Anwar Ibrahim’s balancing act

In a report released the day after Anwar was made PM, Affin Hwang looks at what is in store for the nation under the new administration 


AFTER days of consulting political leaders, Datuk Seri Anwar Ibrahim was selected by the Yang di-Pertuan Agong as Malaysia’s new prime minister (PM), prompting the FTSE Bursa Malaysia KLCI (FBM KLCI) to rally 3.43%. 

In our view, Anwar as PM allayed fears that the country could have been governed by a leader who is less aligned to market-friendly policies, and resulted in a huge relief rally particularly in the sin sectors. The ringgit gained 1.45% against the US dollar, the largest daily gain since September 2015. 

Best Alternative So Far 

Having been deputy PM and finance minister in the past, Anwar is the most suitable candidate to govern the country at present. We understand that Anwar is popular with foreign investors as a reformist to improve the judicial system and drive the anti-corruption movement, and maybe the right candidate to provide the much-needed boost for Malaysia in the near term, by elevating the country as a choice destination for the relocation of manufacturing bases given the ongoing trade wars. Coincidentally, foreign direct investment (FDI) into the country also peaked in the 90’s during Anwar’s tenure as finance minister (Fig 1). 

We believe the construction sector and industrial property developers will benefit from a likely higher FDI in the manufacturing, information technology services (data centres) and warehousing/logistics facilities. Some potential beneficiaries include AME Elite Consortium Bhd (RM1.31, ‘Buy’), IJM Corp Bhd (RM1.60, ‘Hold’) and Sunway Construction Group Bhd (RM1.58, ‘Buy’). The rising demand for green energy by multinational manufacturing companies and data centres could benefit engineering, procurement, construction and commissioning contractors, such as Samaiden Group Bhd (RM0.76, ‘Buy’) and Solarvest Holdings Bhd (not rated). This will drive rising demand to instal rooftop solar panels and build offsite solar farms to supply green energy via virtual power purchase agreements. 

Maintain ‘Neutral’ Stance 

Ultimately, Anwar will need to face a balancing act to appease the demands of other political parties as part of the newly-formed unity government. On the investment flows, the country has seen numerous years of equity outflows and even suffered outflows during the period post the previous Pakatan Harapan (PH) win. 

Hence, it remains to be seen whether he will be able to manoeuvre his way around with such demands and drive the country forward. But, near term, we believe the focus should be in managing the economy and navigating it from the risk of a global recession. We hold the view that the external environment will have a larger bearing on the market than the 15th General Election or who the PM is. We continue to see downside risk for the market on this front, given the risk of further capital outflows as US dollar strength continues. We maintain our ‘Neutral’ stance and year-end FBM KLCI target of 1,545 (based on a PE of 15.3x). 

Macro Implication 

From a macro perspective, the immediate focus of market observers and investors will be on the new government’s strategy to revive the country’s business and consumer sentiment as well as introduction of measures to promote better private investment growth trends, especially in attracting FDI into the country. 

Going forward, we believe Malaysia will be able to be a destination for FDI inflows among multinational corporations, if the right business policies are introduced and implemented by the new government. Assuming the country is able to form a stable unity government, this will improve foreign investors’ perception of Malaysia. This will be supported by the country’s good infrastructure, as well as prospects of political stability to carry on the quality investments, thereby offsetting the possible rising cost of doing business from higher minimum wages. We believe that improvement in the outlook on global FDI flows and domestic investment will lead to the realisation of manufacturing and services investments in Malaysia in the coming years, which will sustain the country’s gross fixed capital formation (total investment) growth momentum. 

Fostering a Competitive Environment

As a guide from PH’s manifesto and shadow Budget 2023, to encourage the inflow of FDI, specifically high value-added investment, measures such as tax incentives and reinvestment allowance could be proposed to improve the competitiveness of Malaysia as an investment destination. To boost the competitiveness of East Malaysia, the new government intends to gazette the status of Free Trade Zone to several industrial parks in East Malaysia. Furthermore, the PH government also aims to reduce the bureaucracy in government agencies to remove administrative barriers and reduce the burden on businesses. 

Higher Development Expenditure Allocation

Taking the guidance from the 12th Malaysia Plan (12MP), we believe that allocation for development expenditure by the new government will remain substantial to provide an expansionary stimulus to the economy in view of the slowing external demand. Due to the uncertain external environment, Malaysia will have to rely more on internally generated growth from domestic demand. The new government will likely prioritise on development expenditure with high-impact projects that generate higher multiplier effects in the economy. 

In the case of the 12MP, the previous administration had estimated that it will spend close to an average of RM70 billion in each of the first two years (2021 and 2022). We believe that development expenditure will likely be significantly higher over the remaining three years (2023-2025), possibly increasing to RM90 billion in 2023 and RM85 billion each in 2024 and 2025, for a five-year total of RM400 billion allocated under the 12MP. 

Economic Growth and Domestic Demand

We expect the newly-elected government to announce the specific date for a new Budget 2023 only after unveiling the new Cabinet. However, with signs of a sharp slowdown in the global economy next year, we believe the 2023 budget proposals will include measures such as caring for the people by dealing with the rising cost of living, steering the economy onto a sustainable growth path, as well as promoting transparency, accountability and clarity in the government’s medium and long-term fiscal strategy. 

We believe the newly-elected government will introduce the Government Procurement Act that ensures good governance in managing public spending and contracts by complying with good practice such as open tenders and compulsory auditing on big procurement items (as highlighted in PH’s 2023 Shadow Budget). 

In the medium term, market observers will be focusing on the government’s strategy on fiscal consolidation. By pursuing a fiscal consolidation path in a fiscal reform review plan, we believe that any fast-action plans to address the deficit position will help to safeguard and maintain the country’s sovereign credit rating outlook by the international rating agencies. The government will look at ways to strengthen revenue collection, and at the same time, ensure that it does not derail or discourage FDI into the country. 

Economic Outlook 2023 

On domestic demand, based on the growth momentum of private consumption in recent years, there is some downside risk of slower growth attributed to higher cost of living adjustments alongside weaker consumer sentiment in 2023. While growth in private consumption will be supported by higher tourist arrivals and spending in 2023, we believe the newly-elected government would need to focus on measures directed at increasing disposable income, as well as managing the household cost of living. As such, we believe any introduction of a targeted fuel subsidy system will only be done gradually and at a measured pace without burdening the lower-income groups with a subsidy reduction. 

Addressing the High Living Cost

As a guide, in its election manifesto, the PH government has proposed several measures to boost the food supply which could moderate the food inflation indirectly in a sustainable way, such as increasing investment to promote the use of technology in smart farming, ample production incentives to farmers and fishermen, and eliminating the involvement of cartels in the food supply chain. 

Despite the slower pace of global economic growth in the near term, the domestic economy will move in tandem with the broad-based increase of Malaysia’s third quarter of 2022 (3Q22) real GDP growth and continue to be supported by a healthy labour market, as well as steady recovery in tourism-related industries. Similar trends have also appeared in other Asean economies with a strong recovery in tourism-related sectors due to the reopening of international borders. However, we believe that the growth momentum will start to moderate from 4Q22 and into 2023, mainly due to the uncertain external factors, such as the increasing risk of recession in advanced economies (particularly the US economy), heightened inflationary pressures, tightening global financial conditions, escalation of geopolitical conflicts as well as China’s zero-Covid policy. The Composite Leading Indicator of the Organisation for Economic Co-operation and Development continued its downward trend in September, falling from 98.6 in August to 98.4 in September, which has remained below the 100-threshold level for the sixth consecutive month. 

The International Monetary Fund (IMF), in its latest issue of the World Economic Outlook update, projected that the global economy will slow sharply to 2.7% in 2023 (3.2% in 2022). This was the fourth time that the IMF has cut its global GDP growth forecast for 2023, by a further 0.2 percentage points, with likely further downward revision. We believe the negative effects from persistent geopolitical tensions and aggressive monetary tightening by advanced economies would result in lower external demand, and further drag down the economy next year. We are maintaining our full-year real GDP growth for 2023 at 3.7% (7.5% estimated for 2022). Malaysia’s economic fundamentals remain healthy, and we expect the country’s current account surplus to continue into 2023 which in turn provides some underlying support to the ringgit. 

However, given the likely continued aggressive US Federal Reserve tightening in the months ahead, the outlook remains for a stronger US dollar against most foreign currencies over the medium term. 

The views expressed are of the research team and do not necessarily reflect the stand of TMR. 

  • This article first appeared in The Malaysian Reserve weekly print edition