What Does The Current Political Uncertainty Mean To Our Economy?

What Does The Current Political Uncertainty Mean To Our Economy?

It has been a suspenseful couple of days for Malaysians with news of a backdoor government being formed, and even the possibility of a new prime minister.

This has led to the latest news of Tun Dr Mahathir Mohamad’s sudden resignation as prime minister, which has set in motion a political shift that will have far-reaching consequences.

With the recent turn of events, let’s see how it’s affecting our economy right now.

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The tumbling ringgit

Since yesterday, the Malaysian ringgit has dropped to 4.22 against the US dollar. In fact, it’s been on a downward trend for February and it looks likely to slide further.

Local daily theedgemarkets.com quoted FXTM market analyst Han Tan forecasting the ringgit will continue its downward trend “towards the 4.24-4.25 region, until there is more clarity with regards to Malaysia’s policy and economic outlook.”

The ringgit also lost more ground among other currencies, breaching 3.0 and 3.7 respectively against the Singaporean dollar and the Japanese yen.

The political turbulence Malaysia is facing right now, coupled with the uncertainty associated with Covid-19 outbreak, make the perfect recipe for a weakened consumer sentiment and reduced pace of economic development.

Bursa Malaysia takes a plunge

It’s official, the FTSE Bursa Malaysia KLCI Index hit a 10-year low yesterday.

In fact, the index fell below 1500 at one point yesterday to 1,486.71. The last time the index tumbled that low was back in November 2010.

Shares associated with government-linked companies were among the biggest losers, with Tenaga Nasional taking the lead. The overall impact saw a loss of 38.94 points by midday yesterday, ending the day at a historic low of 1,490.06 points.  It has since picked up over 9 points since the markets opened today but uncertainties remain.

The writing was already on the wall last Friday when the outflow of foreign funds from Bursa Malaysia reached RM447.9mil, the second highest recorded in 2020.

What will happen next?

While local politics was a big factor in the downtrend seen this week, the global outlook didn’t help as news of coronavirus deaths increasing in South Korea, Italy and the Middle East triggered a selloff among international investors causing global shares and oil prices to drop.

Apart from the coronavirus outbreak, the volatile conditions of the ringgit and local stock market did not happen overnight.

By the end of 2019, market analysts were already forecasting the ringgit weakening this year. Fitch Ratings had issued its ringgit forecast back in December 2019, maintaining it at RM4.25 and RM4.20 against the US dollar for 2020 and 2021 respectively. The ratings agency had then cited “domestic political risks to weigh on sentiment on the ringgit”.

Investors had also factored in this risk for Malaysian investments as early as middle of last year, by choosing to invest in companies that are seen to be less prone to political risks, with many choosing a ‘wait and see’ approach. The downward pricing may also present a buying opportunity for investors looking to pick up bargains once the dust settles.

Earlier, the government had promised to unveil an economic stimulus package to business sectors affected by the coronavirus outbreak to weather the economic storm. However, a political storm has also broken out and the situation is still unfolding by the hour.

Will there be a snap election? Will we be able to recover the foreign investors’ confidence in Malaysia?

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