During our short visit to Kuala Lumpur, we had a chance to talk with CNBC Reporter, Sri Jegarajah. We expressed certain matters that the new Government needed to do within 48 hours of assuming power.
Unfortunately, it has not been done yet.
We have always stated that the Election Result on May 09, 2018 is considered a shock result from the global investment community. There are a couple of risks that needs to be managed.
First the positives.
According to its latest detailed breakdown of reserves, the aggregate short positions of Foreign currency vs. Ringgit was about USD $7b , which is down substantially from its peak of about US $19 b about a year ago. International reserves was at US $107b, which is ‘ok lah‘ considering our external liability position.
There has also been a change of Government through a peaceful mechanism. There were no riots, no martial law and no curfew.
Now the negatives.
As of early May, most major fund managers and international bankers were banking on a BN victory. In fact, I had a chance to speak to a key international banker who knew me personally, and knew of certain Black Swan predictions that I made in the past. He left shaking his head when I convinced him that BN was going to lose. Hopefully his bank is well positioned ahead of market open, but I don’t think many other banks are as fortunate as the bank he represents.
A. Key Questions on Government Policy
At this stage of the post election, markets have expected a Cabinet to be agreed upon and sworn in, especially the Finance Minister. The Finance Minister was supposed to be ready to have given an interview with the international press by Monday morning outlining the following :-
- What will be the immediate policy of the Government?
- What will be the debt to GDP ratio that the Government is comfortable with? Will it include on-balance sheet and off-balance sheet i.e. Government linked debt liabilities as well?
- Will GST be abolished or not?
- Will there be capital controls?
B. Contingency Funding Plans for Foreign Currency Liabilities
At this stage, Bank Negara should have announced a big Ringgit – Yen swap facility, which can then be transformed quite easily to have an effective Ringgit – USD swap facility. So far it has not been done, and this could pressure the Foreign Currency markets if there is a hint that there is a lack of US Dollar Liquidity in the domestic markets.
There also should have been a crisis meeting of all major Government funds, banks and GLCs with the incoming Government to establish a Crisis Funding Plan if required. This will involve an order of execution of which foreign currency assets will be sold to ensure that the Ringgit does not crash tomorrow. There also needs to be a plan and a strategy at which point will there be a support on the Ringgit i.e. support at RM 4.00 , RM 4.20 or RM 4.50?
C. Portfolio flows and kleptocratic flows
Is there a plan to distinguish between genuine portfolio outflows, which must be honored versus kleptocratic flows which should be subject to Enhanced Due Dilligence. At this stage, Bank Negara should have issued a directive to all banks to practise EDD on all accounts linked to Politically Exposed Persons (PEPs). There should also be a limit on individual outflows of Ringgit for example capping it to maximum USD $100,000 or else special approval is required. Trade flows should be honored but only if there is supporting documentation. No local entity should be using this opportunity to take a speculative position against the Ringgit.
D. Fate of Najib and the previous Government
I believe there is a mix of politics here that makes it difficult for the new Government to act as soon as they would like to. Nonetheless, this is also a risk that is weighing on the markets.
I don’t care if I burn my bridges with the “Prime Minister in waiting” but the stunt PKR pulled was just ridiculous. The fact that we do not have an agreed upon Cabinet adds to the already heady mix of political uncertainty that can influence the view of international investors.
Investors want something called certainty – and PKR should not have insisted on a Cabinet meeting to be held in a hospital just to obtain Anwar’s opinion. After all, isn’t Datuk Seri Wan Azizah the Deputy Prime Minister? Is she Anwar’s wife, PKR President or Deputy PM?
Please decide very soon.
There is a bunch of people called the Rating Agency and if they issue a downgrade on Malaysia on Monday, it could make things very difficult. Minister of Finance elect, Lim Guan Eng better put out a statement by tonight to reassure investors on all the points we had mentioned. The Eminent People’s Council also will make things more complicated if there is seen to be too many cooks that affect Government policy. Co-ordinate with Minister of Finance elect Lim Guan Eng if not there will be lack of clarity from the point of view of international investors.
It was extremely crucial that those things happened on Saturday, which has yet to materialise. I would like to advise the Government, but unfortunately the unresolved issue of Pastor Koh does not allow me to play any direct role until there is a clear and firm commitment to have this investigated thoroughly.
Good luck, Tun and the rest of the PH leadership.
Please note: If RM crashes past RM 4.80 to the USD, BN will be back in power very soon. Btw, it may even be that this is what the establishment wants. My view, even though I used to be PH friendly but as a finance guy, we are very quickly descending into a circus. Will see how things are at 12.00 pm tmrw. Someone should tell Rafizi that Malaysia and the fate of 30 million citizens, 5.8 million of which voted for PH is bigger than Anwar Ibrahim.
Updated 2:04 pm 14th May 2018.
Things seem surprisingly quiet on the Ringgit front. Well that is good news for Malaysians. Bad news it seems for a lot of ppl related to 1MDB as an immigration blacklist gets enforced.