Covid-19 outbreak, debt and politics to test Malaysia's finance minister

The decision to retain Mr Tengku Zafrul Aziz points to policy continuity from the Muhyiddin Yassin administration.
The decision to retain Mr Tengku Zafrul Aziz points to policy continuity from the Muhyiddin Yassin administration.PHOTO: REUTERS

KUALA LUMPUR (BLOOMBERG) - Malaysian Finance Minister Tengku Zafrul Aziz - who retained the post in the new government announced on Friday (Aug 27) by Prime Minister Ismail Sabri Yaakob - has his work cut out for him.

In October, Datuk Seri Zafrul is set to unveil the 2022 federal budget to what may be the most divided Parliament in Malaysia's history.

That budget will need to address an economy weakened by protracted lockdowns and a raging Covid-19 outbreak, amid steep financial constraints and a budget deficit target that was already revised higher twice this year.

At stake is the fate of the days-old administration he just joined: Per convention, Datuk Seri Ismail would need to resign if the budget fails to get majority support in Parliament.

Ratings companies also will be watching keenly for any departure from the country's fiscal consolidation path.

The decision to retain Mr Zafrul as finance minister "should be welcomed by the market", said Mr Wellian Wiranto, an economist at OCBC Bank. "He is known as a technocrat by and large, and his reappointment signals continuity in his role in carrying out the ongoing fiscal plans and to shepherd the new budget through the Parliament."

The ringgit rose 0.1 per cent to 4.1930 per dollar after the Cabinet announcement. The yield on benchmark 10-year government bond dropped two basis points to 3.24 per cent.

Mr Zafrul, 48, has more than a year's experience as finance minister in the previous government. The decision to bring him back points to policy continuity from the Muhyiddin Yassin administration.

Earlier this month, he affirmed the central bank's 2021 growth forecast for Malaysia at 3 per cent to 4 per cent, the second downward revision as the country grapples with protracted lockdowns and virus flare-ups.

The outlook is expected to improve in the fourth quarter due to more sectors reopening and increased vaccination coverage, Mr Zafrul said on Aug 13.

"The government's current priority is to protect lives from the threat of Covid-19 and ensure the country's economic growth prospects remain strong in the medium to longer term," he said in that statement.

Government efforts will be guided by the National Recovery Plan - an evolving blueprint to exit the pandemic - and underpinned by the principles of prudent financial management, he added.

Mr Zafrul was chief executive of CIMB Group Holdings before Tan Sri Muhyiddin picked him last year for the finance portfolio. He spent much of his career climbing the ranks at CIMB, becoming CEO in 2015.

He previously worked at Citigroup Malaysia, Credit Agricole Group and local broker Kenanga Holdings. He holds a master's degree in economics and accounting from the University of Bristol and a bachelor's degree in finance from the University of Exeter.

Compromise pick

Mr Zafrul will likely spearhead efforts to raise the debt ceiling from 60 per cent of gross domestic product now to perhaps 65 per cent, Mr Wiranto said. That would "give the government more wiggle room in pushing through a loose fiscal stance in the midst of economic challenges", as well as prepare the ground for an election that must be held by July 2023.

The appointment shows the compromise Mr Ismail had to make as he formed Malaysia's third Cabinet since the 2018 election.

The Prime Minister commands the support of just 114 of the nation's 220 lawmakers, a slim majority that may be put to the test in a confidence motion when Parliament reconvenes in two weeks.

While he is not a member of any political party, Mr Zafrul is affiliated with Mr Muhyiddin's Perikatan Nasional coalition, which makes up nearly half of the lawmakers backing Mr Ismail.

"The continuity is positive, but the generally poor performance of the previous government means that the overall Cabinet line-up is important," said Mr Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong. "After all, Malaysia's No. 1 policy goal right now is to contain the pandemic."

Recovery plan

In the previous government, Mr Zafrul also served as coordinating minister for the National Recovery Plan, which outlines Malaysia's exit strategy from the pandemic.

In that role, he changed thresholds for easing states' virus curbs, helping to advance economic reopening in some areas.

Still, the opposition warned against loosening restrictions too early, given the uneven pace of vaccination and the spread of the more infectious Delta variant.

Malaysia's virus situation remains the key risk amid Prime Minister Ismail's plan to reach recovery targets sooner by ramping up vaccination. About 57 per cent of the population has received at least one dose as at Sunday, according to the health ministry.

A renewed lockdown that began in June pushed the economy back into contraction in the second quarter, with the jobless rate rising for the first time in four months.


Malaysia's economy is weakened by protracted lockdowns and a raging Covid-19 outbreak. PHOTO: REUTERS

The central bank cut its 2021 growth target for the second time this year. At the same time, daily virus cases have soared nearly threefold despite the containment measures, hitting fresh highs three days in a row last week.

Standard & Poor's, Fitch Ratings and Moody's all affirmed their Malaysia ratings in recent months. But the country's predicament has not escaped their attention.

"If fiscal deficits remain wide for some time because of further economic stimulus or weak revenue, resulting in a persistent rise in the government debt burden that fiscal authorities are unable to reverse, this has the potential to materially weaken Malaysia's credit profile," said Mr Christian Fang, vice-president and senior analyst at Moody's Investors Service.