Asian economies should brace for financial aftershocks ; Malaysia: Despite new cabinet line-up, political risks remain high

Highlights from the CAA Weekly Table

Four themes are driving the global economy:

  • Accelerating global response to the coronavirus crisis: Central banks across the world have eased monetary policy and injected liquidity into the financial system. Fiscal policy support is also being ramped up. Our view is that these actions are not enough to help absorb the shocks, more policy support will have to be added.
  • China’s economy is returning to normalcy: China’s stringent policies have brought the pace of new coronavirus infections down sharply, allowing the authorities to more aggressively ease the restrictions on activity. Although the rebound will be modest, it will provide progressively greater support for the world economy.
  • But the US is likely to be a source of growing risks to Asia: The poor initial handling of the coronavirus crisis coupled with the weak social safety nets in the US raise the chances that the virus will spread alarmingly in the US, adding to the panic and restrictions that could slow the economy.
  • Oil prices will remain lower for longer: The Saudi-Russian stand-off will persist for some time, which in combination with demand destruction, will keep oil prices low. However, the benefits of low oil prices will take time to emerge while its downsides will be more immediate.

Asian economies should brace for financial aftershocks

The escalating loss of confidence in the US and Europe over the coronavirus crisis and the abrupt fall in crude prices led to a swift collapse in financial market sentiment. The ongoing financial turbulence could unleash further adverse impacts on Asian economies:

  • First, emerging Asian currencies, equities and bonds are at further risk should capital inflows reverse and capital outflows accelerate.
  • Second, Asian economies potentially face a USD funding squeeze as the global risk aversion leads to a desperate “dash for dollars”.
  • Third, Asia faces a wall of debt that is due to mature in less than 12 months, a period when refinancing is expected to be difficult.
  • Fourth, there is a risk of a negative feedback loop established between the real and financial sectors as tightening financial conditions dovetail with a deepening growth slowdown, pushing up default risks.

Malaysia: despite new cabinet line-up, political risks remain high 

  • The announcement of a new cabinet has reduced uncertainty: The appointment of technocrats such as the new Finance Minister and the Minister in the Prime Minister’s Office supervising key economic agencies will be welcomed by investors.
  • However, infighting within the coalition could undermine its coherence: The parties within the coalition are making demands for position while factional strife within parties, including the largest component, UMNO, and Prime Minister Muhyiddin’s own party could create new sources of instability.
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