MONTREAL - Prime Minister Najib Razak took over a tough assignment when he took
office in Kuala Lumpur at the beginning of April, following the election
victory of the United Malays National Organization (UMNO).
He faced an economy in contraction, with a decline of 6.2% in gross domestic
product (GDP) in the first three months of this year and about the same is
expected for the second quarter. Not surprisingly, he has announced a stimulus
package amounting to US$19 billion.
Industrial production was down 11.4% in April compared with the equivalent
period in 2008, a slight improvement over the previous year. The worst-hit
industries were, in order, electronics, wood and paper, petrochemicals and
manufacturing. Exports declined
26.3% year-on-year in the same month. Given Malaysia’s export-to-GDP ratio of
1.11, exports are expected to continue to decline since export markets will
remain in recession, although Chinese demand may attenuate the decline in
commodities exports.
In this context, it is significant that the Kuala Lumpur Composite Index
(KLCI), is due to be replaced next month by a new benchmark gauge, according to
Bloomberg News, citing a CIMB Investment Bank report.
The finance and power sectors, along with gaming stocks, are set for increased
representation, while stocks in no fewer than seven sectors - building
materials, construction, hotels, insurance, property, timber and technology -
will largely disappear from the new index, to be called the FBM KLCI, for FTSE
Bursa Malaysia KLCI.
The number of companies in the benchmark will be cut by more than two-thirds,
to 30 from 102, and will include only the largest companies by market value
having at least 15% of its shares available for public trading. Its predecessor
is a broad-based capitalization-weighted index.
At nearly the same time as the CIMB report was published this week, the Bursa
Malaysia said Najib would soon announce significant measures to roll back
restrictions on foreign investment, this following on his mid-April
announcement of a review of said guidelines.
The demise of the KLCI comes after a 22% gain this year, a laudable
performance, albeit the weakest in Southeast Asia.
The KLCI closed on June 16 at 1,074, down from a high of 1,516 on January 11,
2008, for where it had fallen over the course of nine-and-a-half months to a
closing low of 829 on October 29 last year, recovering from an intraday low of
801 the previous day.
While the patterns of the chart are hard to read, in part because of the
destructive influence of the Asian financial crisis at the end of the 1990s,
the most likely extrapolation of inferred current trends could bring it up as
high eventually as 1,410, which (coincidence or not) matches the next highest
resistance below the 1,516 mark from January last year. Technical indicators,
however, suggest some mild short-term weakness.
Every effort is being made to ensure that the new FBM KLCI index is comparable
to the old one in statistical terms, but its launching is likely to bring
greater international attention to the Malaysian market. This, together with
further financial liberalization announced by the new government, and the
implementation of the announced stimulus plans in addition, may end up having
significant upward pressure on the behavior of the new index.
Such a move in the new stock index would take place despite declines in fixed
investment and corporate earnings, although companies' balance sheets will make
them much less stressed than counterparts in many other countries. The central
bank's place to reinvigorate the Corporate Debt Restructuring Committee will
likely take up the slack of any hesitation in bank lending.
Median growth estimates for the current year (the variance is too wide to say
that there is a consensus estimate) foresee a roughly 3% contraction and, for
2010, an expansion of about 2.7%. For reasons that are unclear, the Asian
Development Bank is consistently more optimistic (or less pessimistic) than the
International Monetary Fund, the World Bank, the Malaysian government and
investment banks.
The political re-emergence of opposition leader Anwar Ibrahim, following his
striking August 2008 victory in a by-election for a parliamentary seat, is
unlikely to affect the country's economic course, notwithstanding its
significance for domestic politics. He was convicted of sodomy and corruption
in 1999 and was sentenced to nine years in prison in what many believe to have
been a politically motivated trial.
Although the conviction was reversed in 2004 on appeal, Malaysian law
prohibited him from engaging in politics until August 2008. Two months
beforehand, he was again accused of and tried for sodomy; the new conviction is
now being appealed.
Despite the international reaction to all these events, the security of the
ruling UMNO's hold on power does not appear to be threatened, and national
economic life proceeds under the assumption that Najib's rule will continue
unimpeded. In the 2008 elections, UMNO won 79 seats and its ruling coalition
comprises 140 of the 222 seats available.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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