Fitch Forecasts MCO 2.0 Will Be Extended, More Stimulus Announced

Prime Minister Muhyiddin Yassin announced a stimulus package worth RM15bn, or 1.1% of GDP. The package, dubbed the Permai Stimulus Package, includes the measures to extend tax relief for covid-19 tests, cash aid for 11.1 million receipients, one off handout worth RM66mn to cab and bus drivers, tax break for local assembled cars, handphone and laptop purchase. The government will set aside MYR2.2bn for special charity; and expand the wage subsidy program to cover all employers.

While the announcement of the Permai package is in line with the view for the government to implement fresh
stimulus to counteract the impact of the new round of lockdown measures, however, at just 1.1% of GDP, the impact is likely to be muted. Fitch expects the lockdown measures to last beyond the initial two-week period and the extended duration will do increasing damage to Malaysia’s 2021 growth outlook, which would otherwise have been set to see a swift recovery. According to the agency, the package also poses some downside risks to the 2021 fiscal deficit forecast of 5.5% of GDP, this goes against remarks made by Finance Minister Tengku Zafrul, who said the stimulus will not impact our GDP even if more capital injection is required.

Fitch Solutions believes this will not be the last round of fiscal stimulus enacted in 2021 and is likely meant as an initial stopgap to offset the impact of the first two weeks of the lockdown. They are confident that the lockdown measures will have to be extended as indeed, the previous lockdown in Q220 lasted close to a quarter before the outbreak then was contained, and it was a much milder one compared to the current third wave which has seen daily cases exceed 4,000 on January 16.

The government will likely have to introduce more stimulus, as soon as later in Q1, as the lockdown is extended, especially since PM Muhyiddin has pledged to hold snap elections (and hence needs to shore up support) once his administration has succeeded in containing the third wave. This development lends further strength on the view that the government will likely raise the debt limit again over the coming quarters in order to finance more stimulus to support the economy.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company FSG is solely responsible for the content of this report, without any input from Fitch Ratings.

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