What Mahathir’s shock win means for economy and markets

Mahathir inherits an economy that’s growing more than 5%, inflation that’s subdued and a currency that’s been one of Asia’s best performers this year.

Pakatan Harapan, led by Dr Mahathir Mohamad, has promised to abolish the GST and reintroduce gas subsidies.

KUALA LUMPUR: Investors are grappling with Dr Mahathir Mohamad’s surprise election victory in the 14th general election. Here’s a look at what it means for the outlook for economic policy and markets.

At 92 years old, Mahathir led a four-party coalition to end the six-decade rule of Prime Minister Najib Razak’s party. He inherits an economy that’s growing more than 5%, inflation that’s subdued and a currency that’s been one of Asia’s best performers this year.

What were Mahathir’s main policy pledges?

Abolishing a 6% goods and services tax (GST) was a key campaign promise, which Mahathir promised to do within 100 days of taking office. The tax, which was introduced in 2015, is widely blamed by citizens for their rising living costs. The opposition coalition said it would replace the GST with a sales and services tax that’s more fair.

The coalition also promised to reintroduce gasoline subsidies, increase petroleum royalties to oil-producing states and raise minimum wages.

What does it mean for the economic outlook?

Malaysia’s economy is enjoying a strong rebound at the moment, with growth surging to 5.9% last year and forecast by the central bank to reach 5.5% to 6% in 2018. Most of that recovery has come on the back of a pick-up in global trade and rising domestic demand. But with trade tensions dominating this year, and exports accounting for two-thirds of gross domestic product, there are risks to Malaysia’s outlook ahead.

Moody’s Investors Service said there’s lack of detail on the electoral pledges, but some campaign promises would be “credit negative” for Malaysia. In particular, scrapping GST without any measures to offset the loss in revenue would increase the economy’s reliance on oil income and narrow the government’s revenue base, the ratings company said. Najib had said abolishing the 6% GST would add RM416 billion (US$105 billion) to the nation’s debt.

A move on GST and a return of fuel subsidies would put pressure on the budget deficit, which Malaysia has steadily brought down to 3% of GDP.

Malaysia should also brace for a “sharp slowdown in investment growth” if Mahathir’s positioning against Chinese involvement in infrastructure prompts a stalling of those projects, according to Capital Economics Ltd.

Does this change the monetary policy outlook?

The central bank was scheduled to announce an interest rate decision at 3pm today. After moving early with a January rate hike, economists didn’t expect another change any time soon. All 18 economists surveyed by Bloomberg before the election predicted the benchmark rate would stay at 3.25%.

Inflation has been relatively benign, slowing to 1.3% in March, with a stronger currency since last year helping to ease price pressures. The government had forecast average inflation of 2.5% to 3.5% for this year.

Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore, said he expects the central bank to proceed with its rate decision on Thursday and hasn’t revised his call that there’ll be no change in the policy position.

“You want to ensure continuity,” he said. Bank Negara Malaysia will probably include language in the statement around “ensuring stability” in the ringgit and that they are “monitoring capital flows”, he said. The central bank is independent enough that policy shouldn’t change, he said.

What does the upset win mean for currency policy?

The manifesto by Mahathir’s coalition said it will give a mandate to the central bank to develop a strategy to return the ringgit to its actual potential within three years. Mahathir retains a wariness of currency traders and has warned that he’ll be willing to re-introduce a peg on the ringgit to ward off “currency manipulators” if necessary.

The ringgit is the best-performing currency in emerging Asia this year, strengthening 2.5% against the dollar.-FMT