Malaysia’s undeliverable speculator salvation

Gary Kleiman November 24, 2016 11:33 PM (UTC+8)
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Malaysian stocks and the currency fell into year-to-date losses on massive street rallies demanding the ouster of Prime Minister Najib Rezak as global graft probes continue into the 1MDB sovereign fund, and a central bank crackdown against offshore ringitt “non-deliverable” trading after a post-election US dollar surge.

Under the banner of the Bersih anti-corruption movement tens of thousands, including Najib’s predecessor Mahathir Mohamad, marched in Kuala Lumpur, but the government dismissed the “deceitful” action and claimed the “silent majority” was on its side. As the greenback strengthened 5% on Donald Trump’s presidential nod, foreign banks were asked to sign a letter committing to stop participation in the Hong Kong and Singapore forward markets to stem the decline, given the ringitt’s “non-international” status.

The central bank governor called NDF activity “damaging and speculative,” while insisting that the requested halt was not a capital control as imposed in the aftermath of the Asian financial crisis. He also dipped into almost US$100 billion in reserves for defense, and overseas investors who own half of local currency government bonds, the highest share in the region, immediately slashed positions on revived debt and political qualms.

At the APEC summit in Peru, the Prime Minister stated that the IMF supported the anti-volatility move, but dollar funding costs for Malaysian banks jumped to almost 2% over Libor, the steepest in Asia.

Analysts also pointed out that short-term official and corporate external debt equal to almost 30% of GDP must be rolled over, and that sudden policy and value shifts are deterrents. They expressed reservations as well about geopolitical direction with the collapse of the US-led Trans-Pacific Partnership, as Najib cozied up to Chinese President Xi Jinping in Lima. The two had met the week before in Beijing and signed US$25 billion in Mainland loan and investment pledges, mirroring the Eastern pivot of neighboring Philippines President Duterte while refraining from his anti-Washington diplomatic tirade.

The Prime Minister’s deals likewise triggered a domestic backlash, particularly from the ruling United Malay party questioning China’s potential future hold on strategic assets like a promised rail network, after Beijing stepped in a year ago to buy problem 1MDB holdings. The closer ties could inflame ethnic tensions with the local Chinese community which previously sparked riots, according to independent researchers.

GDP growth was 4.3% in the third quarter, above the 4% forecast, on solid private consumption and net exports despite a new goods and services tax and mixed commodity prices. However the World Bank pared its 2017 prediction to below 5 percent on slowdown and stability worries, which the Prime Minister, also serving as Finance Minister continued to reject with assertions of “strong fundamentals.”

In presenting next year’s budget recently, he attributed any weakness to outside forces including Brexit and slack hydrocarbon and palm oil values, but cited domestic demand and low inflation “momentum.” He reiterated the 3% of GDP budget deficit target, and argued that the new VAT and energy subsidy cuts prevented “collapse.” The digital economy will be spotlighted next year, with the goal of lifting its output contribution to one-fifth the total through creation of special hubs and end-decade training of thousands of data scientists. Risk capital funding will be a major thrust, but the overall climate remains subdued with only a dozen initial public offerings last year on the Kuala Lumpur Stock Exchange as a possible exit.

Foreign reserves are currently 1.2 times short-run external debt and cover eight months’ imports, and while central bank head Muhammed Ibrahim acknowledged capital flow vulnerability as a small, open economy, he justified the non-deliverable forward steps to “maintain order” and reassured they were not a “proxy control.” He vowed “prompt supervisory intervention” against banks and individuals violating the bar, but liquidity and foreign investor confidence have already suffered and the move may also damage the Islamic banking sector, one quarter of the system, as non-speculative currency hedges are caught in the net. The abruptness and tenor of the rule change may also echo a past era, overshadowing a future post-Najib bullish case of leadership and policy overhaul with possible resignation or early elections next year.

Gary Kleiman
Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.
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