Political risk recedes for stock market

PRIME Minister Datuk Seri Najib Tun Razak's approval ratings rebounded strongly in the latest Merdeka Centre polls, climbing to 69% from 59% in August last year. The improvement is seen across all races (Malays: 74% vs 69% on Aug 11, Indians: 80% vs 69% on Aug 11), with the largest jump seen for the Chinese (57% vs 38% on Aug 11). Ratings were also high among poorer Malaysians, at 78%.

Ratings had fallen in the last polls following the Bersih 2.0 rally in July last year, when over 40,000 people took to the streets. About 1,667 demonstrators were arrested for defying the government ban, with accusations of police brutality.

Najib has since moved to address the fallout. A generous 2012 budget unveiled in October sweetened the ground with hand-outs targeted at voters (and less on companies).

There was a generous one-off RM500 cash assistance to low-income households (with income less than RM3,000 a month), reaching 3.4 million households. This cost the Government RM1.8bil. The welfare programme was enhanced with assistance to poor senior citizens (RM300/month), poor children (RM100-RM450/month) and the disabled (RM150-RM300/month).

These reached more than 500,000 citizens, costing RM1.2bil.


The Prime Minister’s approval ratings rebounded strongly to 69% in the latest Merdeka Centre polls from 59% in August last year.
There was a host of other hand-outs, reaching a broad spectrum. These included civil servants (half-month bonus, wage hike, later retirement age of 60); teachers (large increment, speedier promotions), taxi drivers (100% duty exemption, interest rate subsidy loan, road tax abolishment); senior citizens (outpatient registration fee exemption, 50% discount on public transport fares), students (primary and secondary school fees abolishment, RM20 book voucher, RM100 schooling assistance for poor families), pensioners (RM500 payment); low-cost home buyers (housing subsidy of RM20,000); widows and widowers (RM3,000 payment) and even soccer players (150 new futsal courts, RM50mil to build football fields).

The Government has moved to repeal the Internal Security Act (which allows for the detention of people indefinitely without trial) and made amendments to improve transparency in the electoral process.

There was general surprise and a positive buzz after the Kuala Lumpur High Court acquitted Opposition leader Datuk Seri Anwar Ibrahim of a sodomy charge.

The Cabinet is considering a minimum wage of slightly below RM1,000 for 3.2 million workers in the private sector, with a RM100 difference between states in the peninsula and Sabah and Sarawak.

Receding risks of an election shock outcome should reduce the risk of a repeat of the stock market sell-off (-13%) and sharp portfolio outflow after the March 2008 elections, when Barisan Nasional (BN) lost five states and parliamentary control. Portfolio outflows turned sharply negative for five quarters.

BN may still face an uphill battle in regaining control of parliament. Re-capturing Selangor, however, was “do-able”, according to former Finance Minister Tun Daim Zainuddin, who correctly predicted the shock election results in 2008.

Populist policies will weigh on the Government's fiscal position, but will probably be of secondary concern given the focus on winning the elections. We expect the fiscal deficit to come in at 5% of GDP, above the government's 4.7% forecast. Fuel subsidies are likely to be higher than the budgeted RM17bil, as global oil prices rise and fuel price adjustments are postponed. Our estimates put the fuel subsidy cost closer to RM19bil, or an additional RM2bil (or 0.2% of GDP).

Elections have put off a host of difficult fiscal decisions including introducing a consumption tax and reducing fuel subsidies until after. Introducing a consumption-based tax would broaden and stabilise the tax base, and reduce the dependence on oil and gas-related revenue (about 40% of fiscal revenue).

Reducing the burden of fuel subsidies would trim the fiscal deficit and free up resources for more productive investments, including infrastructure. Further delays and procrastination would be a setback for the Government's transformation programme.

Given the strong showing in the latest Merdeka Centre polls, Najib is likely to call for general election soon, rather than wait until 2013. One possibility could be this June, during the school holidays and before the fasting period. The economy is humming along, with domestic demand remaining relatively robust although exports have been softening. Inflation has fallen to only 2.7% in January.

A window is opening up for Najib to call elections before the “positive mood” fades.

● Chua Hak Bin is head of emerging Asia economics research at Bank of America Merrill Lync