The Malaysian government's move to pump cash into the share market will bolster confidence in a period of uncertainty, but it will not be enough to reverse the region's faltering growth, say economists.
Prime Minister Najib Razak announced a package of stimulus measures on Monday, including a RM20 billion (S$6.5 billion) injection into the stock market through state equity investment unit ValueCap.
Malaysia's benchmark Kuala Lumpur Composite Index has pared around 18 per cent between its 52-week high in mid-April to the year's low on Aug 24.
Given the massive fall, the focus of the stimulus measures on the equities market instead of other areas is not surprising, said Barclays senior regional economist Leong Wai Ho.
"This will help stimulate share prices to levels that better reflect fundamentals. It will also minimise the negative wealth effect on consumption, as excessive falls in asset prices will negatively impact consumer confidence," he added.
"So in stimulating the stock market, the Malaysian government is also trying to shield domestic consumption from financial volatility."
The sluggish Malaysian stock market mirrors regional weakness amid worries over the impact of China's deepening slowdown. Commodity exporters such as Malaysia and Indonesia have not been helped by the persistent drop in oil prices over the year.
As confidence sags, the currency has also fallen aggressively, with the Singapore dollar gaining around 10 per cent between April and the end of August to 2.9703 against the ringgit.
The measures announced this week are targeted at building confidence, economists noted.
CIMB Private Banking economist Song Seng Wun said: "The stimulus is more of a symbolic move to boost confidence, an act to show that the government is ready to support the market and the economy, which is actually not uncommon in Malaysia through various government pension funds."
The move is particularly timely now ahead of fresh events that could dampen sentiment and trigger further capital outflows, including the upcoming United States Federal Reserve rate hikes and rising discontent against the Prime Minister, Mr Song added.
Citi economist Kit Wei Zheng said that RM20 billion is around 54 per cent of Bursa Malaysia's monthly trading value and 1.3 per cent of equity market capitalisation. He added: "The intention is more of confidence building, but with limited direct impact at the macro level."
In fact, measures announced by regional governments - including the package unveiled by Indonesian President Joko Widodo last week - will not be sufficient to revive economies and markets.
"(The measures) will help in limiting the downside risks and buffering against any hard landing, but I doubt we will see a reversal of the regional growth trend, which is still pretty much a function of how China and the United States economy fare in the second half this year," Mr Leong cautioned.
But any improvement in sentiment will still help the region, including Singapore, Mr Song said.
He added: "If confidence in Malaysia and Indonesia - two of Singapore's major trading partners - improves, Singapore may see stronger demand for goods and services exports."
