Outbreak, Debt, Politics to Test Malaysia Finance Minister
(Bloomberg) -- Malaysian Finance Minister Tengku Zafrul Abdul Aziz, who retained the post in the new government announced Friday by Prime Minister Ismail Sabri Yaakob, has his work cut out for him.
In October, Zafrul is set to unveil the 2022 federal budget to what may be the most divided parliament in Malaysia’s history. The spending plan will need to address an economy weakened by protracted lockdowns and a raging Covid outbreak, amid steep financial constraints and a deficit target that was already revised higher twice this year.
The decision to retain Zafrul as finance minister “should be welcomed by the market,” said Wellian Wiranto, an economist at Oversea Chinese Banking Corp. “He is known as a technocrat by and large, and his reappointment signals continuity in his role in carrying out the ongoing fiscal plans and to shepherd the new budget through the parliament.”
The ringgit was up 0.1% to 4.1897 per dollar as of 4:15 p.m. The yield on the benchmark 10-year government bond dropped three basis points to 3.23%, while the main stock index was headed for its best week since November.
Zafrul, 48, has more than a year’s experience as finance minister in the previous government. The decision to bring him back points to policy continuity from the Muhyiddin Yassin administration.
“You need somebody who is already quite well-versed with the ministry” to prepare the budget by the October deadline, said Oh Ei Sun, a senior fellow at the Singapore Institute of International Affairs.
It’s not clear if the new lineup, which includes a number of holdovers from Muhyiddin’s Perikatan Nasional coalition, will inspire investor confidence.
“This is a cabinet that retains largely the same faces, and they had policies which obviously failed during the last administration,” Oh said. “Why would they be able to formulate new policies that would succeed in tackling the pandemic and reviving the economy?”
Azmin Ali was reappointed as trade minister, and former Foreign Affairs Minister Hishammuddin Hussein was given the defense portfolio. Khairy Jamaluddin, who managed the nation’s vaccine rollout in the previous government, was named health minister.
“The return of the recycled Cabinet of the previously failed PN government will put into doubt the commitment of the new prime minister toward not only winning the battle against Covid-19 and the economic crisis,” said Lim Guan Eng, former finance minister and secretary-general of the Democratic Action party, which has the largest number of seats in parliament. “It will also raise scrutiny whether Ismail is genuine about undertaking concrete institutional reforms to protect our democratic and constitutional rights.”
Two weeks ago Zafrul affirmed the central bank’s 2021 economic growth forecast at 3%-4%, the second downward revision as the country grapples with protracted lockdowns and virus flare-ups. The outlook is expected to improve in the fourth quarter as more sectors reopen and the vaccination program advances, he said in the Aug. 13 statement.
“The government’s current priority is to protect lives from the threat of Covid-19 and ensure the country’s economic growth prospects remain strong in the medium to longer term,” Zafrul said at the time. Government efforts will be guided by the National Recovery Plan -- an evolving blueprint to exit the pandemic -- underpinned by prudent financial management, he added.
What Bloomberg Economics Says:
“Ismail Sabri Yaakob was sworn in Saturday as the third prime minister in 18 months. The immediate economic outlook is probably beyond his control -- hinging on the extent of damage from Covid-19. With the domestic outbreak yet to crest and more trading partners combating their own outbreaks, another contraction in GDP this quarter remains likely.”
Tamara Mast Henderson, Asean economist
Click here to read the full note
Zafrul was chief executive officer of CIMB Group Holdings Bhd when Muhyiddin picked him last year for the finance portfolio. He spent much of his career climbing the ranks at CIMB, becoming CEO in 2015.
He previously worked at Citigroup Malaysia, Credit Agricole Group and local broker Kenanga Holdings Bhd. He holds a Master’s degree in economics and accounting from the University of Bristol and a bachelor’s degree in finance from the University of Exeter.
Zafrul will likely spearhead efforts to raise the debt ceiling from 60% of gross domestic product to perhaps 65%, OCBC’s Wiranto said. That would “give the government more wiggle room in pushing through a loose fiscal stance in the midst of economic challenges,” and would prepare the ground for an election that must be held by July 2023.
The appointment shows the compromise Ismail had to make as he formed Malaysia’s third cabinet since the 2018 election. The prime minister commands the support of just 114 of the nation’s 220 lawmakers, a slim majority that may be put to the test in a confidence motion when parliament reconvenes in two weeks.
Nearly half of the lawmakers backing Ismail are affiliated with Muhyiddin’s Perikatan Nasional coalition.
“The continuity is positive, but the generally poor performance of the previous government means that the overall cabinet lineup is important,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets LLC in Hong Kong. “After all, Malaysia’s number one policy goal right now is to contain the pandemic.”
Malaysia’s virus situation remains the key risk amid Ismail’s plan to reach recovery targets sooner by ramping up vaccination. About 58% of Malaysians had received at least one dose as of Aug. 26, according to the government.
At the same time, daily virus cases have soared nearly three-fold despite the containment measures, hitting a fresh high Thursday and turning the country into Southeast Asia’s Covid hotspot.
Standard & Poors, Fitch Ratings Inc. and Moody’s Corp. all affirmed their Malaysia ratings in recent months. But the country’s predicament hasn’t escaped their attention.
“If fiscal deficits remain wide for some time because of further economic stimulus or weak revenue, resulting in a persistent rise in the government debt burden that fiscal authorities are unable to reverse, this has the potential to materially weaken Malaysia’s credit profile,” said Christian Fang, vice-president and senior analyst at Moody’s Investors Service.
©2021 Bloomberg L.P.