Malaysia: Mahathir’s Return Points To Uncertain Outlook

Malaysian election may mean near-term volatility in economic policy and performance.

Malaysia PM

The return of 92-year-old Mahathir Mohamad to Malaysian politics last month represents one of the greatest electoral upsets in Southeast Asia’s history. But beyond the shocking result, there are unanswered questions over the costs for the Malaysian economy of campaign commitments made by the newly elected government. The new Pakatan Harapan government has pledged to fulfill ten promises in its first 100 days in office, including abolishing the Goods and Services Tax (GST).

Last year, GST generated 42 billion ringgit in tax receipts, or 18.5% of total government revenues, says Capital Economics. That helped diversify the tax base, making government revenues less dependent upon a small pool of income tax payers. GST previously stood at 6% and credit rating agencies have warned that implementing some of the government’s campaign commitments without offsetting measures would be credit-negative.

Such a move would also increase the budget deficit at a time when the country’s debt burden is already growing. At 54% of GDP, Malaysia has one of the highest levels of public debt in the region. Granted, higher oil prices will help support government revenues in the short term, but analysts warn of overdependence on an unsteady sector. “Greater reliance on oil-related revenues will expose the fiscal position to fluctuations in oil prices,” said Koon Goh, head of Asian Research at ANZ Research, in a note following the election.

Meanwhile, Mahathir is expected to step down in two years to hand over power to his friend—turned foe, turned friend again—formerly jailed Deputy Prime Minister Anwar Ibrahim. Anwar received a royal pardon following Mahathir’s landslide victory. But analysts warn of continued tensions between these former adversaries, and of uncertainty over the timing of the planned transition.

Still, Mahathir is likely to move quickly to crack down on what is perceived to be endemic corruption under his predecessor and protégé, Najib Razak. Najib is embroiled in the scandal surrounding 1Malaysia Development Berhad (1MDB), involving the embezzlement of more than US$4 billion from the strategic development fund and allegations that US$681 million was transferred to the personal account of Najib. 1MDB and Najib deny any wrongdoing. Nevertheless, with some supporters of Najib still in power, investors will be looking for reassurance—and ANZ says near-term volatility in Malaysia’s financial markets should be expected.