Markets vs voters and the 2018 Malaysian elections: The questionable credibility of credit rating agencies

Millions of ordinary voters in Malaysia mustered moral courage and harnessed a yearning for change to oust the incumbent government led by Najib Razak. His regime was thoroughly tainted by corruption scandals and allegations of creeping authoritarianism. In bringing about a peaceful transfer of government through the ballot box, Malaysian voters have created two historically unprecedented outcomes. First, the new government will be represented by a multi-party coalition under the auspices of Pakatan Harapan (PH) rather than the ruling Barisan Nasional (BN) coalition that has held power since Malaysia became an independent nation in 1957. Second, it marks the return to Prime Ministership of Mahathir Mohamad who ruled as Prime Minister for 22 years under the BN banner. At 92, Mahathir will be the oldest elected head of government in the world. He also demonstrated an uncanny ability to abandon his previous party, overcome past political enmities and embrace PH.

Yet, as the world celebrates the collective wisdom of ordinary voters in Malaysia, ‘markets’ representing the nebulous community of bond stockholders, currency traders and credit rating agencies are hesitant to join in the celebrations.  Reuters reports that ‘Malaysian markets are leery over Najib’s defeat, Mahathir’s return’. CNBC proclaims that bond markets are experiencing ‘shockwaves’. Bloomberg writes that ‘investors are bracing for further market jolts’. The Wall Street Journal warns of ‘turbulence’ following the unanticipated election results. These publications uncritically cite the concerns expressed by credit rating and sovereign analysts.

What are these concerns? The new government has pledged to overturn the highly unpopular goods and services tax and replace it with a fairer indirect tax system. It will restore fuel subsidies and increase minimum wages. The aforementioned analysts argue that these populist pledges, if implemented, are likely to have a negative fiscal impact with adverse consequences for Malaysia’s sovereign credit rating and hence borrowing costs. Indeed, even Mahathir felt obliged to assure markets that the new government will not do anything to disrupt investor confidence.

In feeling obliged to respond to the concerns of ‘markets’, Mahathir does his own record of economic management a great disservice and inflates the importance of credit rating agencies.  These bodies have a highly dubious track-record in assessing the creditworthiness of both companies and countries. Furthermore, careful empirical scrutiny suggests that despite a great deal of media hype about fiscal issues, ‘…growth has a more significant impact on sovereign default risks than debts and deficits’ in the formal evaluations of credit agencies. This is consistent with common sense. What is the point, after all, of assigning a high credit rating to a country simply because it has a balanced budget and low public debt while it is afflicted by low growth, high incidence of material deprivation, social and political tensions and poor quality of governance?

Mahathir’s own record of economic management shows that his government was able to defy economic orthodoxy and the dire warnings of credit rating agencies during the Asian financial crisis of 1997. His government spurned advice and assistance from the IMF, instituted selective capital controls and allied measures and nursed the Malaysian economy back to health. The World Bank has paid a glowing tribute to these policies in its latest report on the Malaysian economy.

As the previously cited World Bank study notes, subsequent administrations have built on the critical legacy of the policies crafted during the turmoil of the late 1990s. Today, Malaysia is poised to become a high-income economy between 2020 and 2024. Both its fiscal deficit and public debt are low by international standards and are likely to remain so. The economy is growing in excess of 5 percent which is line with its growth potential; inflation is subdued; extreme poverty is virtually non-existent; unemployment is around 3 percent; the labour force participation is about 68 percent. Malaysia is a substantially diversified economy and a major exporter of electrical and electronic goods.

In sum, the credit rating agencies should stop being fixated by fiscal issues and consider the broader economic and social context of countries on which they pontificate. They should exercise due humility by recognizing their fallibility. They should shed their inhibitions and join others in celebrating the triumph of electoral democracy in Malaysia.

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