A new year, a new beginning

Wishing a very prosperous 2014,

from Japan with love

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Malaysian Economy, Where Will It Go From Here? (Part 1)

Our index this year

It’s nearing end of 2013..lots of things happening in Malaysia, particularly on the side of our economy this year. We finally had the 13th general election in early May after waiting for almost 18 months for it. Again Barisan Nasional coalition won with majority albeit losing 7 parliamentary seats.

Market moved in a positive direction where we could see 5% gain in KLCI in the 3-4 weeks after the election. But then came tapering of quantitative easing announcement which has halted the rally. We could see spike in bond yields by 80-100 bps and also weakness in emerging market currencies, including Ringgit, where it has lost 10% of its value from end May to end August.

See the spike after the election?

 

Our bank has issued the first bond in the market after election and it was oversubscribed by 9 times times. Yes, our market was hungry. Prior to election everyone was cautious and sentiments were difficult to gauge, therefore it kinda hamper the excitement. Turned out everyone was hungry for new issuance, especially coming from an AAA rated issuer.

You happy, index?

Then along came Fitch with its rating downgrade. The rating agency has put Malaysia under negative watch (from stable) in July due to slow pace of fiscal reforms and rising government debt. As at end 2012, government debt has risen to 53.3% of GDP, whereas our revenue (mostly from petroleum) remains low at 24.7% of GDP. As expected, the first measure taken by the government was cutting down the oil subsidies. For which I believe, wherein other people blame the government for the sudden reduce in subsidy, was a necessary move in order to reduce fiscal deficit.

Well, a little input on sovereign ratings; it consist risk assessments assigned by the credit rating agencies to the obligations of central government. In other words it is the assessment of the likelihood that a borrower will default on its obligations. The ratings directly affecting fund raising activities, as it determines how expensive the cost of fundings will be. Lower rating assigned would indicate that it is more difficult for companies to raise foreign currency funds and it would be expensive for the country to borrow money from abroad. Plus, lower rating would dampen investment flow into our equity and bond market.

Anyway…the implementation of GST (as announced in 2014 budget in October) and the lowering of subsidies are not enough of measures to address fiscal deficit. The nation needs real structural reforms, say by way of tackling corruption and reducing leakages. Even after announcing the implementation of GST, Fitch still maintain its negative outlook, probably until they’re seeing our track record of budget management.