Malaysia's rosy economy a winner in election year

Singapore

THE dominant theme in Malaysia for 2018 is no mystery - the imminent and no doubt, hotly contested 14th General Election that must be called by August next year. And if you believe the pundits, neither is its outcome, with most expecting the long-ruling Barisan Nasional led by Prime Minister Najib Razak to snag a victory.

Offering a clear advantage to Mr Najib's team would be the health of the national economy and by extension, personal pocketbook issues (1MDB scandal, step aside) that are top issues in the minds of a large swathe of voters.

The macro narrative is rosy - the economy is expected to be all fired up by domestic demand, thanks in no small part to easy financial conditions and an expansionary budget, and exports in 2018. Much like how it fared in 2017 except a tad lower.

A great deal of that optimism was led by Malaysia's third quarter outing which surprised on the upside - the economy grew 6.2 per cent from a year ago - the highest in three years - fuelled by private consumption which clicked higher by 7 per cent as well as higher public spending ahead of the the election and buoyant exports.

"With an estimated real GDP growth of 5.8 per cent ending on a high note in 2017, this provides a firm base for the Malaysian economy to continue charting its growth trajectory. Real GDP growth is estimated to grow by 5.1 per cent in 2018, albeit at a moderate pace as the high comparative base effect kicks in," said Socio Economic Research Centre executive director Lee Heng Guie.

The stellar showing has even surprised some economists.

"We have been always relatively positive but the strength of the spillover (into domestic environment) this year surprised us," admits Nomura's Singapore-based economist Brian Tan.

Going into next year, the numbers could stay "solid" with Nomura projecting a 5.5 per cent growth.

Some others, like Nizam Idris, head of strategy, fixed income and currencies at Macquarie Bank, prefer to tamp down expectations.

"We remain doubtful that growth could further accelerate to break out of the recent 4.0-6.5 per cent quarterly growth range, especially with the central bank agitating to hike rates," he said.

"Unlike most of Asia, domestic demand has played a more prominent role in driving Malaysia's growth in recent quarters, outstripping manufacturing production and exports. With household debt already among the highest in the region, hikes in BNM (Bank Negara Malaysia) rates in the face of higher inflation may quickly bite, curbing growth into 2018," Mr Nizam elaborated.

Hawkish bandwagon

A rate hike by the central bank next year appears to be a given, led by the BNM's hawkish tone at the final meeting for the year last month.

The backdrop for a rate normalisation is conducive - many Asian central banks appear to be on a similar path with Bank of Korea making the move to hike rates for the first time since 2011.

Strong growth provides the central bank a window to do so as raising rates mitigates the undesirable side effects of robust growth such as risk-taking behaviour.

"This is not so much to slow growth but to avert the buildup of financial risks," said Nomura's Mr Tan.

Most expect one rate hike of 25 basis points but appear divided on whether it will take place in the first or second half of the year.

Mr Nizam expects the rate hike to unfold in the first half of 2018, ahead of the market's consensus forecast, based on Bloomberg's survey, which currently projects a third-quarter hike.

He opined that the move would hurt the economy on two fronts - curbing consumption and investment demand through higher borrowing costs, and curtailing exports through (initially) a stronger ringgit.

Mr Tan expects a rate hike to happen as early as January which would coincide with the disbursement of a number of cash handouts announced in the 2018 budget with more rate hikes in the year unlikely.

"We believe this window will close after January due to the upcoming general election (which we expect some time in March to May)," said Nomura, in a report.

"Rate hikes after the election are unlikely because the government will be forced to sharply tighten its fiscal stance to meet its 2018 fiscal deficit target of 2.8 per cent of GDP after front-loading spending ahead of the election," the house added.

Battered ringgit, no more

After falling by a cumulative 27 per cent against the US dollar between 2013-2016, the ringgit has strengthened by some 10 per cent for the first time in 2017 which Mr Lee attributed to the onshore ringgit stabilisation measures. Foreign reserves that have fallen by RM160 billion between 2013 and 2015 have also stabilised, albeit rising slowly and stood at US$101.9 billion as at end-Nov 2017.

A gradual appreciation could continue to be on the cards for the currency in 2018 as it's undervalued (by some 9 per cent, according to Saktiandi Supaat, head of FX research at Maybank Singapore, who estimates the fair value to be at 3.80 levels) as well as owing to rising oil prices, strong economic fundamentals and spurred by central bank tightening.

Mr Lee expects the ringgit to be around RM3.90-RM4 (S$1.28-S$1.31) against the greenback by end-2018.

He however cautions one to be wary about the state of capital flows and exchange rate pressure triggered by the US Federal Reserve's continuation of rate hikes and shrinking of its balance sheet.

Mr Nizam expects the ringgit to end the year around 4.05 and rise to 4.05-4.20 range in 2018, mainly on a stronger US dollar as well as downside risks to the Malaysian economy as domestic demand slows on higher interest rates.

Mr Saktiandi pointed out that, typically, Malaysian equities and ringgit tend to strengthen in the lead-up to elections due to rising confidence.

That could somewhat be a consolation for the Malaysian stock market - a sore underperformer among its regional counterparts who have enjoyed a hurrah in 2017.

Year to date, the benchmark KLCI is up just over 6 per cent - paltry compared to its regional peers that have notched up double-digit percentage gains - making it one of the worst performers in the Asia-Pacific.

'Mother of all elections'

In the run up to the do-or-die polls, expect a great deal of "noise" (political posturing, mud slinging a la Malaysia).

"We don't know what kind of craziness is in store during the election season," said Mr Tan. In this upcoming election, Mr Najib will face off with former Prime Minister Mahathir Mohamad who is expected to contest under the opposition banner Pakatan Harapan.

Most expect the elections to be called in March or April 2018 - after the Chinese New Year celebrations and before Ramadan.

Pre-election spending could ramp up in the first half which will be a boost to the economy, followed by belt tightening in the second half of the year given the country's commitment to reduce its fiscal deficit.

"Our base case is for Prime Minister Najib Razak and his Barisan Nasional coalition to remain in power after the elections," said Nomura.

The projection for the incumbent to win rests on three words - "three-cornered fight".

"If those three-cornered contests fail to materialise, he (Mr Najib) may end up losing seats in Parliament, possibly leading to a hung Parliament or even losing the election outright," said Nomura, adding that this could be negative for growth and the fiscal accounts, given the opposition's pledge to reverse fiscal reforms such as the GST (goods and services tax) and reinstate fuel subsidies.

Over and above the economics of it all, the elections marks a crossroads for Malaysian politics.

"This is the moment of truth for the Malay community and for the Malay agenda in the form into which it has evolved over the last few decades," said Dr Ooi Kee Beng, who heads the Penang Institute think-tank on social, political and economic issues.

"That is why there is so much talk about a 'Malay tsunami'."