Perfect storm of oil price woes, weak ringgit, external debt and now, political infighting

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KUALA LUMPUR (Jan 23): Rarely do Malaysia's politics set off reverberations in the financial markets.But now, falling oil prices and the ringgit's slide couldn't have come at a worse time for Prime Minister Datuk Seri Najib Razak who is faced with a revolt from within his own ruling party and is losing the confidence of financial markets over his management of the economy.

The drop in the price of crude has spotlighted nett oil exporter Malaysia as the weakest of Southeast Asia's major economies and has also set off alarms among foreign investors who own more than 40% of the domestic bond market, The Edge Review reported today.

The ringgit is at its lowest in six years, dropping 10% in the past four months, and Malaysia's foreign currency reserves have also shrunk.

A weak ringgit might help the country's export-driven manufacturing sector, but the shrinking revenue from gas and petroleum exports have led Najib to recently tweak the national budget for 2015.

He also revised GDP growth to a slower rate of 4.5% and raised the fiscal deficit to 3.2%, compared to 3% previously.

But more worrying was the possibility of a credit downgrade, The Edge Review noted. Already, Malaysia has a long-term foreign currency credit rating of "A-", assigned by Fitch Ratings, which found that the budget revision still showed the government's dependence on oil revenues – a "key sovereign credit weakness".

"The big question is whether international rating agencies will follow suit and potentially spark a stampede," the digital weekly said.

Malaysia holds external debts of around US$47 billion (almost RM170 billion) in bonds "happily soaked up" by foreign investors three years ago when problems like household and government debts, and now, lower revenue from oil and gas earnings, were non-issues, the Edge Review noted.

But now there is fear that these problems could see the country's current account fall into deficit, it said.

How does all this tie into Malaysia's politics?

The political attacks against Najib this time are centred around "ticking financial time-bombs", as The Edge Review called them, including the controversial strategic development fund, 1Malaysia Development Bhd (1MDB) which is wholly owned by the Finance Ministry.

It's also not just the usual critics from the opposition bench – leading the assault is former prime minister Tun Dr Mahathir Mohamad, and of late, other veterans from the strongman's league, including former finance minister Tun Daim Zainuddin.

With old players emerging from the shadows of retirement, Malaysian politics is in for interesting times ahead, and surely, the markets are watching.

For the full story, go to http://www.theedgereview.com/