Foreign cash is leaving Malaysia as the economy is slowing
Mahathir faces a new blow to market liquidity signals index provider
International investors are leaving Malaysia, hit by various financial headwinds and therefore home to the worst-performing primary inventory sector in Asia.
Now poor macro indicators add to the challenge facing Prime Minister Mahathir Mohamad, whose government will be entering its second year in May. Foreign investors last week were net sellers of Malaysian shares for a fourth consecutive week, according to a Monday study from MIDF Research, a Malaysian financial services supplier. Net revenues from overseas investors amounted to 1.14 billion ringgit ($270 million) so far this month.
In nearby equity economies, this bucks the trend. Foreign investors in Indonesia purchased more than $218 million in stock in the first three-quarters of April than they sold. The estimate is $121 million in the Philippines and $83 million in Thailand.
The Kuala Lumpur Composite Index decreased by 4 percent from the end of last year before Monday. Other markets in Southeast Asia improved during the same period. The benchmark index for Singapore rose by 9%, 7% for Thailand and 4% for Indonesia.
One factor that drags Malaysia down is the heavy dependence on trade. According to the World Bank, exports accounted for 71 percent of the gross national product in 2017. Global manufacturers of electronics have made Malaysia an export base. They also made it vulnerable, when sales of products such as semiconductors slumped, which is happening right now as the global demand for smartphones decreases.
Malaysia has been one of Asia’s worst-performing countries, according to Nikkei’s monthly Purchasing Managers’ Index. For the sixth consecutive month through March, the country’s headline PMI pointed to a decline as supply fell abroad. Malaysia’s manufacturing PMI was the smallest of the 15 Asian Nikkei monitors in March.
Another issue is the conflict between Malaysia and the European Union over palm oil, one of the primary export goods of Southeast Asia. The EU is shifting, citing deforestation, to prohibit the use of palm oil in biofuels.
Although the price of palm oil bottomed out early last year, it remained small opposed to 12 months earlier and weighed on Malaysian firms owning palm farms.
Meanwhile, last week, British index company FTSE Russell announced that its flagship World Government Bond Index— a benchmark for fixed-income investors — would drop Malaysian public bonds because of market liquidity issues. The change would imply fewer global investors purchasing public securities from Malaysia through assets tracking the FTSE index.
Funds tracking the index are worth a total $1 trillion, with Malaysia bringing 0.39 percent of the index’s weight as of March, according to a calculation by the United Overseas Bank of Singapore. This translates into $3.9 billion in prospective overseas investments or 4% of all outstanding public bonds in Malaysia. In the near term, considering this recent news, the “Malaysian ringgit is obviously on the offensive,” the bank advised.
Mahathir said in reply, “We have no intention of withdrawing from the bond industry,” according to an April 19 study from the New Straits Times.
Meanwhile, the leading financial indices of Malaysia point to slow growth. In January and February, the customer cost index experienced decreases year-on-year. The agricultural manufacturing gage is also small. Economists are therefore expecting some stimulus steps.
“The central bank will use the present low inflation backdrop to provide more economical strategy incentive,” said ING analyst Prakash Sakpal, adding that the central bank will lower policy levels by 25 percentage points to 3 percent at the next cabinet conference, planned for May 7, making it the first rate cut in almost three years.
As far as overseas direct investment is concerned for establishing factories and making commercial acquisitions according to CEIC Data, Malaysia had net profits until the middle of October-December returning to early 2013. There was no information accessible for the latest quarter.