What Malaysia's Shock Vote Result Means for Economy, Markets

(Bloomberg) -- Investors are bracing for further market jolts after Mahathir Mohamad’s surprise victory in Malaysia’s election.

At 92 years old, Mahathir led a four-party coalition to end the six-decade rule of Najib Razak’s party. Investors had been betting on Najib retaining power, and Mahathir’s return to office 15 years after he stepped down as prime minister injects more uncertainty into financial markets and the economy at a time when emerging markets are under attack globally.

What To Watch in Markets

  • Markets are shut on Thursday and Friday after the government declared public holidays. One-month non-deliverable forwards imply the ringgit will be about 3 percent weaker when onshore markets reopen on Monday. The currency touched four-month low of 3.9507 on May 8 
  • Stocks could drop 8 percent within three days: Affin Hwang Asset Management Bhd
  • Consumer sector stands out as major beneficiary as GST removal, fuel subsidy, minimum wage revision could boost consumption

Here’s a look at what else the election outcome means for economic policy and markets.

What were Mahathir’s main policy pledges?

Abolishing a 6 percent goods and services tax 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 gasoline subsidies, which could be a boon for consumption as the new government eyes a 6-percent growth goal. They also campaigned to increase petroleum royalties to oil-producing states and raise minimum wages.

What Malaysia's Shock Vote Result Means for Economy, Markets

Read More: Malaysia’s Opposition Candidate Envisions 6% GDP Growth, No GST

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 percent last year and forecast by the central bank to reach 5.5 percent to 6 percent in 2018. Most of that recovery has come on the back of a pick-up 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 percent GST would add 416 billion ringgit ($105 billion) 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 percent of GDP.

What Malaysia's Shock Vote Result Means for Economy, Markets

Malaysia should also brace for a “sharp slowdown in investment growth” if Mahathir’s positioning against Chinese 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?

The central bank’s policy decision on Thursday was all business as usual, with Bank Negara Malaysia holding its benchmark rate at 3.25 percent, in line with the forecasts of all 18 economists surveyed by Bloomberg. After moving early with a January rate hike, economists don’t expect another change anytime soon.

What Our Economists Say...

In the aftermath of elections, investors have additional concerns about a sharp increase in the budget deficit, a negative response from ratings agencies and possible reinstatement of the currency peg. It will be up to the central bank to demonstrate that fears about macroeconomic stability are misplaced.

Read the full report: BNM Still Confident After Election Shock

-- Tamara Henderson, Bloomberg Economics

Inflation has been relatively benign, slowing to 1.3 percent in March, with a stronger currency since last year helping to ease price pressures. The government had forecast average inflation of 2.5 percent to 3.5 percent for this year.

What does the upset win mean for currency policy?

The manifesto by Mahathir’s coalition said it will 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 re-introduce 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 percent against the dollar.

What does this mean for the stock market?

The uncertainty following the surprise election result will boost volatility and prompt re-positioning 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 on Thursday and Friday, the knee-jerk selloff could well be more pronounced in offshore trading, according to Tan.

The iShares MSCI Malaysia ETF dropped 6 percent to $32.42 in the U.S., the lowest since December.

©2018 Bloomberg L.P.