Will Malaysia stimulus work?

Malaysian Prime Minister Najib Razak's decision to roll out a mega stimulus package is certainly eye-catching, both in terms of its ambition and goals.

Datuk Seri Najib announced that the government will pump RM20 billion (S$6.5 billion) into ValueCap, an investment company set up in 2002 to buy undervalued stocks, in a move to shore up the battered stock market. It was announced alongside a host of other measures including financial incentives for Malaysians to buy property and RM6 billion in projects to support the flagging tourism industry.

The programme was part of initiatives suggested by the Special Economic Committee established three weeks ago to address Malaysia's investor flight. Will it work to stop the outflow of funds which has hit nearly RM23 billion since the start of last year?

First, Malaysia is not the first to introduce economic stimulus in the face of slowing export growth and a weakening global economy. China did it, Indonesia came soon after and Thailand also embarked on its own set of stimulus measures.

Second, the move is not aimed so much at replacing funds that fled the market, but to boost confidence. "He may not be able to do anything politically but he wants to show that he can still manage the economy," said CIMB economist Song Seng Wun, referring to Mr Najib.

The Malaysian government is also eyeing the eventual US Federal Reserve rate hike, which could cause further outflows from this part of the world.

"Whether or not the funds are eventually used to buy cheap stocks is beside the point: What is important is the signal that the government can and is willing to step in," said Mr Song.

But while the measures could shore up the market in the short run - the Bursa rose a further 0.46 per cent yesterday, on top of the near 2.25 per cent the previous day - DBS economist Irvin Seah believes the political instability issues need addressing, especially over allegations against Mr Najib regarding troubled state investor 1Malaysia Development Berhad.

"If the deep-rooted issues are not fixed, then it will be hard to restore confidence among overseas investors," said Mr Seah.

A version of this article appeared in the print edition of The Straits Times on September 16, 2015, with the headline 'Will Malaysia stimulus work?'. Print Edition | Subscribe