Economists still expect more monetary support, despite Malaysia's latest fiscal package

MALAYSIA'S latest assistance package may not change expectations for further monetary support, said economists, who still expect an upcoming 25 basis points cut to the overnight policy rate.

On Monday, Malaysia announced another RM15 billion in fiscal support - funded from reallocated expenditure - to offset the effects of Covid-19 curbs that began Jan 13, including the reimposition of the Movement Control Order (MCO) in several states.

UOB senior economist Julia Goh and economist Loke Siew Ting estimate that the package could involve some RM4 billion (S$1.32 billion) in funds reallocated from 2021's total budget expenditure of RM322.5 billion.

They expect a "minimal impact on the government's fiscal targets", estimating a fiscal deficit of 5.7 per cent of gross domestic product (GDP) in 2021, larger than the official forecast of -5.4 per cent.

Barclays economist Brian Tan is less sanguine, sticking to an expected fiscal deficit of 6 per cent of GDP - similar to the projected 2020 deficit.

"As we had noted previously, with the tighter social-distancing measures set to create pressure for more expenditure to support the economy, as well as a renewed hit to domestic demand likely to hurt revenue collection, the government would likely face even greater challenges narrowing the 2021 deficit to 5.4 per cent of GDP as budgeted," he added.

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Even as the government steps up on the fiscal policy front, however, expectations endure for another 25 basis point rate cut. Barclays expects this cut on Jan 20, "though this is a close call", said Mr Tan: "We believe the return of MCO-level lockdowns implies an economic hit too big for the central bank to ignore."

He noted that the Health Ministry's Director-General Dr Noor Hisham Abdullah has warned that the 14-day MCO may not be sufficient to contain the current outbreak - supporting Barclay's base-case scenario that curbs may be extended to last 28 days, with a correspondingly larger economic impact.

With Malaysia's monetary policy decisions occurring every two months, the UOB economists expect a 25 basis points cut some time in the first quarter, but added: "However, the pressure to ease may be lesser with the latest assistance measures and the government's assessment that the economic impact from current MCO is more manageable."

In contrast to the large-scale lockdown in March and April last year, the current MCO is more modest, with many economic activities unaffected.

If the MCO is assumed to last for at least four weeks, the UOB economists expect the measures to shave about 1 percentage point off 2021's full-year GDP growth, with estimated economic losses of about RM12 billion.

With the MCO, UOB lowered its forecast for Malaysia's 2021 growth to 5 per cent, down from 6 per cent previously.

"We are cautious as risks are tilted to the downside, particularly as the current MCO could be extended depending on pandemic situation. This weighs on private consumption and seasonal Lunar New Year spending, while the unemployment rate remains elevated," they said.