Malaysian Currency Falls After Deadlocked Election

Malaysia’s stock market and national currency wobbled after an election resulted in the country’s first ever hung parliament. Parties must now form a coalition before an administrative deadline that expires in a few days, and thereafter must deal with the negative response of the financial markets to the news.
The Malaysian ringgit slipped by 0.8% against the US dollar in early trading this week before recovering to be down 0.1%, as markets braced for the likelihood of a long period of political instability.

Southeast Asia’s fourth-largest economy had been on a good path after recovering well from the COVID-19 pandemic, which had caused the largest contraction to the economy since the 1998 Asian financial crisis. Malaysia’s GDP grew by 14% during the July-September period, after growing 8.9% during the second quarter.

The country’s national election on Saturday failed to produce a clear winner, with neither the Pakatan Harapan (PH) nor the Perikatan Nasional (PN) coalitions winning the minimum 112 seats needed to form a government.

The hung parliament was largely expected by those close to polling trends, and this is viewed as a negative outcome as coalition governments around the world have been known to be unwieldy and inefficient.

Important post-election issues, like fiscal consolidation, will be challenging if there is a political deadlock. This likely means that investors will be less enthusiastic about Malaysia’s prospects until there is more clarity around policy direction and speed.