Malaysia is facing a perfect storm of alleged deep-seated corruption, proliferating political protests, a currency falling to levels last seen in 1997, and a sharp deterioration in its international trade prospects. So it’s not a surprise that Malaysia’s stock market is down 4 percent so far this year.
In recent days, thousands of protestors gathered in Malaysia’s capital city Kuala Lumpur to call (yet again) for the resignation of Prime Minister Najib Razak. He’s been under fire for much of the past two years for his central role in an alleged money laundering scandal at Malaysia’s state development fund, 1Malaysia Development Berhad (1MDB).
The latest on the scandal
The last time we discussed 1MDB, the U.S. Department of Justice (DoJ) had just moved to seize over US$1 billion in assets that were allegedly purchased using money laundered from 1MDB. The U.S. is just one of at least five countries investigating the fund.
The DoJ believes that over US$3.5 billion was misappropriated. Swiss authorities say it’s more than US$4 billion. And the first conviction of a person linked to the fund recently occurred in Singapore – a private banker was charged with forging documents and not disclosing suspicious transactions from a Malaysian client linked to the 1MDB scandal.
Najib continues to deny any wrongdoing on his part (even though US$681 million was deposited into his personal bank account a few years ago… a “donation” from the Saudi royal family), while his government remains in power. And it seems likely to stay there at least until the next election in 2018. What’s more, Najib has cracked down on opposition to the government, especially over 1MDB.
Earlier this month a member of Malaysia’s parliament was sentenced to 18 months in prison for disclosing classified information related to 1MDB. A Malaysian human rights organisation said that the conviction “will create a dangerous chill on free speech and result in a more repressive, opaque and unaccountable government.”
In many countries, an international scandal of the scope (and audacity) of 1MDB would have resulted in a number of high-level resignations (if not convictions) – of the prime minister in particular. But Najib seems to have drawn strength from the scandal by solidifying his position and firing those in government who oppose to him.
So far only a handful of heads have rolled, including the country’s attorney general, who reportedly planned to announce misappropriation charges against Najib. Perhaps unsurprisingly, the newly appointed attorney general has cleared Najib of any unlawful activity.
But given the far-flung and complex nature of the scandal, it may take years to conclude the investigations. This means 1MDB will be in the spotlight for some time.
A Trump presidency likely to weigh on Malaysian growth
Despite this cloud, the World Bank projected in late June that Malaysia’s economy would grow 4.5 percent in 2017, compared to 4.4 percent for 2016. But this forecast was based in part on “a new generation of regional [trade] agreements including… the TPP.”
The recent election of Donald Trump as U.S. president will likely hurt Malaysia’s exports and economy. Trump has said that on the first day of his presidency, he will “issue a notification of intent to withdraw from the Trans-Pacific Partnership [TPP], a potential disaster for our country.”
That means that anticipated growth in trade from the TPP – and the ripple effects of the deal – won’t boost Malaysia’s economic growth in 2017 and beyond.
As we’ve written before, Trump’s efforts to roll back globalisation – if they’re implemented – will be particularly damaging for emerging Asian economies, not least Malaysia. The U.S. is Malaysia’s third-biggest export destination, after Singapore and China, as shown below.
Worse still, the U.S. rejection of the TPP means that the deal is dead in the water for all 12 countries involved. For the TPP to take hold, it requires ratification by at least 6 of the 12 nations, and they must account for 85 percent of the group’s economic output. Without U.S. involvement – and unless the remaining countries renegotiate the original agreement – the TPP will not happen.
Trump’s policies could prove to be a significant drag on Malaysia’s trade relations – not just with the U.S., but other Asia-Pacific countries involved in the TPP (including Singapore, Malaysia’s biggest export destination). According to the World Bank, Malaysia’s exports are equivalent to a high 71 percent of the country’s GDP (compared to 176 percent for Singapore, 22 percent for China, and 12 percent for the U.S.).
The potential damage to Malaysia is now partly being reflected in the weakness of its currency. The ringgit was one of the world’s worst performing currencies in 2015. And Trump’s election victory has pushed it back down to near 2015 lows against the U.S. dollar – and it’s getting close to levels last seen during 1997’s Asian Financial Crisis.
A weaker ringgit can benefit exporters by making their goods and services cheaper when priced in foreign currencies. But to prevent further weakening, Malaysia’s central bank suspended all offshore ringgit trading. This indicates that funds had been leaving the country at an accelerating rate.
Protests seem ineffective as stock market remains resilient
Prime Minister Najib has endured the worst of the fallout from 1MDB, and will probably continue in his post. Ironically, this has provided a degree of market stability. And his continued reign is likely to provide some certainty to investors and financial markets.
The Kuala Lumpur Composite Index (KLCI) has underperformed the MSCI Emerging Markets Index over the last 12 months – the KLCI is down 3 percent, the MSCI Emerging Markets Index is up 3 percent. But it’s significantly outperformed emerging markets over the past five years, as shown below. And remarkably, over 1-year and 5-year periods, the KLCI has been substantially less volatile than emerging markets overall.
As we’ve previously written, the KLCI is a defensive market with a large proportion of companies that are less sensitive to economic swings. This explains the KLCI’s relative lack of volatility.
But it also underlines the resilience of Malaysia’s stock market. A lot of foreign investors stay away from markets plagued by scandal. But there has been enough domestic investment – from Malaysia’s local pension funds – to keep the market afloat.
And the worst may be passed. In September, political risk analysts Global Risk Insights said that “there are signs that the country has seen off the worst of its downturn,” and that “the risks of doing business in such a climate continue to be outweighed by the attractive tax incentives offered by the government, Malaysia’s strategic proximity to the primary Asian markets, and its consumers’ growing spending power.”
As we said before, Malaysia’s stock market may show that it’s out of the woods if it holds steady, or rallies, during the next round of scandal revelations. That could signal that all the bad news is already priced in to the market.
But Trump, and his aversion to trade deals, adds uncertainty to Malaysia’s economic outlook. Malaysia isn’t out of the woods yet.