Fitch Solutions sees Malaysia’s reliance on banks, pension savings in stimulus as risk to long-term growth

Kenneth Tee
An Alam Flora personnel sprays disinfectant in Kampung Baru to curb spread of Covid-19 in Kuala Lumpur March 31, 2020. — Picture by Ahmad Zamzahuri

KUALA LUMPUR, March 31 — Fitch Solutions warned today of risks to Malaysia’s long-term growth and social security from financing its Covid-19 stimulus by drawing on pension funds and relying on the private banking sector to absorb the economic shocks, as fallout from the outbreak continues to bite.

The research unit said it does not expect the RM250 billion ‘Prihatin Rakyat’ economic stimulus package to significantly improve the economic outlook as reflected in its growth forecast being maintained at 1.2 per cent for 2020.

This follows after Prime Minister Tan Sri Muhyiddin Yassin said Malaysians aged 55 and below were now allowed to withdraw a maximum of RM500 monthly for a period over 12 months from their Employees Provident Fund (EPF) Account Two to buy essential goods.

“We wish to stress the risk that will come with any additional stimulus packages that Malaysia might be forced to implement to deal with the economic shock of the Covid-19 pandemic, as these are likely to rely on the same funding strategies of drawing on pension savings and use the private banking sector to absorb the economic shock.

“We reiterate that while this can avert a short-term worsening of the fiscal balance, it has long-term consequences for social security.

“Furthermore, repeatedly relying on banks to absorb the economic shock would eventually harm the stability of the financial sector,” it said in a statement here.

It also noted that the fiscal space constraints faced by the government is evident with the government only putting up 10 per cent of the stimulus in the two packages announced so far in 2020 with 90 per cent of the outlays for the package coming from the banking sector and pension funds instead.

“With about 90 per cent of the outlays for the RM250 billion stimulus package coming from the banking sector and pension funds, we continue to see increasing risks to Malaysia’s long-term economic prospects, especially if the economic downturn as a result of the Covid-19 necessitates yet another stimulus package,” it added.

The research unit also said it was cautious as to the effectiveness of the stimulus package which did not contain much by way of cost reduction measures for businesses to help them remain viable.

“While concessionary loans and loan guarantees for businesses are a positive step, we are of the view that they are only part of the solution. Cost reduction measures are important in helping businesses remain viable, or decide that the current downturn will not exact losses that will be too costly to weather.

“If businesses instead decide that it is futile to carry on, then they will likely not take up the loans that the government is offering or guaranteeing which make up the bulk of the stimulus package,” it said.

It further added that this posed a bigger problem when combined with the fact that the loan moratorium does not contain a government-mandated halt to interest accrual. This means unless banks choose to forgo interest over the next two quarters, businesses may be hit with a large interest bill once the moratorium ends.

On March 24, Bank Negara Malaysia (BNM) ordered an automatic six-month moratorium on all bank loans — except for credit card balances — for those affected by the Covid-19 outbreak.

On a positive note, the research unit also revised its fiscal deficit forecast for Malaysia from 3.9 per cent of the Gross Domestic Product (GDP) to 5.7 per cent to reflect the increased expenditure required to fund the combined RM250 billion stimulus package announced for the year so far.

It also maintained a small but positive growth forecast of 1 per cent for private consumption in 2020 as the large increase in handouts for households will likely help to keep private consumption growth afloat.

On March 27, Muhyiddin announced a RM250 billion economic stimulus package to cushion the economic impact of the Covid-19 outbreak.

A total of RM128 billion will go towards the people’s welfare, RM100 billion to supporting businesses, including small and medium enterprises (SMEs), and another RM2 billion to strengthen the country's economy.


 

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