Opposition win in Malaysia’s general election could shock markets - analysts

Photo: Former Malaysian Prime Minister and candidate for opposition Alliance Of Hope, Mahathir Mohamad speaks during an election campaign rally in Kuala Lumpur, Malaysia, May 6, 2018. REUTERS/Athit Perawongmetha

KUALA LUMPUR - Malaysia’s ruling National Front (BN) coalition is still favourite to win the fourteenth general election since independence but the four-party Alliance of Hope (PH) opposition has put in a strong showing over a short, 11-day campaign, causing investment managers to consider the once unthinkable.

“The markets are jittery. People have never really considered the possibility of an opposition win as much as they are doing this time,” Gerry Ambrose, chief executive of Aberdeen Islamic Asset Management in Kuala Lumpur told Salaam Gateway.

“The expectation is, if this happens, the markets will tank. Even if the ruling party gets fewer seats than expected, the market would also be affected, and who knows with a hung parliament. There would be a lot of chaos.”

Unusually, investment firms such as Aberdeen have been receiving calls from government-linked institutional clients to enquire how a change in power would hit their portfolios.

“It would affect all of them, from the senior management down. Institutions have become very closely associated with BN,” said Ambrose.

SHOCKS

Another long-time fund manager surmised that any shocks from a transfer of power would be exacerbated if the ruling coalition refused to accept an orderly transfer of power.

 “In the past, when the opposition has won individual states, newly elected state reps have been enticed to switch side to the government, as happened in Perak in 2008 and Sabah in 1994,” said the 25-year veteran of Malaysian investments speaking on condition of anonymity because his residency visa prevents him from speaking publicly on political matters.

“Though the likelihood is that BN would accept the result, there would still be ramifications. It is widely speculated that after over 60 years of uninterrupted power, there are many skeletons in many closets.”

Though most observers are convinced that an opposition victory would lead to economic shocks for Malaysia, not all have been as forthright.

“If the opposition managed to win, I think the markets would be shaky, probably in the short term—maybe a few days or one or two weeks. But after that it should be business as usual,” said Wan Zahidi Zakwan, a Malaysian markets analyst with a local bank.

“Like what happened in Thailand or Indonesia during changes of government there, things are always going to be a bit jittery. In Malaysia it would be unprecedented—we’ve never had a change of government. But the markets will still follow the fundamentals, and most business will be running well even with a change of government,” added Zakwan. 

1MDB FACTOR

Ambrose believes an opposition victory could improve Malaysia’s international business standing “significantly”, following allegations of corruption and graft centred on the 1Malaysia Berhad (1MDB) scandal currently embroiling Prime Minister Najib Razak.

The government-owned strategic investment fund is now the subject of investigations in America, Switzerland and other countries following suggestions that billions of dollars were syphoned out of the fund, which was set up by Razak in 2009.

The prime minister himself, who previously served as chairman of 1MDB’s advisory board, has been accused of receiving nearly $700 million from the fund, though he denies any wrongdoing and was cleared of any offence by Malaysia's attorney general.

“One of the positives [of investing in Malaysia] used to be that there was continuity of government, but this has now become a negative,” said Ambrose.

Nevertheless, he pointed out that that the ragtag nature of an opposition coalition spanning a range of different agendas might clash, leading to greater uncertainty down the line.

“That’s something that Najib has been strongly highlighting during the election campaign,” Ambrose added.

FIGHT OVER GST

One of the key battlegrounds in the lead-up to this general election has been the issue of a goods and services tax (GST), which was imposed at a rate of six percent in 2015 by the prime minister, in his dual capacity of finance minister. The levy continues to be unpopular across Malaysia, and is blamed for what is perceived as an increasing cost of living in the country.

At the centre of the four-party Alliance of Hope (PH) opposition’s manifesto is a pledge to replace GST with a sales and services tax (SST) featuring a narrower base with cascading and compounding interest.

“GST has actually dropped the overall economic condition and purchasing power of the average person in Malaysia,” Nurul Izzah Anwar, vice-president of the People’s Justice Party (PKR), the leading component party of the PH coalition, told Salaam Gateway. She is also the daughter of the jailed former Malaysian deputy prime minister, Anwar Ibrahim. “The average person is really feeling the pinch,” she said.  

Earlier this year, the Royal Malaysian Customs Department identified more than 5,000 companies involved in fraud over payments of the Goods and Services Tax since it was implemented.

Nevertheless, the government claims that the GST regime has been a success, and the tax comfortably met its target of 42 billion Malaysian ringgit in revenues last year. Earlier this week, Razak said its implementation had been “one of the hardest decisions” he had to make as prime minister, though he believes it has made Malaysia fiscally independent and stable at a time when oil prices have been low.

“I knew that it would lead to increases in the prices of some goods and services, and that it would be painful for some Malaysians," he wrote in a column for local newspaper the New Straits Times.

“While there may be some short-term pain, I assure you that the rewards will be long-term and felt in the years to come.”

Curiously, despite the opposition’s charge that the tax was implemented in a hurry, it has pledged to replace it with an SST in its first 100 days of power, if elected. When asked if this might be construed as repeating what PH sees as the government’s mistake, Anwar distanced herself from the coalition’s policy.

“I am a party person, and I abide by collective decision,” she said. “We [PH] have tied ourselves to that pledge mainly because of popular demand, but I remain committed to engage with economists to encourage rigorous debate on the matter, which will be completely different from the government today.”

MAHATHIR

Perhaps one of the biggest economic factors that could swing the election in the opposition’s favour is the reputation of its leader, Dr Mahathir Mohamad, who as prime minister from 1981 to 2003 was lauded for his handling of the economy, especially during the 1997 Asian financial crisis.

The 92-year-old veteran enjoys strong influence among the rural Malays, especially in his home state of Kedah, where he is running for election to parliament after falling out with the United Malays National Organisation (UMNO), which leads the ruling National Front (BN), over perceived graft and corruption. Mohamad left UMNO in 2016 to found the Malaysian United Indigenous Party, a component party of PH.

If the opposition wins in the general election, Mohamad has pledged to assume the role of caretaker prime minister until Anwar Ibrahim becomes eligible to replace him. As Ibrahim nears the end of a five-year prison sentence for sodomy, a conviction that has widely been seen as being politically motivated, he must wait for a royal pardon before he can seek a vacant seat and return to government—should PH win this election.

Both Mohamad and his one-time protege, Razak, have traded poisoned barbs in an increasingly personal campaign, with the former prime minister working hard to sway voters through his record for economic competence.

But would his presence calm jittery markets on the off-chance that PH seals victory in the election?

Zakwan believes so.

“If you look at the opposition, their candidate for prime minister is Mahathir, who has run the country for 20-plus years. Because of his presence, I don’t think business confidence would be affected over the long term if the opposition take power,” he said.

As Malaysians prepare to cast their ballots on May 9, there is a feeling of uncertainty among investment managers over what they will face come May 10—whether it will be more of the same from a BN government that has brought stability and growth to Malaysia, or if the country will be stepping into the unknown with an untested coalition led by a nonagenarian who founded the party that it would be replacing.

“As far as macroeconomic management is concerned, I’m forced to admit that Najib has not done a bad job. His move to reduce the budget deficit to give a bit of credibility to Malaysian government securities, and the ringgit itself, has been the right approach,” said Ambrose.

“But I’m still a bit concerned about the ability of Anwar [Ibrahim], Mahathir and others in PH to manage the economy. But if there is a change, I think it would be positive for investors in Malaysia. We would just have to weather that storm.”

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim emmy.alim@thomsonreuters.com)

Our Standards: The Thomson Reuters Trust Principles

© SalaamGateway.com 2018 All Rights Reserved