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Malaysia Vote Puts This Currency Back in Play

CollinsChin | E+ | Getty Images

After Malaysia's ruling coalition won a tightly-fought election on Monday, analysts are turning bullish on the country's currency, expecting the ringgit to strengthen together with the rest of the economy in the months ahead.

News of the election result pushed both the Southeast Asian economy's currency and stock market to record highs. Malaysia's KLCI Index surged 7 percent to an historic high of over 1,700 in early Asian trade on Monday, while the ringgit strengthened half a percent against the dollar to 2.9870 – levels not seen since September 2011.

"It [the election result] allows the market to come out and buy the ringgit again. We like what is happening in the economy," said Patrick Bennett, executive director and forex strategist at the Canadian Imperial Bank of Commerce.

"If you look at the growth of the economy, it grew 5.6 percent last year and compare it to somewhere like Singapore, which is struggling to grow at all, there is some very good pick-up in Malaysia from these levels," added Bennett, referring to Singapore's 1.2 percent gross domestic product (GDP) growth in 2012. The resource-rich Malaysian economy is expected to grow at the same pace in 2013, according to majority estimates.

(Read More: Malaysia Stocks Hit Record High After Elections)

‎Malaysia's governing coalition the National Front, which has been ruling the country since independence in 1957, won 133 seats in the 222-member parliament, defeating the strongest opposition it has ever faced.

Despite the victory, Prime Minister Najib Razak's National Front could not secure a two-thirds majority even after handing out $2.6 billion to poor families in the run up to the polls. In the last election in 2008 it had secured 140 seats.

But, analysts were largely positive on the election outcome as it led to some investor relief after an untested opposition was not voted in.

"Absolutely now is the time to start to buy [Malaysian assets]. We think investors have been waiting on the sidelines waiting to buy again," added Bennett.

In a report from Bank of America Merrill Lynch, forex strategist Christy Tan also said the ringgit would be one of the benefactors from the election result: "The MYR [ringgit] could still benefit from the removal of political risks," she said.

(Read More: Malaysia's Closely-Fought Elections: What's at Stake)

The ringgit has had a volatile past year. It fell to a low of 3.1680 against the dollar in June last year and has since regained some ground, but its recovery has been volatile. Going forward analysts expect it to benefit from political stability.

But a report from HSBC's global research team said the less convincing nature of Najib Razak's victory posed some risks for the ringgit. The prime minister has been reported to have said in the past that a reduced parliamentary majority could weaken his push to reduce Malaysia's budget deficit and raise investment.

"The less convincing nature of the victory compared to 2008 could take some shine off the currency," said HSBC. "One question which could hang over the MYR is whether or not incumbent PM Najib will remain in power… his position could come under pressure. If that were to happen, then MYR volatility would likely remain elevated until the future of the leadership is resolved," said HSBC.

— By CNBC.Com's Katie Holliday; follow her on Twitter @HollidayKatie

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