Impact of political uncertainties on Malaysia’s economy


ALMOST every event can trigger a change in economic performance. Recently, the resignation of Dr Mahathir Mohamad as prime minister, followed by his appointment as an interim prime minister, sparked change in Malaysia’s political and economic landscape.

Although this is normal to other countries, it is the other way around in the eyes of Malaysians that consider his contribution since 1981. The Malaysian political uncertainties and the heat from Covid-2019 completely transform Malaysia’s economic landscape.

The FTSE Bursa Malaysia KLCI is the capitalisation-weighted stock market index that comprises 30 of largest companies in the primary market based on their full market capitalisation. The FTSE Bursa Malaysia KLCI serves two essential purposes. First, it provides capital to top companies for their expansion. Second, is for the purpose of investors’ profit through the buying and selling of stocks. For the purposes of companies’ expansion, stock offerings are preferable as they can avoid unnecessary debt and the cost of borrowing.

Technically, a decline in the FTSE Bursa Malaysia KLCI will affect the companies in terms of their stock offering, specifically the companies’ liquidity and ability to meet their obligations, leading to a slowing down in their expansion.

Bloomberg predicted a decline in the FTSE Bursa Malaysia KLCI as it hit 1521.95 on February 3, due to worries over the Covid-19 outbreak. Recent Malaysian political uncertainties are putting more downward pressure leading to a second decline. The FTSE Bursa Malaysia KLCI hit its lowest since December 2011 to 1490.06 on Monday.

The estimated decline by 41.14 points or 2.69% will slow down the expansion of top companies if the political uncertainties continue for an extended period. The FTSE Bursa Malaysia KLCI gained its momentum to 1500.73 yesterday.

The FTSE Bursa KLCI increment is primarily demand sided from the investors that sees an opportunity to buy stock at low prices. It depends on Bank Negara Malaysia to curb this shock, or FTSE Bursa Malaysia KLCI’s decline will continue and disrupt companies’ liquidity and ability to meet their obligations.

The Covid-19 outbreak mirrors the depreciation of the ringgit against the US dollar since January 24 at 4.0590. This was primarily on Malaysia’s close trade ties with China. However, concerns over political uncertainties has pushed the ringgit down about 4.13%.

The ringgit opened lower against the US dollar on February 24 at 4.2265 and also depreciated against other major currencies, such as the euro, at 4.5745, yen at 3.8191, and British pound at 5.4617. If political uncertainties persist, more investors will take their money elsewhere.

Therefore, it is crucial to regain foreign investors’ trust, and the magnitude of the impact on the economy depends on how long political uncertainties and the Covid-2019 outbreak last. The faster, the better for Malaysia. 

Oil prices are also one of the indicators of a sliding ringgit. The Covid-19 outbreak has brought down oil prices down to US$49.55 per barrel as of February 10. The drop in oil prices continues after a rebound to US$ 51.62 on Monday.

A slowdown in China’s economy,  leads to an excessive supply of oil in the global market and will pull down oil prices. Investing in the oil and gas stock market is not preferable in the short term as investors worry over the Covid-19, and its severity is still unknown. As a result, the drop in oil prices episode will pressure ringgit to depreciate more.  

Theoretically, a depreciating ringgit will boost Malaysia’s exports as our products will be seen to be cheaper. However, the historical data debunks that notion. For example, the ringgit depreciated to 4.2920 against the US dollar on December 31, 2015, but Malaysia’s export in 2015 still decreased to about 16.02% compared to a year before.

The depreciation of the ringgit will not help Malaysia’s export because most of our intermediary goods to produce the final product are  imported

Political uncertainties and the Covid-19 outbreak should be resolved immediately. Economists have predicted that there will be a slowdown in Malaysia’s revenue in 2020, while the World Bank revised that Malaysia’s GDP growth to 4.5%.

Therefore, the economic stimulus package that will be announced by the government should play a crucial role in curbing these pressures. Through various channels, it can boost investors’ confidence and absorb the impact of Covid-19. – February 26, 2020.

* Abdul Aziz Karia reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.


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Comments


  • Who cares ............?

    1) Malaysian unit trusts investors in funds holding purely overseas shares are CHEERING .......... eg 5yr S&P +51%, KLCI -17.25% (excluding FX translation) ..... the reason PNB are investing more in foreign assets.

    2) Malaysian expatriates overseas planning retirement back home are CHEERING .......
    (why suffer living overseas when with their savings, they become instant ringgit multi-millionaires)

    3) Singaporean MALAY (and other foreign) retirees living in Malaysia under Malaysia-my-second-home program are CHEERING .... (their rental income of their Singapore HDB flats are increasing due to depreciation of the ringgit!) ..................Ketuanan Melayu Singapura !!!!!!

    4) etc (think about it !!!)

    Posted 4 years ago by Malaysian First · Reply