ASEAN’s Malaysia Maelstrom Milage
The shock victory and anti-corruption and economic policy cleansing promised by Malaysia’s opposition alliance roller-coasted stocks before a slight MSCI index gain, and cast a shadow on ASEAN peers the Philippines and Thailand with their own political and fiscal battles under overall asset class retrenchment. The International Monetary Fund chimed in with caveats at a Singapore event marking a decade since the 2008 financial crisis, as it called for “budget and monetary buffer rebuilding” with capital outflows. On the positive side, exchange rates are more flexible and reserve coverage is above the adequacy standard, but Asia’s current account balance is down the past decade amid higher external and public debt, which has jumped 15% to 60% of gross domestic product with average fiscal positions now in deficit.
The Fund’s Deputy Managing Director Tao Zhang noted a “striking increase” in corporate and household debt over the period and urged targeted macro-prudential measures. He also warned of higher inflation through rising oil and other commodity import costs, and the unfinished financial inclusion agenda with “large disparities” in automatic teller and formal banking access across the region. His speech put the Asia-Pacific behind Sub-Sahara Africa on mobile transactions and urged stronger credit bureau and payment system infrastructure to tap unreached customers.
Foreign investors , who own over one-quarter of Malaysia’s local debt and equity, had already trimmed exposure before the election on steep valuations over 15 times earnings. They joined in an immediate 5% forward ringgit selloff as a party coalition, led by former President Mahathir Mohamed, other than the ruling UNMO won a parliamentary majority for the first time since independence. When last in office during the 1990s financial crisis, he lambasted “unscrupulous” currency traders and imposed capital controls, and fund managers turned skittish fearing a reprise. The party manifesto hinted at possible currency intervention, while assigning the central bank responsibility for reviving “international market value.” However Mahathir signaled a hands-off approach in early finance minister and other appointments based on track records rather than ethnic or crony ties as in the past.
On the Kuala Lumpur Stock Exchange consumer goods listings were buoyed by the incoming administration’s promise to abolish the goods and services tax, while maintaining fiscal discipline through cutting unspecified project spending. Prime Minister Mahathir after reassuming power ordered a raid on his predecessor Najib’s residence, and barred him from leaving the country as the government tries to recover billions of dollars allegedly siphoned from the 1MDB sovereign wealth fund. The Belt and Road relationship with China will in turn be reexamined on suspicion that $30 billion in agreed bilateral transport financing posed a debt trap that could presage Chinese asset seizure as in Sri Lanka. The East Coast rail link to Singapore, underwritten by China’s Export-Import Bank and estimated at half that sum, will be scrapped as “economically unviable” although it would have created tens of thousands of jobs according to a Mahathir adviser.
The political earthquake resounded in Thailand, where street protestors demanded an end to four years of junta rule as the timetable for February elections next year was again in doubt. General Prayuth Chan-ocha, who heads the military government, may be positioning to stay in charge under a nominal civilian regime, as next generation activists organize new parties. GDP growth at 4.8% in the first quarter was the fastest in five years on healthy exports and tourism, although private consumption and investment were weak. Inflation is only 1% with the benchmark interest rate on hold, but foreign investor capital market confidence turned bearish in May with a 75 index reading.
Philippines’ GDP growth came in at 6.8% on President Rodrigo Duterte’s 15% infrastructure spending push under the $180 billion “Build Build Build” program, but double-digit credit expansion also lifted inflation above 4%, triggering a 25 basis point rate change. The trade deficit swelled on equipment imports and remittances slipped in a lethal peso depreciation combination, down 5% against the dollar this year. The setbacks hurt the President’s popularity rating currently at 70%, as ratings agencies cited overheating and governance worries despite low external debt. Standard & Poor’s upgraded the outlook to positive, as international fund managers reserve such small market ASEAN judgment with building tensions.
