By Chris Wright
Malaysia’s political scene underwent its biggest shake-up in 40 years after March’s general election. But despite investor anxiety, the changes might bring economic rewards
When Malaysia’s ruling party suffered its worst performance for nearly 40 years in the March 8 general election, the opposition hailed the results as a victory for democracy, transparency and good governance. But investors thought differently: the Kuala Lumpur Composite Index lost 9.5% on the next trading day.
They were frightened that a weaker government would struggle to carry out several critical infrastructure projects and that reform of state-owned companies might stall. With its two-thirds majority gone, the Barisan National coalition that has ruled Malaysia since independence can no longer push spending through parliament unchallenged. It now controls only eight of the country’s 13 states.
Anwar Ibrahim, the former deputy prime minister who has become the public face of Malaysia’s opposition, accepts that political uncertainty has worried investors. But he, and some analysts, believe the opposition’s greater role will actually strengthen the economy by making the government more accountable.
Speaking to Emerging Markets, Anwar insists the market ambivalence to opposition gains was mostly due to “the fact that there’s a bit of uncertainty because the opposition have won very strong support. So because of that uncertainty and because the prime minister is under siege, there is anxiety among investors.”
Economists say Malaysia’s high domestic spending on projects has helped it offset a fall in export revenues as the global economy slows. These projects come under the aegis of the country’s five-year development plans (it is now on its ninth), which have previously been criticized for a lack of transparency.
The Northern Corridor
There is particular concern about the Northern Corridor initiative, a cluster of infrastructure projects designed to improve agriculture, manufacturing and tourism in the north of peninsula Malaysia. Three key states affected by the plan – Perak, Kedah and Penang – are now run by the opposition.
That, says Citi analyst Kit Wei Zheng, “makes coordination between the state and federal government much more problematic. State governments have jurisdiction over land, water and forestry while the federal government will likely be the main source of funding. There could also be possible delays of major projects that have already been awarded if the new state governments decide to review them.”
For his part, Anwar says: “We honour the agreements involving both domestic and foreign investors,” but makes exceptions for “one or two contentious issues”. One example is the Penang Global City Centre, which Anwar describes as a RM25 billion project (other sources say RM18 billion), and which is seen as closely linked to the ruling coalition.
Anwar challenges the legitimacy of the land approvals involved in this project and says that on projects like this, “it is difficult for us on the platform of transparency and anti-corruption to condone these excesses.” A water privatization in the state of Selangor is also likely to undergo review.
GLC reform
The opposition has also criticized the government’s moves to reform government-linked companies, known in Malaysia as GLCs. A state agency, Khazanah, was set up to restructure or revamp more than 50 companies wholly or partly owned by the state. It has been largely successful in this mandate, with the largest 20 companies under its control outperforming Malaysia’s main share index since 2004. The agency also says aggregate earnings from these companies have trebled since 2005.
Anwar, though, does not share the positive view, which has implications for what might happen to the process if the opposition wins more political power. “This is actually renationalization in the name of reform,” he says. “You can’t have a reform agenda of any GLC if it is in effect renationalization. If you want Malaysia to remain competitive, we have to accept there are certain rules to follow, which means that the private sector must take the lead.”
Given the size – and unexpected nature – of the opposition gains in March, more political uncertainty is likely. Not only did the government lose control of four states (the opposition previously dominated just one), but its share of the available vote sank to only 51%. Although Anwar was still serving a ban on standing for office after being convicted of corruption, he is likely to return to parliament at the next by-election and will then become the official leader of the opposition.
Most worrying for the government, it has lost support among Malays, the ethnic majority group on whose votes it has counted since independence. Even Kedah, a Malay-dominated state, switched to the opposition, pointing towards a fundamental shift in the country’s political landscape.
On the bright side
Despite the market’s worries about political uncertainty, and for all the tension between federal and state governments, many Malaysians think the new situation will be beneficial. Even though the opposition is a loose and untested coalition, its unexpected gains might push the government to improve its performance.
“The good news is that the government is now under pressure to deliver on its promises, and the opposition coalition is right on their heels,” says one observer. “Doing business in the new Malaysia should be more transparent and should favour companies with strong track records and the ability to execute in a timely fashion... it may even slow down the pace of brain drain to Singapore, Hong Kong or China.”
Some policies face re-examination. The New Economic Policy (NEP), a controversial affirmative action scheme adopted in 1971 to protect the economic position of Malays, has been criticized for harming Malaysia’s competitiveness. “A stronger opposition raises the potential for greater accountability,” says Wei, adding that the changes could reduce “problems associated with the NEP, including cronyism and corruption.”
Anwar himself says he can see the need for affirmative action – “the poor and marginalized must be assisted” – but objects to the fact that “at the moment it is race based and not merit based.”
Some analysts think there are already positive signs. The appointment of former Maybank president Datuk Amirsham to the cabinet as head of the Economic Planning Unit was particularly warmly received. Some believe this, among other things, suggests a more transparent open-tender system for major projects in future.
In the new political environment, it is unclear which businesses will benefit most. One broker is recommending companies that do not rely on government contracts to sustain growth. When considering this alongside screens for sustainable dividend yields, low valuations and high recurring income, it particularly favours Public Bank, Resorts World, Gamuda and IGB Corp.
Edward Ong, of Macquarie, believes the election result “could mean stronger checks and balances and potentially spur reform in the medium term”. He thinks telecom companies such as Telekom Malaysia and Digi.com could do best. They were battered immediately after the election, but have little to fear from a change in the composition of the parliament.
Larger political troubles could loom in Malaysia’s future. Race riots followed the last hotly contested election in 1969, and protests about alleged racial discrimination have become more vocal in recent years, particularly from Indian Malaysians.
However, since Malays have swung in their voting preferences along with Indians and Chinese, the disaffection demonstrated by this election is probably not about race, or at least not entirely. But the way the ruling party responds – by reaching out to all races, or by trying to win back the support of ethnic Malays – may prove to be the most important variable of all for the country’s future, commentators say.
“Will UMNO [United Malays National Organization, the largest political party in the country and founder of the ruling coalition] play up the race card to win back the Malay vote?” asks one. “This could raise the potential for further polarization and social instability. On the other hand, should UMNO decide to re-invent itself and adopt a more moderate tone in going forward, this could well be the proverbial wake up call.”