Stockholm (Ekonamik) – Foreign investors have been returning to Malaysia in the past week, according to findings by Bloomberg, following a $3 billion outflow of foreign funds since the beginning of the year due to severe austerity measures imposed by the government of Prime Minister Tun Dr Mahathir Mohamad. The Malaysian stock market, which Bloomberg had described as “the world’s worst major stock market” earlier in the year following a loss of over 5%, drew $84 million from foreign investors last week, the most since late January, also restoring about half of the earlier loss incurred on the FTSE Bursa Malaysia KLCI Index. The index is valued at 16.2 times projected 12-month earnings.
The rebound likely reflects signs from the Pakatan Harapan (PH) government’s signals to loosen purse strings and revive large state projects in infrastructure and construction, while reforms at state-linked companies such as Telekom Malaysia Bhd and Tenaga Nasional Bhd have spurred hopes of more interest rate cuts. In addition, Bloomberg found that investors see Malaysian equities as safe for trading amid the U.S.-China trade war. Malaysia, whose GDP is expected by the World Bank to grow 4.7% in 2019, is considered one of the most open emerging markets in the world, with a well-diversified economy suited to weather external shock, and low and stable inflation. The financial system is considered to be well-regulated and the banking system well-capitalised, and so the effects of Mr Mohamad’s austerity measures since taking power last May came as something of a shock to international investors.
In a report released this week on household debt, Fitch Ratings expects continued moderation for Malaysia’s household leverage, which is key to supporting banks’ debt service capacity and is expected to support the banking system’s asset quality, though it cautions that pockets of vulnerability remain in banks’ exposure to lower-income households and personal loans. “The household sector accounts for roughly 58% of bank gross loans, about 37% of which is to lower-income borrowers,” Fitch wrote. “Such borrowers often have limited asset buffers to mitigate the risk of default, and while banks’ exposures to them tend to be secured, loan-to-value (LTV) ratios can be high, weakening recovery prospects. About 28% of banks’ overall home loans have LTV ratios over 80%.”
The ratings agency also said it expected bank lending standards for households to remain broadly steady, “but we remain watchful for any significant easing in standards that could cause risks to accelerate once more,” it said. According to the World Bank, “Malaysia’s near-term economic outlook will be more dependent on government measures to sustain private sector activity as an increasingly challenging external environment reduced opportunity for export-led growth, and reduced fiscal space limits the scope for public investment-led expansion.”
Image: Bursa Malaysia (Wikimedia Commons)