Malaysia’s Opposition Challenge Churn

Malaysia stocks stayed lethargic pending imminent elections, where the opposition three-party alliance headed by former Prime Minister Anwar with one-third of seats vowed to “conquer” the dominant National Front with its anti-corruption employment creation platform. It plans to add a million jobs through reduced immigrant labor reliance mainly from Indonesia and to end racial discrimination against ethnic Indians and Chinese. Under its leadership government contracts would no longer be reserved for Malay-owned firms under longstanding preferences. The ruling coalition remains ahead in opinion surveys although it may suffer further losses after 2008’s surprise debacle. Domestic demand from infrastructure and consumer spending will again bring 5 percent GDP growth this year, at the cost of a chronic fiscal deficit hurtling toward the overall informal 55 percent of output public debt cap. Food and fuel subsidies have been untouched and the project pipeline under the signature Economic Transformation Program has propelled fixed investment to almost 30 percent of GDP. Double-digit annual credit expansion chiefly for personal and mortgage borrowing has raised the outstanding amount to 115 percent of GDP and disintermediation toward private bonds has been notable particularly in the fixed-rate sukuk market. Banks have been big buyers of the paper to keep business relationships and diversify assets, as they also extend their networks regionally. Government-linked funds like Khazanah hold large banking and unit trust stakes and promote tax incentives for Islamic finance. Bank capital adequacy was 15 percent and non-performing assets were under 3 percent according to the latest yearly figures. Deposits cover 85 percent of total funding and ringitt accounts do not operate offshore except in the Labuan island center, which has an active takaful insurance segment. The securities regulator honors IOSCO principles and has recently added frameworks for ratings agencies and investment advisers as the RAM now grades ASEAN and global issuers alongside its domestic franchise. In a financial system review just published the IMF and World Bank urge insolvency law passage in the absence of a formal re-organization process, as well as clarification of government guarantees for infrastructure debt which pose contingent budget liabilities.

Indonesian stocks have fared better through February despite a similar combination of credit and election jitters in addition to corporate governance and balance of payments woes. The Bumi saga in London reached a crossroads as the Bakrie family slate of directors was approved, defeating a challenge from the Rothschild consortium. The terms of trade shock has subsided as commodity exports pick up, but weakness has dropped the rupiah toward 10,000 to the dollar. Despite 5.5 percent GDP growth on solid domestic support foreign investors have trimmed bond positions on the continued inability to remove fuel subsidies taking one-tenth the budget. The Finance Minister who endorsed reform has been nominated for central bank governor in a move seen to appease vested business and voter interests he confronted too clearly.