Malaysia has known only one ruling bloc, the Barisan Nasional or National Front coalition, since gaining independence from the U.K. more than a half century ago. But the BN and its leader, Prime Minister Najib Razak, are facing the fight of their political lives as the country prepares to vote in a general election on May 5. The outcome could have a major impact on the country’s political stability, on financial markets and on Malaysia’s neighbors.
Najib’s BN is running neck and neck with the opposition Pakatan Rakyat, or People’s Alliance, led by former Deputy Prime Minister Anwar Ibrahim. Once regarded as the heir apparent to former leader Mahathir Mohamad, Anwar was fired abruptly in the aftermath of the Asian financial crisis in 1998, then convicted of sodomy charges and sent to prison. A court overturned the verdict in 2004, and Ibrahim emerged to lead a re-energized opposition to demand an end to BN rule and a culture of corruption he contends it has fostered. In 2008, the BN received just over 50 percent of the popular vote but won more than 60 percent of the seats thanks to gerrymandered constituencies that are heavily weighted toward rural areas, the stronghold of the BN. (In the wake of that strong showing, police arrested Anwar on a fresh sodomy charge in 2008; he was released on bail and acquitted four years later.)
This time around many analysts regard the BN as likely to fall short of 50 percent popular vote but scrape through with a slim majority of seats in the 222-member parliament. Malaysia bans opinion polls just ahead of elections but Ibrahim Suffian, who runs opinion research group Merdeka Centre, says the election is too close to call. If the ruling coalition wins by a wafer thin majority, Mahathir, who at age 87 remains a key power behind the scenes, has suggested it might dump Najib as prime minister and head of the BN’s largest party, the United Malays National Organization, and replace him with his deputy, Muhyiddin Yassin, who is known to be a more hardline nationalist.
Such a move — or a more dramatic result such as an opposition victory or a hung parliament in which neither side wins a parliamentary majority — could provoke turmoil in financial markets, analysts say. “If there is a surprise result the immediate reaction would be a sell-off in the market,” says Monem Salam, portfolio manager for Saturna Capital in Kuala Lumpur.
There isn’t much of a difference in economic policies between the two coalitions. Both are pro-business and advocate an open economy. Instead, the key issue is change: how much and how fast. Anwar’s battle cry is “reformasi,” or comprehensive reform. Najib has responded with own “transformasi” or gradual transformation. He pledges to tweak things without dramatically overhauling a system he contends has served Malaysia well for 56 years.
“The real issues in this elections are better governance, a fairer society with equal opportunity for all Malaysians, not a system that just helps the elite who are beholden to BN’s opaque system,” the opposition leader told Institutional Investor in a brief interview on the campaign trail last week. “We want to restore the dignity of Malaysians. People tell us that our agenda of change and reforms has given them hope.”
The desire for change is profound, analysts say. “The key issue is, can Malaysia’s political system accommodate the demands for change and produce a government capable of making those changes?” says Manu Bhaskaran, CEO of Centennial Asia Advisors in Singapore. “Malaysian voters clearly are tired of corruption, cronyism and abuse of office. They are tired of rising crime and a deteriorating quality of life. This election is really a test of whether the incumbent ruling coalition can respond effectively to these demands and whether the rival coalition can come up with an alternative that is compelling.”
In its election manifesto, the ruling coalition has pledged to fight corruption, bring down living costs — including lower automobile taxes and broadband charges — and embark on several large infrastructure projects including a 2,300 kilometer (1,440 mile) Borneo Expressway linking the Malaysia states of Sabah and Sarawak on the island. Anwar has accused Najib of copying the coalition’s program, which first proposed the highway. He also promises to pursue a tighter fiscal policy.
Najib has exercised the perquisities of power over the past year, providing two generous cash handouts to poor Malaysians and raising wages for public servants, armed forces personnel, the police and employees of government-linked companies. “The government has been running populist policies of cash handouts and have racked up subsidies to win support,” says Hak-Bin Chua, Southeast Asia Economist at Bank of America Merrill Lynch in Singapore.
Malaysia was a favorite of international investors in the mid 1990s. It boasted the third-largest stock market in Asia behind Japan and Hong Kong in terms of market capitalization. When the crisis erupted in neighboring Thailand in 1997, Anwar, then Finance minister and deputy prime minister, initially adopted the kind of austerity policies recommended by the International Monetary Fund and the U.S. Treasury. The crisis provoked a split between Mahathir and Anwar, however. After Anwar was fired and jailed on sodomy charges, Mahathir imposed stringent capital controls and pegged the ringgit against the dollar, moves that sought to protect the country from contagion but ended up making it a pariah among international investors.
Today, Malaysia is not among the top ten equity markets in Asia, by market cap. The MSCI Malaysia Index was up 8.3 percent over the past 12 months as of April 26, and up merely 28 percent over five years, making it the worst performer in the region during over that period.
Malaysia’s $300 billion economy, the second largest in Southeast Asia after Singapore, is healthy by many measures. Gross domestic product grew by 5.6 percent last year and is forecast to expand by just over 5 percent this year and 5.5 percent next. With a population of 29 million, Malaysia is roughly as rich as Turkey with per capita output of about $10,500, and ahead of China’s $6,100, according to the IMF. The country ran a hefty current account surplus of 6.4 percent of GDP last year. International reserves stood at $140 billion at the end of March, sufficient to finance 9.7 months of imports or 4.6 times its total short-term foreign debts.
Still, “Malaysia has some serious issues that it needs to address,” says Sanjay Mathur, Southeast Asian economist for Royal Bank of Scotland. The country’s fiscal deficit is hovering at about 4.5 percent of GDP, the second highest in Asia ex-Japan after India, and household debt stands at 80.5 percent of GDP, the highest in all of Asia, according to the Asian Development Bank. Household borrowing in Malaysia have been growing at a pace of more than 13 percent annually in recent years despite government efforts to rein in a credit-fueled spending binge.
“Whoever wins on May 5 will find himself in charge of a pretty heavily indebted country,” says Chua. “I suspect there will probably be a period of fiscal consolidation and we will see fiscal reforms, a goods and services tax and a fuel price hike to cut subsidies and bring prices close to international levels.” Bhaskaran sees a similar scenario. “The Malaysian economy is actually in a reasonably good shape,” he says, but adds, “a goods and services tax that has been repeatedly deferred and rationalization of subsidies can no longer be avoided.”
Another key issue in the election is the affirmative action policy that the BN has pursued for the past 42 years. Unlike some of its ethnically homogenous neighbors, the country has a delicate racial balance between Malays and other natives and minority Chinese and Indians. Beginning with the New Economic Policy, launched in 1971 by then Prime Minister Tun Abdul Razak, Najib’s father, the BN adopted measures designed to give ethnic Malays a greater share of the economy, which has traditionally been dominated by the country’s Chinese and Indian minorities. The opposition alleges that the affirmative action program has fed cronyism, with the government steering big contracts to favored businesses rather than helping ordinary Malaysians.
“The key will be how Malaysia restructures its affirmative action program so that the distortions that have been created are done away with and a new program which better delivers equity outcomes to the weaker segments of society is put in place,” says Bhaskaran.
Chua says Malaysia needs to boost investment in infrastructure and improve its educational system if it is remain a step ahead of China, Thailand, India and other fast-growing economies. “Manufacturing competitiveness remains a bit of concern as other competing economies have moved up the ladder,” he says. Exports of electronics, machinery and other manufactured goods, he notes have been slipping in recent years making Malaysia more reliant on oil and gas as well as agricultural exports like palm oil.
As the election campaign enters its final days, expectations are running high. Many Malaysians, especially the young, yearn for a fair, equitable system that doesn’t discriminate based on race or religion. “If the political system fails to deliver, political stability in Malaysia could be at risk in the long term,” says Bhaskaran.
Malaysia’s neighbors in Southeast Asia will also be watching the election closely. “For Indonesia, Thailand and the Philippines, which now see regular changes in ruling parties and heads of government, a change of regime will not be a huge shock but it would have a major psychological impact on Singapore, where the same party has been in power since 1959,” says Bhaskaran.
Bhaskaran also notes that Najib’s government has played a constructive role in recent years in encouraging Thailand and the Philippines address separatist challenges by reaching out to Muslim rebels in their countries. It is unclear, he adds, “whether a new government under Anwar would have the same commitment given that its plate would be quite full in taking power for the first time.”
If Anwar wins and manages to implement real reforms, that could embolden opposition groups elsewhere in the region, says Bank of America Merrill Lynch’s Chua. “This election, because it is so closely fought, will have far-reaching ramifications for Malaysia and for the region,” he says.
