No quick fixes to the despair in Malaysian stock and currency markets

(CNA) – The bumpy ride in Malaysia’s financial markets is about to get bumpier as expectations for an uptick in foreign and domestic investor sentiment following the appointment of Mr Anwar Ibrahim as premier in November last year have dissipated.

The road to economic recovery has been undermined by a clutch of external factors and the failure of the new administration to provide fresh direction for the economy and seriously tackle issues facing Malaysians.

Among the issues include the persistent spikes in the cost of living for ordinary Malaysians that have in turn raised political concerns.
The hawkish stance by the US Federal Reserve on interest rates has also drawn away foreign funds from the local stock and currency markets.

According to MIDF Research, foreigners have been net sellers of Malaysian equities for 17 out of the 23 weeks since the beginning of the year, chalking up a net outflow of RM3.4 billion (US$727.5 million) and turning the Malaysian stock market into one of Asia’s worst performers.

The FBM KLCI, the primary benchmark for investors of the Malaysian stock market that hovers just below 1,400 points, has lost more than 7 per cent this year, compared to the Singapore FTSE Straits Times Index, which is up 0.27 per cent for the same period.

The ringgit also continues to be mauled. At the end of May, the Malaysian unit emerged as Asia’s worst performing currency against the US dollar after Japan and hit RM4.66 to the greenback on Jun 22. It also touched a record low of RM3.47 to the Singapore dollar on the same day.

MIDF Research blamed the depreciation of the currency on the “sharper-than-expected decline in exports, subdued global manufacturing activities and the limited boost from China’s port-reopening economy”.

To be sure, the Anwar government is discovering that it is trapped in a policy straightjacket.

Typical policy responses to bring stability to a depreciating currency would be to raise interest rates or intervene directly in currency markets through large purchases of the local unit by the central bank.

But doing so would lead to higher borrowing costs for business and consumers that in turn would weaken economic activity.

Central bank intervention on the other hand would result in the loss of foreign reserves, which in turn would make it difficult for the government to finance its debt.

Bank Muamalat chief economist Mohamed Afzanizam Abdul told CNA that the pressure on the ringgit was a result of the interest hikes in the US, geopolitical tensions involving China and the fluctuation in commodity prices.

“These short-term factors are beyond our control and we need to be focused on the structural issues facing the economy,” he said.

There are no quick fixes to Malaysia’s dimming growth prospects.

Economists noted that the government has to focus on issues, such as the persistent deficits that Malaysia continues to register in the agriculture sector, to spur the economy.

This is because the country’s heavy reliance on imports for food products has been a major source of rising inflationary pressures.

Malaysia recorded a deficit of RM25 billion in the agriculture and food sectors in 2022, with imports amounting to RM64 billion against RM39 billion worth of exports.

Over the last decade, imports of food amounted to RM482.8 billion, while exports only raked in RM296 billion during the same period, according to data from the Department of Statistics.

“There is a real urgency for the government to revisit the agri-food sector,” said Mr Afzanizam, who added that another issue that needs immediate government attention is the impact of the rising annual remittances by foreign workers, who make up 30 per cent of the national workforce, on the local currency.

Senior Malaysian financial executives also fret that Mr Anwar appears preoccupied with the country’s unsettled politics.

“His economic team is very thin and it appears that he is the only one who is doing the heavy lifting (in government),” said the chief executive officer of a foreign bank in Kuala Lumpur, who requested anonymity.