Cushioning the impact of MCO 2.0


PETALING JAYA: The new fiscal support plan will have a minimal impact on the government’s fiscal position as it will be financed by reallocating the government’s existing funds based on current priorities and through prudent spending, according to economists.

PublicInvest Research expected a RM6bil direct fiscal injection by the government under the Permai package, which would come from existing funds.

“The fiscal deficit target for the year 2021 at 5.4% of gross domestic product (GDP) is therefore unchanged, ” it said.

The RM15bil Perlindungan Ekonomi dan Rakyat Malaysia (Permai) assistance package comprising 22 initiatives, was aimed at shoring up consumer and business sentiment.

CGS-CIMB Research said the government’s swift announcement of the Permai fiscal support provided some short-term reparations to affected households and businesses.

However, it pointed out that the stimulus package would not completely offset the downside risk from the MCO 2.0 on the economic outlook.

“We expect each fortnight of MCO 2.0 to shave RM10bil or 0.7 percentage points from our headline gross domestic growth (GDP) growth forecast of 7.5% in 2021, which has not imputed the effects of MCO 2.0.

“In our view, with fiscal resources deployed, Bank Negara may adopt a wait-and-see approach at its next Monetary Policy Meeting today, maintaining its current monetary policy stance while signalling strongly that it stands ready to ease further risks to the economic recovery fester, ” it said in a note.

Bank Negara head quartersBank Negara head quarters

Meanwhile, JP Morgan noted that the size of the Permai package was smaller compared with previous stimulus packages.

This is likely due to the government’s limited fiscal space and the ability to spend, considering the currently high fiscal deficit and federal government debt levels.

The government’s fiscal deficit in 2021 is projected to be 5.4% of GDP, despite a slight reduction from an estimated 6% last year.

Meanwhile, the government’s gross debt jumped by nearly 10 percentage points over the year to 61% of GDP in the third quarter of 2020.

Despite its smaller size, JP Morgan expected the Permai package, coupled with the measures under Budget 2021, to support consumption amid the MCO 2.0.

“Both of the measures support our narrative that the overall economic trend remains one of an uneven path to recovery, ” it said.Kenanga Research said the Permai assistance package would soften the economic blow of MCO 2.0.

However, it opined that the size of the new fiscal stimulus was smaller compared with the estimated impact of the tightened Covid-19 curbing measures on the economy.“Greater fiscal injection is needed should the government extend the MCO to more than four weeks.“Nonetheless, amid the tight fiscal condition, we view that the emphasis on accelerating distribution of existing measures, providing a targeted assistance and expanding measures that exert less strain on the fiscal coffers (such as forgone revenue, guarantees, statutory bodies’ funds) as preferable, ” it said.

Contrary to several other research houses, Kenanga Research expected the country’s fiscal deficit and debt to GDP ratio to widen although the government has said the Permai package would be financed through the reallocation of existing funds.

This is primarily because of the greater tax exemptions allowed by the government under the Permai package and the recent downward revision of 2021 nominal GDP, according to the research house.Fiscal deficit is projected to widen to 5.8% of GDP from Kenanga Research’s initial forecast of 5.6%, lower than the 2020 projection of 6.3%.

In addition, the government debt is projected to expand to 64.6% of GDP, above the statutory limit of 60%.

“Note that the government debt has increased by RM81.3bil within the three quarters of last year and is expected to increase further amid the modest economic recovery, ” it added.

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