Malaysia’s king has declared a nationwide state of emergency for the first time in more than half a century. An independent committee would be established to advise the king on the duration of the state of emergency, which is set to expire on 1 Aug unless the outbreak abates sooner.
The emergency decree gives Prime Minister Tan Sri Muhyiddin Yassin and his Cabinet extraordinary power to tackle Covid-19 cases, such as allowing police and military to assist in public health measures and even introducing new laws without the approval of Parliament.
What does this mean for Malaysian Economy?
Details outlined by the PM do not appear to place additional curbs on economic activities beyond what was stipulated under the Movement Control Order. CIMB estimates a near-term GDP drag to the tune of -0.7% point for each fortnight of MCO implemented. A protracted period of emergency and concerns over escalating political tensions in Malaysia may fan headwinds by deflating consumer and business sentiment, as well as deterring foreign direct investments over the medium- to long-term.
What does this mean for Malaysian Market and the Ringgit?
CIMB views that the state of emergency declaration could delay the potential return of foreign funds to Malaysia’s equity market due to political uncertainty. This is in view of recent withdrawals of two UMNO MPs support for the PN government, leaving the government with a backing of only 109 MPs out of 220 MPs currently. The initial assessment is the implementation of MCO 2.0 will lead to higher corporate earnings risk, while the state of emergency could negatively impact foreign investors sentiment on Malaysia. CIMB maintains the end-2021 KLCI target of 1,759 but expect the market to be more volatile on concerns over earnings and political risks.
The weaker growth trajectory and inflation means BNM is expected to remain the door open for further rate cut while pending the effective roll-out of the COVID-19 vaccines. On the Malaysia Government Securities (MGS), we expect 10 year MGS yield to be gradually higher in the range of 2.75% to 3.10 towards end of 2021, taking into account the recent surge in COVID 19 cases, subsequent MCO, rolling out of COVID-vaccines and the increasing US government bond yield post the US congress being controlled by the Democrats that pave an easier path for Biden to formulate policies.
On Ringgit, CIMB maintain the USDMYR forecast at 4.08 in 1Q2021, before Ringgit gradually recover to 4.03 to 4.05 in 2H 2021. While a potential cut in OPR to cushion economic growth and a higher US government bond yield could weigh on the Ringgit; a higher US fiscal stimulus that is expected to boost commodity demand, shall support the Ringgit.
What’s Next for Investment?
CIMB remains neutral on local equity and overweight on regional equity. Customers are recommended to stay invested in the longer term with a well-diversified portfolio to reduce the potential risk of massive losses during market volatility.
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