Emergency declaration could lead to FDI flight - economists

Alyaa Alhadjri
·4-min read
Emergency declaration could lead to FDI flight - economists
Emergency declaration could lead to FDI flight - economists

As the government moves to sustain the domestic economy that has been hit by the Covid-19 pandemic, a declaration of a state of emergency could further lead to a flight of foreign investors, said several economists.

The possibility of declaring an emergency was first speculated on Friday after Prime Minister Muhyiddin Yassin's audience with the Yang di-Pertuan Agong Sultan Abdullah Sultan Ahmad Shah.

Universiti Malaysia Sarawak economist Shazali Abu Mansor said while an emergency state could temporarily restore political stability, certain segments of foreign investors would see it as an undemocratic move.

"We have to look at two perspectives. First, the good thing is that the government can focus on policies towards economic recovery.

"But in terms of market, foreign investors look at this as an undemocratic move," he told Malaysiakini.

Shazali said this is more so for foreign companies that place a high value on political stability as criteria for investments.

"An emergency (declaration) is not something they like to see because to them, it's undemocratic.

"We might see some pulling of funds from the Kuala Lumpur Stock Exchange. But that depends on how they view democracy as a factor that determines their investments," he said.

As for the domestic market, Shazali said local businesses would better understand the temporary nature of an emergency state, and so it would have minimal impact on their investments.

In the absence of any official announcements today, Shazali said the stock market would have already absorbed news of the possible emergency.

"Politically, our country has been unstable for the last one year. It's not just now [...] so even if there is an impact, it would not be much because the situation is already unstable.

"From an unstable state to an emergency, there is not much difference. But if it is from stable to an emergency, that's a lot of difference," he said when asked if an assurance is needed by the market to prevent a crash.

Economist Barjoyai Bardai said the impact of an emergency declaration on the economy would also depend on how it is announced and the severity of the measure.

"If it was announced as a situation that requires political stability to ensure aspects of the government's administration can continue, for example, for the budget to be passed, then it could have a positive impact particularly on domestic investors," he told Malaysiakini.

The Universiti Tun Abdul Razak's MBA Global Islamic Finance Programme director said while he did not expect a flight of large foreign investors already based in Malaysia, an emergency state could delay potential new investors from setting-up a base here.

"We saw on Friday the stock market was 'shocked' and dropped drastically. But it rebounded not long after.

"The rebound is due to a realisation that the King has little options... and the market understands this, particularly the domestic investors," he said.

It was reported on Friday that Bursa Malaysia was generally in the red as investors were given a jolt that a state of emergency was expected to be announced later the same day.

The FBM Kuala Lumpur Composite Index reportedly hit a low of 1,490 on Friday before closing, while the ringgit weakened against the US dollar in late trading.

At 5pm on Friday, it was reported that the KLCI was down 4.16 points or 0.28 per cent to 1,494.64.

As for smaller foreign investors or market speculators, Barjoyai said they could quickly move their money to neighbouring markets, although with limited options due to recent upheavals in Indonesia and Thailand.

"Maybe they would move to Singapore. This could happen," he added.

Meanwhile, Sunway University professor of economics Yeah Kim Leng said overall market uncertainty would continue as the result of an emergency declaration.

"Resorting to emergency rule implies not only an out-of-control pandemic crisis but also a band-aid for an unstable government as it kicks the 'can down the road' in establishing its legitimacy through the democratic process.

"For investors in financial markets, it means 'sell-on-news' amid heightened political risk even if the declaration does not affect economic activities," Yeah said, referring to a market practice of investors selling their shares based on news and buying based on rumours.

He also echoed Barjoyai's views that foreign direct investment (FDI) will likely decline as potential investors hold back investment decisions or turn elsewhere due to the country's uncertain political situation.

The Yang di-Pertuan Agong has convened a meeting of Malay rulers at the Istana Negara this afternoon to discuss proposals from the prime minister, which might include a suggestion to declare an emergency.

Muhyiddin's critics had claimed that any attempt to seek an emergency declaration was a desperate move to suspend the upcoming parliament sitting on Nov 2, amid mounting challenges against the Perikatan Nasional administration.