Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Cross Asset Strategy

<ul>
<li>PM Anwar was strengthened in the near-term by PH comfortably winning the 3 states where it was the incumbent, although the alliance helped UMNO gain leverage in Negri Sembilan. </li>
<li>PAS won landslide victories in Kelantan, Terengganu and Kedah (three states that were part of Thailand until 1909, with smaller non-Malay populations). Bersatu is a token junior partner everywhere. </li>
<li>As the prospect of PAS gaining national power grows, non-Malay emigration and capital flight will increase, reversing the positive gain from the PKR-DAP vision of renewed strength for multi-racialism. </li>
</ul>


PM Anwar was strengthened in the near-term by PH comfortably winning the 3 states where it was the incumbent, although the alliance helped UMNO gain leverage in Negri Sembilan. 
PAS won landslide victories in Kelantan, Terengganu and Kedah (three states that were part of Thailand until 1909, with smaller non-Malay populations). Bersatu is a token junior partner everywhere. 
As the prospect of PAS gaining national power grows, non-Malay emigration and capital flight will increase, reversing the positive gain from the PKR-DAP vision of renewed strength for multi-racialism. 


Malaysia: State Elections Bolster Anwar Near-Term; Long-Term PAS Shadow Grows

Macroeconomics

<ul>
<li>Expansionary fiscal and monetary policy have bolstered growth at the expense of a 13%YoY depreciation of the ringgit and capital flight reflected in shrinking FX reserves amid surging trade surpluses. </li>
<li>Elevated crude-oil and palm oil prices boosted the trade surplus, but the current account surplus shrank to less than 1% of GDP in 1H2022, as foreign-worker remittances soared. </li>
<li>Despite 24 years of current account surpluses, Malaysia's reserves provide just 4.6 months' import cover. Net FPI outflows persisted even when global equities were soaring. Kleptocracy is inducing capital flight.  </li>
</ul>


Expansionary fiscal and monetary policy have bolstered growth at the expense of a 13%YoY depreciation of the ringgit and capital flight reflected in shrinking FX reserves amid surging trade surpluses. 
Elevated crude-oil and palm oil prices boosted the trade surplus, but the current account surplus shrank to less than 1% of GDP in 1H2022, as foreign-worker remittances soared. 
Despite 24 years of current account surpluses, Malaysia's reserves provide just 4.6 months' import cover. Net FPI outflows persisted even when global equities were soaring. Kleptocracy is inducing capital flight.  


Malaysia: Local and Foreign Investors Are Fleeing Despite the Commodity Boom

Malaysia's investment/GDP ratio stagnated at 25.5% in 2012-17, then fell to 21% in 2019 and 19.7% in 2020, with public investment falling below 5% of GDP. Any reversal of this in 2022 remains unlikely with the one-off "prosperity tax" leading corporates and banks to bring forward expenses, hike provisions, and delay income-recognition in order to lower their taxable income. With corporate and bank earnings likely to be anaemic in 2022, we recommend staying Underweight Malaysia. 
A second consecutive expansionary Budget (with deficits above 6% of GDP) barely hid the reality of a steadily declining public investment/GDP ratio since 2012; the rebound in private investment is led by GLCs, while the steady erosion of non-bumiputra companies in Malaysia is reflected in steadily-rising net capital outflows and in declining private non-GLC investment in Malaysia. Despite consistent current account surpluses since 1998, Malaysia's foreign reserves (US$115.4 billion in September 2021) are much lower than they were in 2012 (over US$160 billion). 
No discernible strategy has emerged from the current government to reverse these trends; the one-off tax is instead a further negative for corporates and banks, and UMNO-PAS are doubling down on anti-minority regulations as a means of securing the bumiputera vote at the next election. We are structurally bearish on Malaysia until the next election is held.

Malaysia's investment/GDP ratio stagnated at 25.5% in 2012-17, then fell to 21% in 2019 and 19.7% in 2020, with public investment falling below 5% of GDP. Any reversal of this in 2022 remains unlikely with the one-off "prosperity tax" leading corporates and banks to bring forward expenses, hike provisions, and delay income-recognition in order to lower their taxable income. With corporate and bank earnings likely to be anaemic in 2022, we recommend staying Underweight Malaysia. 
A second consecutive expansionary Budget (with deficits above 6% of GDP) barely hid the reality of a steadily declining public investment/GDP ratio since 2012; the rebound in private investment is led by GLCs, while the steady erosion of non-bumiputra companies in Malaysia is reflected in steadily-rising net capital outflows and in declining private non-GLC investment in Malaysia. Despite consistent current account surpluses since 1998, Malaysia's foreign reserves (US$115.4 billion in September 2021) are much lower than they were in 2012 (over US$160 billion). 
No discernible strategy has emerged from the current government to reverse these trends; the one-off tax is instead a further negative for corporates and banks, and UMNO-PAS are doubling down on anti-minority regulations as a means of securing the bumiputera vote at the next election. We are structurally bearish on Malaysia until the next election is held. 

Malaysia: In a Middle-Income Trap of Low Growth Despite Sustained Fiscal Deficits

Ismail Sabri Yaakob, the third-ranking member of Malaysia's second-largest party in parliament (UMNO, the long-ruling party that was defeated at the 2018 general election) became Malaysia's 9th Prime Minister on Saturday (21 August 2021). Having never been the minister of Education, Trade &amp; Industry or Finance (the 3 traditional stepping-stones to the top job), the new PM is a relative lightweight in Malaysian politics: all previous prime ministers from UMNO have also simultaneously been Presidents of the party (while UMNO Deputy Presidents were Deputy PM).
Continuity in policy is assured, with the line-up of parties exactly the same as the previous government -- except that the Prime Minister is different, from UMNO rather than Bersatu (PPBM). This year's fiscal deficit (projected at 6% of GDP) is still expected to keep real GDP growth at just 2.5% YoY in 2H 2021; given high public debt, the deficit will need to be reined in next year, limiting the government's options. PM Ismail Sabri will also face persistent pressure from the UMNO leadership to drop (or ease up on) corruption cases against UMNO leaders like ex-PM Najib and party president Zahid Hamidi, while Muhyiddin's Bersatu  counters with pressure to keep prosecuting those cases. The Sarawak state election (originally due in June 2021, now likely only in March 2022) could be a crucial destabilizing factor, as the 18 Sarawak MPs (from the GPS group) are crucial to this government's parliamentary majority. 
Opposition leader Anwar Ibrahim has chosen not to make sordid deals with tainted politicians, and instead bide his time until the next (15th) General Election, officially due in May 2023, but likely to be held sooner (mid-2022) if the Covid pandemic eases. On present indications, that will become a straight fight between a purely Malay-Islamist grouping (UMNO, Bersatu and the openly Islamist PAS) and a multi-racial coalition -- comprising two genuinely multi-racial parties (PKR and DAP) with a more ethnically-harmonious vision for Malaysia, supported by two smaller Malay parties (Amanah and Pejuang).  For the past 3 decades, UMNO has never formally aligned with PAS (which nonetheless gained ground in Kelantan and Terengganu, the two states with the largest proportion of Malays). The emergence of an UMNO-Bersatu-PAS alliance at the centre of the current government is shifting Malay politics increasingly in a pro-Shariah direction (including the imposition of hudud-based punishments), which will likely polarize the electorate by 2023. Competence (especially in dealing with Covid) will be a key determinant of the political outcome (and on that, both Muhyiddin and Ismail Sabri will be on the defensive), but the broader debate about Malaysia's future direction will be the key underlying question. That the Anwar-led alliance won the 2013 election (in terms of popular vote) and in 2018 (despite Anwar being in prison) suggests that the electorate will hand PH a clearer victory at the 15th General Election. But until that election is held, slow growth and a more polarized society will make the Malaysian market unattractive.

Ismail Sabri Yaakob, the third-ranking member of Malaysia's second-largest party in parliament (UMNO, the long-ruling party that was defeated at the 2018 general election) became Malaysia's 9th Prime Minister on Saturday (21 August 2021). Having never been the minister of Education, Trade &amp; Industry or Finance (the 3 traditional stepping-stones to the top job), the new PM is a relative lightweight in Malaysian politics: all previous prime ministers from UMNO have also simultaneously been Presidents of the party (while UMNO Deputy Presidents were Deputy PM).
Continuity in policy is assured, with the line-up of parties exactly the same as the previous government -- except that the Prime Minister is different, from UMNO rather than Bersatu (PPBM). This year's fiscal deficit (projected at 6% of GDP) is still expected to keep real GDP growth at just 2.5% YoY in 2H 2021; given high public debt, the deficit will need to be reined in next year, limiting the government's options. PM Ismail Sabri will also face persistent pressure from the UMNO leadership to drop (or ease up on) corruption cases against UMNO leaders like ex-PM Najib and party president Zahid Hamidi, while Muhyiddin's Bersatu  counters with pressure to keep prosecuting those cases. The Sarawak state election (originally due in June 2021, now likely only in March 2022) could be a crucial destabilizing factor, as the 18 Sarawak MPs (from the GPS group) are crucial to this government's parliamentary majority. 
Opposition leader Anwar Ibrahim has chosen not to make sordid deals with tainted politicians, and instead bide his time until the next (15th) General Election, officially due in May 2023, but likely to be held sooner (mid-2022) if the Covid pandemic eases. On present indications, that will become a straight fight between a purely Malay-Islamist grouping (UMNO, Bersatu and the openly Islamist PAS) and a multi-racial coalition -- comprising two genuinely multi-racial parties (PKR and DAP) with a more ethnically-harmonious vision for Malaysia, supported by two smaller Malay parties (Amanah and Pejuang).  For the past 3 decades, UMNO has never formally aligned with PAS (which nonetheless gained ground in Kelantan and Terengganu, the two states with the largest proportion of Malays). The emergence of an UMNO-Bersatu-PAS alliance at the centre of the current government is shifting Malay politics increasingly in a pro-Shariah direction (including the imposition of hudud-based punishments), which will likely polarize the electorate by 2023. Competence (especially in dealing with Covid) will be a key determinant of the political outcome (and on that, both Muhyiddin and Ismail Sabri will be on the defensive), but the broader debate about Malaysia's future direction will be the key underlying question. That the Anwar-led alliance won the 2013 election (in terms of popular vote) and in 2018 (despite Anwar being in prison) suggests that the electorate will hand PH a clearer victory at the 15th General Election. But until that election is held, slow growth and a more polarized society will make the Malaysian market unattractive. 

Malaysia: A Lightweight Takes Over, Setting up a Future Election over the Nation's Soul

With the Supreme Council of UMNO (Malaysia's former ruling party, which is now down to just 38 out of 220 MPs in the current parliament) withdrawing support from PM Muhyiddin's Perikatan Nasional (PN), the latter is theoretically down to 77 MPs. However, 26 UMNO MPs (including recently-appointed DPM Ismail Sabry Yaakob, Senior Minister Hishamuddin Hussein and Coordinating minister for Covid vaccination Khairy Jamaluddin) have not yet signed statutory declarations (SDs) withdrawing support from PM Muhyiddin Yassin's PN government. Even if he is able to hold onto all 26 MPs, however, Muhyiddin will have only 103 MPs, 8 short of a majority. Pakatan Harapan (PH), the main Opposition alliance led by Anwar Ibrahim, has 90 MPs, 21 short of a majority. If the 38 UMNO MPs swing their support to PH, it will be able to comfortably form a government, but that is unlikely immediately. Beginning with 12 UMNO MPs, Anwar will need another 9. If the Sarawak-based GPS goes along with the UMNO (hence BN) leadership and switches to PH (a big leap that the GPS has never made electorally in the past), that will suffice to enable Anwar to form a government. Alternatively, Anwar could form a government with the help of Shafie Apdal's Warisan (8 MPs) plus a couple of independents, or more easily with Warisan plus the 4 MPs from Mahathir's Pejuang. The King has thus far been reluctant to allow Anwar to form a government. The implicit fear among Malays (as perhaps also felt by many of the rulers) is that a PH government will be dominated by DAP, which will be its largest party. Given the political impasse, and the fact that PH (then including Muhyiddin's Bersatu) did win the last general election, a PH government would be morally legitimate. UMNO, however, will look primarily at the next general election, now unlikely to be held for at least another 9-12 months (until Covid recedes). With Muhyiddin losing credibility after the shambolic response to Covid in the past half-year, UMNO is now expressing outrage over the PN government's perceived insults to the King. Since it cannot form a government on its own, the UMNO leadership will likely go along with an Anwar-led government, as long as UMNO is prominently represented in it. The UMNO calculation will be that, when the party is ready for a post-Covid general election, UMNO will pull the plug on Anwar's government and take the country back to a general election. For now, uncertainty prevails (a big negative); but if Anwar Ibrahim is finally able to become Prime Minister (heading a genuinely multi-ethnic government and cabinet), it will be good for Malaysia in the longer-term.

With the Supreme Council of UMNO (Malaysia's former ruling party, which is now down to just 38 out of 220 MPs in the current parliament) withdrawing support from PM Muhyiddin's Perikatan Nasional (PN), the latter is theoretically down to 77 MPs. However, 26 UMNO MPs (including recently-appointed DPM Ismail Sabry Yaakob, Senior Minister Hishamuddin Hussein and Coordinating minister for Covid vaccination Khairy Jamaluddin) have not yet signed statutory declarations (SDs) withdrawing support from PM Muhyiddin Yassin's PN government. Even if he is able to hold onto all 26 MPs, however, Muhyiddin will have only 103 MPs, 8 short of a majority. Pakatan Harapan (PH), the main Opposition alliance led by Anwar Ibrahim, has 90 MPs, 21 short of a majority. If the 38 UMNO MPs swing their support to PH, it will be able to comfortably form a government, but that is unlikely immediately. Beginning with 12 UMNO MPs, Anwar will need another 9. If the Sarawak-based GPS goes along with the UMNO (hence BN) leadership and switches to PH (a big leap that the GPS has never made electorally in the past), that will suffice to enable Anwar to form a government. Alternatively, Anwar could form a government with the help of Shafie Apdal's Warisan (8 MPs) plus a couple of independents, or more easily with Warisan plus the 4 MPs from Mahathir's Pejuang. The King has thus far been reluctant to allow Anwar to form a government. The implicit fear among Malays (as perhaps also felt by many of the rulers) is that a PH government will be dominated by DAP, which will be its largest party. Given the political impasse, and the fact that PH (then including Muhyiddin's Bersatu) did win the last general election, a PH government would be morally legitimate. UMNO, however, will look primarily at the next general election, now unlikely to be held for at least another 9-12 months (until Covid recedes). With Muhyiddin losing credibility after the shambolic response to Covid in the past half-year, UMNO is now expressing outrage over the PN government's perceived insults to the King. Since it cannot form a government on its own, the UMNO leadership will likely go along with an Anwar-led government, as long as UMNO is prominently represented in it. The UMNO calculation will be that, when the party is ready for a post-Covid general election, UMNO will pull the plug on Anwar's government and take the country back to a general election. For now, uncertainty prevails (a big negative); but if Anwar Ibrahim is finally able to become Prime Minister (heading a genuinely multi-ethnic government and cabinet), it will be good for Malaysia in the longer-term. 

Malaysia in Political Flux: Muhyiddin Likely to Go, but Can Anwar Gain a Majority?

Malaysia

The FTSE Bursa Malaysia KLCI Index comprises of the largest 30 companies by full market capitalization on Bursa Malaysia's Main Board. When launched, on July 6, 2009 it replaced the Bursa Malaysia KLCI Index starting at the closing value of the KLCI Index on July 3 2009, also inheriting the full history of the KLCI Index.

Kuala Lumpur Composite Index (KLCI) (FBMKLCI INDEX)

Kuala Lumpur Composite Index (KLCI) (FBMKLCI INDEX)

Malaysia: State Elections Bolster Anwar Near-Term; Long-Term PAS Shadow Grows

Anwar's govt retains stability after PH victories in Penang & Selangor, plurality in NS. But PAS landslides in 3 states, & gains in all 6, suggest...

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Malaysia: Local and Foreign Investors Are Fleeing Despite the Commodity Boom

Expansionary fiscal & monetary policy have bolstered growth but induced capital flight. Despite 24yrs of CA surpluses, FX reserves provide just 4.6...

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Malaysia: In a Middle-Income Trap of Low Growth Despite Sustained Fiscal Deficits

Fiscal deficits of 3-6% of GDP annually have been needed for 20 years to sustain 4.5% avg RGDP growth. The investment/GDP ratio is falling, and...

Prasenjit K. Basu

Malaysia: A Lightweight Takes Over, Setting up a Future Election over the Nation's Soul

PM Ismail Sabri is a lightweight who will struggle with Covid. The economy will decelerate, and society will be more polarized under a coalition...

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Malaysia in Political Flux: Muhyiddin Likely to Go, but Can Anwar Gain a Majority?

UMNO's withdrawal of support reduces PN to minority, albeit with 2/3 of UMNO MPs not backing its leaders. Anwar needs 21 more MPs: he can get them...

Prasenjit K. Basu