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Malaysia Election Positive Whats next?

The ruling Barisan Nasional (BN) led by current Prime Minister Najib wins parliamentary election. BN lost just four seats and gained 60% of the votes (133 out of 222, before 137/222 or 61.7%), which is on the high end of market expectations range of 50-60%. State elections were also held and BN won back at least one state. The outcome is positive for MYR since PM Najib now has a public mandate to continue with his economic reform agenda and removes policy uncertainty since some expected a victory for the opposition party (PR). At the time of this writing, PR has yet to concede defeat but we think the magnitude of the victory by BN will keep the election results in tact. Politically positive for the region helped by strong economy. Post the Global Financial Crisis, Malaysia is the third major economy in Asia after Korea and Taiwan where the ruling party was not thrown out (Singapores PAP won but the number of seats gained were a disappointment). Some were worried about the spread of Arab Spring to Asia and introducing political instability. However, we think the strength in the recovery in the Asian economies has kept the ruling parties in power and maintains a stable political environment relative to the rest of the world. It also helps that Chinas transition has moved along smoothly. Whats next? Short term positive MYR. The Malaysian Ringgit (MYR) should perform well short term from two factors. First, foreign inflows should increase in the equity market. Equity market will get a boost as many were cashed up heading into the election and will have to play catch up. In addition, PM Najib will continue to have domestic financial institutions divest from the domestic market, which will reduce the historical premium on Malaysian equities valuation and attract more foreign ownership. Second, we think China will further liberalize its currency by widening the daily trading band and MYR is one of the most highly correlated currencies to CNY. Growth headwinds will limit gains in MYR. Our 12 month target on USD/MYR is only 2.90 (already 2.96 at time of writing) since growth risks on two fronts will slow the pace in MYR. First, the export outlook is still weak and US debt ceiling conversations are returning this month. We think this will be resolved but it will likely continue until August or September. Business confidence will be rusty throughout this period. Second, well likely have fiscal contraction in Malaysia in the coming quarters. Fiscal stimulus increased going into the election to favor the ruling party but this is unsustainable and cuts are likely. Bad news is usually better served post the election, well before the next elections and will be negative for the economy short term.


EDITOR Sean Yokota

Head of Asia Strategy

+65 6505 0583

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