Malaysia aided by lucky timing as oil cushions election shock

The rally in crude oil prices will also cushion the impact of some of the government's policies that were described as credit-negative by ratings agencies.

SINGAPORE: One reason Malaysian assets aren’t getting hammered as badly as some analysts had expected may be that Dr Mahathir Mohamad’s shock election victory has coincided with a jump in oil prices to the highest since late 2014.

Crude has rallied around 9% 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 tenth 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.

“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 rose 0.1% against the dollar as of 12.05pm in Kuala Lumpur, recovering from an earlier loss of as much as 1%. The yield on Malaysia’s 10-year bond rose 4 basis points to 4.17%, while the benchmark stock gauge rose 0.5%, after falling as much as 2.7%.

Goh isn’t alone in seeing benefits of an oil-price decline. 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.” -FMT