As Malaysia embarks on an ambitious programme to create a more dynamic and efficient economy, short-term issues are a small price to pay, says Manu Bhaskaran
This article was first published in the July 2018 China edition of Accounting and Business magazine.
On 9 May, Malaysians voted in their general election to oust the coalition that had ruled the country since independence in 1957, replacing it with a reformist coalition headed by former Prime Minister, Tun Dr Mahathir Mohamad. Malaysians reacted joyously to the change but financial markets have been cautious. What should we expect from the Malaysian economy going forward?
The new government includes many reformists who seek to rectify the governance failures that caused corruption to explode. It has wasted little time in cleansing the system. Investigations into alleged malfeasance have seen even former prime minister Najib Razak hauled in for questioning.
Key agencies such as the Attorney-General’s Chambers and the Malaysian Anti-Corruption Commission are being overhauled as a first step towards revitalising checks and balances in the system. Expensive infrastructure projects have been put on hold and the new government has promised to abolish a slew of repressive laws in order to foster a more vibrant media and civil society.
These changes will eventually produce a business environment that is friendlier and less wasteful. The culture of impunity will be diminished. The degradation of key institutions is now likely to be at least partially reversed, bringing with it more stability.
Political transitions are often difficult so it is not surprising that financial markets are concerned. First, the new government had campaigned on a populist platform of abolishing the goods and services tax, raising the minimum wage, easing the burden of student loans and reducing or eliminating highway tolls. Even with higher oil prices substantially boosting revenues, the fiscal deficit will probably widen, which has made the rating agencies worried.
Second, several megaprojects have been or will be cancelled, including the high-speed rail link between Singapore and Kuala Lumpur, as well as the China-backed East Coast Rail Link, causing markets to react badly.
These concerns are understandable but the downsides are likely to be contained. We estimate the deterioration in the fiscal deficit to be around 0.4% of GDP in 2018 – not ideal but certainly not enough to destabilise the government’s financial position. In the longer term, however, once oil prices fall, new sources of revenue will become necessary.
The cancellation of projects may not be a bad thing as there were question marks over how they were conceived and awarded. Where there are viable projects, it is more than likely that they will eventually go ahead but under more transparent processes and almost certainly at a lower cost. On the other hand, the reforms will hugely improve governance and reduce waste in the budget, releasing funds for more productive use.
In other words, the short-term issues are a small price to pay if the promised reforms are indeed carried through and produce a more dynamic and efficient economy.
Manu Bhaskaran is CEO of Centennial Asia Advisors in Singapore
"Political transitions are often difficult so it is not surprising that financial markets are concerned"