by Gary Kleiman
August 3, 2015
Malaysia’s stock market was down over 10 percent at end-July after Prime Minister Najib Razak, fighting to extend his six-year tenure in the wake of the 1MDB debt and campaign funding scandal, sacked his deputy and other cabinet members openly challenging him.
His public approval rating at 45 percent has suffered since the United Malay party won re-election last year, despite the opposition getting a larger vote total.
His predecessor Mahathir Mohamed did not think he deserved another term for lack of economic and political vision, as the household debt burden, which soared to 85 percent of GDP through government programs to boost consumption, is no longer sustainable to offset falling oil exports.
Foreign investors, with respective one-third and one-quarter ownership in the local bond and equity markets, were once enthusiastic about early promises to change the state-dominated business and financial sector model. But the results were meager and with the currency now at a 15-year low as the region’s worst performer, aversion is spiking as in the Asian financial crisis aftermath.
The sovereign wealth fund investigation into $11 billion in accumulated debt has also begun to scapegoat international finance houses as during the early 2000s. Goldman Sachs has been singled out for high bond underwriting fees and the aggressive style of its Asia head.
The son of a wealthy Malaysian business executive, who started a fund in New York and expanded 1MDB’s portfolio into luxury real estate, has been accused of shady foreign practices and steering $700 million into Najib’s account.
As a central bank task force examines such conspiracies, asset sales to other government-linked companies, with stock exchange heavyweight Tenaga Nasional just bidding for a power unit, will be the main channel for servicing obligations and staying afloat.
GDP growth may be only 4 percent this year as the PMI manufacturing index fell below 50 in June, and April introduction of a goods and services tax to narrow the chronic 3-percent range budget deficit caps domestic demand.
Property and construction after a long upswing have stalled as bank credit growth drops to single digits, with personal non-performing loans rising.
The central bank has held rates despite ringgit depreciation to 3.8/dollar to discourage a further borrowing binge, which has been the main factor cited by ratings agencies for a likely sovereign downgrade.
Fitch Ratings last month maintained an ‘A’ grade on the prospect of household deleveraging amid the allegations swirling around the prime minister. To allow banks to handle workouts, short-term Islamic government securities issuance, which soaked up liquidity, has been stopped, effectively halving the global ‘sukuk’ universe to $50 billion in 2015, according to Standard & Poor’s.
External accounts show a dwindling current account surplus to 1.5 percent of GDP as both high tech and natural resource exports sputter. International reserves have dropped 20 percent this year to just over $100 billion as they are used for currency intervention, and domestic and foreign-based capital outflows accelerate.
In May, a $2 billion sovereign bond was placed to boost holdings, but fund flow tracker EPFR shows steady debt and equity exit since the first quarter. Outward FDI from both private and state companies is a strong trend, as they diversify risk and react to slim infrastructure pickings in Najib’s ambitious Economic Transformation Program now compromised by debt and political baggage.
These elements are also pervasive in Thailand where the stock market was off the same 10 percent at end-July on the MSCI index. It is tied with Malaysia for ASEAN’s greatest household debt, which was pushed by the Yingluck administration’s rice farmer and auto buying schemes before she was ousted by the military.
The generals postponed the election timetable into late 2016 as a new constitution is drafted and former government officials face trial for misconduct, including in agricultural credit. Informal money lenders and external corporate and financial institution borrowing add to the debt load which altogether is estimated at 125 percent of GDP. Balance sheet bloat in both countries regardless of criminal intent remains scandalous, and investors need to see that fiscal and political houses are equally in order.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.