Unexpected shake of Malaysian markets

On May 9, Malaysian markets were unexpectedly shaken by news of changes in the Malaysian government. That day the ruling party suffered defeat for the first time in 61 years. A victory of the opposition was a surprise not only for the functioning government but for experts as well. As a result, Mahathir Mohamad’s coalition managed to get a majority in the Parliament knocking out the party of PM Najib Razak. 92-years old Mahathir Mohamad was nominated for the position of Prime Minister.

How did the markets react and what to expect from the new government?

Investors and experts were sure that former Prime Minister and his party would keep their seats and continue the policy that has pulled the country's economic growth to a 3-year high. That is why a victory of the opposition led to an offshore selloff in the ringgit. Malaysian stock market (MSCI Malaysia ETF) fell to the lowest levels since the end of 2017. Markets do not like changes and dramatically react to them. 

Although Mahathir Mohamad is not a new personality for Malaysians as he led the party and the government of the country in 1981-2003, the victory of his party weakened the Malaysian markets. There are concerns that Mahathir’s policy will boost the nation’s budget deficit. In this case, Malaysian currency and government bonds will significantly decline.

Moreover, investors will consider ties and investments between Malaysia and the Middle East and China. Mahathir Mohamad has already announced a possibility of renegotiation terms of some agreements with Beijing.

What to expect?

The Malaysian ringgit used to be Asia’s best-performing currency. However, now it is under huge pressure. Taking into consideration all of the above, analysts make forecasts on the future of the Malaysian currency. Up to date, the ringgit fell to the level of 4 per US dollar (USD/MYR). The further correction will depend on the political situation in the country. However, analysts have already started to cut their forecasts. For example, ING Groep NV reduced the year-end forecast from 3.84 to 4.05. This week the onshore markets are on holiday. As a result, the situation for the Malaysian ringgit may become worse on Monday. Friday trading in one-month NDF (non-deliverable forwards) supposes currency will be 1.5% weaker.

Despite worries of investors, the Malaysia’s central bank stays positive. Although on May 10, after the election, the central bank kept the interest rate unchanged, comments of the bank’s members may encourage investors. The bank predicts a steady economic growth and a stronger ringgit exchange rate that will reduce import costs this year.

To conclude, we can say that in the close future, there are risks of the fall of the Malaysian ringgit. However, it is not anticipated to continue for long as traders will calm down, consider all risks and get a clear view on the new government. MSCI Malaysia ETF is already recovering from the previous day’s plunge. Moreover, the new Prime Minister announced that he’d lead a business-friendly administration and seek ways to boost Malaysia’s stock market. So, the markets should just wait for a while.