THE move to introduce an economic stimulus package, especially in dealing with the effects of the novel coronavirus outbreak, has received the backing of economists and experts.
There is a cogent case for a stimulus package if the coronavirus’ containment efforts by China and countries to which the virus has been transmitted are unsuccessful by the first half of the year (1H20), Sunway University Business School economist Prof Dr Yeah Kim Leng said.
“By then, the Chinese economy would be severely impacted by lockdown of cities, restrictions on travel, tourism, entertainment and public events, and emergency measures such as quarantines that would sharply curtail consumer spending and business activities,” he told The Malaysian Reserve.
A worst-case scenario could potentially shave off between 0.5% and 1% of China’s economic growth, putting downward pressure on the world economy that’s projected to expand between 0.3% and 0.4% from last year’s estimated 3% growth, he added.
Finance Minister Lim Guan Eng said last Thursday that the government is not ruling out introducing an economic stimulus package in view of the coronavirus outbreak, but it was still early for the government to take action as it needs to study and analyse the extent of the impact from the virus.
“At this juncture, I agree that it is too early to mount a stimulus package given that the virus has been identified, many countries have joined in the race to develop vaccines, and fatality rates have been less scary than other pandemic outbreaks such as the SARS and H1N1.
“Moreover, we have a mildly expansionary budget for 2020 and together with unspent allocations carried forward from last year, the government’s priority for 1H20 should be on speedy, coordinated and efficient spending, and project implementation,” Yeah said.
Should economic stimulus be required, the affected sectors such as tourism, hotels and restaurants, and transport could be supported by targeted government spending and fiscal incentives to boost domestic spending in these industries.
“Specific assistance such as tax breaks, special loans and financing concessions could also be extended to companies and businesses badly affected by the prolonged pandemic outbreak,” Yeah added.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said economic activities in China could be severely impacted if the outbreak carries on for an extended period as Chinese authorities have limited citizen movement, especially in affected areas.
China’s economy could slow further in the first quarter of 2020, judging by the rapidly rising number of confirmed cases, he noted.
“The transmission channel from the slowing China economy to other parts of the world is none other than international trade. This will affect the value chain, along with related industries.
“As such, it is important to ensure that our domestic economy will continue to expand at a decent rate in order to offset the potential weaknesses from abroad,” Mohd Afzanizam said.
This entails quick wins such as speeding up the implementation of infrastructure projects, since the government has allocated a size-able amount for development expenditure in the Budget 2020.
“For investors, diversification is key. Placing more funds in fixed income instruments could help protect investments while enjoying further upside potential in bond prices, as they are inversely related to the interest-rate level,” Mohd Afzanizam added.
Meanwhile, Institute for Demo-cracy and Economic Affairs research manager in economics and business Lau Zheng Zhou said the announcement of a potential economic stimulus package gives confidence to investors that the government has the space to step into the economy, should the situation worsen.
“It is also a strong signalling that could restore some confidence and stability in the market. Hopefully, people will not make any rash decision to cut investment or spending,” he said.
It’s also possible for the administration to take a sectoral view and align with sectors with higher multiplier effects or worst-hit segments like shipping and logistics, tourism and aviation.
“Shipping matters because you can no longer ship as much to China and vice versa,” Lau said, adding that global tourism will slow as caution prevails, in turn affecting airlines and hospitality players.
The electronics and electrical sector will be highly crucial as well, given its tight link to the industrial base in China.
“There could also be tax incentives. The minister may use a mix of spending and tax cuts, but the situation must be monitored and assessed more closely before intervention happens,” Lau said.
Affin Hwang Investment Bank Bhd (Affin Hwang Capital) in a note last Friday said with China being Malaysia’s largest trading partner and a major tourist source, the coronavirus will likely reverberate across the economy and dampen economic expansion and businesses.
“While there are reports claiming that the coronavirus has been replicated and potentially leading to an antidote, we would believe that there would be a downside risk to Malaysia’s GDP growth, ringgit and corporate earnings in the immediate term, although making a proper assessment on the exact impact will likely be difficult.
“Nevertheless, with China being one of Malaysia’s and Asean’s main trading partners, a slowdown in China’s GDP growth is expected to impact the trade performance of the region including Malaysia, especially if the outbreak worsens,” the research house said.
On the tourism side, the coronavirus outbreak may negatively weigh on Malaysia’s tourist arrivals and receipts as tourists are likely to delay or cancel their travel plans, it added.
The rubber glove sector appears to be the only segment that can be singled out as a clear-cut beneficiary, a sentiment shared by investors as seen in the recent share price movements of players such as Top Glove Corp Bhd and Hartalega Holdings Bhd.
There may still be upside in the sector as price earnings (PE) valuations have not reverted to previous highs, Affin Hwang Capital said.
It’s also too early to make any proper assessment on market growth and earnings forecasts, the research firm added, thus leaving its projections unchanged.
“However, we expect GDP growth to be supported by Bank Negara Malaysia’s accommodative monetary policy and a possible fiscal stimulus. We would not rule out a further cut in the Overnight Policy Rate.
“Nevertheless, a sharp slowdown in growth would also justify a lower target PE multiple for the FTSE Bursa Malaysia KLCI (FBM KLCI). For now, we maintain our ‘Neutral’ rating and end-2020 FBM KLCI target of 1,660, based on a PE ratio of 18 times on FBM KLCI 2020 estimated earnings per share,” it added.
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