Singapore. A fall in the Malaysian ringgit in offshore trading and a rise in the cost of insuring the country's debt showed how nervous investors were on Thursday (10/05) after a stunning election defeat of the coalition that had ruled Malaysia for six decades.
Malaysia's stock, bond and currency markets were closed on Thursday and Friday after the government declared them public holidays while the Southeast Asian nation faced a seismic change in its political landscape.
That left thinly traded offshore ringgit markets to absorb the selling after election results showed Pakatan Harapan (PH), an alliance of opposition parties spearheaded by former prime minister Mahathir Mohamad had defeated Prime Minister Najib Razak's Barisan Nasional (BN) coalition.
The ringgit lost four percent in offshore trading, while an overseas Malaysian equity fund showed a 6 percent drop in share values.
"A classic knee-jerk reaction is in play," Eli Lee, head of investment strategy at Bank of Singapore, said in a note.
But others stressed the uncertainties abounding as Malaysia's politics moved into uncharted territory.
"As this is the first time in Malaysia's history that the ruling coalition has lost power, markets are understandably anxious to see a peaceful and orderly transfer of power," Mizuho Bank said in a note.
The 92-year-old Mahathir, who had retired 2003 after leading BN governments for 22 years, says he intends to be sworn in as the new prime minister before handing over the role to Anwar Ibrahim, the former enemy he allied with to topple Najib, who they have both accused of corruption on a massive scale.
Mahathir must first obtain a pardon for Anwar, who is currently in jail on a sodomy conviction that he and independent observers say was politically motivated, and then Anwar needs to win a parliamentary seat before becoming prime minister.
At the same time there are questions hanging over the fate of Najib, given the possibility Mahathir and Anwar, whose reputation as a reformist is largely built on standing against corruption, could reopen a Malaysian investigation into a sovereign fund that is the focus of a US kleptocracy probe.
Najib has consistently denied any wrongdoing.
Adding to market worries, Najib appeared to raise doubt that Mahathir would succeed him, telling a news conference it would be up to Malaysia's king to decide who should be the next prime minister, since no single party had won a simple majority of seats in the 222-member parliament.
Meantime the shock of Najib's defeat reverberated through markets.
"This upset ranks up there with Brexit and Trump election," said Aninda Mitra, a senior sovereign analyst at BNY Mellon Investment Management. "I believe the ringgit will come under pressure as policy continuity will come under a cloud."
If Mahathir's coalition takes over the government, investors have to grapple with the impact of the PH's pledges to abolish a goods and services tax, restore a petrol subsidy, increase minimum wages and review infrastructure projects.
"The impact on the ringgit is likely via the sentiment channel with perceived risk associating with the transition of government," said Frances Cheung, head of macro strategy at Westpac. "The impact on the fiscal balance is the first thing to watch."
Foreigners hold nearly half of all outstanding Malaysian government bonds. The equity market is Asia's top performer after Vietnam, with more than 7 percent gains this year in dollar terms.
While most banks are disallowed by regulators from actively participating in the non-deliverable forward markets for ringgit, the NDFs showed a 4 percent fall in the three-month tenor, to 4.12 per dollar.
The currency was last traded at 3.9480 onshore on Tuesday and has been a relative outperformer in the region as a combination of rising U.S. yields, recovering oil prices and global trade tensions have sapped most high-yielding emerging market currencies.
The US-traded iShares MSCI Malaysia exchange traded fund (ETF) fell 6 percent overnight. The cost of insuring against default on Malaysian debt rose to 84 basis points from 78 before the election.
"At a time of growing pressure on emerging market currencies and bonds, the situation in Malaysia bears careful watching for potential knock-on effects, particularly as rising rates and geopolitical uncertainties remain live in the backdrop," said Bank of Singapore's Lee.
Still, analysts expect the ringgit will find support once the jitters over the election ebb. As a net oil exporter and one of Asia's higher growth economies, the country is also seen retaining its appeal for foreign investors.
"The ringgit has scope to outperform the region once the dust has settled with steady domestic growth path amid lower inflation," wrote Sue Trinh, head of Asia FX strategy at RBC Capital Markets.
"There is upside risk to our 3.93 end-2018 forecast but we are for now reserving judgement until we see Mahathir's policies fleshed out in greater detail."