Project Neptune rising…

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… amid renewed liquidity concerns

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Sovereigns shape up for differentiation

Friday, April 12, 2013

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Malaysia election concerns pose downside risks to credit outlook in Q1-2013 – Asia Q1 results

by Matthew Turner

Election outcome will determine extent and composition of fiscal reform, say analysts


Malaysia’s election cycle adds another layer of uncertainty to the country’s risk assessment, according to ECR analysts.
The sovereign’s upcoming election, scheduled for May 5, is expected to be the most tightly contested since independence in 1957.

A report by Nomura claims ruling coalition Barisan Nasional could lose a substantial number of parliamentary seats, and there was a risk opposition coalition Pakatan Rakyat could win at the May 5 election.

The incoming government will need to “focus on roadmaps aimed at transforming Malaysia into a high-income economy by 2020”, reports Nomura.

This will have a direct impact on the pace and composition of fiscal adjustment, according to a credit outlook report by Moody’s.

“The outcome of these elections, particularly the strength of the incoming government’s mandate, will determine the outlook for important fiscal reforms and, thus, fiscal sustainability,” states Moody’s.

The incumbent administration has targeted a 0.4% deficit-reduction target in 2013, which would lower the country’s deficit to 4% of GDP. The government has embarked on a successful fiscal consolidation plan, successfully reducing the country’s deficit by 2.3% since it last took office in 2009.

 

However, total government debt has risen moderately since 2009, from 50.8% of GDP to 52.1% in 2012, reflecting the stakes at play in the next general election.

 

Meanwhile, election uncertainty could temporarily push economic policy concerns into the background, with political discourse likely to centre on governance in the run up to May 5, according to Moody’s.

Analysts participating in the ECR Survey have reacted negatively to the country’s election challenges. Malaysia’s overall risk assessment declined by two points to 61.8 in Q1-2013. After corruption, the country’s government stability indicator was of most concern to ECR analysts.

Although still the second-safest sovereign in southeast Asia – after Singapore – Malaysia suffered the largest score decline in the region this quarter.

Malaysia’s score decline left the country slipping one place in the ECR global rankings. However, with a global rank of 35, it still remains in contention with Macau and Brazil for a spot in ECR’s second-safest investment tier.

 

An interim update report by Nomura, published on April 9, lists Malaysia’s imminent election as the ninth most important global political development, relevant to markets.

This artice was originally published by Euromoney Country Risk. To discover more, resister for a free trial at Euromoney Country Risk.