels.

Measures to further assist SMEs have also been expected. This is because further efforts to support them are certainly needed despite the assistance already provided by the government through the Prihatin Economic Stimulus Package (ESP). The pressing need for greater assistance can be seen from the fact that the RM10 billion worth of Special Relief Facility (SRF) provided to businesses by Bank Negara Malaysia has been fully utilised. While this is a commendable effort that benefits about 20,000 SMEs, it provides a breather only to a small fraction of Malaysia's 900,000 SME establishments.

From a macro perspective, PENJANA will squarely focus investors' attention on the government's fiscal and debt positions. With additional spending to uplift the economy, coupled with plunging global crude oil prices, MARC is now looking at a budget deficit-to-GDP ratio of between 6.0%-6.5% of GDP in 2020, slightly lower than the level registered during the GFC. This is to be expected and will not pose much problems to the economy as budget deficits are escalating everywhere in the region. Even Singapore, a country that normally records budget surpluses, is expected to incur its largest budget deficit since its independence due to higher spending to reflate the economy.

In our view, investors would be more focused on federal government debt level which is a whisker away from the self-imposed limit of 55% of GDP. Given that budget deficits are likely going to rise to around RM85-RM90 billion in 2020, according to our estimate, Malaysia's debt level would likely breach its self-imposed limit in the near term. Having said this, the plus point is that Malaysia's government debt is predominantly sourced domestically through issuances of MGS, GII and MITB. This, to some extent, insulates the government from foreign exchange risks.

The economy will not be significantly affected if approval to breach the debt limit is granted by the Parliament. Such approval would likely be granted given that, from the policymakers' perspective, the current crisis calls for extraordinary policy measures to rehabilitate the economy. However, investors who do not view this from the government's policy perspective may look at the previous incident of the debt limit uplift in 2009 (from 45% of GDP to 55% of GDP) as an example that a new debt limit could be permanently introduced.

Another important consideration, at least from the investors' point of view, is the reaction by international credit rating agencies (CRAs). The good news is that, thus far, international CRAs have expressed confidence over Malaysia's sovereign rating. Notwithstanding this, given that government debt could now surpass its self-imposed threshold, the guessing game over international CRAs' future reaction will continue. This is despite the fact that from a macro perspective, a sovereign rating is not really a testimony of a country's economic performance. It is merely an assessment of the government's ability and willingness to service its debt fully and on time. And in the case of Malaysia, the federal government foreign currency-denominated debt only accounts for a mere 3% of total government debt.

The government's efforts to support the economy through various economic stimulus packages should be applauded. They are meant to reduce the impact of the crisis on the rakyat and businesses. Understandably, the newly unveiled economic recovery plan is different than the previous National Economic Recovery Plan (NERP) formulated in 1998 during the Asian Financial Crisis which placed a special focus on efforts to stabilise the financial market (i.e. currency). The current economic episode is starkly different from the crisis faced by Malaysia in 1998. During that time, measures to stabilise the financial market were prioritised as they would enable macroeconomic policies to be implemented smoothly as well as prevent difficulties in servicing external debt.

From a macro perspective, although the current financial market has thus far remained resilient, it is worthwhile to once again draw up a specific game plan to safeguard the financial market should its volatility increase. An especially weaker currency would lead to falling business confidence, rising imported inflation and increasing portfolio capital outflows. All these would affect investors' confidence on the overall economy.

Ultimately, the success of a recovery plan hinges largely on its execution. Hence, proper coordination in carrying out its implementation is critical to stabilise and uplift the economy to its potential again.

Nor Zahidi Alias, +603-2717 2936 / zahidi@marc.com.my