Malaysian Prime Minister Najib Razak, reeling from the 1MDB scandal as GDP growth and currency readings hit fresh lows, received a further blow as host of the ASEAN ministers’ meeting in Kuala Lumpur on Nov. 21 with street protests for his resignation and US President Obama pressing for additional economic and political transparency. However China, as the largest trade partner taking 15% of exports, managed to reassert influence amid the upsets, with a new currency swap line and winning bid for $2.3 billion in 1MDB’s nuclear power assets to whittle away at the fund’s $11 billion debt. China’s atomic operator beat out state-owned electricity company Tenaga to anger patrons in the ruling UNMO party, but government debt is already in the danger zone at over 50% of GDP, according to Fitch Ratings, and the Prime Minister’s recent fiscal adjustment plan reinforced sustainability doubts.
President Obama and Prime Minister Najib have been golfing partners, and the US delegation arrived at the summit with a strategy to enlist Malaysia’s support for South China Sea navigation and territorial issues. However, a Justice Department investigation into 1MDB’s alleged corruption and money laundering, alongside $2.5 billion in unexplained offshore Caribbean accounts, complicated the agenda to strain relations. Washington’s embrace was also diluted by the Prime Minister’s unconvincing presentations to fund managers during the annual UN General Assembly in October, when he dismissed economic policy criticism that has fueled $7 billion in foreign capital outflows as “noise.” The stock market is tied with Indonesia as Asia’s worst with a 25% loss on the MSCI Index, and 40% international ownership of local bonds has been reduced. At the investor sessions he pledged to continue his big transport infrastructure modernization agenda “until the next 2018 election” while denying reconsideration of exchange controls as during the 1990s crisis to staunch reserve depletion.
The ringgit is off 20% against the dollar and the economy grew just over 4.5% in the last quarter for the worst performance in two years. The current account surplus also dropped to $1 billion despite a jump in non-commodity electronics exports. Inflation was just 3%, but private consumption flagged with April’s imposition of a 6% goods and services tax to shrink the chronic budget deficit. The central bank clamped down on $15 billion in foreign reserve leakage this year by setting individual customer limits on outward remittances. It is also grappling with banking system volatility as long-term deposits are withdrawn and assets shift increasingly to Islamic units, which received additional incentives in the October budget.
The 2016 fiscal plan projects a 3% of GDP deficit with a slight spending cut, and proposes a levy on high-income earners. However Fitch, which maintains an A-minus investment-grade sovereign rating, warned that the goal will not be met with continued petroleum and palm oil export weakness. Monetary policy may also be tightened as the US Federal Reserve raises rates, with liquidity already under pressure as prudential rules and bank loan officers try to rein in runaway household borrowing at 85% of GDP. Although ratings have not budged from the top category, credit default swap spreads, which reached 250 basis points over Treasuries at their height in September, reflect particular concern over this binge. Under these constraints private analysts believe economic growth may dip to 3.5% next year, leaving aside continued confidence drag from political confrontation and judicial prosecution.
The Philippines convened the separate APEC forum, which also brought demonstrators out against the Trans-Pacific free trade partnership and a Manila sprucing campaign that evicted squatters. The stock market declined 5% through November on President Aquino’s waning popularity in the final months of his term on reported infrastructure project bungling despite 5% GDP growth. Company profits lag the 15 price/earnings ratio, and $2 billion in monthly remittance inflows have slowed to potentially cramp the current account surplus. Peso depreciation has increased the debt burden, and presidential candidates campaigning on greater anti-poverty spending may reverse fiscal prudence. Skittish investors in both countries join summit attendees in challenging host priorities, and will not reciprocate generous overtures lacking credibility and payment means.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.
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