Stability rules for investors in Malaysia

By Shull Ren / BLOOMBERG

How the mood changes.

Malaysia is now seen as the best growth story among emerging South- East Asian markets. Year-to-date, foreign investors bought a net US$635 million (RM2.54 billion) of the country’s shares, while pulling money out of Indonesia, Thailand and the Philippines.

The FTSE Bursa Malaysia KLCI Index has outperformed its peers with an 8% rally this year in dollar terms.

It’s a sharp turnaround from a year and a half ago. Back then, investors fled after Bank Negara Malaysia asked foreign lenders to stop “speculative and damaging” trading in the offshore ringgit forwards market.

Kuala Lumpur has never been a favourite for overseas stock investors: More than 40% of the benchmark index is owned by sovereign funds such as Khazanah Nasional Bhd, leaving foreign-asset managers with little influence over companies’ operations or valuations.

But in a world of political instability, investors love continuity. And with Prime Minister Datuk Seri Mohd Najib Razak looking set for five more years in power, they have reason to cheer. Last weekend, Najib dissolved Parliament, forcing a general election (GE) within the next two months.

The timing is perfect for Najib, with the vote to be held before his archrival Datuk Seri Anwar Ibrahim is released from a five-year prison sentence for sodomy on June 8. According to the World Bank, Malaysia is ahead of other South-East Asian countries in terms of “political stability and absence of violence”.

Najib looks to have shaken off the scandal surrounding 1Malaysia Development Bhd, the state-owned investment fund created under his watch that has been mired in corruption allegations. The prime minister has denied wrongdoing and was cleared by a Malaysian inquiry. Just 6% of young Malaysian adults cited the scandal as a top concern in a survey last year.

Close ties with Beijing mean Najib is an integral part of the Malaysian growth story. China is helping the country to build a dozen projects ranging from a US$13 billion railway linking Peninsular Malaysia’s east and west to billion-dollar new ports and development zones, as part of its Belt and Road initiative.

Not all Malaysians welcome China’s growing presence. Former Prime Minister Tun Dr Mahathir Mohamad, the Opposition’s candidate for prime minister, said he would review Belt and Road projects if elected, Anisah Shukry and Yudith Ho at Bloomberg News reported on Monday.

But, this isn’t what investors want to hear. Strengthening investment helped drive economic growth of 5.9% last year, the fastest pace since 2014. Private investment climbed to 26% of Malaysia’s gross domestic product in 2016 from 23.4% in 2010. Thailand’s ratio, by contrast, has been slipping.

There’s no sign of overheating yet. Inflation has eased since mid-2017, in part because increasing investment leads to higher production capacity, reducing price pressures. As a result, even if the US Federal Reserve raises rates three or four times this year, Malaysia’s central bank could still safely hold. That’s a contrast to the neighbouring Philippines, where the central bank looks to have slipped behind the curve.

Malaysia is arguably also safer than Indonesia, another regional growth engine, because of its currency.

While the ringgit has appreciated by close to 5% this year, the rupiah has lost more than 1%, even though the US dollar is broadly weaker. Unlike Indonesia, Malaysia runs an account surplus.

At a time when corruption scandals have led to the jailing of former presidents from South Korea to Brazil, foreign investors aren’t in the mood for more political shocks. The Malaysian public’s indifference should be music to their ears.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.