MNI ANALYSIS: Malaysian Ringgit Can Withstand Political Shift

--Several Factors To Support Ringgit Resilience

By Stuart Allsopp

     SINGAPORE (MNI) - The shock victory by Malaysia's Pakatan Harapan coalition

poses downside risks to the ringgit over the medium term due to the threat posed

to the country's fiscal accounts and to the current friendly business

environment. 

     However, the Malaysian economy is far more flexible and able to withstand

economic shocks now than in previous years, and the ringgit is already

relatively cheap from a regional perspective, while the central bank has shown

some prudence in terms of maintaining positive real interest rates. These

factors should prevent any major ringgit weakness and provide opportunities in

the event of a continued selloff.

--SHOCK RESULT

     The election result marked the end of the Barisan Nasional coalition's

61-year spell in government and uncertainty surrounding economic policy

continuity will likely remain heightened for some time. Specifically, one of the

PH's key election promises is to repeal the 6.0% goods and services tax (GST)

that was introduced by the Najib administration in 2015. 

     GST accounts for roughly 18% of the government's revenues and has been

growing steadily since it was initially implemented. Together with the

possibility of increased fuel subsidies, these policies may undermine fiscal

sustainability.

     In addition, Mahathir has slated raising the minimum wage and undertaking a

comprehensive review of foreign funded infrastructure projects, both of which

would likely reduce the attractiveness of Malaysia as a destination for FDI. FDI

has been a major pillar of economic strength thanks to the country's relatively

attractive business environment.

--MAHATHIR WARY OF CURRENCY MANIPULATORS

     Mahathir, who was prime minister from 1981 to 2003, was quick to try and

reassure the business community, stating that 'our concern over the economy is

the main thing' and adding 'there is no cause to devalue the ringgit. We should

ensure this.' Investors are likely fearful that Mahathir, who imposed capital

controls on the ringgit in his previous stint as prime minister following the

Asian Financial Crisis in 1998, will engage in similar policies. In a sign he

remains wary of financial markets, he said in a media interview on April 6 that

he is willing to implement a peg on the ringgit to ward off currency

manipulators.

--FUNDAMENTALLY STRONGER

     That said, Mahathir is presiding over a fundamentally much stronger economy

than in his previous reign (as head of Barisan Nasional). The country's business

environment has improved markedly with indices such as the World Bank's Ease of

Doing Business index seeing huge gains over this time that will make the economy

more flexible and resilient to economic shocks.

     Furthermore, the country's external accounts are far superior after years

of current account surpluses have allowed the net international investment

position to move from deeply negative into balance. Although foreign investors

hold a large share of local government bonds and outflows could trigger the MYR

to weaken, BNM holds a huge amount of reserves that can be used to protect the

currency.

     Crucially, the country is a net creditor in US dollar terms as the bulk of

its assets are in dollars while a large share of its liabilities are in local

currency. This means that any weakness in the ringgit is likely to be

self-limiting as the country`s external balance shift improves with currency

weakness. 

--CURRENCY ALREADY CHEAP

     Despite ringgit outperformance since the start of the year, the currency

remains cheap in real effective terms and on the basis of average price levels

relative to GDP per capita. This is in spite of positive real interest rates.

One-year interest rate swaps are currently at 3.79% compared with trailing core

CPI of just 1.70%, which provides significant room for real rates to remain

positive even in the event of more fiscally profligate policies by the new

administration.

--MNI Singapore Bureau; +65 8233 2326; email: Asia-Editor@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$A$$$]