What Mahathir's shock win means for economy and markets
Mahathir inherits an economy thatâs growing more than 5%, inflation thatâs subdued and a currency thatâs been one of Asiaâs best performers this year.
Pakatan Harapan, led by Dr Mahathir Mohamad, has promised to abolish the GST and reintroduce gas subsidies. (Bloomberg pic)
KUALA LUMPUR: Investors are grappling with Dr Mahathir Mohamadâs surprise election victory in the 14th general election. Hereâs a look at what it means for the outlook for economic policy and markets.
At 92 years old, Mahathir led a four-party coalition to end the six-decade rule of Prime Minister Najib Razakâs party. He inherits an economy thatâs growing more than 5%, inflation thatâs subdued and a currency thatâs been one of Asiaâs best performers this year.
What were Mahathirâs ma in policy pledges?
Abolishing a 6% goods and services tax (GST) 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 thatâs more fair.
The coalition also promised to reintroduce gasoline subsidies, increase petroleum royalties to oil-producing states and raise minimum wages.
What does it mean for the economic outlook?
Malaysiaâs economy is enjoying a strong rebound at the moment, with growth surging to 5.9% last year and forecast by the central bank to reach 5.5% to 6% 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 Mal aysiaâs outlook ahead.
Moodyâs Investors Service said thereâs lack of detail on the electoral pledges, but some campaign promises would be âcredit negativeâ for Malaysia. In particular, scrapping GST without any measures to offset the loss in revenue would increase the economyâs reliance on oil income and narrow the governmentâs revenue base, the ratings company said. Najib had said abolishing the 6% GST would add RM416 billion (US$105 billion) to the nationâs 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% of GDP.
Malaysia should also brace for a âsharp slowdown in investment growthâ if Mahathirâs positioning against Chinese involvement in infrastructure prompts a stalling of those projects, according to Capital Economics Ltd.
Does this change the monetary policy outlook?
The central bank was scheduled to announce an interest rate decision at 3pm today. After moving early with a January rate hike, economists didnât expect another change any time soon. All 18 economists surveyed by Bloomberg before the election predicted the benchmark rate would stay at 3.25%.
Inflation has been relatively benign, slowing to 1.3% in March, with a stronger currency since last year helping to ease price pressures. The government had forecast average inflation of 2.5% to 3.5% for this year.
Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore, said he expects the central bank to proceed with its rate decision on Thursday and hasnât revised his call that thereâll be no change in the policy position.
âYou want to ensure continuity,â he said. Bank Negara Malaysia will probably include language in the statement around âensuring stabilityâ in the ringgit and that they are âmonitoring capital flowsâ, he said. The central bank is independent enough that policy shoul dnât change, he said.
What does the upset win mean for currency policy?
The manifesto by Mahathirâs 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 heâll be willing to re-introduce a peg on the ringgit to ward off âcurrency manipulatorsâ if necessary.
The ringgit is the best-performing currency in emerging Asia this year, strengthening 2.5% 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 ârough ride as this was the least priced-in scenarioâ and âwhile the result is cheer ed by Malaysians, this means more uncertainties for international investorsâ.
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 today and tomorrow, the knee-jerk selloff could well be more pronounced in offshore trading, according to Tan.
The iShares MSCI Malaysia ETF dropped 6% to US$32.42 in the US, the lowest since December.
Source: Google News