PETALING JAYA: Malaysia’s economic growth is forecast to rebound at a moderate pace in 2021, with Kenanga Research retaining its 2021 gross domestic product (GDP) forecast at 5% to 6% – which is lower than the government’s 6% to 7.5% forecast, which is expected to be revised downwards.
“We still think that private consumption is likely to improve in the third quarter (Q3) onwards. In fact, it is starting to improve in Q2. We are looking at a higher private consumption growth in the second half (H2) (6.7% growth versus 5% in H1), ” said Kenanga Investment Bank Bhd head of economic research Wan Suhaimie Wan Mohd Saidie (pic) said in an online presentation on the research unit’s market outlook for Q3 of 2021.
Wan Suhaimie said based on the research unit’s internal model, the number of daily new Covid-19 cases could drop to the three-digit level by September, and Malaysia could achieve the 80% herd immunity target in December, as the government accelerated its vaccination programme coupled with strict standard operating procedure (SOP) compliance.
Meanwhile, he also noted that the ringgit was further pressured as S&P Global Ratings has retained its negative outlook on Malaysia’s sovereign credit ratings.
Wan Suhaimie pointed out that despite the falling US dollar index and higher Brent crude oil price, the ringgit had weakened to its lowest level since early November last year due to the rising US 10-year treasury yield and lack of buying interest post-Federal Open Market Committee risk-off mood.
“The major risk to bond flows in the long term is the tapering of the United States Federal Reserve and bond buying, and sovereign credit rating downgrade because of factors like the higher Covid-19 cases and also political stability, ” he said.
Wan Suhaimie added that there was a risk that S&P Global may downgrade Malaysia’s sovereign credit rating in the next 12 to 24 months. “Recently, S&P Global had cut its growth forecast for Malaysia’s to 4.1% from 6.2%, ” he noted.
Kenanga Research also estimated the government’s budget deficit to settle at RM105bil this year (versus RM88bil in 2020), on expectations of easing Covid-19 related support in H2 as cases diminish post-widespread vaccinations and Brent crude oil prices to average US$65 this year.
“It appears that the government may be able to keep to the debt ceiling this year, but only just.
“Doubts will be raised on its financing capacity to fund Budget 2022.
“This calls for the urgent need to raise the debt ceiling soon or embark on an aggressive fiscal consolidation in 2022, ” noted the research unit, which estimated that there was headroom of about RM87bil in statutory debt raising in 2021 before the 60% debt-to-GDP threshold is reached.
“This source of funding will no doubt be supplemented by offshore borrowing where there is headroom of RM7bil, ” it said.
Meanwhile, Kenanga Investment Bank head of research Koh Huat Soon said the government’s aid packages, especially in 2021, may mean less Employees Provident Fund (EPF) support into capital markets.
In a recent report, Koh had said that given the size of the EPF’s funds, there are justifiable concerns as to how much its stressed cash-flow in 2021 might impact the institutional flows in the equity market.
“Given the EPF’s strategic asset allocation which is tilted more heavily towards fixed income (reported in 2019 to be 51% fixed income instruments, 36% equity, 10% real estate and infrastructure and 3% money market), it was bonds that saw more of the EPF’s liquidation, which thankfully, was well funded by keen foreign inflows that kept yields low, ” he said.
However, the risk of further asset liquidation by the EPF to fund withdrawals has waned considerably after June for as much as 90% of the RM80bil funds approved for the i-Lestari and i-Sinar schemes withdrawals have been paid out by end-May, stated Koh.
Koh also noted that the knee-jerk spike in Malaysian government securities (MGS) yields in November last year was in response to fears that EPF may have to reduce holdings in invested assets to fund i-Sinar withdrawals (announced in Budget 2021 tabling in November) on top of i-Lestari already approved since April 2020.
In 2020, EPF had trimmed down its MGS and government investment issues (GII) holdings from RM228.7bil in the first quarter of 2020 to RM207.3bil in the fourth quarter of 2020.
Regarding the investment theme for Q3 2021, Koh said companies like GHL Systems Bhd, Revenue Group Bhd and Managepay Systems Bhd are benefiting from the growth in digital payments.
He noted that based on Bank Negara data, e-payment transaction value (credit, debit, charge cards and e-money only) had seen a compounded annual growth rate (CAGR) of over 10% since 2007.
The total transaction value of e-payments had grown from RM61.3bil in 2007, to RM226.1bil in 2020 while from January to April 2021, it was recorded at RM87.7bil.
“Covid-19 has accelerated that shift towards paperless, contactless transaction and a growing large young tech-savvy demographic enlarges the e-payment ecosystem. Digitalisation has improved cost efficiencies of banks significantly, as the growth in cashless transactions has curtailed the use of cheques and ATMs (automated teller machines) while the convenience of online commerce and online banking reduce staff and branches, ” said Koh.