Malaysia’s economy suffers as political instability continues post GE14

Photo Credit: Kremlin

Malaysia’s economic growth slowed in 2018 despite a smooth transition of power. To mitigate the damages inflicted by an international trade war Pakatan Harapan must find some stability.

By John Pennington

Malaysia’s economy is not starting 2019 on a solid footing. Oil prices are at their lowest since 2017. The ringgit continues to slide against the Singapore dollar. The Pakatan Harapan (PH) coalition is under pressure to turn things around.

The bad news is that analysts expect more of the same in the coming months. “The ringgit will weaken due to continued political and policy uncertainty in Malaysia brought about by the ruling Pakatan Harapan coalition,” the head of Asia Country Risk at Fitch Solutions, Chua Han Teng predicted. Is that a fair assumption? Exchange rates aside, what lies in store for the Malaysian economy as a whole?

While some moves the PH made since coming to power have helped the economy, others have had an adverse effect. Abolishing the Goods and Service Tax (GST) led to a drop in inflation and boosted consumer spending power. However, public spending dropped following the election.

Fissures between the coalition’s ruling parties are widening

It took less than a year for serious cracks to emerge within the four-party coalition. There are substantial ideological differences between the four parties.

The Democratic Action Party (DAP), Parti Keadilan Rakyat (PKR) and Amanah stood on a ‘Reformasi’ platform. They want to rid the country of the very institutions and practices that characterised Malaysia under Mahathir’s previous leadership.

The in-fighting throws into question whether Mahathir will indeed hand over power to Anwar Ibrahim. This uncertainty and instability will continue to discourage financial investors and traders.

Assuming he does so next year, it will be another change in direction, further fuelling the state of uncertainty engulfing the Malaysian economy.  

The economy was always going to be a massive challenge for PH

Amid the uncertainty, Malaysian Islamic Party (PAS) MP Datuk Mohammad Khairuddin Aman Razali suggested his party could help create a unity government.

But PAS becoming anything other than minor political players in Malaysia is unacceptable.

While the party achieved success in some areas, including Kelantan and Terengganu, their goal of making the country an Islamic state makes them unpalatable to the majority of Malays.

Right from the start, the economy was one of the key challenges PH faced. Investors were nervous following the election. Companies with links to outgoing PM Najib Razak saw their share prices dive.

PH identified the need for structural reform of Malaysia’s economy. They pledged to address the 1MBD controversy, revise taxation policies and root out corruption. They needed to put in place a plan to reduce Malaysia’s debts.

At the same time, investors felt that political stability would be vital to delivering an economic upturn. The test for PH was to provide the stability that would enable them to focus on the economy and restore trust in investors.

While the growth rate of Malaysia’s Gross Domestic Product (GDP) continues to fall, there has been no evidence of a drop in Foreign Direct Investment.

A state of investor uncertainty and market unpredictability remains. However, it is not fair to attribute that solely to political instability. If anything, external factors were the leading causes of the post-election economic slowdown.

Specifically, Malaysia has considerable exposure in China, its biggest trading partner. As a large supplier of intermediate goods that are used in the manufacturing of Chinese exports to the US, the US-China trade war loomed large over the Malaysian economy.

As a result, Malaysia saw negative export growth in the latter half of 2018, in part because of the US-China trade war. A general slowdown in the Chinese domestic economy also rippled across the Malaysian economy.

PH must now attempt to provide Malaysia with some stability

Investors do not like uncertainty. There is ample evidence of that – from the US government shutdown to Brexit. The World Bank projects that the rate of Malaysia’s annual GDP growth will drop below what it was in 2015 should current trends continue.

Eventually, PH will need to take stock of the fiscal situation and make some hard decisions. That could include cutting spending, renegotiating deals or raising taxes. None of those are popular, vote-winning moves.

Doing so against a backdrop of infighting would weaken its position. Bickering among the coalition parties might even prevent it from taking action. Avoiding making decisions could lead to further economic slowdown.  

The government must also consider the risk of future slowdown as a knock-on effect of any global recession in the years to come.

The sooner the coalition parties put aside their differences and lay out proper plans for handover of power, the better. It is precisely what those who elected them demand. Malaysia’s economy – as well as PH’s future as a viable ruling coalition – needs political stability.