Malaysia: New Administration to Form Government

Malaysia witnessed a historical democratic change in government on the 9th of May 2018. Since it was unexpected and unprecedented, many wonder what kinds of changes could we expect with Pakatan Harapan taking over the helm.

Policies  

As we enter into a new era of government, we can look towards the appointment of key ministers as clues to what rules and policies could change. While the full line-up has yet to be announced, investors could take some comfort in Mr. Lim Guan Eng’s appointment as Finance Minister. From an economic perspective, Mr. Lim is a qualified professional accountant, and was widely credited for improving governance and the state finances (reducing Penang’s public debt by 95%) during his decade as Penang Chief Minister since 2008.

One closely watched area would be Malaysia’s pact with China as there were differing views from leaders within Pakatan Harapan on how to best manage the bilateral ties between the two countries. A sharp reversal could present big ramifications for investors. Another area to look out for would be the JB-Singapore Rapid Transit System signed recently and the continued progress on the proposed KL-Singapore high speed rail project. With the expected economic benefit of RM21 billion in GDP to Malaysia and Singapore, it is hoped that the bilateral ties between Malaysia and Singapore will not be affected by the change in government. It is reassuring when Malaysia’s newly elected Prime Minister, Tun Dr. Mahathir, emphasized that he would lead a business-friendly administration.

Growth and Fiscal Standing

Pakatan Harapan’s key election pledges include replacing Goods and Services Tax (GST) with Sales and Services Tax (SST) and reinstating fuel subsidies within the first 100 days in office. To put things in perspective, revenue contribution from GST is around 3% of GDP and contribution from SST is around 1.6% of GDP. Hence, the replacement of GST may have a knock-on impact on Malaysia’s sovereign ratings. The caveat is that the extent of implementation is unlikely to be ascertained. Further review and reform ideas will be looked upon for clues. For now, the table below summarizes Pakatan Harapan’s pledges and proposed cost-cutting measures;

Governance

Dr. Mahathir had launched a crackdown on Election Commission (EC), Attorney-General (AG) and the Malaysian Anti-Corruption Commission (MACC) for suspected misconduct including their involvement in the state investment fund 1Malaysia Development Berhad (1MDB). The Prime Minister Tun Dr. Mahathir had also emphasized that the way of the Law will be honoured moving forward. As the scandal surrounding 1MDB was cited by S&P Global Ratings as one of the key risks to Malaysia’s sovereign rating (statement dated 22 June 2017), a rectification in this area could bode well for Malaysia.   

Assets and FX

Volatility in asset market is largely expected in any political transition. Even though asset markets opened soft in the first session since the General Election, MYR and equities were better behaved than many feared. While potential demand for Overseas Direct Investments and de-risking by some portfolio investors could still support some USD demand over next several sessions, the strengthened position of Bank Negara Malaysia (BNM) foreign reserves, USD selling by exporters, cheap valuation of MYR relative to its fundamentals and broad retracement of the USD are likely to limit the upside for USDMYR. On top of that, Tun Dr. Mahathir has explicitly mentioned that he prefers a stable MYR and there is no cause for a devaluation. With that, Citi’s view on MYR’s medium-term fundamentals and valuations are still favourable.

On bonds, yields were higher by 7 to 9 basis points across tenors amidst thin liquidity. Liquidity in bond market could likely improve after the 7 year Government Investment Issue (GII) on 15 May.

In conclusion, while major public projects are expected to be reviewed, new ways of governance, and possibly a spike in risk during the transition, Citi thinks that the policy environment is likely to remain business friendly, evident from Selangor and Penang which were no less open to trade and investments under the governance of Pakatan Harapan. Growth friendly policies are largely expected to remain. With that, and also how we are reminded that major regime changes in global markets only had short term negative impact on markets, Citi analysts believe that markets are likely to recover from any post-election sell-off.