Business unusual in Malaysia

Saved: The Tun Razak Exchange project will continue with an injection of RM2.8bil.

The Malaysian voters booted out the previous government largely premised on one main agenda – system-wide reformation.

Pakatan Harapan’s promise to enact economic, institutional and political reforms successfully led the coalition to an unprecedented victory in GE14.

Indeed, the outcome of GE14 has surprised most observers and research houses such as Nomura and RHB Research Institute, who had predicted Pakatan to lose.

Despite the expectation of a Barisan Nasional win, nervy investors had chosen to be on the sidelines and switched to defensive blue chip counters ahead of GE14, driven by perceived domestic political risk.

The benchmark FBM Kuala Lumpur Composite Index (FBM KLCI), touted as the world’s longest bull market since 2008, began to decline after hitting a record-high on April 19 – barely a month before the election.

The 30-stock index continued to hit downtrend even after May 9, the GE14 day.

However, it was the small-cap counters that were most battered in the run-up to GE14, as investors sought haven in blue chips considering the uncertainties in the political scene then and the escalating global trade war concerns.

Between January 2 and May 8, the FBM Small Cap Index slumped by some 15%, bringing the index’s price-to-earnings ratio close to the average small-cap valuation since the 2009 Global Financial Crisis.

In comparison, in the same period a year earlier, the FBM Small Cap Index surged by nearly 19%. In fact, for the full-year 2017, the index overwhelmingly outperformed the FBM KLCI, continuing its handsome run in the prior two years.

Uncertainties shrouding GE14, aside from the trade tension between the United States and China, also led to the net outflow of foreign funds from Malaysia.

In an earlier report, MIDF Research pointed out that foreign investors turned net sellers in the penultimate week before GE14, withdrawing a net amount of RM438.4mil.

“In contrast, the penultimate week before the GE13, foreign investors snapped up RM750.4mil net of local equities. Foreign attrition was only seen on the last trading day before GE13 which only amounted to RM91.7mil net,” stated MIDF Research.

Actually, the jitteriness among investors and market players prior to GE14 is understandable. After all, Malaysia has never seen such a tight political state of play at the federal level post-independence.

On top of that, Pakatan’s election promises such as the proposed abolition of the goods and services tax (GST) and the removal of toll charges nationwide, were criticised as populist by many as well as counterproductive to the country’s fiscal deficit target.

The buildup of such perception prior to the election has cast doubt on Pakatan’s victory and its potential to steer Malaysia towards effective macroeconomic management in the long run.

And then came May 9, the D-Day for GE14.

What transpired post-GE14?

The announcement on Pakatan gaining a simple majority came in the wee hours of May 10. The unexpected outcome of the election could have easily rattled the bourse, leading towards a sea of red in the stock exchange.

Fortunately, Prime Minister Tun Dr Mahathir Mohamad declared two consecutive days of national holiday on Thursday and Friday following GE14, leaving ample time for the market to somewhat cool down.

In an immediate knee-jerk reaction, on May 10, the five-year credit default swap price, an indicator of cost to insure a Malaysia default, surged to an 11-month high in the United States. On the same day, the iShares MSCI Malaysia ETF, the biggest exchange-traded fund holding Malaysian stocks, fell by 6% - the lowest since December 2017.

On May 12, in an unexpected turn of events, Dr Mahathir announced the setting up of the Council of Eminent Persons to help the Government shape national policies to fulfil Pakatan’s promises to the rakyat.

Headed by Tun Daim Zainuddin, the council comprises Tan Sri Dr Zeti Akhtar Aziz, Tan Sri Hassan Mari­can, Prof Jomo Kwame Sundaram and tycoon Robert Kuok.

The establishment of the council gave investors and market observers a stronger confidence of Pakatan’s ability to remain steadfast to resilient economic management over the next five years.

Bursa Malaysia reopened for trading on May 14, amid expectations of intense selling pressure.

Early trade for the FBM KLCI was negative as the index lost almost 50 points after the opening. In fact, within the first five minutes of trade, the FBM KLCI fell by nearly 2.7% - the sharpest in 14 weeks.

However, underpinned buying support mostly from local funds, the benchmark index rebounded thereafter and ended the day 3.91 points or 0.21% higher at 1,850.42 points.

On May 16, the Finance Ministry announced that the GST would be set at 0% beginning June 1, 2018, in the Government’s first move to abolish the indirect tax regime completely.

“As such, all registered traders must follow the decision of the zero rate now. At the same time, registered businesses are still subjected to all current regulations,” said the ministry.

Removal of the GST was one of the key pledges by Pakatan within 100 days of coming to power. The consumption tax will be replaced by the sales and services tax (SST) from Sept 1 onwards.

While the abolition of GST is expected to result in a shortfall of RM23bil, the Government has said that it could be largely offset given higher crude oil price, revenue from the SST and the cost-cutting measures at the federal level.

“In other words, the projected fiscal deficit will increase from RM39.8bil to RM40.1bil, which would maintain the Federal Government budget deficit at 2.8% of the gross domestic product (GDP). In addition, the Government’s current balance (government revenue less operating expenditure) will also remain positive,” said newly-minted Finance Minister Lim Guan Eng in an earlier statement.

Just as when most Malaysians were rejoicing the news on zerorised GST, the Government dropped a bombshell which spooked everyone, investors and ordinary people alike.

In his first address to civil servants on May 21, Dr Mahathir revealed that Malaysia’s debt level has breached the RM1 trillion mark and stood at 65.4% of the GDP.

A day after his announcement, Finance Minister Lim put the ratio at 80.3% of GDP, or about RM1.09 trillion in debt as at end-2017.

The figure was substantially higher than the 55% self-imposed debt limit and the 50.8% debt-to-GDP ratio indicated by the previous Government.

The revelation on debt levels hammered Bursa Malaysia for four consecutive days, and the benchmark FBM KLCI saw the biggest year-to-date decline on May 23, tumbling by 40.78 points or 2.21% to 1,804.25 points.

A day later, the index fell below the 1,800 points-mark on the back of foreign selling pressure on Malaysian blue-chip stocks.

The drop effectively wiped out the FBM KLCI’s total gains made in the first five months this year, within just four days after Dr Mahathir’s announcement. The looming concern on public debt has also taken a toll on the ringgit, which has weakened since early April.

On May 30, in the first move to cut expenditures related to mega-infrastructure projects, Dr Mahathir announced that the Mass Rapid Transit Line 3 project, reported to cost between RM40bil and RM45bil, will not proceed.

He also said that the Kuala Lumpur-Singapore High-Speed Rail (HSR) and the East Coast Rail Link were under review.

This announcement received mixed reactions, including criticism from the former Premier Datuk Seri Najib Tun Razak, who said that the benefits from the HSR project outweighed its cost.

“The projections from the relevant report I have seen indicate an estimated economic benefit of RM650bil in Gross National Income until year 2069.

“There would have been 110,000 jobs created, which is estimated to increase to about 442,000 by year 2069,” he said, urging for the report to be shown to the public.

On May 31, in order to further fulfil Pakatan’s 10 promises within the first 100 days, the new Government announced price stabilisation measures on petrol and diesel retail prices.

“Retail prices of RON95 petrol and diesel will be maintained at current prices of RM2.20 and RM2.18 per litre respectively. Effective 7 June 2018, the retail price of RON97 will be set based on market prices and reviewed on a weekly basis every Thursday according to the managed float mechanism,” stated the Finance Ministry.

The Federal Government has allocated RM3bil until end-2018 to maintain the RON95 and diesel retail prices.

Pakatan has previously promised in its manifesto to introduce a targeted fuel subsidy for low-income earners.

“The Pakatan Harapan Government will provide targeted petrol subsidies at a suitable monthly rate to those who qualify. This will be targeted to those who use motorcycles below 125 cc and cars below 1300 cc. A quota will be devised to prevent abuse,” the coalition pledged.

Global ratings agency Fitch Ratings has pointed out that Pakatan’s targeted fuel subsidy could offset some potential budgetary gains from rising oil and commodity prices.

To note, fuel subsidies accounted for around 1.7% of GDP in 2014 before they were rationalised, declining to 0.3% in 2015.

Corporate Malaysia resets

The month of June witnessed dramatic changes in the Malaysian corporate scene, with a slew of resignations seen among high-profile Malaysians holding top positions in government-related entities.

The first to leave on June 6 was Bank Negara governor Tan Sri Muhammad Ibrahim, who left the post just two years after being appointed.

On the same day, government-linked company Telekom Malaysia Bhd confirmed that its group chief executive officer, Datuk Seri Mohammed Shazalli Ramly, had resigned. Apart from Shazalli, the group’s independent non-executive director Datuk Seri Fateh Iskandar Mohamed Mansor also submitted his resignation, which took effect on June 8.

Petroliam Nasional Bhd (Petronas) independent non-executive director Datuk Mohd Omar Mustapha also resigned from the board, with chairman Tan Sri Mohd Sidek Hassan expected to relinquish his position in the national oil company.

It is worth noting that Sidek was part of the Royal Commission of Inquiry to investigate the Bank Negara foreign-exchange trading losses in the 1990s.

Among other key corporate figures who have stepped down is Lembaga Tabung Haji group MD and CEO Datuk Seri Johan Abdullah. Malaysia Airports Holdings Bhd MD Datuk Badlisham Ghazali did not get his contract renewed.

Meanwhile, speculation regarding the controversial Tun Razak Exchange (TRX) came to an end on June 22, when the Finance Minister announced that the project will continue.

The Government has agreed to inject a total sum of RM2.8bil to keep TRX going, for in not doing so will cost the Government much more in compensation payouts. The project’s master TRX City was also instructed to lodge a police complaint on the alleged misappropriation of RM3bil funds by 1Malaysia Development Bhd.

On June 29, many were taken by surprise when the chairman of Permodalan Nasional Bhd (PNB), Tan Sri Abdul Wahid Omar, retired from his post.

He was replaced by former Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz, a member of the Council of Eminent Persons.

Wahid previously served as a minister in the Prime Minister’s Department under the Najib Cabinet, responsible for the Economic Planning Unit.

He started his stint as a minister in June 2013 after his appointment as a senator in Dewan Negara. Wahid’s senatorship ended in June 2016.

Barely few days after Wahid’s exit from PNB, Petronas chairman Sidek stepped down as chairman of its board on July 2.

Sidek was appointed as Petronas chairman on July 1, 2012, few days after his retirement as the 12th Chief Secretary to the Malaysian federal government.

The Light Rail Transit Line 3 (LRT3) came under scrutiny after the Finance Ministry announced that the project cost had shot up to RM31.45bil, from its earlier expected cost of RM9bil.

On July 10, Finance Minister Lim said the Government would approve the continuation of LRT3 only if its project owner, Prasarana Malaysia Bhd, slashed the cost by more than RM6bil.

The shake-up in Malaysia’s government-linked entities reached its height when the nine board members of Khazanah Nasional Bhd tendered their resignation letters on July 26.

Among the ones who resigned is Khazanah’s managing director Tan Sri Azman Mokhtar.

As a background, the new government led by Dr Mahathir has repeatedly criticised Khazanah, stating that it had deviated from its original objectives and that the executives were overpaid.

In an apparent knee-jerk reaction, Khazanah’s six key stocks on the stock exchange tumbled on July 26, wiping out nearly RM2bil worth of market capitalisation in just a single day.

As Pakatan maneuvers the country’s economy and re-aligns the national policies, there will be some unintended effects on investors’ confidence and the ringgit.

There was a net outflow of funds worth RM5.6bil and RM4.93bil in the months of May and June 2018 respectively, when foreign investors left the country’s shores in droves.

Foreign ownership in Bursa Malaysia’s securities market has been on a decline since March 2018, albeit a marginal drop. Based on market capitalisation, foreign investors’ ownership fell to 23.9% in June as compared to 24.2% in March.

The ringgit has been weakening against the US dollar since April this year, exceeding the RM4 psychological mark. In the last four months alone, the ringgit has depreciated by 5.16% against the greenback.

The currency’s depreciation was largely due to GE14, the net selling of domestic equities and bonds, surging US Treasury yields and the revived strength of the US dollar.

However, it is also worth noting that over the last one-year period, the ringgit has strengthened by 5.1%.

The last few weeks have seen renewed interest among investors. The FBM KLCI has risen slightly by over 7% since July 9, and is close to regaining what the index has lost since the beginning of 2018.

Investors’ optimism on the local market is anchored on policy clarity and sound economic fundamentals. It is now up to the new Government to win the trust of investors and private players through pro-business measures, while protecting the welfare of the larger Malaysian community.

Simply put, the buying demand in Bursa Malaysia will ultimately return and accelerate in momentum - once the dust is settled.

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