Malaysia’s 7th Prime Minister Tun Mahathir tendered his resignation after lunch yesterday. The Agong however appointed him as interim Prime Minister. Separately, the Pakatan Harapan coalition government faced a major setback with members quitting, resulting in a loss of a majority. We believe these events will likely intensify political uncertainty, spur market volatility and deter any capital inflows over the near term. We cut our 2020 KLCI year end target to 1,540 based on -1SD its 5-year mean PE (from 1,660 based on mean PE). We downgrade the construction to Underweight, and continue to be positioned defensively in MREITS and Healthcare. Other sector Overweights are Rubber Gloves, EMS and Plantations. No changes to our Top Buys for now.

Event: Tun Mahathir Is Now Interim Prime Minister

In a sudden turn of events, Tun Mahathir tendered his resignation as Prime Minister (PM), which was accepted by the Agong. However, Tun Mahathir will continue to run the country in the interim until the appointment of a new PM.

Without a Cabinet, Only Caretaker Government in Place

Concurrently, the single term government, Pakatan Harapan (PH), has lost its majority with the exit of 26 Bersatu MPs and 11 others from PKR, coalition members from the PH party. PH had 139 MPs (consisting PKR: 50, DAP: 42, Bersatu: 26, Parti Warisan Sabah:9 and Upko: 1 MPs respectively) in the 222-seat Parliament. As such, with the current Cabinet having ceased to exist, there is currently only a caretaker government in place, without a proper Cabinet.

King Will Need to Appoint New PM, and in Turn, New Cabinet

Without a majority coalition in Parliament and the resignation of the PM, the Federal Constitution states that the Agong will have to appoint a PM from the 222 members of Parliament, someone in his judgement that is likely to command the confidence of the majority. The PM would then form his own cabinet and should thereafter take a confidence vote, to determine if he remains in office.

Impact: Chaos, But Government Would Still Need to Focus on Economy

Whatever the outcome of the current political situation and the changes to the political landscape in Malaysia, the priority of the government will need to focus towards ensuring the sustainability of the country’s economy, by bringing back and restoring confidence among businesses and investors quickly, especially when the global economy still faces significant downside risks from Covid-19 outbreak and global trade policy uncertainty.

Reversal of Earlier Policies Implemented?

Concerns of a newly formed government may still complicate implementation of earlier government policies, despite the announcement of the appointment of Tun Dr Mahathir Mohamad as the interim Prime Minister by the King. Nevertheless, we believe the present government will need to stick to continuation of policies such as in the areas of institutional reforms, corporate governance, fiscal transparency and consolidation, as well as structural reforms to improve on productivity, income of the people and generating new growth areas. We believe it is important for the government of the day to provide immediate clarity on the economic policies, which need to include strategies on implementation towards long term sustainability of the Malaysian economy.

Source: Affin Hwang Research - 25 Feb 2020