INVESTORS are grappling with Tun Dr Mahathir Mohamad’s surprise election victory in Malaysia’s election. Here’s a look at what it means for the outlook for economic policy and markets.
At 92 years old, Mahathir led a four-party coalition to end the six-decade rule of Datuk Seri Najib Tun Razak’s party. Returning to power 15 years after he stepped down as prime minister, Mahathir inherits an economy that’s growing more than 5%, inflation that’s subdued and a currency that’s been one of Asia’s best performers this year.
What were Mahathir’s main policy pledges
Abolishing a 6% goods and services tax (GST) was a key campaign promise, which Mahathir promised to do within 100 days of taking office. The tax, which was introduced in 2015, is widely blamed by citizens for their rising living costs. The opposition coalition said it would replace the GST with a sales and services tax that’s more fair.
The coalition promised to reintroduce petroleum subsidies, which could be a boon for consumption as the new government eyes a 6% growth goal. They also campaigned to increase petroleum royalties to oil-producing states and raise minimum wages.
What does it mean for the economic outlook
Malaysia’s economy is enjoying a strong rebound at the moment, with growth surging to 5.9% last year and forecast by the central bank to reach 5.5% to 6% in 2018. Most of that recovery has come on the back of a pickup in global trade and rising domestic demand. But with trade tensions dominating this year, and exports accounting for two thirds of gross domestic product, there are risks to Malaysia’s outlook ahead.
Moody’s Investors Service said there’s lack of detail on the electoral pledges, but some campaign promises would be “credit negative” for Malaysia. In particular, scrapping GST without any measures to offset the loss in revenue would increase the economy’s reliance on oil income and narrow the Government’s revenue base, the ratings company said. Najib had said abolishing the 6% GST would add RM416bil to the nation’s debt.
A move on GST and a return of fuel subsidies would put pressure on the budget deficit, which Malaysia has steadily brought down to 3% of GDP.
Malaysia should also brace for a “sharp slowdown in investment growth” if Mahathir’s positioning against China’s involvement in infrastructure prompts a stalling of those projects, according to Capital Economics Ltd.
Longer term, proposed changes to education policy have an outside chance of lifting potential growth in Malaysia, according to economists at Morgan Stanley. Mahathir’s coalition campaigned on free tertiary education at public universities and a bigger boost to technical and vocational training.
Does this change the monetary policy outlook
After moving early with a January rate hike, economists don’t expect another change anytime soon. All 18 economists surveyed by Bloomberg before the election predicted the benchmark rate would stay at 3.25%.
Inflation has been relatively benign, slowing to 1.3% in March, with a stronger currency since last year helping to ease price pressures. The Government had forecast average inflation of 2.5% to 3.5% for this year.
Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore, hasn’t revised his call that there’ll be no change in the policy position. “You want to ensure continuity” he said. Bank Negara would probably include language in the statement around “ensuring stability” in the ringgit and that they were “monitoring capital flows,” he said. The central bank is independent enough that policy shouldn’t change, he said.
What does the upset win mean for currency policy
The manifesto by Mahathir’s coalition said it would give a mandate to the central bank to develop a strategy to return the ringgit to its actual potential within three years. Mahathir retains a wariness of currency traders and has warned that he’ll be willing to reintroduce a peg on the ringgit to ward off “currency manipulators” if necessary.
In the aftermath of the 1998 Asian financial crisis, then prime minister Mahathir imposed capital controls and rejected a bailout from the International Monetary Fund, raising the ire of investors. “It will be an interesting, but unsurprising, development if those instincts reappear this time around,” economists at DBS Group Holdings Ltd said in a note.
The ringgit is the best-performing currency in emerging Asia this year, strengthening 2.5% against the US dollar.
What does this mean for the stock market
The uncertainty following the surprise election result would boost volatility and prompt repositioning of Malaysian assets by investors, analysts said. Christy Tan, head of markets strategy at National Australia Bank in Singapore, said markets are in for a “rough ride as this was the least priced-in scenario” and “while the result is cheered by Malaysians, this means more uncertainties for international investors.”
The FTSE Bursa Malaysia KLCI Index of shares is the third best-performing major emerging Asian benchmark this year as the pre-election rally sent the measure to a record high.
With the onshore market closed because of public holidays declared yesterday and today, the knee-jerk selloff could well be more pronounced in offshore trading, according to Tan.
The iShares MSCI Malaysia ETF dropped 6% to US$32.42 in the US, the lowest since December. — Bloomberg
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