Response to Economic Stimulus Package 2020

By Benedict Weerasena, Economist of Bait Al Amanah

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The stimulus package was still announced despite the past week’s political headwinds, indicating the commitment of the interim Prime Minister towards restoring optimism in the Malaysian Economy. 

This much needed stimulus package which focuses on “bolstering confidence, stimulating growth and protecting jobs” will certainly help raise disposable income of households and mitigate the impact of Covid-19 on the tourism industry to a certain extent. 

The anticipation of the stimulus package managed to inject confidence in economy: For instance, the ringgit appreciated 100 basis points against the US dollar on better demand due to investors’ improved risk appetite ahead of the announcement of the government’s economic stimulus package. In addition, shares on Bursa Malaysia staged a rebound (FBM KLCI was up 10.4 points or 0.7% to 1,505.59). 

However, the optimism was short-lived as the FBM KLCI fell 1.51% in early trade the next morning, tracking the steep losses at global markets. This highlights the deep fears over the effect of Covid-19 worsened by political uncertainty which eclipsed the positive impact of the RM20 billion stimulus package. 

In fact, the stimulus package could not avert the benchmark index’s drop to its lowest level (1,456.08 points) since November 29, 2011. 

This highlights an important concern that the impact of the stimulus package on economic growth will be minimal in 1H of 2020. However, we understand that the government’s hands are tied with the drive for fiscal consolidation. 

One major question is how the new government will promote fiscal consolidation post economic stimulus package, considering government revenue is expected to drop to RM244.53 billion in 2020, down 7.1% from RM263.3 billion in 2019? In addition, Budget 2020 did not address the burning issue of the narrow revenue base, which if widened initially would certainly act as a buffer for stimulus packages like this. 

Specifically, several initiatives in this package need to be improved upon. For instance, the reduction in EPF contribution by 4% should not be a one size fit all solution, but an optional one, considering that not all employees are affected, only those in some sectors especially the tourism sector. 

In addition, this reduction will have a long-term effect of reducing employee savings, leading to social consequences, including old age poverty in an increasingly expensive future.

Next, questions abound on how effective Stimulus package without a functioning Cabinet at the moment. For instance, the bringing forward of 1,400MW of solar power investment project for MESTECC. Although the civil service of this Ministry is still functioning, clarity of direction needs to provided.

However, we welcome the adjustment of GDP growth estimates to a range of 3.2% to 4.2%, as this is much more practical, achievable and less ambitious/lofty as announced by the Finance Minister in Budget 2020.

We are still optimistic that the second half of the year may see an improvement with the strengthening of aggregate domestic demand, provided the RM20 billion fiscal stimulus package is properly implemented by a stable and functioning government. 

*For the full Economic Stimulus Package, refer to the attachment below:

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