All eyes on Pakatan financial policies

  • Economy
  • Friday, 11 May 2018

PETALING JAYA: Malaysia’s economic growth is expected to remain healthy with no real concerns if the Pakatan Harapan-led coalition government takes charge.

However, a period of uncertainty remains and the speed at which the policies are going to be implemented will have an impact on business.

Pakatan’s surprise victory, bringing down the 61-year-old Barisan Nasional-led government, is viewed positively by analysts and investors, and they believe that finally someone will “start to tackle some of the institutional problems the country has been facing that hinder its long-term growth potential”.

The focus of investors and analysts will also be on who will lead the various ministries that have a direct impact on the economy and stock markets. These include the Finance Ministry, the International Trade and Industry Ministry, the Plantation Industries and Commodities Ministry, the Agriculture and Agro-based Industries Ministry, and the Domestic Trade, Cooperatives and Consumerism Ministry.

In its pre-election manifesto, Pakatan had said it would come up with a fiscal reform review plan within the first 100 days, including the review and reprioritisation of major public projects, a shift towards social expenditure, reducing borrowings and fully accounting for debt including contingent liabilities, abolishing the goods and services tax (GST), and reintroducing fuel subsidies.

“All this bodes well, but the pace of structural reforms will need to quicken to lift medium-term growth potential,” said an analyst.

Malaysia’s gross domestic product (GDP) growth surged to 5.9% in 2017 and the GDP forecast this year is 5.5% to 6%. But will the growth be achieved?

For the first time in Malaysia’s history, an Opposition coalition has won an outright majority with Tun Dr Mahathir Mohamad as prime minister for the second time for the Pakatan coalition. Since Thursday and Friday were declared public holidays, analysts are expecting a knee-jerk reaction when the market reopens on Monday.

“We believe any market selldown may be brief and offer accumulation opportunities. Dr Mahathir was prime minister for 22 years and has the experience in governing the country. Over the medium term, structural reforms will be a catalyst to watch out for,” said AllianceDBS Research in a note.

RHB Research said the surprise GE14 “outcome may see investors exiting the market, given the ensuing uncertainty over economic policy, continuity and priority. A sell-off in assets by foreign investors may put pressure on the currency. Still, beyond the immediate term, the new political maturity by the electorate may be the catalyst to enable Malaysia to reach escape velocity, and break out from the inexorable gravitational pull of the middle-income trap”.

It added that as global and domestic macro fundamentals remained sound, “we would look for bottom-fishing opportunities to accumulate quality, non-politically aligned stocks at lower levels”.

Early yesterday, stocks with Malaysian exposure were hit on the Singapore bourse, as people recovered from the Opposition’s shock election win.

The Pakatan manifesto will also give a mandate to Bank Negara to develop a strategy to return the ringgit to its actual potential within three years.

However, the biggest change that people will see from Pakatan is the abolishment of the GST and replacing it with a sales tax and reintroducing fuel subsidies. Pakatan also wants to review mega projects and renegotiate agreements with China.

Citi Research believes that while abolishing the GST and reintroducing fuel subsidies should raise real incomes and boost private consumption, how consumer confidence responds is key.

“Increased uncertainties could dampen fixed investments near-term. With major public projects to be reviewed, delays in key bilateral projects such as the East Coast Rail Line with China, and the KL-Singapore high-speed rail project are possible, with the risk of knock-on effects on the balance of payments, including via portfolio outflows,” it said.

Abolishing the 6% GST would add RM416bil to the nation’s debt, and the return of fuel subsidies would put pressure on the budget deficit, which Malaysia has steadily brought down to 3% of GDP, a report said.

Another said that Malaysia should also brace for a “sharp slowdown in investment growth” if Dr Mahathir’s positioning against Chinese involvement in infrastructure prompts a stalling of those projects.

The abolishment of the GST brings in questions as to how the government would fund its expenses. Pakatan plans to reduce expenditure through prudent budgetary measures.

Moody’s Investors Service said there was a lack of details on the electoral pledges, but some campaign promises would be “credit negative” for Malaysia.

“In particular, scrapping the GST without any measure to offset the loss in revenue would increase the economy’s reliance on oil income and narrow the government’s revenue base. Another policy pledge, the reintroduction of fuel subsidies, would also distort market-determined price mechanisms, with effects on both the fiscal position and balance of payments,” Moody’s senior analyst at Sovereign Risk Group Anushka Shah said.

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