What Mahathir's shock win in Malaysian GE means for economy and markets

SINGAPORE — Investors are grappling with opposition leader Mahathir Mohamad’s surprise election victory in Malaysia’s election. Here is a look at what it means for the outlook for economic policy and markets.

At 92 years old, Dr Mahathir led a four-party coalition to end the six-decade rule of Prime Minister Najib Razak’s party. He inherits an economy that is growing more than 5 per cent, inflation that’s subdued and a currency that’s been one of Asia’s best performers this year.

What were Mahathir’s main policy pledges?

Abolishing a 6 per cent goods and services tax was a key campaign promise, which Dr 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 that is 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?

Malaysia’s economy is enjoying a strong rebound at the moment, with growth surging to 5.9 per cent last year and forecast by the central bank to reach 5.5 per cent to 6 per cent 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 Malaysia’s outlook ahead.

Moody’s Investors Service said there is lack of detail on the electoral pledges, but some campaign promises would be “credit negative” for Malaysia.

In particular, scrapping GST without any measures to offset the loss in revenue would increase the economy’s reliance on oil income and narrow the government’s revenue base, the ratings company said.

Mr Najib had said abolishing the 6 per cent GST would add 416 billion ringgit (S$141 billion) to the nation’s 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 per cent of GDP.

Malaysia should also brace for a “sharp slowdown in investment growth” if Dr Mahathir’s positioning against Chinese involvement in infrastructure prompts a stalling of those projects, according to Capital Economies.

Does this change the monetary policy outlook?

The central bank was scheduled to announce an interest rate decision at 3pm on Thursday. After moving early with a January rate hike, economists did not expect another change anytime soon.

All 18 economists surveyed by Bloomberg before the election predicted the benchmark rate would stay at 3.25 per cent.

Inflation has been relatively benign, slowing to 1.3 per cent in March, with a stronger currency since last year helping to ease price pressures. The government had forecast average inflation of 2.5 per cent to 3.5 per cent for this year.

Dr 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 has not revised his call that there’ll be no change in the policy position.

“You want to ensure continuity” he said.

Bank Negara Malaysia will probably include language in the statement around “ensuring stability” in the ringgit and that they are “monitoring capital flows,” he said. The central bank is independent enough that policy should not change, he said.

What does the upset win mean for currency policy?

The manifesto by Dr Mahathir’s 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.

Dr Mahathir retains a wariness of currency traders and has warned that he will be willing to re-introduce a peg on the ringgit to ward off “currency manipulators” if necessary.

The ringgit is the best-performing currency in emerging Asia this year, strengthening 2.5 per cent 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.

Ms Christy Tan, head of markets strategy at National Australia Bank in Singapore, said markets are in for a “rough ride as this was the least priced-in scenario” and “while the result is cheered by Malaysians, this means more uncertainties for international investors.”

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 on Thursday and Friday, the knee-jerk selloff could well be more pronounced in offshore trading, according to Tan.

The iShares MSCI Malaysia ETF dropped 6 percent to US$32.42 (S$43.50) in the US, the lowest since December. BLOOMBERG