Malaysia’s Oil Transformation Trigger

Malaysian shares, unlike the rest of the region, were aided by the post-Libya global oil price premium with the country’s small net exporter status as Prime Minister Najib continued to launch projects under his Economic Transformation Program (ETP) that may presage early elections to solidify his ruling party leadership supremacy. The higher petroleum costs will be reflected in the budget which retains partial subsidies, although the revenue windfall could translate into better domestic consumption and join the recent upswing in the electronics PMI cycle to generate 5-6 percent GDP growth. Inflation should peak around 4 percent according to the central bank, which has kept the benchmark rate intact while signaling bank reserve requirement retracement from crisis-related lows. The currency may break through 3 to the dollar, especially as foreign ownership of government securities at 60 billion ringitt is equal to banks’ and ranks only below pension fund portfolios. ETP high-tech initiatives in health, data centers and training have proliferated with an official “switch into overdrive” this year, although the new balance between pro-Malay affirmative action and greater meritocracy remains abstract. The lack of precision may be designed to co-opt popular leaning toward the opposition coalition headed by former Prime Minister Anwar whose second trial for alleged personal offenses drags on. The dominant UNMO party, which had lost parliamentary member share, has done well in recent state by-elections even as religious activism has alienated mainstream voters. The issue of rising household debt, which after Japan is Asia’s highest at 80 percent of GDP, has been ignored to retain low and middle-income class appeal. Bad loans in the sector are under 3 percent of the total, but Bank Negara has slapped fees and restrictions on mortgage and credit card dealing to curb risk and instead encourage traditional business borrowing.

Korea, in comparison, will be knocked by the oil spike after the central bank left the benchmark rate unchanged in February, reinforcing reduced foreign investor bond and equity exposure following tax resumption and a regulatory crackdown on options trading that has punished Deutsche Bank’s local unit. P/e ratios are still cheap among the emerging market universe with an embedded corporate governance discount that has forced the giant National Pension Fund as a major shareholder to increasingly challenge management moves. It also intends to raise the overseas portion to 12.5 percent of overall allocation to obtain the 7 percent annual return goal, and the strategy calls for selection of both publically-listed and alternative assets in developed and developing locations. With the US free trade agreement still blocked by the Congress and the North’s leadership transition tentative, Korean company attention may shift to alternative attitudes and sites, the fund figures.

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