KUALA LUMPUR: There will be questions raised and policy uncertainty in the near term, following the 14th General Election (GE14) unexpected victory of Pakatan Harapan (PH).
Standard Chartered Bank said the country might see uncertainty related to some of PH’s manifesto implementation and its 10 promises for the first-day under the opposition’s administration.
Among the PH’s manifesto include abolishing the goods and services tax (GST), introducing targeted petrol subsidies, and revisiting mega-projects.
The bank has also raised its concern on how the measures will be implemented and to what extent, citing that markets may look at plans to replace the GST with a sales and services tax (SST), which was in place before GST.
Based on 2018’s budget projection, the GST’s collection is expected to hit RM43.8 this year.
Standard Chartered said the USD-RM spot may make its adjustment when onshore markets open on Monday from a negative initial asset market reaction to the election outcome.
Malaysia equity exchange-traded funds (ETFs) declined about six per cent and CDS spreads widened following the results.
“In the near term, we expect USD-RM to be driven by any negative asset market reaction and potential measures by the authorities to contain foreign exchange volatility.”
Standard Chartered said market focus is likely to be more on sentiment than fundamentals in the near term.
Standard Chartered said it expects adjustment of MGS risk premium and positioning due to the defeat for the incumbent government, which has surprised markets.
“MGS yields will likely open higher when the market opens on 14 May. Our long 10Y MGS recommendation is 18bps away from our stop-loss level at 4.3 per cent based on the last closing price on 8 May.”
The bank noted local demand for long-end MGS is likely to mitigate any excessive selling however, market conditions may not be favourable for its long position.
The bank also noted that Malaysian IG corporate bond spreads may remain under pressure near-term, citing that the 1MDB bonds may be impacted by the election results.
To recap, the US$3 billion OGIMK 23 bonds were issued by 1MDB Global Investments Ltd, which is 100 per cent held by 1MDB.
“We expect the OGIMK 23 to underperform TIAMK 22 given the difference in bond language and uncertainty surrounding the new government’s approach towards 1MDB.
“We have been underweight the Southeast Asian IG corporate space, including Malaysia, since the start of the yea,” it said, adding that the spreads on Malaysian IG corporates have widened 5-7bps following the election results.
The bank said it expects Malaysian IG corporate to remain under a bit of pressure near-term. However, significant spread widening is unlikely unless the new government implements material changes in policies related to state-owned enterprises and the fiscal situation.