(Bloomberg) — Malaysian stocks dropped and the ringgit weakened after the government imposed a two-week nationwide lockdown to curb a relentless surge in Covid-19 infections.

The FTSE Bursa Malaysia KLCI Index fell as much as 1.6% on Monday, before paring losses to 0.9% as of 2:59 p.m. in Kuala Lumpur. The ringgit slid as much as 0.4% to 4.1480 per dollar, while 10-year bond yields rose three basis points to 3.25%. The government said on Friday that most businesses will be shut from June 1 except for essential economic and service sectors.

“The government is finally biting the bullet,” said Alexander Chia, an analyst at RHB Investment Bank Bhd. “Clearly, there are downside risks to FY21 earnings growth, even if it is essentially a postponement of growth to FY22.”

Malaysia’s return to a hard lockdown comes in the wake of record daily infections that saw cases top 9,000 on Saturday. A resurgence in virus outbreaks in Asia has spurred some countries including Vietnam and Singapore to tighten restrictions. A similar lockdown in Malaysia last year cost the country an estimated 63 billion ringgit ($15 billion).

Vietnam tightened social distancing measures in Ho Chi Minh City for 15 days from May 31, while Singapore this month reissued some lockdown-like conditions that it put in place a year ago.

Recovery Dims

Malaysia’s lockdown will “drag on the country’s recovery, with a good chance that 2Q GDP growth will contract on a sequential basis,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. “We will likely see the ringgit continuing to underperform in the region, but its weakness is being put in check by a soft U.S. dollar.”

READ: ‘Covid Zero’ Havens Find Reopening Harder Than Taming Virus

Malaysia’s government may announce an aid package ahead of the lockdown as soon as today, NewsRise reported, citing Zakiah Jaafar, deputy secretary general at the finance ministry.

Still, Monday’s market drop pales in comparison with last year when the KLCI plunged as much as 5% a day after a nationwide lockdown was announced then.

Story continues

Expectations of a “mild” market reaction is due to the availability of vaccines and a government plan to ramp up daily vaccination rates in the second half of 2021, Ivy Ng Lee Fang, an analyst at CGS-CIMB Securities, said in a report. Strong export sales, robust market liquidity, and low interest rates have also helped limit the market drop, she said.

Malaysia’s gross domestic product shrank 0.5% in the first quarter from a year earlier, Malaysia’s central bank said earlier in May, adding that it expects growth to remain within the 6% to 7.5% forecast range for the full year.

Banks including Public Bank Bhd. and CIMB Group Holdings Bhd. dropped, while Maxis Bhd. and Supermax Corp. were among the biggest decliners in the benchmark gauge, falling more than 2%. Top Glove Corp. was the top gainer in the key stock gauge, up 1.2%.

The Malaysian stock benchmark is down 6.2% from a December high as investor concerns about the impact of stricter curbs on movement weigh on riskier assets.

The “recovery plays in the cyclical sectors will require a longer term investment perspective with a focus on achieving a favorable entry price,” said Chia of RHB Investment. “The trading angle will remain an enduring theme in the coming quarters that continues to focus on small-mid caps with resilient growth attributes.”

(Updates with more details throughout.)

More stories like this are available on bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.