: Super User; Malaysia; 10 December 2008; Hits: 1224

Politics Takes a Back Seat to Economy

POLITICS in Malaysia is beginning to settle down, and it is not a moment too soon. Thanks partly to the capital controls and reforms it introduced in the wake of the 1997-98 Asian financial crisis and its huge foreign exchange reserves, Malaysia’s economy has so far been largely insulated from the crisis that has swept the global economy.

The trade balance for September was better than expected as demand from Asia offset declining commodity prices and sales to the United States and Europe. The unexpectedly strong performance won precious time for the country as ongoing political unrest distracted the government from dealing with economic issues. Such luck, however, is unlikely to last.

Malaysia’s squabbling politicians head a nation more heavily exposed to the global economy than politically unstable Thailand, which itself has a high export- to-GDP ratio of 70 per cent. The comparative figure for Malaysia is in excess of 100 per cent – a figure exceeded in Asia only by the trade-dependent economies of Singapore and Hong Kong.

Data released by Malaysia’s Ministry of International Trade and Industry early last month showed that September exports rose 15.1 per cent year on year, far more than the 8 per cent most economists expected, and faster than the 10.6 per cent rise in August. This development, together with strong domestic demand, produced a surprising 4.7 per cent growth in the third quarter.

Economists point out that Malaysia has enough financial resources to mitigate any fiscal adversity. They also note that Bank Negara has sufficient US dollar liquidity reserves to ensure that international trade is not starved of foreign exchange. Domestic banks are also in a strong position to weather an economic downturn.

The more important point, however, is that despite an upcoming by-election in the northern state of Terengganu on Jan 17, recent political developments have finally put government ministers in a position to give the economy the attention it deserves.

The leadership issue within the United Malays National Organisation (Umno) has been settled since Oct 9, when Prime Minister Abdullah Badawi announced his decision to hand over the premiership to his deputy, Datuk Seri Najib Razak, in March next year. Opposition leader Anwar Ibrahim, who seemed poised to topple the government in September with the help of defecting government parliamentarians, also appears to have been outmanoeuvred.

The impact of these developments on economic planning was evident as early as last month, when Mr Najib presented an expansionary Budget to Parliament.

Mr Najib, who is also Finance Minister, outlined plans to shift almost US$2 billion (S$3 billion) saved from fuel subsidies to infrastructure projects. He also announced plans to cut pension fund contributions to 8 per cent from 11 per cent in order to put more cash into the hands of consumers.

Another key measure involved allowing foreign investors to hold up to 70 per cent of firms in the service sector from 2015, a market liberalisation move that has proved highly controversial in other developing countries.

“The drastic change in global economic developments lately requires us to take a proactive action to deal with the global crisis,” Mr Najib said at the close of the 2009 Budget debate.

By making these moves now, rather than wait for the bleak global outlook to have a more obvious impact on the domestic economy, Mr Najib is probably hoping to provide the strong leadership that the ruling coalition has lacked since the March elections, when it chalked up its worst-ever election result.

He also came up with a much more realistic economic growth forecast for 2009. Economic expansion next year, he said, would be around 3.5 per cent, significantly lower than the previously targeted 5.4 per cent. The new fiscal measures, combined with a drop in government revenues, are expected to result in the fiscal deficit rising to 4.8 per cent of gross domestic product, up from the previous projection of 3.6 per cent.

The Budget has not met with universal approval. Some economists have expressed concern about the widening deficit, noting that Kuala Lumpur has spent more than it earned almost every year since 1998. However, it is also possible to argue that economic planners are being relatively conservative.

The amount of money to be injected into the economy from early next year is lower than the RM7.3 billion (S$3 billion) stimulus package to counter the downturn caused by the Sars outbreak in 2003. At that time, it was felt that the government had to come up with a stimulus package because the economy was still reeling from the effects of the September 2001 attacks in the US.

Stimulating domestic demand this time around, however, may be more difficult. One survey conducted by Nielsen Co Malaysia in October found that 67 per cent of Malaysians planned to put their spare cash into savings, up from 63 per cent in May.

Apart from the impact of lower international commodity prices, Malaysia is also likely to be hit by faltering demand for consumer electronics. A severe slowdown in this sector would have serious repercussions for the economy. Electronics is the country’s biggest export industry, accounting for 40 per cent of overseas sales in September.

The good news, however – at least for now – is that ministers are finally able to grapple with such problems without having to worry excessively about their own political survival.

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Key Political Risks

Now that the general assembly of UMNO, the senior partner in the ruling National Front coalition government, is over, the long-awaited general election could be held at any time. Constitutionally, Prime Minister Najib Razak has to call elections before April 21st 2012, after which the Elections Commission must hold the election within 60 days.

Widely expected to be the most hotly contested in Malaysian history, the polls will pit Mr Najib's government against a rival political coalition led by charismatic opposition leader Anwar Ibrahim.

While the opposition Pakatan Rakyat alliance attacks what is says are the corrupt and authoritarian ways of the government, Mr Najib has been describing the opposition coalition as an unnatural alliance of Islamic fundamentalists and multi-ethnic and liberal parties.

The strong economy is likely to favour the government.

WATCH OUT FOR:

The size of the expected government victory, particularly the ability of the ruling party to retake control of key states such as Selangor. Mr Najib needs to win convincingly if he is to implement long-delayed economic reforms. These include reducing oil and food subsidies and introducing a goods and services tax to boost government revenue.
The ability of Mr Najib to placate conservative elements of his Muslim-based UMNO party who disapprove of his policy of boosting national unity through greater inter-faith and ethnic tolerance.
The extent to which the government is able to convince the public that the coming elections will be free and fair. If the election result is close, influential organisation such as Bersih could declare them illegitimate, and stage major protests.