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Malaysia Aided by Good Timing as Oil Cushions Election Shock

Updated on
  • Ringgit, crude prices are showing signs of decoupling
  • Higher oil will provide a boost to government revenues: ANZ

One reason for the resilience of Malaysian assets as local markets reopened Monday may have been that Mahathir Mohamad’s shock election win has coincided with a jump in oil prices to the highest since 2014.

Crude has rallied around 8 percent this quarter in the run-up and aftermath to Malaysia’s historic vote last Wednesday. That’s providing a boost to state coffers in a country where official data shows mineral fuel exports accounted for around a 10th of gross domestic product in the nine months through end-2017. It will also cushion the impact from some of the new government’s policies that were described as credit-negative by Moody’s Investors Service and Fitch Ratings.

The fact that the ringgit, which often moves in tandem with oil prices, decoupled from crude in the weeks preceding the election is also helping to prevent a more severe selloff, said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore.

‘Undervalued’ Ringgit

“While there will be near-term uncertainty over the fiscal impact of the new government’s policies, especially abolishing GST and reintroducing targeted oil subsidies, higher oil prices will provide a boost to government revenues,” he said. The decoupling from oil means the ringgit looks “undervalued” at the moment, according to Goh.

The ringgit was steady against the dollar as of 3:53 p.m. in Kuala Lumpur, recovering from an earlier loss of as much as 1 percent. The yield on Malaysia’s 10-year bond rose two basis points to 4.15 percent, while the benchmark stock gauge climbed 1.2 percent, after falling as much as 2.7 percent.

PineBridge Investments wouldn’t be paring its holdings of Malaysian assets due to the election result, Omar Slim, senior vice president for fixed income at the asset manager in Singapore, said on Thursday.

“Generally, we think that even if there’s some fiscal slippage, Malaysia should be able to handle it given that oil prices have increased.”

While rising oil prices have been Malaysia’s friend, the country’s finances could come under pressure if crude declines again, said Markus Muller, global head of the chief investment office at Deutsche Bank Wealth Management in Frankfurt. If oil dropped back to $50 to $55 a barrel from current around $70, that “could become a problem” for the nation’s budget, said Mueller, adding that the firm’s base case was for prices to be at $62 a barrel by March 2019.

(Updates with comments from Deutsche Wealth in eighth paragraph.)
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