Malaysia a safer prospect than Turkey… politics aside

The news that Malaysia and Turkey are to face snap elections in May and June respectively has given emerging-market (EM) investors reasons to remain cautious, given the fact both countries were downgraded by analysts in Euromoney’s latest country risk survey.

Turkey’s risk score of 52.1 from a maximum 100 points puts the country low down in Euromoney’s third of five-tiered categories of risk, at 57th out of 186 countries surveyed in the global rankings.

That means Turkey is riskier than Hungary, Brazil, Thailand and other EMs, including Malaysia.

Turkish investors are perceptibly nervous at the prospect of re-election for Recep Tayyip Erdogan, whose authoritarian rule will be rubber-stamped by a new executive-style presidential system.

Those political concerns are matched by uncertainty over the strength of Turkey’s economy, highlighted by the recent fall in manufacturing capacity utilization, persistently high double-digit inflation, a widening trade deficit and a rising external debt load weighing on the lira.

Despite stimulus measures, GDP growth is expected to slide from 7% in 2017 to 4% this year, which is low by historical standards.

Malaysia on the other hand is 43rd in the survey rankings, on 59.2 points. The score differential is underlined by their credit ratings, with Malaysia higher than Turkey’s BB-/Ba2/BB+ ratings, from Standard and Poor’s, Moody’s and Fitch respectively, on A-/A3/A-.

The case for Malaysia

In comparison with Turkey’s fading appeal, Malaysia is still seven points better off in Euromoney’s survey since 2010, a performance that is largely down to an economy that has “shown resilience in recent years despite external shocks”, the IMF states in its latest Article IV consultation report.

Some Euromoney Country Risk (ECR) experts speaking off the record stated it would be a shock if the opposition were to win the elections on May 9, despite opposition to the incumbency led by prime minister Najib Razak, driven by corruption, ethnic tensions and the cost of living.

Plus, the political climate will calm down eventually, and the focus will return to the economic situation, certainly among potential investors.

On that front, there is much to commend the authorities.

Last year, real GDP growth increased to 5.9%, and although it is forecast to slow in 2018-2019, as global trade growth softens, it should stay above 5%.

Indeed, ECR survey contributor Arjen van Dijkhuizen, senior economist at ABN Amro, notes the fact his bank has upgraded Malaysia’s prospective growth this year to 5.5%, in line with Indonesia.

Crucially, not one of Malaysia’s surveyed economic, political or structural risk indicators was lowered in the first quarter.

The risk score deteriorated solely because of more restrictive capital access, according to a separate group of contributors working in international bond and syndicated loan markets, and bank finance, providing confidential insight.

Indeed, all of Malaysia’s economic and political indicators are higher on a year-on-year comparison, except for corruption still affected by the scandal surrounding the 1MDB state-owned investment fund, handing Malaysia the advantage over Turkey:

That’s not hard to figure with such a strong economy.

Annual inflation fell to 1.3% in March and first quarter GDP growth is likely to be among the best in the region, most economists believe.

Spurring this expansion is strong global trade, notably supporting electronics manufacturing, and complementary monetary policy stimulus from Bank Negara Malaysia – the central bank – despite a small 25 basis points rise in the key policy rate in January to 3.25%.

Business confidence is high, leveraging investment, consumers are spending, and there are two mega construction projects ongoing – a petrochemical complex and the East Coast Rail Link, plus the high-speed rail linking Kuala Lumpur with Singapore is due to begin during the next 12 to 18 months.

There is low unemployment, a current-account surplus and ample reserves coverage for six months of import payments.

On fiscal indicators, the headline federal deficit (IMF calculated measure) is forecast to narrow from 3% of GDP last year to 2.8% in 2018 and 2.5% in 2019.

The debt and interest payments are high, but projections show some improvement and external borrowing risk is mitigated by the large domestic institutional base that can absorb local currency debt.

Malaysia is not without its challenges. The economy is highly dependent on global trade, the government must stick to fiscal consolidation to rein in the debt, and household borrowing at 80% of GDP requires monitoring.

However, despite this, it remains a decent bet.