The stock market and the ringgit have yet to pull off from the previous volatility caused by the revelation of the country’s debts and state of the economy. However, analysts say Malaysians should not be worried by the heavy foreign selling as it was in conformity with other Asian peers. — Bernama photo
KUALA LUMPUR: Both the markets and investors were further jolted by major announcements including on the controversial Tun Razak Exchange (TRX) project as well as market talk of a new lady governor for Bank Negara Malaysia.
The stock market and the ringgit have yet to pull off from the previous volatility caused by the revelation of the country’s debts and state of the economy.
However, a financial analyst said Malaysians should not be worried by the heavy foreign selling as it was in conformity with other Asian peers.
Malaysian Industrial Development Finance Bhd (MIDF) Research analyst Adam Mohamed Rahim said that South Korea and Taiwan both saw higher net outflows of US$418 million and US$1.27 billion respectively during the first four days of last week, compared with Malaysia’s US$360.2 million (about RM1.44 billion).
“Outflows may feature in the near term but please bear in mind that the main trigger would be external developments such as geopolitics in the Korean peninsula and the trade war between the US and China,” he told Bernama.
He said foreign selling of Malaysian equities was higher than the previous week’s RM1.21 billion, and was at its peak on Tuesday (June 19) at RM555 million net, the highest in a day since May 30, 2018.
In spite of the gradual decline in attrition, Adam said the market barometer FBM KLCl moved in the opposite direction to slide further to the lowest close since February 2017 at 1,692 points on Thursday.
It marked the ninth straight day of losses as Telekom Malaysia Bhd led decliners, dropping as much as 12 per cent amid worries over a slash in broadband prices.
“However, in terms of investors’ participation from Monday to Thursday, foreign funds remain active as the foreign average daily trade value stands above the RM1 billion mark at RM1.55 billion.
“We reckon the outflows will be larger this week compared to last week’s as investors are not just anxious regarding the trade uncertainties between the US and China but also the outcome of the Organisation of the Petroleum Exporting Countries meeting on June 22,” he explained.
He said the trend in outflows may feature in the short-to-medium term considering concerns over recession hitting the US in the coming year or two, coupled with lofty valuations of developed markets and their hawkish and protectionist stances.
“Of course, from the uncertainties on the domestic front as the new government settles down and works through its plan.
“We need to give time as changes cannot happen overnight especially the ones that involve existing laws which entails a complex procedure,” he said.
Commenting on the impact on the market of the latest announcement on one of the mega projects, TRX, Adam said it has negatively impacted the construction sector but nonetheless should not derail interest among foreign investors.
“The government has the right to re-look at mega projects and determine their profitability to have the costs reviewed.
“The focus on improving corporate governance is actually a big plus to entice foreign investors, which is further enhanced by the government’s stance in ensuring a good relationship with foreign investors,” he said.
Hence, MIDF expects the stock market to be a bit quiet in the next few months as trading value has already hit a record high twice in May, namely RM7.3 billion on May 14 and RM9.3 billion on May 31, Adam pointed out.
“We believe that further clarity on policies of the new government may be a catalyst to bring back investors. However, systemic factors that affect the global markets will still be the major determinant of foreign flows into Malaysia,” he said.
Meanwhile, as the government has decided to continue undertaking the TRX development, on top of the on-going reviews of the country’s mega projects, analysts and economists opined that the potential resumption of other projects will create the need for long-term funding, promoting fundraising activities in the capital market.
Professor of economics at Sunway University Business School, Dr Yeah Kim Leng, said funding for these mega projects is likely to be raised through bank borrowings and the capital market, allowing the current government to access the debt market as a financing alternative and reduce the more expensive borrowings taken earlier.
“Among the areas that can be improved are government guarantee schemes which could be replaced with cheaper direct loans or bonds,” he told Bernama in a phone interview.
According to Finance Minister Lim Guan Eng, who was appointed to his post a little more than a month ago, the federal government’s guarantees stood at RM199.9 billion out of the RM1 trillion national debt.
Upon completion of the mega projects’ reviews and the government’s efforts to fulfil its 100-day promises, Yeah said the market would gradually be provided with greater clarity over the direction of the country’s economy and monetary policies.
“At the end of the review, the market will see a clearer picture as to the projects and fiscal consolidation, so foreign investors will have a better assessment of the country’s growth prospects and health of the public finance,” he explained.
Concerns over the drain in foreign funds have emerged following the continuation of foreign outflows recorded each week since the government stripped off the country’s financial position.
“This trend (foreign outflows) was due to the combination of external and internal factors, in which we can see investors withdrawing from emerging markets because of the risk aversion factors such as US monetary tightening and European Union asset-purchase programmes.
“On the domestic front, political uncertainties arising from actions taken by the new government to pare down debts, project cancellations and restructuring of the government’s coffers led to jitters in the market,” he explained.
Commenting on the appointment of Datuk Nor Shamsiah on Friday evening, the don said the nomination is likely to untangle one uncertainty given that the new governor was previously from the central bank and this would provide policy continuity.
“Current conditions remain accommodative and the monetary policy allows the authority to re-assess the situation,” he said, adding that the growth fundamentals are still unchanged despite changes in government policies.
He said the country’s inflation rate is expected to stabilise with the removal of the Goods and Services Tax (GST) as the zero-rating would have a dampening effect on the prices of goods.
“The reinstatement of fuel subsidy would also play a role in capping the price increases,” he added.
Asked whether Malaysia will see another round of interest rate hikes under the new administration, he said it is unlikely as the central bank’s Monetary Policy Committee needs to look into the country’s economic growth and inflation rate.
“Malaysia is ahead of the curve when compared with some other countries including India and Indonesia as we have already revised the interest rate and this has provided a buffer for our monetary stance.
“And of course the view about raising the interest rate to prop up the currency may not be so compelling for Malaysia,” he said.
Another MIDF economist, Muhammad Zafri Zulkeffeli, opined that the ringgit will continue trading at the 3.98 to 4.01 per dollar level until year-end especially after Budget 2019 and Mid-Term Review of the 11th Malaysia Plan are tabled in Parliament.
“External trade, investment, and flow of funds into the capital market are among the determinants of the ringgit’s performance.
“At this juncture, external factors are more prevalent in weighing on the near-term outlook of the ringgit and emerging market currencies in general,” he said.
However, on the local front, Muhammad Zafri said, policy uncertainties would cause the local note to stay in the low range due to a revision of government-backed mega projects, reformation of government agencies and government-linked companies, and adjustment in business activities with the GST zero-rated. — Bernama