International investors might have to re-evaluate their investments in Malaysia after an Associated Press (AP) report concerning the country’s Prime Minister, Najib Razak, who today warned about the likehood of an economic collapse if the opposition wins a national election that must be held before mid-2013. Najib said Malaysia’s budget deficit would increase to almost 30 per cent, and its debt will be a massive 140 per cent of the gross domestic product, akin to that of Greece, by 2015 shall the opposition attains power.
Malaysian Prime Minister warns of an economic collapse
Bracing for what is expected to be one of Malaysias most intensely fought elections since independence from Britain in 1957, former Malaysian Prime Minister Mahathir Mohammad warned two days ago that democracy does not guarantee the public safety and security as violence could ensue when groups rise to demand their rights, a suggestion that Malaysia might experience violent street riots shall political tension escalates.
Malaysia, which is expected to hold general elections in six months, is a country that is easily accessible to U.S. investors and also a prime example of one that can easily be affected by domestic politics. To that end, the iShares MSCI Malaysia Index Fund (EWM) traded in New York is one country-specific emerging markets ETF investors will want to keep an eye on in the coming months.
Fighting perhaps the tightest election in Malaysian history following the ruling coalition’s disastrous 2008 electoral performance, Malaysia has adopted a familiar tactic seen in the U.S., that is the opening up of government’s coffers by the party in power to stimulate economic growth in election years. The country’s $444 billion Economic Transformation Program is aimed bolstering domestic demand and lifting personal incomes, arguably, it is also designed to keep the incumbent government in power.
The MSCI Malaysia has so far gained bull investors nearly 10 per cent this year
Investors have so far reaped the rewards of Malaysia’s pre-election generosity. The EWM, for instance, is up nearly 10 per cent year-to-date. Despite that though, there are now ever-increasing risks to the Malaysian economy and the EWM itself. While the spending plan has been lauded by the international community, debt as a percentage of GDP in Malaysia has risen by more than 33 per cent since 2008. The country’s debt-to-GDP of 53.4 percent at the end of the first quarter was more than 200 basis points higher than that of the Philippines.
That rate is dangerously high to the government’s desired limit of 55 per cent and it does put some burden on investors to ignore rising debt levels while embracing the theme of increased domestic consumption. By comparison, Indonesia’s debt-to-GDP ratio has steadily declined from 83 per cent in 2001 to less than 25 per cent now. Already foreign investors are expressing their concerns, Malaysia attracted net inflow of foreign direct investment (FDI) worth RM13.6 billion in the first half of 2012, down 35 per cent than the amount recorded in the same period last year.
A warning from the head of government, be it political rhetoric or not, would definitely weight down Malaysian ETF. Put options are available for EWM, which effectively means investors could profit from an outright chaos in Malaysia as a result of political infighting. The Ishares MSCI India Index Fund tumbled more than 22 per cent earlier this year while India suffered from a credit crunch, giving short-sellers a considerable earnings.