Malaysia’s Fraternal Merger Feelings

Malaysian shares retained modest gains through July as Islamic finance powerhouse CIMB run by the prime minister’s brother reprised merger negotiations with RHB, potentially creating a national banking champion able to expand regionally as envisioned in the latest development blueprint. State investment funds with big stakes have pledged to purge political influence from the outcome and instead apply corporate governance rules under a new code. The deal focus coincides with a slight 25 basis point benchmark rate rise and further fuel subsidy cut postponement into next year as the government struggles with popularity erosion after the missing airliner fiasco. GDP growth should top 5 percent on a combination of solid exports and domestic demand such as recent approval for another industrial hub. A smooth presidential handover across the peninsula in Indonesia will aid sentiment as equities and the rupiah kept their surge on initial reports Jokowi beat the old guard’s Parabowo whose backers control major Jakarta exchange listings. The election commission will certify the outcome as foreign investors with three-quarters of the share free float and one-third of local bonds kept their nerve, as the central bank paused on 7 percent inflation and a monthly return to trade surplus although the oil and gas gap jumped. Jokowi’s economic platform was murky as he stressed trouble-shooting skills as a mayor and then Jakarta governor but hinted at further FDI restrictions and gas subsidy delays. His running mate Kalla is expected to recruit seasoned technocrats for cabinet posts, with the Energy and Finance Ministries under particular scrutiny. However a personal ally could get the latter appointment as in India, where Minister Jaitley unveiled a maiden budget to lukewarm receptions, as the top Asian stock market sold off after $20 billion in international inflows the past six months anticipating breakthroughs. He targeted a 4 percent of GDP fiscal deficit and hiked permitted insurance industry overseas ownership to 49 percent, and agreed to improve external settlement of local bonds and exempt bank infrastructure-related debt placement from reserve requirements. The plan will pursue tax reform and anti-poverty transfer overhaul as 7 percent-plus growth is the medium term goal on low single-digit inflation, despite the current poor monsoon compromising both aims.

The Philippines was also ahead almost 20 percent on the MSCI gauge in the teeth of another devastating typhoon and an unexpected 25 basis point increase in the special deposit account rate. The economy advanced 5 percent in Q1 but the current account surplus was offset by capital outflows in the portfolio and errors and omissions categories. President Aquino has been criticized for unilaterally accelerating spending under special provisions without legislative debate. That check is absent altogether in Thailand with the military at the helm and stocks still up double digits despite the forecast growth rollback to 1.5 percent. The junta has imposed price controls on staples and approved $20 billion in backlogged projects although tourists and automakers stay away expressing disapproval.