Analysts sees CMCO having minimal impact on Malaysia's GDP

A woman wearing a mask in the design of the Jalur Gemilang is pictured in Kuala Lumpur August 16, 2020. — Picture by Yusof Mat Isa
A woman wearing a mask in the design of the Jalur Gemilang is pictured in Kuala Lumpur August 16, 2020. — Picture by Yusof Mat Isa

KUALA LUMPUR, Oct 13 — The implementation of the conditional movement control order (CMCO) is expected to have minimal impact on Malaysia’s gross domestic product (GDP).

The government had enforced the CMCO effective Oct 13-26 in Sabah and Oct 14-27 in Selangor, Kuala Lumpur and Putrajaya.

MIDF Research said as the CMCO is less restrictive compared to a targeted enhanced movement control order (TEMCO), the disruptive impact should be marginal as most economic activities will be allowed to continue as usual, subject to the prescribed standard operating procedures (SOPs).

Hence, the research house said it is maintaining its GDP forecast at a -4.8 per cent contraction for 2020.

“In our previous report, we estimated that should a month-long TEMCO be implemented in Klang Valley, its impact to Malaysia’s economy could reach RM28.8 billion in output loss or -1.9 per cent of GDP from the fall in aggregate demand.

“This is because, based on the economic size, Selangor, Kuala Lumpur and Putrajaya contributes approximately 40 per cent to Malaysia’s GDP. This would have resulted in a deeper contraction in Malaysia’s economic growth this year, with GDP estimated to contract at a steeper pace of -6.7 per cent,” it said in a note.

The estimates are calculated based on the assumption that the TEMCO in Klang Valley is going to be as strict as the MCO during the first wave of the Covid-19 outbreak, it said.

On the demand side, physical movement restrictions would adversely impact both the level as well as the variety of consumption activities, it said.

“We recognise that the major impact of CMCO on the economy is mainly from weaker consumer spending and its spillover effect to the services industry, particularly consumer-related sub-sectors such as retail trade, restaurants, hotels, travel, education and recreation services,” it added.

As for the market, MIDF Research expects that there will be some short-term negative sentiment following the CMCO, saying that markets will likely be volatile at the current juncture, presenting a very precarious situation to investors.

“We believe that investors would need to select potential stocks which have solid fundamentals and defensive earnings in nature. 

“Furthermore, this should be paired with those that give very attractive dividend yields which should moderate any downside risk,” it noted, adding that the cascading impact of CMCO on corporate earnings could also be limited.

Overall, MIDF Research is maintaining Bursa Malaysia’s FBM KLCI year-end 2020 target of 1,400 points.

Meanwhile, CGS-CIMB has lowered its GDP projection for 2020 to -4.4 per cent from -4.0 per cent, factoring in the CMCO and data disappointments in July-August, which impacted the third quarter growth forecast.

It reckoned that the CMCO will dampen market sentiments, and corporate earnings recovery could disappoint due to lower consumer spending.

Overall, the affected states collectively accounted for 46.6 per cent of Malaysia’s GDP in 2019, with Selangor at 24.2 per cent, KL and Putrajaya at 16.4 per cent, and Sabah at 6.0 per cent.

“Each incremental two-week extension of CMCO 2.0 beyond Oct 28 subtracts a further 0.18 percentage point,” it added. — Bernama