A risky election
Malaysia’s upcoming general election looks set to be a close-run affair. The big risk for investors from the May 5 poll is that neither of the two competing coalitions – the ruling Barisan Nasional or the opposition Pakatan Rakyat – may be able to claim a decisive victory.
Domestic and foreign investors withdrew a net $3 billion from the country in the fourth quarter of last year. If the poll ends up exacerbating political and policy uncertainty, the risk premium for holding Malaysian assets might be permanently raised. That would threaten the country’s benchmark equity index, which has doubled from its post-financial crisis low of March 2009.
A big win is crucial for both camps. If Barisan fails to reclaim the two-thirds parliamentary majority it lost in 2008, Prime Minister Najib Razak’s party will blame him for diluting the country’s “son of the soil” patronage system, which favours ethnic Malays, in an attempt to make society more inclusive.
If Najib is replaced by a hardliner, the minority Chinese community, alienated by decades of discrimination in favour of the majority Malay Muslims in education, jobs and housing, will see migration as the only answer. Two out of three ethnic Chinese said in a February survey that their country is headed in the wrong direction.
Similarly, the opposition’s lack of cohesion could ruin its first-ever chance to wield sovereign power. One of the opposition parties wants to introduce Islamic criminal law, a plan that makes another coalition partner that represents the Chinese voters very uncomfortable. Adding to the uncertainty, the alliance hasn’t formally named Anwar Ibrahim, its de facto leader and a former deputy prime minister, as its prime ministerial candidate.
A weak government from either side might dump fiscal prudence and embrace populist policies. That might threaten the urgent need to broaden the government’s sources of revenue, about a third of which currently comes from the country’s depleting oil and gas riches. The election manifestos are silent on an already-delayed goods and services tax. For now, bond investors are taking a sanguine view of Malaysia’s sovereign debt: credit default spreads have narrowed by a quarter over the past year. A less-than-decisive election outcome might force investors to rethink.