• The London Financial

Malaysia’s Triple-Edged Sword: A Crisis of Politics, Economics, and Public Health

Updated: Sep 6, 2020

By Stephanie Kannimmel, BSc PPE Student at King's College London

Malaysia’s third regime change in less than two years, against a backdrop of a global pandemic, has led many to speculate on what this means for the country's future. While other countries struggle to ensure economic recovery after COVID-19, Malaysia faces the same worry with another layer of uncertainty in the form of political instability. Could this political instability hinder the growth and recovery of the Malaysian economy in the long run?

Recent events in Malaysian politics

A background of Malaysia’s political climate

The past two years has seen unprecedented change in Malaysian politics. Prior to the general election in 2018, Barisan Nasional faced significant instability due to scandals Prime Minister Najib Razak and associates were discovered to have been partaking in. The biggest scandal was the laundering of over RM2.67 billion ($700 million) from 1MDB, a government-run strategic development company, to Najib’s personal offshore bank accounts. In the 14th General Election on May 9, 2018, the Pakatan Harapan coalition secured an upset victory. This victory was of paramount significance; for the first time, a party other than Barisan Nasional — the incumbent party since Malaysia gained independence in 1957 — was in power.

With Pakatan Harapan’s victory, leader Mahathir Mohamad was sworn in as prime minister for the second time as the world’s oldest head of government. Almost immediately, Mahathir secured a royal pardon for the imprisoned Anwar Ibrahim, his former finance minister, and indicated that he would give Anwar the position of prime minister in the next two years. The two have had a tumultuous history after disagreements regarding financial plans ensued during Mahathir’s first term as prime minister. However, it soon appeared that this history was yet to be put behind them.

Replacement of the Pakatan Harapan government

Despite Mahathir’s initial promise of Anwar becoming his successor in two years, Mahathir and his associates began to deny this decision. As tensions increased as a result, rumours began to circulate: Mahathir was forming a backdoor coalition government that excluded Anwar. Forces supposedly allied to Mahathir attempted to form a new coalition, but failed. However, Mahathir’s allies later stated that Mahathir did not endorse the formation of this government, as it would have meant joining forces with the United Malays National Organization (UMNO), founding member of the Barisan Nasional coalition, and UMNO’s allies. It was later found that the attempt to form this coalition was championed by People’s Justice Party (PKR) former deputy president, Mohamed Azmin Ali. Subsequently, on February 24, 2020, Mahathir unexpectedly resigned as Prime Minister and chairman of his party Bersatu, creating a power vacuum in Malaysia.

After negotiations and an interim government, Muhyiddin Yassin was sworn in as Malaysia’s 8th prime minister on March 1, 2020. Muhyiddin came to power after leaders in several different political parties reconfigured their alliances to remove Mahathir and prevent Anwar from succeeding. With different views and aims for the future of Malaysia, the governing coalition has a fragile majority, with UMNO and the Malaysian Islamic Party (PAS) holding 57 seats, and Bersatu holding 31 seats. Muhyiddin has taken office as Malaysia faces its most difficult obstacles since gaining independence: tackling a worsening economy, political, racial, and religious turmoil, and the COVID-19 pandemic. Media outlets report a snap election being possible soon, after parliament met in March to debate motions including a vote of no-confidence against Muhyiddin.

How the new Malaysian government has handled COVID-19

Despite the uncertainty and fragility in Malaysian politics, the new government has done many things right in handling the pandemic. Malaysia moved very quickly to implement a movement control order, with a strict lockdown, clear policies and updates, and social distancing measures being strictly implemented. As of August 25, Malaysia has had 9,285 cases, 8,971 recovered, and 125 deaths.

The Movement Control Order (MCO) was introduced on March 18, 2020, and was initially supposed to last for two weeks. However, it was extended until May 4. The Conditional Movement Control Order (CMCO) commenced from May 4 to June 9, in which movement was less severely restricted and non-essential businesses were allowed to reopen. Finally, the Recovery Movement Control Order (RMCO) began on June 10, and has been extended until December 31, which bans foreigners from entering the country but allows for inter-state travel.

In addition to lockdown policies, policymakers introduced significant interest rate cuts and supplementary budgets. Contractions were still sharper than expected in the second quarter, but the Malaysian government introduced 259 billion ringgits ($70 billion) in stimulus measures, including a direct injection of 45 billion ringgit.

The effect of COVID-19 thus far on the Malaysian economy

Despite the success of Malaysia’s measures to prevent the spread of COVID-19, such restrictions meant that the economy would take an inevitable hit. GDP contracted by 17.1% since the previous year in the second quarter, compared to a 0.7% growth in the first quarter due to stringent lockdown measures and the closure of all non-essential businesses. With the restriction of production and consumption activities during MCO, demand and supply shocks occurred in several economic sectors. These shocks were also compounded by a decline in tourism due to border closures and restrictions on inter-state travel during MCO and CMCO. Some expenditure components of GDP, namely investment and consumption, declined significantly. On the supply side, negative growth occurred in most economic sectors.

Inflation fell to -2.6% during the second quarter due to lower retail fuel prices and electricity tariffs. However, core inflation only moderated slightly at -1.2%. However, as easing movement restrictions occurred in the second quarter, the ringgit appreciated by 0.5% against the US dollar as optimism among investors improved.

Obstacles Malaysia could face in dealing with COVID-19

Economists warn that it will be challenging for economies to grow, given the global uncertainties during COVID-19. This will be especially difficult for Malaysia, facing the uncertainties of a global pandemic in addition to turmoil within their own government. Thus, a “U-shaped” recovery at best seems to be expected, with Malaysia experiencing more time at the bottom of a contraction. This is confirmed by Bank Negara Malaysia, Malaysia’s central bank, with a significant contraction projected at 3.5-5.5%.

Although policymakers are currently introducing stimulus measures, the government can only spend so much through expansionary fiscal policy. Domestic consumption and property development may soon hit their limits, if they have not already. Therefore, to recover completely in the long run, Malaysia’s economy and diplomatic relations have to undergo reform.

Internationally, Malaysia needs to broaden its horizons, and look into less reliance on domestic consumption for growth in the long term. Malaysia could benefit from increasing exports such as semiconductors, capitalizing on the boom in telecommunications as people begin to work from home, and promoting innovation in existing industries such as palm oil. As a result, aggregate demand will increase as net exports increase, the ringgit will appreciate as demand for the ringgit increases due to increased exports, and economic growth will occur in the long run due to innovation. Furthermore, by seeking help from abroad, Muhyiddin could foster improved international relations and curb political instability domestically.

Domestically, though the central bank is open to doing more in terms of targeted policy measures and raising the debt limit should a second outbreak occur, some form of reinvention is required for recovery. Although the ringgit has appreciated against the US dollar now, political instability, regional instability in Southeast Asia, and global uncertainty from the pandemic could still lead to exchange rate volatility in the long run. Policymakers could also introduce measures that would boost private investment to encourage domestic growth, which has been falling in comparison to rising foreign direct investment (FDI):

Boosting private investment would also curb any uncertainty over the declining FDI, as foreign investors may be discouraged by the fragility of the new government and uncertainty during COVID-19. Furthermore, solutions to tackle unemployment are essential after activities in several sectors have been slowed, as well as possible tax relief for middle-income earners and/or subsidies to boost consumption. However, overall, Malaysia still needs to arrive at a stable political condition to reboot its economy fully and enhance investor confidence for sustained growth.

By Stephanie Kannimmel - BSc PPE Student at King's College London

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