Ringgit sinks amid uncertainty

While Malaysians celebrated the results of the 14th general election, analysts said the near-term economic outlook could be troubled as investors were cautious about the unexpected change of governments.

A smooth handover of power from the Barisan Nasional, or National Front, (BN) coalition, which had ruled since independence in 1957, to Pakatan Harapan, or Alliance of Hope, (PH) will help ease investor concern. PH is comprised of four political parties with different aims, only united by their antipathy to the government.

Mahathir Mohamad was sworn in (pictured) as Malaysian prime minister yesterday (Thursday) after sealing his historic general election victory over the coalition he headed for decades.

But his underdog triumph was not greeted particularly warmly by the markets.

The iShares MSCI Malaysia ETF, the biggest exchange-traded fund holding Malaysian stocks, fell by 6 per cent, the sharpest decline in over two years, while in offshore forward markets, the ringgit fell more than 2 per cent.

Rating agency Moody’s was uneasy about the prospects for the economy, saying that while “little was known” about Mahathir’s economic policies, it was unconvinced about the proposed abolition of a goods and services tax and the reintroduction of fuel subsidies. Such campaign promises, “if implemented without any other adjustments, would be credit negative”, said Anushka Shah, a Moody’s analyst.

Lukman Otunuga, a research analyst at FXTM, said the ringgit would be threatened by “domestic political uncertainty” and the onshore market could be vulnerable to downside losses when the market reopened next week. The DBS Group strategists Philip Wee and Duncan Tan, however, said the ringgit would have depreciated without Mahathir’s win.

“Our forecast for the ringgit to depreciate to 4.2 by the end of this year was formulated before the election. This was based on our expectation for a resurgent US dollar from a more hawkish US growth/inflation/rates outlook and a moderation in the Eurozone’s momentum,” Wee and Tan said.

Propped up by rising oil prices, this year’s economic growth was forecast at a respectable 5.5 per cent.
Investors might take heart from the 92-year-old Mahathir’s experience of power.
During the East Asian financial crisis in the late 1990s he criticised currency traders, calling them “unscrupulous profiteers” and putting capital controls on global investors. His policies were derided at the time, but Malaysia swiftly recovered from the crisis and was seen as having fared better than most other “tiger” economies.
Malaysia’s Election Commission announced PH won 113 seats, one more than the 112 required for a majority. Outgoing prime minister Najib Razak’s BN secured 79, with the Malaysian Islamic party (PAS) coming third.
Mahathir, who repressed the opposition during his 22 years as premier from 1981 to 2003, hand-picked his two successors, including Najib, before turning on his protégé and forming the new opposition movement.

 

Mahathir Mohamad is sworn in as prime minister. Picture credit: YouTube