Covid-19: Impact on

Malaysian Financial
Markets
By:
Syed Alwi bin Mohamed Sultan
Managing Director, ABC Strategy Sdn Bhd
18 October 2020
Covid-19: A Snapshot View of the Pandemic

• In the nine months since it

started in Wuhan (as at
September 2020), the virus
has infected more than 33
million people and killed more
than 1 million.
• Malaysia started a nation-wide
lockdown called Movement
Control Order (MCO) on 18
March, 2020 and started
easing the measures in June
2020.
• In mid-September, Malaysia
entered the third wave which
is far worse than before. As at
Oct 10, 2020, Malaysia has
had more than 15,000 cases
resulting in 155 deaths.
WHAT HAPPENED BETWEEN
JANUARY – MARCH 2020
Global Trade Volumes Plunge

Salient points:

• China recorded a 7.3% fall in

imports in January and a further
fall of 3.2% in February.

• Imports to Japan contracted nearly

9% in February compared with the
previous month, the largest
contraction of any major economy.

• Industrial production in Asia’s

emerging economies narrowed by
9% in February compared with the
same period last year.
Purchasing Managers’ Index (PMI) Severe Drop in Q1FY2020

Salient points:

• PMI in major trading countries with

Malaysia went into freefall, which
invariably affected Malaysia’s
production levels.

• Business conditions dropped

severely since January 2020 which
is an early warning of an economic
contraction

• This is also an indication of potential

increase in unemployment levels
across manufacturing industry

• There were already more than 22

million job loss claims made in US
alone between March and April.
Malaysia’s PMI Index Before MCO

Salient points:

• The IHS Markit Malaysia

Manufacturing PMI was already
contracting for the last 3
consecutive months since January
2020.

• The contraction in March 2020 was

the steepest since September
2019.

• A headline PMI reading of 31.4

would indicate zero annual growth
rate of GDP. In March, the PMI was
at 48.4
THE STIMULUS MEASURES
The Stimulus Package – Wage Subsidy

1. Under this wage subsidy program, eligible

companies with local workers earning
RM4,000 and below will receive wage subsidy
assistance of between RM600 (for companies
with more than 200 workers) and RM1,200
(for companies with less than 75 workers)
between April to September 2020.

2. It is valued at RM5.3billion and expected to

affect 2.7million workers.

3. However, the programme does not stop

employers from downsizing their staff count.

4. As of May, unemployment was at 820,000

people before further job cuts in large
organizations that occurred in June-Sept.

5. Youth unemployment is at 13% and this

doesn’t include recent graduates coming to
the market.
Wage Subsidy – Examples Elsewhere

• On 27 March 2020, the US Government launched Paycheck Protection

Program ie loan scheme to incentivize job retention.
• The loans will be forgiven if all employees are kept on the payroll for eight
weeks from the day of disbursements of the loan.

• In February 2020, the Singapore Government launched the Job Support

Scheme (JSS).
• The government will co-fund the first S$4,600 of gross monthly wages
paid to each local employee, with subsidies ranging from 20%-75%,
tiered according to industry sectors.

• On 20 March 2020, the UK Government launched Job Retention Scheme.

• Grant for all employers to cover up to 80% of the wage costs of
“furloughed” employees, up to a cap of £2,500 per employee per month.
 The Stimulus Package – Debt Moratorium

• From April to September 2020, banking institutions were

instructed to grant loan moratorium to its SME and
individual customers on all loan/financing repayments.

• Originally, the moratorium was only a deferred period to

repay the loan/financing repayments with accrued interest
or profit. This means that banks would still charge the
customers interest or profit for the 6 months of
moratorium.

• Subsequently, most banks agreed to even waive this

interest and profit for the 6 months.

• At the end of the moratorium in end-September, banking

institutions started offering selected and targeted
extensions to the moratorium to seriously affected
customers i.e lost jobs and deduction in salary.

• This loan moratorium is presumed to cost the economy

and banking institutions RM100billion, eventhough this is
not a direct fiscal stimulus but rather a deferred cashflow
incentive.
Monetary Policy Through Interest Rate Reduction

Malaysia’s policy rate

was reduced 4 times
since January 2018,
down from 3.25% to
1.75%
THE IMPACT IN Q2 FY2020
GDP for Q2 FY2020
PMI – Impact of the Stimulus Measures

Malaysia’s Manufacturing PMI (Apr-June 2020) Salient points:

• Following lockdown measures, the

PMI dropped to its steepest low in
April 2020, at 31.3.

• Subsequently, following the

restarting of the economy in June
2020, the PMI surged to 51.0.
Demand started to increase
eventhough the global conditions
were still subdued.

• Since June 2020, the PMI has

consecutively been contracting
with production trend deteriorating
and new orders remain unchanged
from previous months.
 Unemployment in Malaysia

• The unemployment level in Malaysia

was at 3.9% as at March 2020 with
more than 610,000 unemployed.

• This hit a peak of 860,000

unemployed people in May 2020
reaching 5.3%.

• With the stimulus efforts of the

government, jobs creation improved
since May and as at August, the
unemployment rate is 4.7% with
741,600 unemployed people.
Quiz: Trend in MGS Yields

Question:
The 10-year MGS yields dropped by 49 basis points
in June 2020 against the previous quarter ending
March 2020. Why?
a) There was an increase of inflows of funds
especially from non-resident portfolio inflows
which were channeled into the domestic bond
market, which resulted in decline of MGS yields.

b) The dovish monetary policy resulting in the

reduction of OPR rates by BNM by a total of 125
bp since January 2020, has resulted in a low
interest rate environment and has also resulted
in a decline in MGS yields.

c) The weakening Ringgit caused by OPR cuts

resulted in attractive valuation of domestic
assets for non-resident investors. This resulted in
higher demand for MGS which resulted in
decline in MGS yields.
Quiz: Trend in MGS Yields
Question:
The 10-year MGS yields dropped by 49 basis points
in June 2020 against the previous quarter ending
March 2020. Why?
a) There was an increase of inflows of funds
especially from non-resident portfolio inflows
which were channeled into the domestic bond
market, which resulted in decline of MGS yields.

b) The dovish monetary policy resulting in the

reduction of OPR rates by BNM by a total of 125
bp since January 2020, has resulted in a low
interest rate environment and has also resulted
in a decline in MGS yields.

c) The weakening Ringgit caused by OPR cuts

resulted in attractive valuation of domestic
assets for non-resident investors. This resulted in
higher demand for MGS which resulted in
decline in MGS yields.
d) All of the above
Net Foreign Flow to MGS and GII Increased in Q2

The net foreign inflow into MGS/GII increased by RM9.3billion in Q2FY2020

USD/MYR: 365-Day Historical Chart

Eventhough MYR appreciated against USD in Q2, but it is still at depreciated levels against
the rate in January 2020

Oct 7, 2020:
RM4.15
Stock Market Performance

• The performance of most domestic equity

markets in the region showed an
improvement in Q2 FY2020 as most
economies started to come out of their
hibernation.
• The Malaysian FBM KLCI, as at end-June,
increased by 11.1% to close at 1,501 points
(end-March: 1,350.9 points).
• The strong performance in the equity
market in Malaysia was boosted by higher
resident participation, despite continued
non-resident outflows.
• However, beginning end-September, with
the ending of loan moratoriums, there was a
clear outflow from retail investors from the
equity market.
Banking System Capable of Absorbing Pandemic Shock
Financing through the Banking System

• The reduction of SRR to 2% (on 20 March

2020) released approximately RM16billion
worth of liquidity into the banking system.
• However, net financing in Q2 expanded at
a slower pace at 3.7% as compared to
4.7% in Q1FY2020.
• This was mainly attributed to the
settlement of a one-off large corporate
bond issued in Q1FY2018 that came to
maturity.
• The outstanding balance in loans and
financing granted by the banking industry
increased by 4.1% during Q2FY2020.
• But can we conclude that the banking
industry was supportive of funding
economic growth during this crisis?
Financing through the Banking System

In Q2FY2020:

a) Total Loan approvals declined 39.3%

b) Total Loan disbursement declined by
15.4%
c) Loan approvals for business enterprises
declined by 20%.
d) Loan approvals for SMEs declined by
10%
e) Loan disbursements for SMEs declined
by 26%.
f) Loan approvals for households declined
by 56.8%
g) Loan disbursements for households
declined by 37%.
Quiz: Should BNM Further Reduce OPR in Next MPC Meeting?
YES
a) Because the rate reduction will result
in a weaker Ringgit which can
support our manufacturing and export
industry, as Malaysian goods will look
more competitive. This will boost
balance of trade and GDP.
b) Because the rate reduction will help
ease the debt obligation of borrowers
as the virus continues to spread and
affect livelihoods of people especially
individuals and smallholders. Lower
rate will also mean more disposal
income to boost economic growth
through consumer spending.
NO
a) Any further rate reduction will
depreciate Ringgit further and
reduce income of exporters and
increase the inflation from imported
goods.
b) The rate reduction and weakening
of the Ringgit, will result in a
weaker position to service foreign-
currency debt. This will raise the
possibility of a sovereign debt
default.
PMI – Impact of the Stimulus Measures

Malaysia’s Manufacturing PMI (12 months) Salient points:

• Following lockdown measures, the

PMI dropped to its steepest low in
April 2020, at 31.3.

• Subsequently, following the

restarting of the economy in June
2020, the PMI surged to 51.0.
Demand started to increase
eventhough the global conditions
were still subdued.

• Since June 2020, the PMI has

consecutively been contracting
with production trend deteriorating
and new orders remain unchanged
from previous months.
External Debt as at July 2020

Malaysia’s External Debt (July 2020) Salient points:

• Malaysia’s external debt stood at

RM1.003trillion as at July 2020,
which is an increase from
RM975billion in Q1.

• The external debt is 69.3% of GDP.

However, almost RM700billion of
these external debt are
denominated in foreign currency
where there is a natural hedged
position.

• Malaysia still has a surplus Balance

of Trade of RM13billion and surplus
current account of RM7.5billion.
Core Inflation in Q2 2020

Salient points:

• Headline inflation declined to -2.6%

in Q2 FY2020.

• This was primarily due to

substantial decline in retail fuel
prices of the average RON95
(RM1.37 (Q2) vs RM1.96 (Q1))

• Core inflation moderated to 1.2%

(Q2) from 1.3% (Q1) due to
moderation of demand and weaker
labour market conditions.

• The improving demand in Q3 may

counter any effects of a deflation.
Quiz: Should BNM Further Reduce OPR in Next MPC Meeting?
YES
a) Because the rate reduction will
result in a weaker Ringgit which
can support our manufacturing and
export industry, as Malaysian
goods will look more competitive.
This will boost balance of trade and
GDP.
b) Because the rate reduction will
help ease the debt obligation of
borrowers as the virus continues to
spread and affect livelihoods of
people especially individuals and
smallholders. Lower rate will also
mean more disposal income to
boost economic growth through
consumer spending.
NO
a) Any further rate reduction will
depreciate Ringgit further and
reduce income of exporters and
increase the inflation from imported
goods.
b) The rate reduction and weakening
of the Ringgit, will result in a
weaker position to service foreign-
currency debt. This will raise the
possibility of a sovereign debt
default.
How Does the OPR Affect Financial Players

1. Treasury department/ Fund Managers

2. Loan applicants/ Bond issuers
3. Depositors
4. Business owners
Conclusion

1. As long as there is no vaccine available, we cannot predict with certainty the

length of the economic recession.
2. As such, governments have to cleverly balance the use of fiscal and monetary
policy tools to spur economic performance while also look after the wellbeing
and welfare of its population.
3. Of all the economic challenges caused by the Covid19 pandemic,
unemployment is the most critical issue. It is hoped that the Budget
announcement will tackle this with due seriousness.
4. Investing during this crisis requires great wisdom. Cash preservation seems to
be the norm thus dividend payout is no longer an indicator for investing
decisions. Investors have turned to bonds and bond funds to protect against
investment losses in equities.
5. Banking institutions have a social and moral obligation to do more and behave
in countercyclical way to support and sustain the economy and livelihoods.
6. Political stability is now, more than ever, the best currency for economic growth.
Thank You