Malaysia can buffer against US rate hikes

NOT all agree that Malaysia is among the riskiest emerging markets as the United States continues raising interest rates.

“Malaysia is in a state of strength to buffer against external headwinds.

“Economic growth prospects remain good. Fiscal consolidation is on track and government debt is capped at below 55% of gross domestic product.

“The current account of the balance of payments is still in a small surplus. The banking system is strong, and there is a well-intermediated and functioning capital market.

“As at end-October, foreign reserves have been rebuilt to US$101.5bil. The ringgit onshore stabilisation measures and the forex swap position of US$12.3bil in September should act to counter capital reversals,” said Lee Heng Guie, executive director, Socio Economic Research Centre.

Thailand and Malaysia are considered the riskiest emerging markets in Asia as the US Federal Reserve continues to raise rates.

“Malaysia has quite a weak foreign exchange reserves position; it also has elections next year.

“A lot of the rebound in growth in the first half was due to budget announcements at the end of 2016, which isn’t really sustainable because the nation is in ‘a bit of a bind’ on the fiscal side,” said Bloomberg, quoting Julian Wee, Singapore-based senior markets strategist, National Australia Bank.

“With Bank Negara preparing to normalise domestic rates in 2018 (when the economy is strong enough to absorb the gradual hikes), the expected positive yield gap with US rates will likely support the ringgit,” said Lee.

“Being an economy that has one of the highest foreign holdings of local currency bonds, Malaysia is said to be in a risky position,” said Nor Zahidi Alias, associate director, economic research division, Malaysian Rating Corp.

In fact, Malaysia’s share of foreign holdings in the local bond market is among the highest, only trailing Indonesia, said Zahidi, quoting Asian Development Bank data.

“The unwinding of such holdings by foreign investors in the wake of higher rates in advanced countries would likely have a knock-on effect on financial markets.

“This was seen from outflows that took place in the first quarter of 2017, post US elections in November 2016,” said Zahidi.

However, other factors would come into play in 2018.

“The uptrend in crude oil prices is positive for Malaysia; global trade performance is supportive of its export sector. (For 2017, growth estimate in world merchandise trade volume was raised to 3.6% from 2.4% by the World Trade Organisation, compared with a 1.3% increase in 2016).

“Domestic factors such as consumer spending and investments point to a sustained expansion. A possible rate hike in the first quarter of 2018 suggests that capital flows will likely still favour Malaysia in the near term,” said Zahidi.

Turning to commodities

Are investors turning to commodities amid growing fears of a correction in sky high equity prices? Within a week, a net US$324mil has flowed into funds that invest in a broad basket of commodities, Thomson Reuters data shows.

In August, flows into commodity mutual funds and exchange traded funds (ETFs) hit US$2.1bil, the highest in more than six years, said Reuters.

“Demand for commodities is well-supported by the improving global economy. With the US and Chinese economies likely to chart strong growth in 2018, the near-term prospect of another collapse in commodity prices is minimal.

“The index that tracks the volume of Chinese imports of crude oil globally has increased 15% since its trough in January 2016.

“The Goldman Sachs Commodity Index that tracks 24 liquid exchange traded futures has surged by 42% in the same period,” said Zahidi.

However, many commodities are vulnerable to an economic slowdown or market crash that dampens demand, cautioned Lee.

A delay in US tax cut reforms may affect sentiment.

“Some stocks are running ahead (of the decision to cut taxes). If there is a delay, short term sentiment may be affected,” said Danny Wong, Areca Capital.

Senate Republicans are unveiling a tax plan that differs markedly on corporate, business and individual tax cuts from legislation set out by their counterparts in the House of Representatives, said Reuters, quoting Republican aides.

Sentiment may be affected

“Sentiment in emerging markets may be affected if there is a correction in US markets,” said Thomas Yong, CEO, Fortress Capital.

“The reforms may offer a one-time lower tax for corporates to repatriate profits to the United States. Depending on the timeframe given, flows back to the United States can weaken emerging market currencies, and hurt markets,” said Yong.

“In the short term, the tax cuts are positive for US equities, which in turn, increases risk appetite globally. In the long term, lower taxes will attract flows and shift of business into the United States,” said Wong.

Columnist Yap Leng Kuen notes the potential powerful shift of funds.