KUCHING: The RM250 billion Economic Stimulus Package (ESP) assistance comes at the cost of a sharply higher fiscal deficit, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) observes in a Malaysia strategy report.
Maybank IB Research recapped that the package essentially aims to cushion broad consumer and business activities through the three to six month estimated Covid-19 economic disruption period.
“However, this assistance comes at the cost of a sharply higher fiscal deficit, even as oil-related and income or corporate tax revenues looks to undershoot,” the research arm said.
“After two years of fixed income outperformance, the risk-reward is now in favour of sharply-discounted equities as the ringgit bond market braces for a supply deluge and potential rating downgrades.”
On market positioning, the research arm remained defensive notwithstanding the recent KLCI rebound off lows, principally via conviction yield picks, exporters or externally-facing stocks, and cashflow resilient sectors such as healthcare, utilities and telcos.
Maybank IB Research highlighted that of the headline RM250 billion ESP quantum, only 10 per cent or RM25 billion comes directly from the government budget, mostly via direct cash transfers.
It further highlighted that the remainder, is sourced from off-budget avenues, primarily by the bringing forward of consumption via the banking system’s RM100 billion six month loan repayment moratorium, and RM50 billion in Employees Provident Fund (pension fund) contribution or withdrawal allowances.
“Consumers and corporates will welcome the cashflow support, albeit at the cost of future consumption, through this extraordinarily challenging time – the equity market will also welcome the modest call on government-linked corporations (GLCs), primarily a RM150 million electricity rebate subsidy from Tenaga Nasional Bhd, which is a circa two per cent hit to financial year 2020 (FY20) earnings; telco impact re free internet is equally modest.”
Maybank IB Research noted that the equity market will also welcome empowering of financial guarantee insurer Danajamin with RM50 billion additional funding (via government-guaranteed bonds) to guarantee up to 80 per cent of the working capital financing of troubled corporates, effectively capping net exposure of banks (i.e. potential non-performing loans) who are extending further related creditine.
“While Malaysia is certainly not alone in deploying the fiscal firehose, it does so from a relatively weak starting point, with government debt or gross domestic product (GDP) already close to the 55 per cent (self-imposed; Budget 2020 estimate was 52.5 per cent) ceiling, and 3.2 per cent deficit target already under stress from undershooting oil-related and corporate tax revenues, collectively over 50 per cent of total fiscal revenues.
“Compared to Mayban Kim Eng (MKE) first cut estimate of an increase in the deficit to 4.9 per cent (implied debtor GDP: 58 per cent), the Ministry of Finance is indicating a lower four per cent deficit (implied debt or GDP: 56.9 per cent), with the underlying circa RM17 billion funding gap to be covered via budget reallocations and higher dividends – of three annual dividend paying entities, Petronas (RM24 billion projected) is likely to deliver another special dividend (Budget 2019: RM30 billion) – by contrast, Khazanah (RM1 billion) and Bank Negara Malaysia (RM2 billion) are minnows.”
“While S&P last week maintained Malaysia’s ‘A-’ sovereign rating, it is on the expectation of medium-term commitment to fiscal consolidation.
“The combination of rising Malaysian Government Securities (MGS) and Government Investment Issues (GII) supply, curtailed domestic or foreign demand and debt rating risks are both sovereign (Fitch review next) and Petronas (Moody ‘A2’ rating is still one notch higher than sovereign after June 2019 downgrade) will pressure MGS yields and corporate credit spreads.”