PETALING JAYA: The impact of the Covid-19 outbreak is likely to be around 0.4 percentage points of Malaysia’s GDP in the first quarter, on the assumption that the viral infection does not become a more major issue according to a special report by OCBC Bank’s treasury research.
“Given the slow momentum from the GDP data from Q4 2019 that was just released, this would compound the slowdown even more and compelled us to downgrade the forecast for Q1 GDP,” said the report.
OCBC has adjusted its growth estimates for the full year to 4% from its previous conservative estimate of 4.2%.
“In terms of policy action, we see a good chance of another rate cut by Bank Negara Malaysia (BNM) in the upcoming meeting on March 3, bringing the overnight policy rate (OPR) to 2.5%,” it said.
OCBC pointed out the anticipated cut will follow the 25 basis points (bps) reduction enacted last month, but it believes that BNM may be more inclined to act now because of the virus threat.
It also said that any fiscal stimulus package by the government will likely be very limited because of the debt constraint.
With the outbreak, the bank also highlighted that credits with a high exposure to mainland China will feel the most impact.
“However, we also consider those credits where the impact will be indirect through business links and exposure to China imports and exports,” it said.
According to the note, industries that will be most affected include those related to tourism, such as airlines and hospitality related credits.
“Financial institutions will also feel the impact, however their existing business profiles and scale as well as their systemic importance should shield them from adverse impacts for the time being.
“We also see higher credit risk among high yield names given heightened risk in Chinese funding markets which may affect their refinancing plans,” it said.
The bank said it is monitoring nine issuers under its Singapore dollar coverage for a potential downgrade.
It explained that the group mostly consists of issuers whose credit profile had weakened in the last 12 months, with the outbreak of Covid-19 potentially tipping them into a downgrade faster rather than the outbreak primarily causing a downgrade per se.
On the whole, it said that credit profiles for the vast majority of the companies under the bank’s coverage should remain stable for now with key credit drivers remaining unchanged.
“This is, however, premised on a global recovery within 3-6 months, if the situation exists for a prolonged period (unresolved in 12 months), the indirect impact (e.g. damage to economic growth) could be of higher concern, which may in turn impact more credits under our coverage,” it said.
In regards to forex, OCBC said that the overall near-term risk sentiment has been relatively supported despite the ongoing headlines.
“Further out, it is clear that there will be a negative hit on the economy. Growth downgrades have already begun,” it said
Overall in the commodity space, OCBC expects depressed prices to continue, whether that be energy, agricultural, industrial metals or rubber.
“There is a case for deferred consumption for most markets, but any catch up is unlikely to fully compensate the demand drawdown in this period. The longer the coronavirus situation lasts, the starker this demand slowdown would be,” it added.