Malaysia: Economic outlook bright despite election uncertainty

While a fiercely fought general election could send ripples through Malaysia’s economy in the next few months, the country otherwise looks set for another year of solid growth on the back of strong domestic demand and higher private investment driven by a number of public sector initiatives.

Experts are divided on whether the forthcoming election, which may prove to be the closest in Malaysia’s history, is likely to have anything more than a minor impact on capital flows and the ringgit, with consensus suggesting the economy is strong enough to weather a spell of uncertainty or change of government despite recent depreciation in the local currency.

In a move aimed at encouraging growth, the Bank Negara, Malaysia’s central bank, opted earlier this month to leave its benchmark overnight policy rate at 3%. Malaysia’s consumer price index was running at 1.3% in January, year-on-year (y-o-y), although there is a risk that the low lending rate could push up inflation in the coming months.

However, the central bank said it was confident that continuing strong investment activity and higher private consumption would steer the economy forward through 2013. “The Monetary Policy Committee considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth,” the bank said in a statement issued on March 7.

The reserve’s confidence is echoed in the latest assessment on the country from the IMF, which left its forecast of 5.1% growth for 2013 unchanged. The figure marks a slight drop on last year’s economic expansion, which Bank Negara put at 5.6% in data it released in late February.

The IMF pointed to Malaysia’s sound fiscal policy, saying home-grown economic activity, strong investment and high domestic consumption should continue to drive growth.

It warned, however, that external factors, such as slower-than-expected expansion in the US or China, along with the threat of continued recession in the eurozone, could weigh on the economy. In a separate note issued in late February, the agency also cautioned that the forthcoming general election could cause “some market volatility”.

Malaysia’s parliament must be dissolved on April 28 at the latest and elections held within the ensuing 60 days. Politicians have already begun courting voters, with the election manifesto of the Pakatan Rakyat opposition coalition, led by Anwar Ibrahim, focusing heavily on economic issues. The opposition has pledged to boost employment, in part by reducing the numbers of foreign workers, and increase the basic wage. Its manifesto includes a promise to lower the cost of utilities, fuel and state services, while creating a $643m fund to help small and medium-sized businesses deal with the impact of its proposed salary hikes.

Critics of the opposition have described the programme as unsustainable in the present economic climate, adding that it lacked details on how the policies would be funded. The governing Barisan Nasional bloc has yet to release its own policy platform, although Prime Minister Najib Razak has called for a further term to complete the economic reforms initiated over the past five years.

Most pundits are anticipating one of Malaysia’s tightest elections to date, with some contrarians predicting that the Barisan Nasional could lose power for the first time since independence. While international analysts remain largely positive about the economy’s prospects for 2013, a number have joined the IMF in pointing to the forthcoming general election as a possible cause for concern.

In an investors’ note issued in late February, financial services group Credit Suisse warned a change of government could prompt disturbances in the market while money managers come to terms with the new situation. “An opposition victory would likely be disruptive to capital flows and the ringgit, not because it would necessarily be a ‘bad’ outcome, but because after decades of Barisan Nasional rule, it would create significant uncertainty for investors about the direction of policy and the structure of business in Malaysia,” the group’s report said.

However, other experts, including Kenneth Akintewe, fund manager with Aberdeen Asset Management, were confident that long term, Malaysia’s economy would weather a temporary disruption. “The reform agenda may be somewhat deflected in the near term but we think there’s enough momentum behind that process that it’s not going to come to a complete standstill,” he said in an interview with Bloomberg on March 4. “We would look for opportunities if the market overreacts to the election risk to actually reposition in the currency market.”

Gundy Cahyadi, an economist with Singapore-based bank OCBC, said he was confident any disturbances in the economy would dissipate soon after the polls close. “A lot of market players have been talking about the elections. Once that is over and done with, sentiment will shift back to the fundamentals of the economy,” he told Reuters news agency on March 7.

While the election could produce a degree of uncertainty in the coming weeks, experts have suggested that an awareness across the political divide of the need for Malaysia to continue its economic expansion and attract further investment, is likely to play a key part in future policy-making.