In October, Tengku Zafrul is set to unveil Budget 2022 to what may be the most divided Parliament in Malaysia’s history. The spending plan will need to address an economy weakened by protracted lockdowns and a raging Covid-19 outbreak, amid steep financial constraints and a deficit target that was already revised higher twice this year.

At stake is the fate of the days-old administration he just joined: Per convention, Ismail must resign if the budget fails to get majority support in Parliament. At the same time, ratings companies will be watching keenly for any departure from the country’s fiscal consolidation path.

The decision to retain Tengku Zafrul as finance minister “should be welcomed by the market,” said Wellian Wiranto, an economist at Oversea Chinese Banking Corp.

“He is known as a technocrat by and large, and his reappointment signals continuity in his role in carrying out the ongoing fiscal plans and to shepherd the new budget through the Parliament.”

The ringgit was up 0.1% to 4.1915 per dollar as of 1.30pm. The yield on the benchmark 10-year government bond dropped two basis points to 3.24%, while the main stock index was up 0.3% at the midday break.

Tengku Zafrul, 48, has more than a year’s experience as finance minister in the previous government. The decision to bring him back points to policy continuity from the Muhyiddin Yassin administration.

“You need somebody who is already quite well-versed with the ministry” to prepare the budget by the October deadline, said Oh Ei Sun, a senior fellow at the Singapore Institute of International Affairs. It is not clear if the choice will inspire investor confidence, however.

“This is a Cabinet that retains largely the same faces, and they had policies which obviously failed during the last administration,” Oh said. “Why would they be able to formulate new policies that would succeed in tackling the pandemic and reviving the economy?”

Lowered forecast

Two weeks ago, Tengku Zafrul affirmed Bank Negara Malaysia’s 2021 growth forecast for Malaysia at 3%-4%, the second downward revision as the country grapples with protracted lockdowns and virus flare-ups.

The outlook is expected to improve in the fourth quarter as more sectors reopen and the vaccination programme advances, he said in an Aug 13 statement.

“The government’s current priority is to protect lives from the threat of Covid-19 and ensure the country’s economic growth prospects remain strong in the medium to longer term.”

Government efforts will be guided by the national recovery plan – an evolving blueprint to exit the pandemic – underpinned by prudent financial management, he said.

Tengku Zafrul was CEO of CIMB Group Holdings Bhd when Muhyiddin picked him last year for the finance portfolio. He spent much of his career climbing the ranks at CIMB, becoming CEO in 2015.

He previously worked at Citigroup Malaysia, Credit Agricole Group and local broker Kenanga Holdings Bhd. He holds a Master’s degree in economics and accounting from the University of Bristol and a bachelor’s degree in finance from the University of Exeter.

Compromise pick

Tengku Zafrul will likely spearhead efforts to raise the debt ceiling from 60% of gross domestic product to perhaps 65%, OCBC’s Wiranto said.

That would “give the government more wiggle room in pushing through a loose fiscal stance in the midst of economic challenges”, and would prepare the ground for a general election that must be held by July 2023.

The appointment shows the compromise Ismail had to make as he formed Malaysia’s third Cabinet since the 2018 election. The prime minister commands the support of just 114 of the nation’s 220 MPs, a slim majority that may be put to the test in a confidence motion when Parliament reconvenes in two weeks.

While he is not a member of any political party, Tengku Zafrul is affiliated with Perikatan Nasional, which makes up nearly half of the MPs backing Ismail.

“The continuity is positive, but the generally poor performance of the previous government means that the overall Cabinet lineup is important,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets LLC in Hong Kong.

“After all, Malaysia’s number one policy goal right now is to contain the pandemic.”

Recovery plan

In the previous government, Tengku Zafrul also served as coordinating minister for the national recovery plan, which outlines Malaysia’s exit strategy from the pandemic. In that role, he changed thresholds for easing states’ virus curbs, helping to advance economic reopening in some areas. Still, the opposition warned against loosening restrictions too early, given the uneven pace of vaccination and the spread of the more infectious Delta variant.

Malaysia’s virus situation remains the key risk amid Ismail’s plan to reach recovery targets sooner by ramping up vaccination. About 58% of the population had received at least one dose as of Aug 26, according to the government.

At the same time, daily virus cases have soared nearly three-fold despite the containment measures, hitting a fresh high yesterday and turning the country into Southeast Asia’s Covid-19 hotspot.

Standard & Poors, Fitch Ratings Inc and Moody’s Corp all affirmed their Malaysia ratings in recent months. But the country’s predicament has not escaped their attention.

“If fiscal deficits remain wide for some time because of further economic stimulus or weak revenue, resulting in a persistent rise in the government debt burden that fiscal authorities are unable to reverse, this has the potential to materially weaken Malaysia’s credit profile,” said Christian Fang, vice-president and senior analyst at Moody’s Investors Service.