Monday, May 21, 2018

FW: CIMB Thematic Outlook - 21 May 2018 - Malaysia?s New Beginning



CIMB Thematic Outlook - 21 May 2018 - Malaysia’s New Beginning


· The unprecedented change in government initially caused a bout of uncertainty on MYR assets, causing the currency to weaken. The smooth transition of power and orderly financial markets subsequently brought calm and returned asset prices to pre-election levels, suggesting the presence of latent bulls.


· GDP growth is expected to be lower from original forecasts due to the slower regional exports, cut in government expenditures and reduction in investment as mega projects get reviewed. Inflation is expected to decline with fuel prices being fixed, GST being cut to 0%, and less demand-pulled inflation on slower GDP growth, providing room for the central bank to keep rates steady and accommodative.


· GST rate will be cut to zero but the reporting system maintained, which we opine presents an avenue for future fiscal flexibility. The resultant fall in revenue is expected to be partly made up by cutting government expenditure which can have a large variability, while revenues can be increased by reinstituting the sales and service tax, a boost from higher oil prices, and more efficient harvesting of investment income.


· The improvement in institutions will be a cornerstone in determining financial market outcomes. In Malaysia’s case, institutional quality could supersede ongoing economic issues since the former is structural and determines the outcome of the latter, and has been a long-standing niggling point with the markets. Resultantly, the common worry is related to uncertainty rather than one-sided negative volatility. While this is a tough call, we lean towards the positive outcome given much headroom for institutional reform due to the “low base effect”. We elaborate this esoteric issue further and liken being long Malaysian assets to a long call option outcome.


· Contrary to the present perception of market jitters, we discuss 4 reasons for our positive outlook on Malaysian FX and bonds.


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