BNM can help finance budget deficit, but under strict conditions

Among the conditions include the govt paying the amount borrowed no later than 3 months after the end of the FY when the financing was provided

By ASILA JALIL / Pic TMR

IT IS possible for Bank Negara Malaysia (BNM) to step in and finance the budget deficit the government may face, but the terms provided would still put the government in a tight situation.

Maybank Investment Bank Bhd (Maybank IB Research) chief economist Suhaimi Ilias (picture) said the government has RM10 billion left under the Covid-19 Fund to mitigate the impact of the virus, which has entered into another wave in the country.

The fund was established under the Temporary Measures for Government Financing (Covid-19) Act 2020 with a RM65 billion allocation for the government. It was estimated that RM38 billion was spent last year, while another RM17 billion is allocated for this year.

Asked if the central bank would step in to finance the budget deficit which is expected to be 6% of GDP last year and 5.4% this year, Suhaimi said the terms provided are “almost” designed to prevent the matter from occurring.

“By law, there is provision in allowing the central bank to finance the government deficit, but I think the terms and conditions are very strict.

“Among them is that the government must pay the amount borrowed no later than three months after the end of the financial year (FY) when the financing was provided and there are no concessionary terms for the lending by the central bank to the government appearing on market.

“So, it is almost designed to discourage the government from approaching BNM to provide financing for its deficit,” he said in a webinar titled “Market Outlook 2021: Steering Through Volatility” last week.

Putrajaya has allocated RM322.5 billion in Budget 2021 in an effort to revive the economic activities after experiencing a downturn brought by the Covid-19 pandemic.

All states in Malaysia are currently experiencing a second round of lockdown, except for Sarawak, as the number of daily infections has not shown signs of slowing down after breaching the 4,000 mark on Jan 16.

On Saturday, the tally reached another record high with 4,275 cases, surpassing the previous record of 4,029.

Although the government reintroduced the Movement Control Order (MCO), it still allows five essential sectors to operate namely construction, manufacturing, services, trade and distribution, and plantations and commodities.

Suhaimi said this translates to about 78% of the economy operating under the new round of movement restrictions, which is higher compared to about up to 45% when MCO was first introduced in March last year before it slowly inched to 52% by April.

“We estimated daily economic losses to be smaller under MCO 2.0, at least RM700 million per day to as much as RM1 billion per day.

“It is definitely lower than the RM1.5 billion per day of economic losses experienced during the first MCO,” he said.

He also reiterated that the firm’s GDP forecast for 2021 of 5.1%, is lower than the official consensus of between 6.5% and 7.5%, as well as International Monetary Fund’s forecast of 7.8%.

Maybank Kim Eng head of regional equity research Anand Pathmakanthan said 2021 will see earnings recovery in various sectors.

The firm is positive on equity market conditions this year as it sees sustained stimulus, not just in terms of fiscal stimulus but monetary stimulus as well.

“Last year, the message was all about how far earnings can decline but this year is all about earnings recovery,” he said.

The banking and financial sector, which was estimated to record a 19.2% loss last year, is projected to record 17.6% growth in earnings this year.

The healthcare sector is poised to rebound 61.3% in earnings this year after a loss of 34.9% last year, while automotive is estimated to record a 17.6% earnings growth from 17.2% loss last year.

As for the technology sector, the firm is of the view that its earnings will increase to 40% this year from 23.7% last year.

Anand also said there has been tangible benefits to Malaysia from the trade war between the US and China as there have been re-allocation of imports and exports by both countries.

“Asean in general is quite well positioned to continue to benefit from the trade war between the US and China. We have been benefitting at macro level and the obvious winner is the tech space,” he added.