Malaysia’s risks are at an inflexion point

After enduring recession from locking down the economy in June-July to stem the wave of Covid-19 infections, Malaysia incurred yet another political crisis in August when the government collapsed, resulting in Ismail Sabri Yaakob taking over as the third prime minister in as many years.

The country’s political risk profile has been heightened for a considerable time, notably when the 1MDB crisis erupted – a global financial scandal involving the state development fund – leading to the ruling party’s president Ahmad Zahid Hamidi and former PM Najib Razak facing corruption charges.

The question now is whether political stability can be restored sufficiently to placate investor concerns. After all, Ismail is associated with the previous fractious government led by Muhyiddin Yassin, and there are so many parties represented in the legislature, none of which claims more than a fifth of the seats.

The National Front coalition, led by the United Malays National Organization, is supported through a confidence-and-supply arrangement by another unwieldy multi-party coalition. There are equally numerous opposition parties, the government still has a small majority and switching sides is not uncommon.

Against this backdrop, the country has endured economic problems caused by the pandemic.

The measures taken to ease movement controls by phases has been underpinned by the success of Malaysia’s vaccination programme 

 - Azizul Amiludin, Developing Malaysia (DM) Analytics

The government wants to address this with increased public spending, which is further raising concern for longer-term fiscal sustainability, given that the consolidated public-sector deficit will likely rise to 8% of GDP this year, and the general government debt to 66% of GDP, according to the IMF.

The economy posted a real-terms year-on-year contraction of 5.6% last year, and the recovery has been patchy in 2021 due to the ongoing spread of coronavirus and, until now, a slow pace of vaccinations – although growth is expected to resume in the current, fourth quarter.

All of this has prompted analysts to become more cautious, downgrading Malaysia’s risk factor scores, not just recently, but also over a longer period.

Compared with five years ago, Malaysia has plummeted 57 places in the global risk rankings to 93rd out of 174 locations based on preliminary results of Euromoney’s Q3 risk survey to be released next week.

That puts the country in the fourth out of five risk categories, which makes it a similar risk to India and Ecuador, and the polar-opposite prospect to other emerging markets (EMs) in the region, such as Taiwan and South Korea, not to mention Thailand and the Philippines, which are also comparatively safer.

Euromoney asked its survey contributors to comment on whether Malaysia’s fortunes are about to turn, although not all were willing or able to do so due to the political sensitivities.

One expert mentioned in confidence that compared with the beginning of the year, the economic outlook for Malaysia in the third quarter deteriorated primarily due to the rising Covid-19 cases, which was previously unanticipated.

This is reflected in the central bank officially revising the 2021 growth forecast considerably in August, he says, from an initial forecast of between 6% and 7.5%, to 3% to 4%.

All in all, the expectation is now for Malaysia to reach its pre-pandemic peak in the second half of 2022 rather than the first half of next year.

That alone has had an impact on several economic risk indicators, including those for economic growth, employment/unemployment and government finances.

The coronavirus situation has eased for now, though – with the peak seen in late August/early September – after a successful national vaccination programme.

The Covid-induced economic slowdown will likely taper off and that should set the stage for the necessary conditions for a sustained economic recovery into 2022.

The political and policy uncertainties have also eased, with continuity seen in key policies along with greater cohesion, for now, between the ruling government and the opposition.

This pact is even more important as parliament will soon try to pass a proposal to increase the debt limit 

 - Azizul Amiludin

This is crucial. There have been downgrades to various political risk indicators, but these are now in the can, so to speak. The government is even proposing political reforms to limit terms, lower the age of voting and, importantly, prevent party-hopping and improve bipartisanship support for bills.

With an economy up to speed, all this suggests Malaysia is poised for a comeback, as far as investors are concerned. The only question is whether it will be a strong or even sustained boost to confidence.

Another survey contributor is Azizul Amiludin, head of research at the Kuala Lumpur-based Developing Malaysia (DM) Analytics.

He is more optimistic concerning the Covid situation and political stability, noting the fact that evidence of economic recovery will shine through during the current quarter to the end of the year, as the government opens up more economic sectors and travel restrictions are eased.

“The measures taken to ease movement controls by phases has been underpinned by the success of Malaysia’s vaccination programme,” says Amiludin.

He notes that, cumulatively, 44.8 million doses have been administered since the vaccination programme started in late February, so almost 90% of the adult population is fully vaccinated, with more than 60% of those aged 12 to 17 having received at least one dose.

“The success of the vaccination programme almost eclipsed another important event,” says Amiludin. “The ruling Perikatan Nasional coalition and the opposition coalition have agreed to a political ceasefire to battle the pandemic, ensuring government stability.

“The governing coalition still holds a razor-thin parliamentary majority, and this agreement puts to rest constant speculation and political manoeuvring that beset the previous administration.”

He adds: “This pact is even more important as parliament will soon try to pass a proposal to increase the debt limit from 60% to 65%.”

As for the economy, Amiludin notes that exports appear to be recovering, underpinned by stronger external demand and the global tech cycle.

“Support for export growth can be attributed to strong demand for manufactured products and higher commodity prices,” he says.

Lending support to the economy, the central bank is expected to retain an accommodative monetary policy. Foreign investment flows have also turned positive. In September, there was a second consecutive month of foreign net inflows following 25 consecutive months of net selling of domestic securities, Amiludin points out.

That is all very well, but Malaysia’s recent turmoil has undermined its appeal.

Risk experts believe an inflexion point has been reached, and that the economic and political risks are easing, but they are also mindful there are numerous warning signs to be aware of.

They include recent turbulence on global financial markets that may worsen for EMs when the US Federal Reserve starts tapering its asset purchases.

Much will depend on the outlook for global economic growth, which in turn is tied to the fortunes of China over-shadowing the region.

China, it must be remembered, is Malaysia’s most important economic partner, with an estimated 10% of GDP derived from Chinese demand, so any slowdown there will invariably have an adverse spill-over effect.

Malaysia, it seems, is back on the right path, but it is not quite out of the woods.