Malaysian bonds tumbled this morning after a surprise win for the opposition unseated a government that has held power for more than six decades.

Shortly after the market opened, Malaysia’s U.S. dollar sovereign bonds due 2026 jumped more than 10bp to a spread of 97bp over Treasuries, before easing to Treasuries plus 92bp, still 7bp wider than yesterday’s close of 85bp.

Malaysian sovereign five-year CDS widened by 7bp to 93bp in active trading, as the Asia ex-Japan iTraxx investment CDS index tightened by 0.25bp. State-owned oil company Petroliam Nasional’s bonds widened 9bp in choppy trading before recovering. Petronas’ 2022s were seen at Treasuries plus 102bp this morning, before recovering to 95bp, 2bp wider than yesterday’s close.

The Malaysian markets are closed for the rest of the week for a two-day public holiday.

The Pakatan Harapan coalition, led by 92-year-old Mahathir Mohamad, who previously served as Prime Minister from 1981-2003, defeated Najib Razak’s ruling Barisan Nasional coalition by a simple majority in Wednesday’s elections. Najib’s United Malays National Organisation party has held power since Malaysia declared independence in 1957.

Analysts warned that the change could be negative for the country’s finances.

“Little is known about the opposition’s full range of economic policies, and its electoral pledges have lacked details that would allow for a full assessment of their budgetary and macroeconomic impact,” said Anushka Shah, Moody’s lead sovereign analyst for Malaysia.

Mahathir said during the election campaign that if elected he planned to pardon opposition politician and former Deputy Prime Minister Anwar Ibrahim, who is currently in prison, and hand over the Prime Minister role to him.

He also planned to abolish goods and service tax and reintroduce fuel subsidies. Moody’s said these moves would be credit negative, shrinking the government’s revenue base and impacting its fiscal position.

Much of the campaign focused on alleged corruption around Malaysia’s 1Malaysia Development (1MDB) state investment fund. 1MDB’s 4.4% 2023 bond was quoted 9 points lower since the Asian session closed yesterday, at a cash price of 84 this morning, implying a yield of 8.5%, according to Tradeweb. A credit trader, however, warned that this quote might not reflect actual trading activity.

The U.S. dollar 2022 bonds of CIMB, whose group chairman is Najib’s brother, widened 5bp to Treasuries plus 121bp. RHB Bank’s 2021 bonds widened 8bp to Treasuries plus 106bp. The other major Malaysian banking group, Maybank, has few liquid dollar bonds.

“It’s not as bad as people expected,” said a fund manager. “1MDB is worst affected.”

The stunning upset is not expected to halt a pipeline of new ringgit bond issues queuing to launch, including those guaranteed by the government.

But with local benchmark rates expected to be volatile for the next few weeks, the pipeline could be slowed down.

Malaysian markets are closed for the remainder of the week, so Malaysian stocks have not yet reacted to the election result and the trader said that the full impact in credit may not be felt
until Monday.

“The show has to go on and new transactions planned will have to be done,” said one Malaysian debt syndicate banker. “But the Malaysian government bonds are going to bleed when markets open on Monday. So issuers will have to wait until things settle down.”

Government-guaranteed bonds for infrastructure projects are less likely to be impacted by the change in government. These will include future bond issuances from DanaInfra Nasional for mass rapid transit projects and for the Pan-Borneo Highway, and from Prasarana Malaysia for road and highway projects.

High-value infrastructure projects such as the M$43 billion ($11 billion) Kuala Lumpur-Singapore high-speed rail link are also expected to left intact. But bankers believe that the massive M$55 billion east coast rail link, a pet project of Najib, will be canned by a new government headed by Mahathir, who promised to shelve it during his election campaigning.