As one of Asia’s biggest investor draws for western companies, the political and economic affairs of Malaysia are always keenly examined, and growing speculation that Malaysian Prime Minister Najib Tun Razak may opt for parliamentary polls nearly two years ahead of schedule is headline news.
Addressing the 61st general assembly of the United Malays National Organisation (UMNO), the ruling party that he heads, on October 23rd, Najib gave “the clearest indication yet” that the 13th general election was imminent. As of now, the parliamentary poll is scheduled for March 2013.
Najib, who took over as the prime minister in April last year, told the party faithful “to get ready for it and to get into battle mode”. Deputy Prime Minister Muhyiddin Yassin was even more direct when he said that “it cannot be denied that the general election is just a few months away”. Newspapers based in Malaysia say that the party general assembly has been abuzz with talk that the elections could be held as early as July 2011.
Najib took over from Ahmed Abdullah Badawi, who quit after the party and the Barisan Nasional, the ruling alliance, fared badly, losing the traditional two-thirds parliamentary majority in March 2008 and control of four of the country’s 13 states. Multi-racial Malaysia is home to 2.1 million ethnic Indians who form eight percent of the country’s 28 million-strong population.
The ruling alliance, which includes a number of Indian-based parties, has had a victory run in recent by-elections. The opposition alliance, Pakatan Rakyat, led by former deputy prime minister Anwar Ibrahim, is widely perceived as having lost ground, media reports have said. This may be due to the fact that Ibrahim remains a controversial figure.
Ten years after he was sacked from the deputy prime ministership in 1998 when he was tried and jailed on a charge of sodomy, he is currently on trial for another charge of sodomy which was brought against him last year. And analysts do not rule out violence if the court delivers a “contentious” verdict.
Political tensions spiked after the 2008 general election when unprecedented opposition gains transformed the political landscape. The National Front coalition’s 52-year grip on the country was dented when it ceded control of five states and lost its two-thirds parliamentary majority to an opposition led by Ibrahim. Since then, the political uncertainty has weighed on foreign investment with net portfolio and direct investment outflows reaching $61bn in 2008 and 2009 according to official data. While money has flowed into the bond market recently, according to central bank statistics, little has flowed into equities.
Another reason why foreign capital may have dried up is a perceived increase in public sector corruption. Malaysia used to be regarded as one of the region’s more reliable countries, but worsening corruption and a perceived lack of judicial independence have damaged investment. Malaysia’s corruption perception ranking dropped to a record low of 57th globally in anti-corruption body Transparency International’s 2009 report.
Other issues may include the country’s attitude towards minorities, especially as race and religion have always been explosive issues in Malaysian politics. While Najib took power pledging a more inclusive approach to ethnic Chinese and Indian minorities, some in his UMNO party are casting this approach aside in a bid to woo conservative Malays. The caning of three women under strict Islamic laws in February for having illicit sex signalled the government’s increasing adoption of a stronger Islamic agenda, and this has worried some investors. A heated row over the use of the word “Allah” by Catholics, which sparked attacks on religious establishments, is also threatening to prolong minority unhappiness with the government.
Government policy tries to strike a balance between the majority Malay Muslims and the country’s minority ethnic Chinese and Indians, but analysts suspect that forced spending cuts which are likely to target minorities are likely to increase racial tension. The government is trying to take measures to alleviate the problem. Najib told delegates that “a new mechanism” was needed to sustain relations as enshrined in the constitution so that they remain harmonious.
His government recently set up a special body called the “Bumiputra Agenda Supreme Council” to look after their economic interests. However, commentators point out that Bumiputra, or “the sons of the soil”, refers to the Malays, which may give an indication about which sections of Malay society may benefit from it.
Yet it is usually the state of a country’s finances and spending that often come back to haunt it, and Malaysia is no different. Government debt for 2009 rose to RM362.39bn or 53.7 percent of GDP, its highest level in five years, according to the country’s public sector spending watchdog, the Auditor-General. This is the first time the debt to GDP ratio had breached the 50 percent mark, largely due to domestic debt. “The debt ratio to GDP at the end of 2009 is 53.7 percent, the highest level in five years and over 50 percent for the very first time,” said its report.
Furthermore, the Auditor-General has found that a total of 109 projects undertaken by 24 ministries and departments overshot their budgets to a cumulative amount of RM527.43m. According to the Auditor-General’s report for 2009 released at the end of October, spending without an allocation, financial mismanagement and budget over-runs were “common” in various ministries and government departments. Based on the audit analysis, there were a total of 195 cases of weak financial management were detected in several ministries and departments. Furthermore, a total of 21 ministries and departments had also applied for emergency funds and additional costing amounting to RM62.2m despite there being a RM96.33m balance from their initial allocations remaining unspent.
Malaysia’s budget for 2011 has skipped structural reforms demanded by investors. Instead, the budget strategy relies on infrastructure spending and raising incomes to fuel economic growth ahead of polls expected next year. The budget plan targets a 2.8 percent rise in spending and aims to shrink the deficit to 5.4 percent of GDP next year from 5.6 percent this year thanks to sustained strong growth.
According to the plan, Southeast Asia’s third-largest economy is expected to grow between five and six percent in 2011 after a seven percent expansion this year and a 1.7 percent contraction in 2009. “The trend of external trade is increasingly challenging, while there is heightened competition to attract foreign investment,” Najib told parliament. “To rise to these challenges, the private sector must be dynamic, creative and innovative to drive economic growth,” he added.
To shift away from the governments significant role in driving economic growth since the financial crisis in 1997/98, the 2011 budget includes a number of important initiatives designed to spur private sector investment, estimated to expand in 2011 by 12.5 percent to RM86bn. Some projects include the Kuala Lumpur International Financial District (KLIFD) commencing in 2011, in collaboration with Mubadala Development Company, of the Government of Abu Dhabi, at a value of RM26 billion; the Mass Rapid Transit (MRT) in Greater KL, beginning in 2011 with expected private investments of RM40bn, to be completed by 2020; and the Warisan Merdeka, an integrated development project comprising a 100-story tower, the tallest in Malaysia, to be completed by 2020 at a value of RM5bn.
Analysts believe that the budget is more likely to please voters than investors who are frustrated with the lack of progress in reforms of Malaysia’s subsidies and its race-based policies. “A majority of the big foreign investors will be unhappy with the budget if he doesn’t give them anything in terms of real money,” said James Chin, a professor at Monash University in Malaysia.
Commentators say that Najib needs strong economic growth to secure a clear mandate from voters to push through reforms considered crucial to win back foreign investors who increasingly skip Malaysia and head to other Southeast Asian economies. Malaysia’s private investment grew only two percent on average between 2006-2010, and was expected to be 10.8 percent of GDP this year, rising to 11.3 percent of GDP next year.
But the government is trying to turn the situation around quickly, and has been delivering some welcome news. At the end of October Prime Minister Najib announced details on $444bn worth of investments the country wants to attract over the next 10 years to double its national income. A government think-tank said in September that it had identified the investments, of which 60 percent would come from the private sector, 32 percent from government-linked companies and eight percent from government. The investment aims to rebalance Asia’s third most export-driven economy towards domestic demand and the service sector, at a time when foreign investors are increasingly attracted to other regional economies.
Some of the key projects named in the investment drive included Germany’s LFoundry, which will relocate and invest in five wafer fabrication plants in Kulim Hi-Tech Park in northern Kedah state over the next five years. Its Initial investment is valued at 214m ringgit while the total estimated investment is 1.9bn Malaysian ringgit ($610.3m).
There are also plans to build a 208-room hotel and 160-unit residence, to be managed by St Regis, an international six-star hospitality brand, while oilfield services firm Schlumberger has recently opened its Eastern Hemisphere Global Financial Services Hub in Malaysia. This is part of the Greater KL/Klang Valley Entry Point Project which aims to attract 100 new multinational corporations to relocate their operations in Kuala Lumpur by 2020.
In fact, Malaysia’s Economic Transformation Programme (ETP) has gotten off to a strong start with nine early wins announced at its roadmap launch in October. “The ETP is already delivering results. These early wins show that by focusing on action, results will flow,” said Najib. More confirmed investments will be announced over the next few months. “Based on our tracking, 53 ‘Entry Point Projects’ (EPPs) with a total investment value of $97bn (RM300.7bn), almost 45 percent of the total investment targeted, are already in various active stages of engagement,” he said.
Najib also announced that a four-tier ETP governance structure has been activated to monitor the progress of the initial 131 EPPs and conversion of the 60 business opportunities into new projects. “A clear governance structure is absolutely critical for the success of the ETP,” said Najib, adding that “the ETP is for all Malaysians”, pointing out that the 131 EPPs are spread all across the country, with 68 for Sarawak and 71 for Sabah.
“For several years now, the government has been the main driver of the economy, but this is neither prudent nor sustainable and the private sector has to reclaim their effective role as the main engine of growth for the economy, in line with the strategy of the 10th Malaysia Plan,” he added.
“We must grow the economic pie substantially. However, Malaysia can no longer be driven by past strategies based on labour intensive models. We need to take the high-skill, high-income route quickly to become and remain competitive in the global economy. Transformation is critical. Failure is not an option,” he said.
On paper, foreign investors and multinational companies may welcome the Kuala Lumpur’s efforts to step back from public sector investment in favour of opening up the market to foreign firms. But it is evident that investors have serious doubts about Malaysia’s political landscape, as well as the sometimes fractious nature of its multi-ethnic population. If Najib and his party call snap elections next year – and more importantly, if they win them – it may just create the political stability that investors are looking for.
