It’s that time again when political flags, posters and banners are strung across towns and cities across the nation, when politicians march through the streets – championing the people’s rights and proclaiming promises of a better future under their leadership.
Yes, after five long years, it’s that time again when the fate of the nation falls in the hands of its people. Come May 9, Malaysian voters will head to the polls for its 14th General Election (GE14) to decide the future of Malaysia.
But underneath this rising political noises, the economy is still the core of the question on who is capable enough to lead this growth.
While generally, a country’s economy isn’t solely churned by politics, its government plays a major role in its direction as it determines policies and structural reforms that could either make or break an economy.
For Sarawak, while still fresh from its 2016 state election, the general election is a vital election for the state as it would mean who will hold key places in the parliament and this is critical for the allocation of federal budget to fund state-related matters and for the development of mega public-funded projects across Sarawak.
First, let us take a look at how Malaysia’s economy has fared this past five years under the Barisan National (BN) coalition government.
According to statistics by the World Bank, Malaysia’s annual gross domestic product (GDP) growth in 2013 was at 4.69 per cent, it rose to 6.007 per cent in 2014 before treading downwards to 5.028 and 4.22 per cent in 2015 and 2016, respectively.
In 2017, Malaysia’s annual GDP growth grew 5.9 per cent, the Department of Statistics reported.
Figures on track
In proportion to Malaysia’s GDP growth, according to the World Bank in its recent Malaysia Economic Monitor ‘Turmoil to Transformation’ report, Malaysia’s fiscal consolidation remains on track.
Overall, Malaysia’s annual value of fiscal revenue has been declining since 2012.
“In proportion to GDP, the Federal Government debt stock narrowed over 2017, standing at 51.1 per cent as of the third quarter of 2017 3Q17 (50.9 per cent in 2Q17).
“Ringgit-denominated papers constituted 96.8 per cent of the Federal Government borrowing, which implies that the risks arising from exchange rate fluctuations are limited. The government’s debt profile also continues to be skewed towards longer maturity issuances, with an average maturity period of 7.2 years and with 66 per cent of outstanding debt having a remaining maturity period of more than three years, limiting exposure to rollover risk.
“Large domestic institutional investors accounted for almost two-thirds of total Government securities as of 3Q17, reducing risks associated with shifting foreign investor sentiment.
“Contingent liabilities have remained relatively sizable, mainly reflecting increased public loan guarantees to facilitate the funding of ongoing infrastructure projects by NFPCs,” World Bank reported.
Malaysia’s fiscal deficit is expected to continue to consolidate, reaching 2.8 per cent of GDP in 2018, it added.
Projections in line
Correspondingly, in proportion to GDP, federal government’s debt is projected to reach about 50 per cent of GDP over the year.
The government’s projections are premised upon expectations of increased revenue collection in the context of sustained strong economic growth and higher crude oil prices.
“In particular, the budget forecasts assume that the domestic economy will grow at rates in the range of 5.0 to 5.5 per cent and that the average crude oil price will stand at US$ 52 per barrel in 2018,” it said.
The World Bank also pointed out that in proportion to GDP, Malaysia’s government revenue collection and operating expenditure are projected to continue to decline in 2018, largely reflecting the lower contributions from GST receipts and a smaller increase in the wage bill.
“Public sector development expenditure is also expected to decline in proportion to GDP next year, primarily due to a projected decline in capital expenditure by public corporations and to a slower growth in federal government capital expenditure with lower allocations in the education, trade and industry, and transport categories.
“With the more favourable domestic growth outlook over the coming years, there is a window of opportunity for Malaysia to accelerate fiscal reforms and thereby achieve the Government’s medium-term objectives,” it further highlighted.
Within the last five years, the current government had also introduced various growth blueprints that set out plans for the medium and long-term development of the financial sector as well as the economy in general. In 2015, Prime Minister Datuk Seri Najib Tun Razak unveiled an ambitious five-year economic development plan called the ‘11th Malaysia Plan, 2016 to 2020’ which centres around efforts to realising Vision 2020 – making Malaysia a high-income nation.
With GE14, the next Government is expected to continue efforts to elevate the economy and Malaysians’ lives, with or without the current plans and policies introduced by the current Government.
MIDF Research
Gauging the market’s direction up to polling date
Leading up to the 14th General Election (GE14), while the market is generally not expected to make a huge surge in either direction, analysts have noted that historically, the market will still react to the upcoming GE14 and subsequently, the market will still fluctuate based on the the outcome of GE14, post May 9.
According to Maybank Investment Bank Bhd’s research arm (Maybank IB Research), the market is expected to trade with a ‘cautious bias’ in the lead-up to the polling day due to uncertainties in the GE14 outcome.
It also pointed out that major investors are also likely to stay in the sidelines until after GE14, as we have witnessed a handful of unexpected outcome of elections in the US and Brexit vote.
Nevertheless, economic analysts generally believe that despite all the uncertainties, they expect a status quo outcome from GE14, whereby the Barisan Nasional (BN) coalition stays in power.
In its baseline scenario (BN coalition wins with a majority), the Kuala Lumpur Composite Index (KLCI) is expected to open at slightly higher levels, immediately post polling and this could be followed by some profit-taking, says Maybank IB Research.
“Having gained 3.7 per cent in January to March 2018, before the fear of a US-China trade war set in to taper the year to date (YTD) gain to 2.2 per cent (as at April 6), the KLCI has partially priced in a status quo GE14 outcome, in our view (during GE13, the KLCI was up three per cent in the one month leading to the dissolution of parliament).
“In addition, unlike GE13, where the KLCI traded at 14.2-times 12-month (12M) forward expected earnings on (the) dissolution of Parliament of April 3, 2013 (it closed at 1,685 then), the KLCI now trades at a higher 16.8-times on 12M forward earnings,” the research team elaborated.
Parallel to the performance of the equities market, the currency market is also expected to react to GE14.
If the US dollar to ringgit rallies further post-GE14, Maybank IB Research believed that foreign investors who have positioned for the short term may also do profit-taking from Malaysian equities.
The ringgit has gained 4.8 per cent over the dollar in 2018 (YTD) and there is still a six per cent upside to its end-2018 target of 3.65.
The research team also expect a relief rally for mid-small caps which have been subjected to profit-taking recently.
Meanwhile, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) noted that the FBM KLCI seems to mirror the pre-GE11,12 and 13 trend.
“It seems that the FBM KLCI is at it again leading up to GE14, underperforming against its emerging Asean peers. Therefore, it is highly likely that the FBM KLCI will once again show a reversal of trend, outperforming its regional peers if the federal ruling incumbent were to remain in power post-GE14,” it opined.
“On this score, looking at the previous GE13, while FBM KLCI movements were relatively muted prior to the election, the market barometer staged a post-election relief rally as uncertainty over the leadership was removed.
“Henceforth, if the GE14 outcome favours the federal incumbent, we can expect another post-election rally (albeit smaller magnitude vis-à-vis post-GE13) coupled with commendable foreign inflow,” MIDF Research added.
On the end of the spectrum, in the case of a of a hung parliament or an opposition win, Maybank IB Research said, the market’s immediate reaction is expected to be negative.
It explained, “Adding to concerns over policy continuity is the political situation which could impact economic growth.
“The most affected macro-economic policy, based on that which affects the people the most in terms of rising cost of living, could be the GST.
“The most affected companies, based also on the cost of living impact, could be the ‘monopolies’ in the communications, essential foods, pharmaceuticals, and other key sectors (such as water), IPPs, and tolled highways.
“Also, some projects in construction, and oil and gas (O&G), may suffer from a longer timeline in implementation.
“In terms of stocks, those which have high foreign shareholding may have more downside bias as foreign investors could rebalance/reposition.”
In such case, Maybank IB Research believe that defensive sectors such as real estate investment trust (REIT) could be the best alternative to seek refuge.
Outcome of GE14 and its impact on ongoing projects
Analysts taking a closer look at sectors and stocks pre- and post- GE14 reveal that generally, most segments are not expected to be significantly affected by the outcome of GE14.
However, sectors such as the construction and building material industries with links to public-funded mega infrastructural projects which includes the Pan Borneo Highway, are expected to be influenced by the outcome of GE 14.
According to MIDF Research, after lingering in uncertainties pre-election, GE14 is expected to unleash a post-election relief rally for the construction sector.
“We posit that the GE14 will unleash a post-election relief rally premised on attractive valuations and ample room in total market cap of KLCI/Malaysia’s construction GDP.
“Attractive and valuations, in fact, unmask sombre interest to construction companies due to the heat of GE14 which pinpoints the next direction of the construction.
“But, considering the impact of contribution to an big-tickets project announcement such as the packages for East Coast Railway Link, Malaysia-Singapore High Speed Railway, MRT3 Circle and Pan Borneo Sabah a post-election relief rally is expected.
“Apart from that, deep sea ports project such as the Carey Island Port and Kuala Linggi International Port will make headlines for its latest developments contributing another round of positive earnings expectation for the sector.
“Additionally, judging by the improvement of construction sector’s operating margin we reckon that the sector’s cost has improved illustrating better opportunity for project undertaking especially for big ticket projects,” the research team highlighted.
It noted, since March 2018, loans continued to fillip the construction sector at a staggering rate of RM7.2 billion (down 4.14 per cent m-o-m or up 38.84 per cent y-o-y) which is above the 11-y monthly average of RM4.3 billion.
Furthermore, it pointed out that the total market cap of KLCI/ Malaysia’s construction GDP (RM65 billion/RM50 billion) in 2017 is 0.77-times – suppressed below its six-year average of 1.06-times.
“Consequently, we reckon that the fillip of credit liquidity in FYE18 and FYE19 will influence the valuation and earnings expectation of the construction sector,” it opined, noting that in 2017, the construction sector has contributed RM65 billion of total GDP.
“For FYE18, we are expecting the construction sector to contribute to RM70 billion (up 7.6 per cent y-o-y) to total GDP.
“Assuming that Malaysia’s GDP grew by 5.5 per cent or RM1,426 billion , the construction sector is estimated to contribute five per cent to the total GDP forecast,” it calculated.
Meanwhile, MIDF Research noted that based on its observation of the previous election held in 2013 (GE-13) share prices of companies such as IJM Corporation Bhd, Gamuda Bhd, Cahya Mata Sarawak Bhd (CMS) and Malaysian Resources Corporation Bhd (MRCB) responded with advancements from the date of voting/election results.
A quick check on CMS showed that following the announcement of the dissolution of the parliament, its stock prices started its ascension followed by a surge on April 11, after the election commission (EC) confirmed key dates leading up to the polling day on May 9.
Hence, we could see more reactions from these stocks, leading up to the polling date and after the election.
Mega infrastructural projects:
1) Highways:
Pan Borneo Sarawak (in progress)
Pan Borneo Sabah (in award stage)
2) Railways:
– East Coast Railway Line (award stage)
– Gemas-JB Double Tracking (sub-contracting packages)
– Malaysia-Singapore High Speed Railway (award stage)
– MRT3 (Circle Line) (award)
3) Deep Sea Ports:
– Carey Island (Klang Port Extension) (Feasibility Studies News)
– Kuala Linggi International Port (progress stage)
Melaka Gateway Port (progress stage)
O&G sector: Continuation is key
The oil and gas (O&G) sector could also be influenced by the outcome of GE14, particularly given that government-backed Petroliam Nasional Bhd (Petronas) is the national custodian of O&G assets in Malaysia.
MIDF Research noted that in 2017, the production of O&G contributed 8.2 per cent to the national GDP and at the same time, Petronas has contributed RM19 billion in terms of dividend to the government in 2017 – this is approximately 12.4 per cent of government revenue.
“Continuation is key. With the O&G sector being a major contributor to the national economy and with the amount of investments spent on the downstream sub-segment, the continuation of policies that are investment friendly is of utmost importance.
“The government of the day must ensure two pivotal actions are continued to ensure the stability of oil and gas production and export which are crucial for national revenue, and to continue to attract foreign investments especially those of which are able to contribute technology transfer to the industry.
“In addition, the government of the day must also encourage and spur local oil and gas companies to be able to compete with regional and global service providers,” the research team stressed.
Of note, Malaysia produced an average of approximately 648kbpd and 6,914mmscfd of oil and gas respectively in 2017.
MIDF Research noted that in terms of global ranking, Malaysia is the largest exporter of LNG in Southeast Asia and second largest in the world. Malaysia is also the largest oil producer in Southeast Asia, exporting about half of the average daily productions.
Among projects that are still ongoing now, are downstream projects such as the US$27 billion Pengerang Integrated Complex (PIC) which is approximately 85 per cent complete.
The people and what election means for the economy
For Malaysia, analysts believe that regardless of whether government continues to be led by the incumbent coalition or an unexpected event occurs, continuation is still vital for the country,
“Next government in power has to ensure Malaysia remains on its medium and long-term targets as highlighted by the Eleventh Malaysia Plan (RMK-11, 2016-2020),” MIDF Research highlighted.
“Under the five-year plan, Malaysia’s economy is set to expand in the range between five to six per cent annually. So far, the average growth rate of 2016 and 2017 is 5.1 per cent,” it added.
Nevertheless, it will be an interesting election to watch as on the ground, this is the first time, GE14 will be the first time ever election held when MIER’s CSI below its threshold line of 100 points.
UOB Group’s senior analyst Julia Goh in a Macro Note report on Malaysia’s market reactions for GE14, said: “Although economic growth has improved, consumer confidence has not recovered back to the highs of 2012.
“The common feedback is that the benefits are not trickled-down to the ordinary households. Several fiscal measures have been announced such as personal tax cuts, higher BR1M cash aid, and budget giveaways.”
She also pointed out that a persistent concern among Malaysians is the higher cost of living owing to the goods and service tax (GST) that was implemented in 2015, removal of subsidies, and relatively weaker ringgit.
“Other issues include a slippage in the perception of corruption and mixed trends on governance, citing the 2017 annual survey by Transparency International and 2016 World Bank Governance indicators respectively,” she noted in the report.
MIDF Research said, the latest Household Income & Expenditure Survey for 2016 saw expenditure-to-income ratio rose from 59.3 per cent in 2014 to 61.1 per cent in 2016.
In layman’s term, it explained that this means for every RM1 of income, 61 cents is spent for routine expenditures.
“The upsurge in expenditure among others partly due to the implementation of GST, subsidy rationalisation plan and increase of minimum wage from RM900 to RM1,000. The negative implications of raising minimum wage indirectly pose pressure on business cost and on the final round translate into higher prices for consumers,” it added.
Nevertheless, Goh said, “Barring any surprises in the coming election, this provides medium-term policy certainty particularly on infrastructure development, implementation of the recently signed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) trade deal, and fiscal consolidation.
“While inflows remain positive, the size of net FDI and portfolio inflows has eased ahead of general election.
“We expect investment flows to pick up post-election and support further ringgit strength.”
Beyond GE14, World Bank had highlighted that Malaysia’s growth has been stronger-than-expected.
Hence, it pointed out that this creates opportunities for the government to increase its initiatives to address the deeper structural challenges that limit the economy’s growth potential.
“A strong growth environment, therefore, offers a crucial window of opportunity to accelerate structural reforms that will facilitate Malaysia’s transition towards the achievement of high-income status in the coming years,” it said.
It stressed that a key area of policy focus are measures to increase productivity growth and to strengthen competitiveness, as Malaysia faces diminishing returns from its factor-accumulation-led growth model.
“Reforms to enhance productivity could be intensified to address the key constraints, such as a lack of competition in key markets and critical human capital and skills deficits.
“While Malaysia’s increased fiscal space creates opportunities to increase its investment in these areas, it is important to recognise that in many areas, particularly in the areas of education and training, the challenge relates as much to the quality of spending as to the quantity,” it added.
The World Bank also emphasised that it is important for Malaysia to continue to implement measures to ensure that growth is inclusive and provides access to opportunities for all its citizens.
“In order to improve the well-being of the B40, attention will need to be paid to both incomes and the cost of living,” it suggested.