Analysts expect more pressure as Malaysia’s political turmoil drives away investors

Photo: mkjr_/Unsplash

Malaysia’s currency fell to a one-year low on Monday and analysts forecast further pressure on the country’s financial markets as the prime minister’s resignation raised the prospect of protracted political instability and uncertainty.

PM Muhyiddin Yassin said he quit after losing the confidence of parliament, though Malaysia’s king said he will remain caretaker leader until a replacement is found.

Muhyiddin has no obvious successor yet and, with his cabinet also resigning on Monday, investors worried a political impasse could delay raising the national borrowing limit and stymie much-needed state spending while the COVID-19 pandemic rages on.

The ringgit fell about 0.1% to touch 4.2430 per dollar, its lowest since July 2020, while the benchmark stock index slipped 0.4%. Sovereign yields and credit default swaps were mostly steady.

“The issue is that there is no clear replacement which raises uncertainty further and that means more economic stagnation,” said Trinh Nguyen, a senior economist at Natixis in Hong Kong.

“With the ongoing political crisis, it’s very difficult to see Malaysia engineer a different growth trend. That means that it falls further behind regional counterparts such as Vietnam.”

Muhyiddin’s leadership has been precarious since he took power with a slim majority 17 months ago.

Investors’ perception matters because foreigners hold about 40% of Malaysia’s sovereign debt. Foreign money has been flowing out of the country as the pandemic and political instability have delayed economic planning and stalled attempts at tax reform.

Malaysia’s stock market has logged 25 straight months of outflows and lagged regional peers, falling 8% so far this year while benchmarks in Indonesia, Thailand and Singapore have gained roughly 1%, 5% and 11% respectively.

The gap between Malaysia’s sovereign bond yields and the yield on Indonesia’s traditionally riskier government debt has also come under pressure from foreign flows, squeezing the difference at the ten-year tenor to its narrowest in three years this month.

“Uncertainty is likely to weigh on the performance of local currency assets and the ringgit in the near term,” said analysts at Citi who said 10-year yields, currently around 3.23%, could rise above 3.4% in coming weeks.

The priority for investors is for a stable leader to emerge as the economic outlook turns cloudy, but the way through the political crisis is unclear.

King Al-Sultan Abdullah has said elections are not the best option, however there is no candidate with the parliamentary numbers to take over.

“We are, at the macro level, quite optimistic … but the situation in politics is something that needs to be resolved soon to keep that in place,” said Mohamed Faiz Nagutha, ASEAN economist at Bank of America Securities in Singapore.

“What’s important for me is that there is a government in place…the worst would be if over the long term some of the medium-term policies were sidelined as a result of this situation.”

Reuters

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In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

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  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.