PM Najib Razak’s announcements today confirm our read the policy shift in Malaysia to target the capital account deficit. Attracting more capital to enter or remain in the country is clearly a more important policy objective. This sets Malaysia well apart from the rest of the region who conversely is attempting to stem capital inflows and encourage outflows. Beyond this, other announcements today support a view of a gradual structural and fiscal improvement. Taken together this suggests MYR will continue to outperform. We expect USD-MYR to continue to break new lows in the coming months, targeting 3.19 by the end of the year. In addition, we have been recommending SGD as a funding currency, and as a closely watched benchmark of relative performance, a normalization of SGD-MYR to its mid-decade average of 2.30 is also likely in the coming months.
The details of the announcement were largely expected as they had been leaked in press in recent weeks (note the government will release more details in a separate event in June). The key points for currency markets are the following:
1. Increasing divestment of Government holdings in companies, including a 32% stake in the postal service (approx MYR353m), and stakes in two Petronas units (which local press reported may include Petronas Gas Berhad, which has a approx market cap of MYR19bn). The goal here is to increase the attractiveness and liquidity of the local equity market for foreign investors.
2. Review the country’s affirmative action program with an aim of making it need-based rather than race-based. This is an ongoing dismantling of the substantial affirmative action program that many have argued has constrained economic vibrancy and hindered domestic investment. Last year the PM removed the 30% Malay equity stake requirement.
3. Noted ongoing consultation regarding reform of the subsidy system and an introduction of the GST tax. This is important to achieve fiscal consolidation, and was first announced during the 2010 budget unveiling.
This shift towards attracting more capital, which we first noted shortly following the surprise BNM hike, led us to upgrade our view on MYR. In our view, this policy focus in effect aims to reverse MYR’s underperformance since early 2008, when domestic savings left the country and capital bypassed Malaysia during the recovery (leading to stark underperformance in FX reserve accumulation). This read on policy will also inform as to the likely FX policy response. While BNM will likely eventually seek to rebuild some of the reserves drained during the crisis, in the near-term it will be more important to allow more appreciation to be realized, in order to boost the attractiveness of local assets, and to use currency appreciation as a signal of the strength of the investment environment. We would not expect significant FX policy resistance to further MYR strength at least until SGD-MYR has normalized to it’s mid-decade average levels around 2.30.
Beyond this, other announcements in the New Economic Model do incrementally improve the broader fundamental backdrop to ringgit. First Najib has stressed the commitment to move away from a strict race-based affirmative action program towards a social support program based more on needs. While we expect progress on this front to be very incremental, not least because Najib will see resistance from within his own party, to the extent that this reinforces the policy direction towards a more investment-friendly economic environment, it is positive for future investment flows. Similar is the continued signaling of a rollback of fuel subsidies and introduction of a GST tax. A more concrete announcement on this front had earlier been expected, but the obvious political difficulty of such moves, has made progress here more gradual and incremental. Still the signal of continued intent to achieve fiscal consolidation is positive for future improvement of the sovereign fiscal picture, and thus the currency.
Daniel P Y HUI
FX Strategist | The Hongkong and Shanghai Banking Corporation Limited
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p/s photos: Mandy Lieu