Kenanga: Riskier Investment Environment May Lead To Higher Market Risk In 2H21
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(Image: The Malaysian Reserve)

Kenanga Investment Bank has commented that the investment environment is currently riskier than six to twelve months ago, which consequently may cause a heightened market risk in the second half of 2021 (2H21). Several factors contribute to this, including the impacts of prolonged lockdowns, Malaysia’s weakening fiscal balance sheet, heightened political risk, and a risk of a Budget 2022 impasse.

“One of the reasons for that is because we are trying to get into the 18 months of dealing with this Covid-19 crisis. So much has been spent in the form of aid packages by the government, and so much resources have been put in to help support the economy. The longer we deal with this, the less room for error that we can afford,” said the research head of the bank, Koh Huat Soon.

Koh also shared that the government’s finances are strained following borrowings, causing the need to tap into alternative sources – such as the National Trust Fund – to manage the fiscal deficit. Briefly, the National Trust Fund (KWAN) was established in 1988 as an emergency fund for the country. In April 2021, the government withdrew RM5 billion out of RM19.5 billion from KWAN for Covid-19 vaccine procurement.

As such, Koh said that the government’s balance sheet is much weaker today, with its debt standing at a record high of RM95 billion to RM100 billion – equivalent to 6.3% of the country’s gross domestic product (GDP). This, in turn, will lead to limited fiscal capacity going forward as well as a need for fiscal consolidation when the country begins to recover next year.

Additionally, Koh said that the government may face challenges in passing Budget 2022 due to the political issues that it is currently facing, as well as doubts on its capacity to fund the spending.

(Sources: The Edge Markets, The Malaysian Reserve)

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