Market implications of Prime Minister Najib's cabinet reshuffle - Zamakhshari Muhamad

Market implications of Prime Minister Najib's cabinet reshuffle

PM Najib has today appeared to remove those ministers who have been critical of 1MDB, including his deputy, Muhyiddin (Channel News Asia).

The new Deputy Prime Minister is the current home minister, Zahid. According to Malaysian Insider (MI), he has been vocal in his support of 1MDB, and as an UMNO VP, he is very popular within his party’s right wing and as home minister, has been responsible for a number of tough measures.

Some members of the Public Accounts Committee (PAC), including its outspoken chairman, Nur Jazlan, have been elevated to cabinet level, putting a halt to the PAC’s investigation into 1MDB (MI). The PAC is a 13-member committee, comprising 8 from the ruling coalition & 5 from the opposition. It is now without 4 members, part way through its 1MDB investigation.

The Attorney General (AG) has concurrently been removed, effective 27th July 2015 (MI). His term was due to expire in October. The AG was heading the ‘4 Tan Sri’ special task force into 1MDB, putting that investigation into question. All eyes will be on Tan Sri Zeti, the Bank Negara Governor, who is arguably best equipped to take over the lead in the investigation, assuming it is continued.

The Najib administration has taken a hard line on its critics, according to CTV News. As per Bloomberg, some 150 people, including opposition MPs & journalists have reportedly been arrested. Access to a London-based whistle blowing website, Sarawak Report, which has been critical on 1MDB was also blocked (Star). The Malaysian newspaper (The Edge) that has led the investigative reporting of 1MDB has been suspended for 3 months (MI). Some critics of 1MDB, including an opposition MP & a newspaper proprietor have been slapped with travel bans (MI). The Najib administration has argued that critics should hold back until its investigations into 1MDB are completed (MI). This is in parallel to the Najib administration’s generally good management of the economy. The focus on balancing the budget has included unpopular, but necessary decisions, like removing energy subsidies & imposing GST.

The impact on the market should be felt on the Ringgit, which is already at 17-year lows, having recently broken through the psychological 3.80 level. The market will continue to focus on a number of factors:

· Will the investigations into 1MDB be continued in a sincere way & when will results be published? If there are questions about the sincerity of the investigation, will there be resignations?

· The current account, that is flirting with deficit.

· Forex reserves, that are just above the psychological US$100bn level, having fallen US$40bn or 29% from its May 2013 high.

· The high level of government debt, both on & off balance sheet.

· The high level of foreign ownership of government bonds.

· The price of oil.

An intangible change in confidence can result in real economic consequences.

Zamakhshari Muhamad

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