Chief Economist & Political Strategist, CrossASEAN Research

Prasenjit K. Basu

Chief Economist & Political Strategist

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Macroeconomics

Malaysia's investment/GDP ratio stagnated at 25.5% in 2012-17, then fell to 21% in 2019 and 19.7% in 2020, with public investment falling below 5% of GDP. Any reversal of this in 2022 remains unlikely with the one-off "prosperity tax" leading corporates and banks to bring forward expenses, hike provisions, and delay income-recognition in order to lower their taxable income. With corporate and bank earnings likely to be anaemic in 2022, we recommend staying Underweight Malaysia. 
A second consecutive expansionary Budget (with deficits above 6% of GDP) barely hid the reality of a steadily declining public investment/GDP ratio since 2012; the rebound in private investment is led by GLCs, while the steady erosion of non-bumiputra companies in Malaysia is reflected in steadily-rising net capital outflows and in declining private non-GLC investment in Malaysia. Despite consistent current account surpluses since 1998, Malaysia's foreign reserves (US$115.4 billion in September 2021) are much lower than they were in 2012 (over US$160 billion). 
No discernible strategy has emerged from the current government to reverse these trends; the one-off tax is instead a further negative for corporates and banks, and UMNO-PAS are doubling down on anti-minority regulations as a means of securing the bumiputera vote at the next election. We are structurally bearish on Malaysia until the next election is held.

Malaysia's investment/GDP ratio stagnated at 25.5% in 2012-17, then fell to 21% in 2019 and 19.7% in 2020, with public investment falling below 5% of GDP. Any reversal of this in 2022 remains unlikely with the one-off "prosperity tax" leading corporates and banks to bring forward expenses, hike provisions, and delay income-recognition in order to lower their taxable income. With corporate and bank earnings likely to be anaemic in 2022, we recommend staying Underweight Malaysia. 
A second consecutive expansionary Budget (with deficits above 6% of GDP) barely hid the reality of a steadily declining public investment/GDP ratio since 2012; the rebound in private investment is led by GLCs, while the steady erosion of non-bumiputra companies in Malaysia is reflected in steadily-rising net capital outflows and in declining private non-GLC investment in Malaysia. Despite consistent current account surpluses since 1998, Malaysia's foreign reserves (US$115.4 billion in September 2021) are much lower than they were in 2012 (over US$160 billion). 
No discernible strategy has emerged from the current government to reverse these trends; the one-off tax is instead a further negative for corporates and banks, and UMNO-PAS are doubling down on anti-minority regulations as a means of securing the bumiputera vote at the next election. We are structurally bearish on Malaysia until the next election is held. 

Malaysia: In a Middle-Income Trap of Low Growth Despite Sustained Fiscal Deficits

Ismail Sabri Yaakob, the third-ranking member of Malaysia's second-largest party in parliament (UMNO, the long-ruling party that was defeated at the 2018 general election) became Malaysia's 9th Prime Minister on Saturday (21 August 2021). Having never been the minister of Education, Trade &amp; Industry or Finance (the 3 traditional stepping-stones to the top job), the new PM is a relative lightweight in Malaysian politics: all previous prime ministers from UMNO have also simultaneously been Presidents of the party (while UMNO Deputy Presidents were Deputy PM).
Continuity in policy is assured, with the line-up of parties exactly the same as the previous government -- except that the Prime Minister is different, from UMNO rather than Bersatu (PPBM). This year's fiscal deficit (projected at 6% of GDP) is still expected to keep real GDP growth at just 2.5% YoY in 2H 2021; given high public debt, the deficit will need to be reined in next year, limiting the government's options. PM Ismail Sabri will also face persistent pressure from the UMNO leadership to drop (or ease up on) corruption cases against UMNO leaders like ex-PM Najib and party president Zahid Hamidi, while Muhyiddin's Bersatu  counters with pressure to keep prosecuting those cases. The Sarawak state election (originally due in June 2021, now likely only in March 2022) could be a crucial destabilizing factor, as the 18 Sarawak MPs (from the GPS group) are crucial to this government's parliamentary majority. 
Opposition leader Anwar Ibrahim has chosen not to make sordid deals with tainted politicians, and instead bide his time until the next (15th) General Election, officially due in May 2023, but likely to be held sooner (mid-2022) if the Covid pandemic eases. On present indications, that will become a straight fight between a purely Malay-Islamist grouping (UMNO, Bersatu and the openly Islamist PAS) and a multi-racial coalition -- comprising two genuinely multi-racial parties (PKR and DAP) with a more ethnically-harmonious vision for Malaysia, supported by two smaller Malay parties (Amanah and Pejuang).  For the past 3 decades, UMNO has never formally aligned with PAS (which nonetheless gained ground in Kelantan and Terengganu, the two states with the largest proportion of Malays). The emergence of an UMNO-Bersatu-PAS alliance at the centre of the current government is shifting Malay politics increasingly in a pro-Shariah direction (including the imposition of hudud-based punishments), which will likely polarize the electorate by 2023. Competence (especially in dealing with Covid) will be a key determinant of the political outcome (and on that, both Muhyiddin and Ismail Sabri will be on the defensive), but the broader debate about Malaysia's future direction will be the key underlying question. That the Anwar-led alliance won the 2013 election (in terms of popular vote) and in 2018 (despite Anwar being in prison) suggests that the electorate will hand PH a clearer victory at the 15th General Election. But until that election is held, slow growth and a more polarized society will make the Malaysian market unattractive.

Ismail Sabri Yaakob, the third-ranking member of Malaysia's second-largest party in parliament (UMNO, the long-ruling party that was defeated at the 2018 general election) became Malaysia's 9th Prime Minister on Saturday (21 August 2021). Having never been the minister of Education, Trade &amp; Industry or Finance (the 3 traditional stepping-stones to the top job), the new PM is a relative lightweight in Malaysian politics: all previous prime ministers from UMNO have also simultaneously been Presidents of the party (while UMNO Deputy Presidents were Deputy PM).
Continuity in policy is assured, with the line-up of parties exactly the same as the previous government -- except that the Prime Minister is different, from UMNO rather than Bersatu (PPBM). This year's fiscal deficit (projected at 6% of GDP) is still expected to keep real GDP growth at just 2.5% YoY in 2H 2021; given high public debt, the deficit will need to be reined in next year, limiting the government's options. PM Ismail Sabri will also face persistent pressure from the UMNO leadership to drop (or ease up on) corruption cases against UMNO leaders like ex-PM Najib and party president Zahid Hamidi, while Muhyiddin's Bersatu  counters with pressure to keep prosecuting those cases. The Sarawak state election (originally due in June 2021, now likely only in March 2022) could be a crucial destabilizing factor, as the 18 Sarawak MPs (from the GPS group) are crucial to this government's parliamentary majority. 
Opposition leader Anwar Ibrahim has chosen not to make sordid deals with tainted politicians, and instead bide his time until the next (15th) General Election, officially due in May 2023, but likely to be held sooner (mid-2022) if the Covid pandemic eases. On present indications, that will become a straight fight between a purely Malay-Islamist grouping (UMNO, Bersatu and the openly Islamist PAS) and a multi-racial coalition -- comprising two genuinely multi-racial parties (PKR and DAP) with a more ethnically-harmonious vision for Malaysia, supported by two smaller Malay parties (Amanah and Pejuang).  For the past 3 decades, UMNO has never formally aligned with PAS (which nonetheless gained ground in Kelantan and Terengganu, the two states with the largest proportion of Malays). The emergence of an UMNO-Bersatu-PAS alliance at the centre of the current government is shifting Malay politics increasingly in a pro-Shariah direction (including the imposition of hudud-based punishments), which will likely polarize the electorate by 2023. Competence (especially in dealing with Covid) will be a key determinant of the political outcome (and on that, both Muhyiddin and Ismail Sabri will be on the defensive), but the broader debate about Malaysia's future direction will be the key underlying question. That the Anwar-led alliance won the 2013 election (in terms of popular vote) and in 2018 (despite Anwar being in prison) suggests that the electorate will hand PH a clearer victory at the 15th General Election. But until that election is held, slow growth and a more polarized society will make the Malaysian market unattractive. 

Malaysia: A Lightweight Takes Over, Setting up a Future Election over the Nation's Soul

While the US was the epicentre of the world's first Covid wave (peaking in January 2021), and India the second (peaking in early-May 2021), the epicentre of the current third global Covid wave is ASEAN. While Indonesia was initially the worst hit, this wave has spread to Malaysia, Thailand and Vietnam (the latter two among the most successful in combatting Covid in 2020), with some scares in Singapore and the Philippines as well. ASEAN's real GDP is estimated to have grown over 10% YoY in 2Q 2021 (helped by a very depressed base from 2Q 2020) but the renewed Covid surge is set to weaken the economic recovery in 2H 2021. In July 2021, Indonesia has had more new Covid cases than any other nation globally. But the worst of Indonesia's Covid wave was reached on 18 July 2021 (at a 7-day moving average of 50,039 new daily infections), and these have since receded by nearly a fifth. The biggest hit will occur in 3Q 2021 growth, but Indonesia's real GDP should exceed 6% YoY in 4Q 2021, bringing full-year growth to about 5%. The worst-hit ASEAN economy (and polity) is Malaysia, where there have been 3 successive Covid waves in 2021, the last of which has not yet reached its peak. Consequently, the greatest economic and political uncertainty in 2H 2021 will be in Malaysia, which has the highest per capita Covid case load in South or South-east Asia (at 31,334 cases per million population). We expect real GDP to grow no more than 3% YoY in 2H 2021 despite a low base. Thailand and Vietnam, both extremely successful in containing Covid in 2020 (although Thailand's tourism-dependent economy nonetheless suffered a severe hit from the drying-up of tourist arrivals) are now seeing their first wave of Covid infections, in July 2021. The peak of the current Covid wave is not yet detectable in either country. Vietnam's Covid wave is concentrated in the south (Ho Chi Minh City and surrounding provinces), but Thailand's is concentrated around the main economic centre, Bangkok, and its surrounding provinces. However, the base effect is more helpful in Thialand than Vietnam (the latter having continued to grow in all four quarters of 2020), so we expect Vietnam's real GDP to grow 5% YoY and Thailand's 5-6% YoY in 2H 2021. Despite a major alarm being raised in Singapore as well, the latest Covid wave is very mild in the island-republic, and real GDP in Singapore is consequently likely to grow 7.2% in 2021.

While the US was the epicentre of the world's first Covid wave (peaking in January 2021), and India the second (peaking in early-May 2021), the epicentre of the current third global Covid wave is ASEAN. While Indonesia was initially the worst hit, this wave has spread to Malaysia, Thailand and Vietnam (the latter two among the most successful in combatting Covid in 2020), with some scares in Singapore and the Philippines as well. ASEAN's real GDP is estimated to have grown over 10% YoY in 2Q 2021 (helped by a very depressed base from 2Q 2020) but the renewed Covid surge is set to weaken the economic recovery in 2H 2021. In July 2021, Indonesia has had more new Covid cases than any other nation globally. But the worst of Indonesia's Covid wave was reached on 18 July 2021 (at a 7-day moving average of 50,039 new daily infections), and these have since receded by nearly a fifth. The biggest hit will occur in 3Q 2021 growth, but Indonesia's real GDP should exceed 6% YoY in 4Q 2021, bringing full-year growth to about 5%. The worst-hit ASEAN economy (and polity) is Malaysia, where there have been 3 successive Covid waves in 2021, the last of which has not yet reached its peak. Consequently, the greatest economic and political uncertainty in 2H 2021 will be in Malaysia, which has the highest per capita Covid case load in South or South-east Asia (at 31,334 cases per million population). We expect real GDP to grow no more than 3% YoY in 2H 2021 despite a low base. Thailand and Vietnam, both extremely successful in containing Covid in 2020 (although Thailand's tourism-dependent economy nonetheless suffered a severe hit from the drying-up of tourist arrivals) are now seeing their first wave of Covid infections, in July 2021. The peak of the current Covid wave is not yet detectable in either country. Vietnam's Covid wave is concentrated in the south (Ho Chi Minh City and surrounding provinces), but Thailand's is concentrated around the main economic centre, Bangkok, and its surrounding provinces. However, the base effect is more helpful in Thialand than Vietnam (the latter having continued to grow in all four quarters of 2020), so we expect Vietnam's real GDP to grow 5% YoY and Thailand's 5-6% YoY in 2H 2021. Despite a major alarm being raised in Singapore as well, the latest Covid wave is very mild in the island-republic, and real GDP in Singapore is consequently likely to grow 7.2% in 2021.  

ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

*Improving NIMs and Credit:CIMB Group (CIMB.MK) [CIMB] reported 1Q21 results of MYR 2.5 bn, increasing MYR 2.2 bn (10.6x) linked quarter. Excluding the one time gain of MYR 1.2 bn, CIMB’s core operatimg result came in at MYR 1.3 bn – increasing MYR 1.1 bn or 5.1x over the same period. 1Q21 results were driven by several factors: 1) net interest income improvement of MYR 169 mn (4.9%) which was driven by NIM ex-ansion of 15 bp and modest loan growth of MYR 718 mn or 0.2%; and 2) a MYR 1.5 bn (66.5%) decline in loss provisions tracking credit quality improvement in both Malaysia and Singapore; and 
*Credit Risk Decelerating: With NCOs of MYR 1.9 bn or at 1.60% annualized of total loans (decelerating from the MYR 1.9 bn posted in 4Q20), we find that net new NPLs increased only MYR 756 mn or 23.0% on an annualized basis – quite the decline from the MYR 2.6 bn or a whopping 83.5% on an annualized basis posted in 4Q20. We believe that reserves are too light by MYR 2.6 bn– which is nearly two quarters of core operating results.

*Improving NIMs and Credit:CIMB Group (CIMB.MK) [CIMB] reported 1Q21 results of MYR 2.5 bn, increasing MYR 2.2 bn (10.6x) linked quarter. Excluding the one time gain of MYR 1.2 bn, CIMB’s core operatimg result came in at MYR 1.3 bn – increasing MYR 1.1 bn or 5.1x over the same period. 1Q21 results were driven by several factors: 1) net interest income improvement of MYR 169 mn (4.9%) which was driven by NIM ex-ansion of 15 bp and modest loan growth of MYR 718 mn or 0.2%; and 2) a MYR 1.5 bn (66.5%) decline in loss provisions tracking credit quality improvement in both Malaysia and Singapore; and 
*Credit Risk Decelerating: With NCOs of MYR 1.9 bn or at 1.60% annualized of total loans (decelerating from the MYR 1.9 bn posted in 4Q20), we find that net new NPLs increased only MYR 756 mn or 23.0% on an annualized basis – quite the decline from the MYR 2.6 bn or a whopping 83.5% on an annualized basis posted in 4Q20. We believe that reserves are too light by MYR 2.6 bn– which is nearly two quarters of core operating results. 

*Lower Tax Rate Offset By Massive Provisions: CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and   *Credit Risk Now Accelerating: With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital.

*Lower Tax Rate Offset By Massive Provisions: CIMB Group (CIMB.MK) [CIMB] reported 4Q20 results of MYR 195.8 mn, increasing MYR 16.7 mn (9.3%) linked quarter. During the period, we noted a  massive reduction in its tax rate from 60.6% in 3Q20 to 18.0% which was additive to bottom-line performance by MYR 70.8 mn. However, this was offset by an enormous increase in loss provisions reflecting a breakdown in credit quality; and   *Credit Risk Now Accelerating: With NCOs of MYR 1.9 bn (accelerating from the MYR 1.2 bn posted in 3Q20), we find that net new NPLs increased MYR 2.6 bn or a whopping 83.5% on an annualized basis. We continue to believe that reserve cover is too light by MYR 12.0 bn (versus MYR 1.5 bn in 3Q20) – which nearly six years of profit before tax or 21.1% of 4Q20 capital. 

CIMB Group – Heading Deeper Into the Woods

United States

iShares MSCI Malaysia ETF is an exchange-traded fund incorporated in the USA. The ETF's objective seeks to provide investment results that correspond to the performance of the Malaysian market, as measured by the MSCI  Malaysia Index. The ETF invests in a representative sample of index stocks using a  "portfolio sampling" technique.

iShares MSCI Malaysia ETF (EWM US)

Malaysia: In a Middle-Income Trap of Low Growth Despite Sustained Fiscal Deficits

Fiscal deficits of 3-6% of GDP annually have been needed for 20 years to sustain 4.5% avg RGDP growth. The investment/GDP ratio is falling, and...

Prasenjit K. Basu

Malaysia: A Lightweight Takes Over, Setting up a Future Election over the Nation's Soul

PM Ismail Sabri is a lightweight who will struggle with Covid. The economy will decelerate, and society will be more polarized under a coalition...

Prasenjit K. Basu

ASEAN as Epicentre of the Covid Crisis: Malaysia Worst Off, Indonesia Improving

After 10%+YoY GDP growth in 2Q21, ASEAN became the epicentre of the 3rd global Covid wave. Malaysia is worst-hit, Indonesia's worst is over,...

Prasenjit K. Basu

CIMB Group – A Positive Turn

CIMB GROUP: CIMB core results improved 5.1x linked quarter, driven by NIM expansion, loan growth, and decline in loss provisions. Loss reserves are...

Thomas J. Monaco

CIMB Group – Heading Deeper Into the Woods

CIMB GROUP: CIMB reported 4Q20 results improved 9.3% linked quarter, and highlighted by a massive reduction in its tax rate and an enormous...

Thomas J. Monaco