Malaysia’s upcoming parliamentary election is captivating newspapers, investors and analysts alike.
Partly this is down to the uncertainty of its timing – prime minister Najib Razak can call it at any time between now and June 27, 2013 – but it’s also because it stands to be a particularly sensitive election this time around.
The ruling United Malays National Organisation (Umno) party has been in power continuously since Malaysia became an independent nation in 1957, yet in the most recent 2008 elections it lost its cherished two-thirds majority in parliament, which prevents it from passing whatever legislation it sees fit.
It is opposed by a coalition of opposition parties that is led by former deputy prime-minister Anwar Ibrahim. They don’t appear to believe they can win but they hope they can eat into Umno’s parliamentary dominance even more, embarrassing Razak.
The prime minister is well aware of such a risk, which is why he is planning to release a set of pre-election goodies to sway voters’ minds.
From an economic and financial perspective this could be a good thing, because Malaysia looks vulnerable. An economy that depends largely on its oil and gas revenues alongside electronic product exports looks doubly exposed to the weak economic conditions now prevailing in the world.
These issues risk affecting the gross domestic product (GDP) growth rate of a country that has thus far held up reasonably well against European economic malaise and sluggish growth in the US. Malaysia’s economy grew 1.6% in the first three months of the year.
Investors certainly appear confident on the country for now too, to judge by the ability of Malaysian healthcare operator IHH to successfully price a MYR6.25 billion (US$1.97 billion) initial public offering (IPO) both in Kuala Lumpur and Singapore on July 11.
If Najib can offer up spending incentives and some GDP-bolstering investment projects too it would do a lot to maintain the country’s economic appeal. That wouldn’t just solidify his political hopes, it would help ensure the country’s economic vigour and stimulate the country’s capital markets.
Malaysia’s economy has so far remained largely unbowed by the increased economic uncertainty plaguing much of the world. However questions over whether this can be maintained are beginning to mount.
On June 11 Credit Suisse released a research report entitled ‘Malaysia: is the best behind us?’ which noted that weak global growth and dropping commodity prices were likely to have an impact on the country’s economy.
The report noted early on that the Swiss bank’s annual GDP growth expectations of 4.6% for 2012 remain above the market consensus of 4.3%.
But it adds that “while pre-election pump priming will provide some support to household consumption, our analysis suggests that the negative impact from a slowdown in manufacturing exports and decline in palm and crude oil prices would likely dominate”.
“Malaysia’s economy is exposed to a combination of the Western world slowdown and China’s, which could hurt it twofold. Firstly, like other electronic exporters it could slow down directly due to dropping European consumer demand. Secondly a softening of commodity prices such as rubber and palm oil could affect it too, which neighbours such as Thailand and the Philippines don’t have to worry about as much,” says Sentitam Sathirathai, the economist at Credit Suisse who wrote the report.
The commodities issue is not just one of export prices, but the impact of a drop on these prices on local incomes.
“A key driver of private consumption in Malaysia is favourable palm oil prices, as it increases farmers’ incomes and allows them to boost consumption,” Sathirathai says. “Similarly a drop in export demand has similar ramifications, while a drop in the demand of oil-related products will eventually impact government revenues.”
Yet Sathirathai’s worst case scenario is that Malaysia’s growth will not be as strong as expected. It’s far from apocalyptic. Others don’t even think the country will experience a modest decline in its economic expansion.
On July 10 Rahul Bajoria, an economist at Barclays, wrote a report on Malaysia entitled ‘At cruising altitude’. As the title suggests, Bajoria has a sanguine view of the Malaysian economy. He calls into question Sathirathai’s doubts on both commodities and exports as having a major impact on local business.
“It used to be the case five or six years ago [that Malaysia was vulnerable to commodity price vagaries], but the biggest buyers of Malaysia’s palm oil are China and India where demand is pretty sticky so there is a lower elasticity of prices versus crude oil,” he says. “And Malaysia isn’t a big oil exporter these days; instead it exports a lot of natural gas, and demand for that is high, particularly from Japan. Those underlying dynamics should provide additional degrees of resilience.”
Bajoria believes that local consumption remains healthy in Malaysia, while both public and private investment is playing a big role in driving economic growth. Added to this inflation looks well contained, with the country likely to sit well within the 2%-3% annual range set by Bank Negara Malaysia, the central bank.
Investing for the future
Key to the country maintaining its GDP growth rate will be the ability of the government to both reform and invest.
It’s something that Najib has already committed to doing under his Economic Transformation Programme, which was announced in September 2010. The programme has a stated goal of making Malaysia a high income nation and attaining a gross national income target of MYR48,000 per capital by 2020. It intends to do this through US$444 billion of projects, led by the private sector but supported by the government.
The programme has had some high minded objectives. One was to stamp out corruption, via both judicial reform – corruption cases now have to be ruled upon within a year – and through the Malaysian Anti-Corruption Agency (MACC), an agency set up in 2008 that aims to root out graft in government, business and civil society.
Part of MACC’s way of achieving this has been to get companies to sign an integrity pledge, after which they must allow a team that includes members from the Auditor General’s Office, Ministry of Finance and other officials to monitor their progress.
In return for being willing to submit to such scrutiny the companies get advantages, such as being short-listed for government projects. That’s a real boon in today’s market, when the government is looking to partner with private companies over multiple infrastructure and construction projects.
These projects are also part of Najib’s programme; a means to stimulate the economy by building needed facilities in Malaysia, be they schools, hospitals, a mass rapid transit rail system for Kuala Lumpur, or new roads and ports – alongside more traditional investments such as oil and gas infrastructure projects.
The programme is already boasting success. The government revealed that investment rose to MYR94 billion in 2011, higher than its MYR83 billion target, in part due to the decision of companies such as Carrefour and General Electric to establish operations in the country.
Sathirathai notes that these investment measures are helping to counteract weaker international prices for Malaysia’s exports.
“The government is giving out a lot of handouts and it is being more effective in implementing ETP pipe projects, although this is due more to government-linked corporations (GLCs) than pure private companies, ” he says. “The GLCs do the work initially and this will lead to more work for private companies later on. It’s something the government has some control over, and as a result I think investment will contribute more [to Malaysia’s GDP] this year than previous years. ”
Such efforts certainly seem to be working. In April Najib declared that the country’s per capita income has risen from US$6,700 when the government began the programme in 2010 to US$9,700. Add into this his government’s hand-out of cash to poorer families in the 2012 budget – and likely the coming 2013 one as well – and it’s little surprise that the prime minister has become an increasingly appreciated individual.
According to the Jakarta Post, a survey carried out by the independent Merdeka Centre in February showed Najib's approval rating to have risen from 59% in October 2011 to 69%. He’s looking fairly well-placed to fend off the assertive challenge of Anwar’s political coalition.
Captive capital markets
One big advantage of Najib’s plans is that Malaysia can afford them. Public coffers are not unlimited, and Sathirathai predicts that increased spending will likely lead the government to report a fiscal deficit of 5%-5.5% this year, higher than its projected 4.7%.
But the economy is still growing, so Kuala Lumpur can afford to add some debt to its books if necessary. And its decision to involve private companies is smart, because they will in turn seek funding from local investors.
The latter are looking flush. According to the Securities Commission Malaysia, the country’s funds possessed MYR372.57 billion in assets under management as of March 31, MYR309.29 billion of which was invested locally. GLCs are big market investors too, holding an estimated 40% of the country’s stocks, while international investors own another 20%-30%.
The support of domestic investors and Malaysia’s stable economy has helped support its stock, even as neighbours suffer. The FTSE Bursa Malaysia KLCI index rose from 1,514.13 at the beginning of January to 1,643.67 on July 17, outperforming most regional peers.
The strength of investor demand was amply demonstrated by two major IPOs. On June 14 Felda Global Venture Holdings raised MYR10.4 billion through a listing on Bursa Malaysia, and on July 12 IHH Healthcare followed with its MYR6.25 billion IPO.
The two transactions, which are both based on the sale of shares by government companies, mark the largest respective initial public offerings in Asia this year, and the second and third largest equity listings globally after Facebook's IPO. They have pushed Bursa Malaysia to become the most active Asian bourse for new listings this year in terms of volume, above the usually far busier Singapore Exhange and Hong Kong's stock exchange.
More importantly both transactions were priced towards the top of their respective pricing ranges. Source familiar with both transactions say that the domestic Malaysian investor audience played a strong supporting role in the two deals.
“The first domestic investor bid helped draw a lot of international interest for the deals,” says one banker familiar with the transactions.
Felda and IHH's listings reveal the continued domestic support for Malaysian stocks, but an even more important measure of the country's investor strength is its bond market.
Ringgit bond issuance is proving to be exceptionally robust this year, largely because of companies linked to Malaysian construction projects seeking funding.
A debt capital markets head that covers the country notes that sales in Malaysian ringgit debt look set to soar to around MYR90 billion this year, a product of both Kuala Lumpur aiming to raise funds to invest in infrastructure, and a number of offshore borrowers raising money in the currency to take advantage of an appealing arbitrage opportunity with US dollars.
“One of the drivers of this debt issuance is a lot of PFI (private finance initiative) and PPP (public-private partnership) projects being conducted in partnership with private sectors,” says the DCM head. “There are hospitals, schools and infrastructure projects all set to come on-stream. The funding part will be taken care of by the private sector but they will have the backing of the government as their paymaster. It’s a good credit story to raise financing.”
Added to this the government said that it intends to add up to 4,000 megawatts (MW) more electricity generation via independent power producers. Half of this total has already been announced and bidding is taking place on another 1,000 MW of this capacity. The final 1,000 MW-worth of generation capability is expected to be tendered either late this year or in 2013.
Bond funding for such projects is proving popular in Malaysia because far greater tenor lengths can be reached than banks can offer via loans. The majority of bond issues in the country are sukuk, or Islamic law-compliant debt, to capture the biggest possible slice of investor demand in a country where Islam is the largest practised religion.
Strength for the future
Healthy capital markets at a time when almost all other countries are seeing their capabilities struggle is not to be underestimated. It means that not only can local companies tap attractive funding, it also acts as a practical means of gauging the level of support that Malaysia continues to hold as an investment story.
The secret of this appeal lies in large part in the country’s stability. For all the shenanigans about the upcoming election, Malaysia has been largely stable for over a decade. Its economic growth is not stellar, in part because its economy is relatively more advanced than those of its more emerging neighbours, and partly due to the heavy influence of the public sector and government-linked corporations stymieing competition.
But provided the government keeps investing alongside private partners its growth prospects should remain decent, at around the 4%-5% level. At worst Malaysia’s GDP growth will be at the lower end of this scale this year, if commodity prices remain low and European demand for exports continues to fall. But it would be far from the only country to feel the pain in that situation.
As the country heads into its coming election it can rest assured of one thing: economic stability. That’s not to be sniffed at, given the news emanating from much of the rest of the world.