Mon, May 14, 2018

Malaysia’s Opposition Alliance Wins Historic Victory: Implications for Business

Malaysia’s opposition alliance Pakatan Harapan (“PH”), led by former Prime Minister Mahathir Mohamad (“Mahathir”), won an unprecedented victory in Malaysia’s recent general elections by securing enough seats in parliament to form the next federal government.

PH’s immediate challenge will be to stabilize Malaysia’s political system and reassure the country that it remains business as usual amidst a fundamental political realignment. The United Malays National Organization (“UMNO”), which is the main party of the losing Barisan Nasional (“BN”) coalition, had ruled Malaysia in an uninterrupted fashion since 1957. Over the decades, UMNO and its coalition parties have had a massive impact on the country’s political economy; for example, they had crafted affirmative action policies favouring the majority ethnic Malay and indigenous population and “state-led” capitalism favouring politically linked businessmen and government-linked corporations (“GLCs”). UMNO exerted a strong authoritarian control over Malaysia and managed to infiltrate state institutions and the civil service to the extent that some observers called Malaysia a “one-party” state.

Bureaucratic Challenges

As such, PH will have to reckon with UMNO’s lingering influence over Malaysia’s bureaucracy. While PH will likely maintain the low and middle rungs of the civil service in order to avoid widespread disruption to services for businesses and the general public, a key question is how PH will deal with the top level of the civil service and especially the heads of Malaysia’s GLCs, who may be personally sympathetic or supportive of BN1.

PH may have doubts about the political loyalties of these individuals because BN will remain an influential political force despite remaining in opposition. Given the prominence of GLCs in Malaysia’s economy (one expert has estimated that the government effectively controls 42% of Malaysia’s stock market in terms of market capitalization), observers should expect that there will be strong shifts in how the GLCs operate. This in turn will have strong knock-on implications for Malaysia Inc.2, which are difficult to predict at this early juncture.

On a wider scale, most public listed companies in Malaysia have at least one chairman or board director whose main role is to interface with the government or regulatory agencies. These individuals have by and large come from ex-civil service backgrounds, and many are politically identified with UMNO rather than PH. Ructions in the boardrooms of most government-linked and public listed companies can be expected as Malaysian companies scramble to ensure that they have suitably vetted and connected directors dealing with the newly minted PH administration and its economic priorities.

Goods and Services Tax

PH’s economic manifesto is largely populist in tone, with one of its key economic promises to abolish the recently introduced Goods and Services Tax (“GST”) within the first 100 days of PH’s administration. However, experts have noted that this would create a large budget shortfall with no obvious substitute; which has raised concerns from financial observers despite Mahathir’s insistence that the government has sufficient revenue to axe GST. Aside from GST, PH plans to focus on the economic development of the more rural states in Malaysia, especially Sabah, Sarawak, Kelantan, Terengganu, and Perlis. PH has also promised to review and renegotiate controversial government-awarded contracts which endanger the environment. In terms of labour policies, PH plans to increase the monthly minimum wage to MYR 1,500 (USD 380), reduce foreign worker quotas, and strengthen collective bargaining and union rights in the workplace. However, as the PH administration will likely be keen to allay the fears of foreign investors about Malaysia’s stability and openness to investment, it remains an open question how much of the economic manifesto’s populist plans will be carried out.

Internal power balance

In the longer term, observers should be aware of a leadership transition in Malaysia, with corresponding economic implications. Although Mahathir is now the Prime Minister and currently leads PH, he has promised to resign to make way for PH’s former leader Anwar Ibrahim (“Anwar”) by June 2020. Anwar remains confident that the planned handover will take place according to schedule, but longtime observers of Malaysia’s politics will recall that despite their recent rapprochement, Mahathir and Anwar held sharply different views in terms of guiding Malaysia’s economy. Amidst the 1998 Asian Financial Crisis, then-Prime Minister Mahathir fired then-Finance Minister Anwar; some observers linked this to Anwar’s push for free market reforms which grated at Mahathir’s advocacy of “state-led” capitalism. Investors should closely watch the relationship between PH’s component parties for clues as to the relative power balance between the Mahathir and Anwar camps in the lead-up to the planned handover of power in 2020.

Even without Anwar in the picture, however, Mahathir’s statist economic instincts will be tempered by the diverse and young coalition he heads. Observers have noted that PH fielded far younger candidates during the election (compared to BN’s candidates, who were generally older). Many of these younger candidates have strong private sector or civil society backgrounds, and this group within PH will demand a more technocratic and consultative approach to policymaking than BN’s approach, which was more top-down and sensitive to racial dynamics. One potential result is that Malaysia could see the introduction of policies which would support broad-based economic growth in the medium term. Mahathir himself has strongly championed anti-corruption and ”restoring power to democratic institutions”, which will have a corresponding impact on the transparency of the business climate in Malaysia. While some observers have rightly noted that Mahathir himself was not known for his probity when he was last Prime Minister, parties in the PH coalition that won the largest numbers of seats were the ones that made anti-corruption and transparency the core of their platforms, and will likely hold Mahathir to account for any lapses.

Foreign relations

In terms of foreign relations, however, Mahathir will likely exert far more personal influence. This will have a corresponding impact in how the government deals with investors from different countries. In the lead-up to the election, Mahathir strongly criticized Najib Razak, the outgoing Prime Minister, for “selling out” to China in terms of allowing China to participate in several large infrastructure projects in the country, most prominently the East Coast Rail Link (a 688-kilometer rail project on the east coast of peninsular Malaysia) as well as Forest City (a residential project on reclaimed land in the southern state of Johor). Mahathir has implied that he would renegotiate these deals, which he claims were made on terms deeply unfavourable to Malaysian interests. As Mahathir works to rebalance Malaysia’s economic linkages and relationships away from China, other investment communities in the Middle East, Asia, Europe, and the U.S. may benefit.

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1 Jomo K.S. and Edmund Terence Gomez (2000) ‘The Malaysian development dilemma’, in Jomo K.S. (eds), Rents, Rent-Seeking and Economic Development, Cambridge University Press
2 During his last term as Prime Minister, Mahathir promoted the close cooperation between the private sector and government-linked companies as part of “Malaysia Inc.”, akin to how the Japanese government works closely with the private sector to guide their expansion overseas; see ‘Malaysian Foreign Policy in the Mahathir Era, 1981-2003: Dilemmas of Development’, by Karminder Singh Dhillon