KUALA LUMPUR – Despite growing political uncertainty, foreign funds are flowing back to Malaysia after fleeing in 2018, when an unprecedented change of government panicked investors.

A whopping net take-up of RM20 billion (S$6.6 billion) of bonds in 2019 far outweighed the RM11 billion in foreign money that left the stock market, which some analysts are heralding as a positive sign of market reforms under the Pakatan Harapan (PH) administration.

Foreign buyers immediately exited Malaysia during election season in May 2018 as doubts loomed over the stability of a ruling coalition of former foes led by Prime Minister Mahathir Mohamad.

The second quarter of that year alone saw the pullout RM24 billion and RM9 billion from debt paper and equities respectively.

The 20 months of PH rule have seen heightened internal politicking and ebbing public support as uncertainty grows over if and when Tun Dr Mahathir will allow Datuk Seri Anwar Ibrahim to succeed him as promised.

But the return of foreign funds into government bonds – which makes up most of the trade in ringgit debt securities – especially in the second half of 2019 shows that “this government is continuing to reform public finance and controlling its debt”, according to Socio-Economic Research Centre (Serc) executive director Lee Heng Guie.

On the other hand, the Kuala Lumpur bourse has been hit as “people are still trying to navigate… negative surprises in terms of new policy or regulations”, he said, pointing to examples such as massive price reductions in telecommunications and a revamp of the power production sector hurting several blue chip counters.

Economist Hafiz Noor Shams, who works in the Finance Minister’s Office, wrote on his personal Twitter account that “public finance reforms proceeded quickly, led to increased confidence in bonds”.

“This is why many previous equities people benefiting from the status quo hate reforms. It means they have to work harder for returns. Less rent-seeking opportunities,” he added.

The RM19.9 billion surge in foreign holdings of Malaysian bonds last year nearly wipes out the entire 2018 outflow of RM21.9 billion. It is the biggest increase since 2012. Meanwhile, the foreign selloff of Malaysian shares narrowed slightly to RM11 billion in 2019 from RM11.7 billion the year before.

The ringgit has also strengthened against the greenback of late, with one US dollar trading for RM4.06 this week against RM4.20 in October. Many analysts now say the RM4 level could be breached by year end if aided by continued strengthening of oil prices – Malaysia is a net fossil fuels exporter – and cooling of US-China trade tensions.

The easing of the trade war is also cited by analysts as a reason why export-oriented economies like Malaysia, which are reliant on Chinese business, have seen their bonds become attractive again.

Political uncertainty has rocked Malaysian markets before. The total outflow from debt securities and equities in 2018 of nearly RM34 billion was similar to the almost RM31 billion that exited in 2015, when the multibillion-dollar 1MDB scandal implicated then Premier Najib Razak, who was slapped with 42 counts of graft after his shock defeat in the 2018 polls.

Singapore Institute of International Affairs’ senior fellow Oh Ei Sun told The Straits Times investors are still on a “learning curve” following the election.

“The old regime’s long-running cronyism is no longer the mainstay of the economy, and there is a need to understand the new, more open and fair realities to discover value in the market,” he said.

Serc’s Mr Lee is also optimistic of upsides in “a year of reversal” on Bursa Malaysia if there are no new policy shocks.

But risk consultancy Eurasia Group’s Asia director Peter Mumford says the market will continue to be jittery as long as doubts remain over whether there will be a power transition, especially as a sizeable number of parliamentarians want the 94-year-old incumbent to stay on for the full term.

“While Mahathir’s position is secure in the near term, there remains considerable uncertainty over when exactly, and to whom, he will hand over power. This creates an underlying level of uncertainty for investors,” he told ST.

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