Election Woes

Malaysia

Economic News

22 Jul 2010
Share
Text size +-
Share
Malaysia's political landscape was dramatically transformed last weekend as the ruling coalition government, Barisan Nasional (BN), suffered its lowest margin of victory in 50 years. BN secured just under two-thirds of the federal parliament, a significant departure from the previous elections held in 2004, when the party won 90%. Islamist and leftist opposition parties also won control of five of the country's 13 states, up from one in the previous term.



While BN won the election as expected, few observers had anticipated that the crucial two-thirds majority, which allows the government to change the constitution at will, would not be attained.



The governing regime has done well to improve the economy, and Malaysia experienced GDP growth of 6.3% in 2007, as well as a 69% jump in foreign direct investment (FDI) to $13.7bn. In this respect, many feel the surprising results stem not from economic, but from political issues, pointing to the unprecedented swing as an indication of growing voter frustrations over inflation, racial tensions and a government that did not perform as much as promised to curb corruption and increase transparency. Since its independence in 1957, Malaysia has had one ruling party with little in the way of opposition representation in parliament, and observers now expect a short period of fragmented government.



The governing party is currently engaged in massive spending programmes, which over the past 12 months have included the introduction of five designated economic development zones. Some fear that many of these projects could be stalled or scaled back should the new state governments decide to review them.



Another concern is related to the potential for a slower decision making process for the passing of crucial economic legislation. For example, BN had indicated prior to the elections that it would review lowering the current subsidy on oil prices in 2008, a policy to which the opposition has already expressed disapproval.



With stocks markets across Asia already reeling over investor concerns abuot a possible US recession, the unexpected election results could not have come at a worse time for Malaysia's stock exchange. On the first Monday of trading after the elections, the benchmark Kuala Lumpur Composite Index (KLCI) fell by 10%. This was the biggest one-day drop since the Asian financial crisis in 1998, and led to the suspension of trading for a brief period towards the end of the day.



Share prices in 99 of the top 100 KLCI member companies fell, with major companies linked to the federal government or behind large government projects accounting for the largest declines.



Of the four new states in which the opposition was victorious, foreign investors are looking most closely at the island of Penang, a key manufacturing base and home to major US electronics firms such as Dell, Intel and Motorola. Lim Guan Eng, Penang's new chief minister elect, has assured foreign investors that the state's pro-business policies will remain unchanged, telling press, "We will not undertake any policies that will frighten investors away." Vincent Leusner, president of the American Malaysian Chamber of Commerce, said, "The opposition victories will not hurt American investment."



Nonetheless, analysts believe that foreign investors will act with caution for the time being, in order assess the impact of the opposition influence on economic policies.



While, as demonstrated in the stock market, reactions to such dramatic results will often be knee jerk, political and economic observers point out that there may be substantial longer-term positives. As volatility in a country's election results is generally seen as indicative of the degree of democracy, some have suggested the recent events could be a catalyst for greater transparency and corporate governance. The private sector may be able to look forward to an era of more transparent public tendering and awarding of government projects.



Gerald Ambrose, managing director of Aberdeen Asset Management Malaysia, told OBG, "A powerful opposition is a positive development for the long term, providing checks and balances for trillion ringgit government spending."



The absence of violence following such hotly contested elections, as well as the success of opposition parties, are also encouraging signs negating any possible suspicions of elections fraud or deceit.



The last time the ruling coalition failed to attain the two-thirds margin was in 1969, when polls were followed by a period of race riots and a declaration of a state of emergency. While the past few days have seen some small-scale demonstrations, they have remained peaceful and orderly, a testament to what many believe is a maturing democracy.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In Malaysia

Plans for Johor

This week it was announced that the state of Johor would become one of the primary growth engines of the country under the Ninth Malaysia Plan (9MP).

Latest

Turkey's Prime Minister Ecevit in the US

The Turkish Prime Minister Bulent Ecevit has spent the last week in the US hoping to garner support for economic reforms at home and trade concessions for Turkish exports to the US.