Top Economic Risks Awaiting Malaysia's Leader After Poll Battle

(Bloomberg) -- Malaysia’s incoming leader will need to tackle a number of challenges in order to keep investors interested in an economy that’s currently booming.

Once the dust settles from Wednesday’s election -- which has so far been too close to call -- the new administration will need to focus on the concerns around jobs and living costs that have been at the top of the minds of voters.

Prime Minister Najib Razak is facing off against his former mentor Mahathir Mohamad to extend the ruling Barisan Nasional coalition’s six-decade rule. While Najib’s reputation has taken a knock because of corruption allegations, he can boast about an economy growing at its fastest pace in three years and a currency that’s among the top performers in Asia.

“Growth momentum is stronger today compared to the previous election,” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore. “Investors will be looking forward to policy continuity which will be crucial to ensuring economic stability after the election.”

Here’s a look at the challenges ahead:

Sustaining Growth

The economy staged an impressive rebound last year, benefiting from a pick-up in global trade and strong domestic demand. This year is set to be another bumper one, with the central bank forecasting growth of 5.5 percent to 6 percent. Najib gave a boost to consumers in his budget by lowering taxes, giving government workers a one-time bonus and raising social assistance and subsidies.

With exports accounting for two-thirds of gross domestic product, risks to the global trade outlook amid rising tensions between the U.S. and China will weigh heavily on Malaysia’s economic prospects.

“Given a high level of trade openness, Malaysia is vulnerable to measures aimed at curtailing global trade,” Moody’s Investors Service said in a recent report. “Trade restrictions that are prolonged or more aggressive than have been recently proposed by the U.S. and China would impact Malaysia directly and indirectly.”

Fiscal Risks

Malaysia has been running a budget deficit since the Asian financial crisis in 1998. Najib’s government has gradually narrowed the gap to 3 percent of GDP over the years by introducing a 6 percent goods and services tax and cutting subsidies from sugar to petrol. He has pledged to bring the budget back into balance, but has pushed out the planned date for that from 2020.

The government has a self-imposed debt ceiling of 55 percent of GDP, and while the federal debt remains below that, an increase in government guarantees on borrowings is putting pressure on that ratio, according to Selena Ling, an economist at Oversea-Chinese Banking Corp. in Singapore.

Current-Account Surplus

The current-account surplus has narrowed in the past decade, reaching about 3 percent of GDP last year, or less than a third of what it was in 2011. That’s been mainly due to a decline in the nation’s trade surplus over time, putting pressure on authorities to increase the diversity and depth of its export industries in order to sustain growth.

Foreign-currency reserves have fluctuated with the shrinking surplus and is down a fifth in the past five years.

Currency Threat

Malaysia’s ringgit has been one of Asia’s best performing currencies since late 2016 after the central bank imposed foreign-exchange measures that helped to restore confidence in the currency. The central bank’s early move on interest rates in January and a pick-up in oil prices helped to bolster the ringgit this year.

But conditions are now changing as U.S. interest rates rise. Foreigners hold about 30 percent of Malaysian government bonds, making the nation relatively more exposed than some of its regional peers to potential outflows and currency volatility.

While inflation has been relatively benign, a worsening market fallout may push Bank Negara Malaysia to take stronger action. It’s set to keep the benchmark rate on hold at 3.25 percent on May 10, according to all 17 economists surveyed by Bloomberg, but some analysts predict it will tighten later this year.

To contact the reporters on this story: Chong Pooi Koon in Kuala Lumpur at pchong17@bloomberg.net, Liau Y-Sing in Kuala Lumpur at yliau@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Yudith Ho

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