What's next for Malaysia?

As Tay’s interview went viral, Tony Pua, Malaysian finance minister Lim Guan Eng’s political secretary, went on the warpath. Pua pointed out that it was, in fact, Malaysia’s fiscal account that was in deficit, not its current account. Pua also noted that Malaysia had a diversified economy, and was not dependent on oil. However, oil and gas revenue is forecast to account for 30.9% of government revenue in 2019. Excluding a one-off special dividend from Petronas, the underlying contribution to government revenue from oil and gas is about 22%.

Pua criticised Tay for being “biased and factually incorrect” and admonished the business news outlet that aired the interview. “Bloomberg, with the power it wields, certainly has a duty to fact-check the information presented by their guests, especially when the mistakes were so elementary. If the information is outright false and damaging, they should be corrected,” Pua said. A few days later, UBS issued a clarification that said Tay had misspoke, using the “wrong terms” in describing the Pakatan Harapan (PH) government’s current account deficit, when he actually meant fiscal deficit.

Pua’s aggressive rebuttal of Tay’s comments on Malaysia came amid growing scepticism in financial markets that the PH government is capable of addressing the country’s debt overhang and engineering a recovery while deflecting political attacks from Malay-dominated opposition parties. In January, credit rating agency Moody’s lowered its forecasts for Malaysia’s GDP growth to 4.7%, and adjusted it downwards again in April to 4.4%. It expects that PH’s new fiscal policy choices, particularly the move to abolish the GST of 6%, will narrow its revenue base and reduce fiscal flexibility.

In March, Bloomberg reported that “Malaysia is bucking the trend in what is generally a good 2019 for regional stock markets”. It was noted that whilst stocks in Singapore and Indonesia were up 4% and 3% respectively, the FTSE Bursa Malaysia KLCI index had fallen more than 1% since the start of the year. It predicted that the trend was likely to persist as investors wait for the government to deliver on promises to cut the budget deficit, clamp down on corruption and boost purchasing power.

This was followed by more bad news: On April 17, stock market indices provider FTSE Russell placed Malaysia on the fixed income watch list for at least six months. It also stated it was considering a downgrade for Malaysia in the World Government Bond Index. This downgrade raises the risk of capital flight and increases headwinds for the ringgit, which economists have already warned could dip to as low as 4.15 against the greenback by the end of the year.

By some estimates, foreign investors have dumped Malaysian shares worth more than a net US$500 million ($679.6 million) so far this year. According to an April 29 report from MIDF Research, a Malaysian financial services provider, foreign investors were net sellers of Malaysian stocks in the week of April 22, for a fourth consecutive week. Up to that week, foreign investors’ net sales amounted to RM1.14 billion.

To be sure, PH did not start off on the right foot with the financial markets. On May 9 last year, even as ordinary Malaysians were cheering the defeat of the Barisan Nasional (BN) coalition government that had ruled the country for more than 60 years, analysts and investors were beginning to panic. During the hard-fought election campaign, the PH coalition, led by Dr Mahathir Mohamad, had promised to abolish the much-hated GST, do away with increasingly expensive highway tolls, and review mega projects with lopsided terms that do not benefit the nation.

For many market watchers, this spelt a potentially bigger budget deficit and slower economic growth. Late in the evening of May 9, 2018, the US-traded iShares MSCI Malaysia ETF sank as much as 9%. The Malaysian ringgit fell 2.4% against the US dollar to 4.07 right after the results were announced.

However, global markets were performing strongly at the time, fuelled by expectations of strong economic growth. And, together with Malaysia’s relatively strong economic fundamentals, including a consistent current account surplus, concerns about the new PH government’s plans soon subsided. But things have since changed.

DBS Group Research economist Irvin Seah says in a recent report that Malaysia faces the same headwinds as other emerging Asian economies, which have recently suffered dips in their export and industrial output growth. “This can be attributed to the trade tension between the US and China, and a broad-based slowdown in global demand. Malaysia will be no exception.”

Seah says Malaysia needs its domestic growth engines to fire up to keep its economy humming. But the prognosis on that front is not good. For one thing, business loan growth appears to have peaked and is seen to be declining now. “Imports of capital goods, a proxy for investment demand, has continued to contract, averaging -11.5% in the past six months. This points to a subdued outlook for domestic investment growth going forward,” he adds.

Seah is forecasting GDP growth in Malaysia to come in at 4.2% y-o-y in 1Q2019, the slowest rate of expansion since 2Q2016 and below the central bank’s official full-year GDP growth forecast of 4.3% to 4.8%.

Cracks in the coalition

Besides the more hostile economic backdrop, concerns are also mounting over the ability of the PH government to deliver on its promised reforms, despite having Mahathir at the helm. One significant stumbling block is what some political observers call a “trust deficit” between the new government and Malaysia’s 1.4 million-strong civil service.

A well-connected source who has worked closely with Mahathir tells The Edge Singapore that the PH government does not command the loyalty of civil servants as the BN government did. “The PH ministers, many of whom were formerly from the opposition, still behave like they [are] in the opposition. They do not understand how to work with the civil servants and the technocrats among them,” the source says. “And among the civil servants, they still feel they are part of the BN government.”

Moreover, the PH ministers themselves are not all that united in terms of their priorities. “Mahathir is captain of a football team of 11 ministers with very different backgrounds and ideology,” the source says.

On top of that, while the majority of Malaysians shared a common purpose of wanting to get rid of previous prime minister Najib Razak when they went to the polls last year, their own expectations of the PH government are quite diverse. For many, the cost of living and business opportunities are key. “The people do not see progress in terms of policy or legislative reform. They see that costs have not gone down, and that things have not improved for them in their day-to-day lives. The bread and butter issues of before have not been addressed as per their expectations,” says the source.

Meanwhile, the young urbanites, who voted overwhelmingly for PH, are frustrated by PH’s inability to deliver seemingly simple election promises, such as abolishing of the death penalty and the Anti-Fake News Act.

Hazree Turee, managing director at research outfit BowerGroupAsia, says the PH government is suffering from the perception that it is disconnected and inexperienced. “Senior civil servants whom I spoke to say there is no direction. While Mahathir talks about integrity and being corruption-free, the direction the government is taking and where it is steering the country is still not clear right now,” he opines.

Mahathir himself does not have a firm grasp over the PH coalition, says Hazree. “He’s disconnected [from] them. Mahathir also leads the smallest component party in the coalition [Parti Pribumi Bersatu Malaysia]. PKR (Parti Keadilan Rakyat) and DAP (Democratic Action Party) are the biggest, so why should they listen to him?”

Identity politics

A much more pernicious hurdle that PH must clear is the identity politics that is deeply entrenched in the Malaysian psyche. This was clearly on display at the ­anti-ICERD (International Convention on the Elimination of All Forms of Racial Discrimination) rally on Dec 8, 2018, when thousands of mostly Malay protestors took to the streets to oppose the ratification of the treaty. Their concern was that ICERD would put paid to the “special position” of the Malays, as prescribed by Article 153 of the Federal Constitution of Malaysia.

So far, the PH government has shown itself to be unwilling to take any chances on this front. In November, several weeks before the anti-ICERD rally took place, the government reversed its pledge to ratify the convention. This was a wake-up call of sorts for Malaysians as well as international investors expecting the PH government to quickly deliver sweeping reforms.

James Chin, director of the Asia Institute at the University of Tasmania, notes that race and religion have been the foundation of Malaysian politics since independence. “Under the New Economic Policy (NEP) promulgated in 1971, Malays and other bumiputeras were given an extensive host of benefits [university admissions, bank loans and overseas scholarships, just to name a few] under Article 153, all in the name of affirmative action,” he says. For decades, adds Chin, the old BN coalition had claimed that this “special position” of the Malays and bumiputera required government help so as to preserve the “Malay share” of the economy.

As main opposition party United Malays National Organisation (Umno) now desperately tries to regain its political position, it has been working ever more closely with the Malaysian Islamic Party, or PAS, and playing up fears of diminishing “Malay power”. And, coupled with growing apathy among the non-Malays, the PH coalition appears to be losing ground. This year, PH-backed candidates lost in three successive by-elections, in Cameron Highlands, Semenyih and Rantau, held in January, March and April, respectively. The demographic majority in the areas of Semenyih and Rantau was the Malays, who voted for PH in May 2018 hoping for change, but who have been left disappointed by the lack of progress since then.

Perhaps PH should have seen it coming, for a poll conducted by Ilham Centre and think tank Penang Institute between October and December 2018 showed that nearly 60% of 2,614 Malay respondents surveyed were unsatisfied with its performance. This trend has not changed, and more reports are emerging that PH is simply not addressing the concerns of the people.

On April 26, 2019, it was reported that fewer than half of Malaysians approve of Mahathir, with an opinion poll by pollster Merdeka Center showing that only 46% of voters surveyed were satisfied with him. This was a far cry from the 71% approval rating he received in August 2018.

Of the 1,204 survey respondents, 46% felt that the “country was headed in the wrong direction”, while just 39% said they approved of the ruling government. Chief among the list of gripes was the high cost of living, which was reflected in the finding that only 40% of those surveyed were satisfied with the way the government was managing the economy.

Reason for optimism?

Francis Hutchinson, senior fellow & coordinator of the Malaysia Studies Programme at the ISEAS-Yusof Ishak Institute, says the PH government has been stymied by a whole range of constraints. Notably, there were financial scandals at 1Malaysia Development Berhad (1MDB) and Felda Global Ventures, which the PH government has been working to clear up. The previous BN government had also failed to make some RM19.47 billion in GST reimbursements, going all the way back to the year the GST was implemented.

“The PH administration also inherited a lot of large-scale projects whose financial benefits are not immediately obvious. Key among these is, of course, the East-Coast Rail Link,” Hutchinson says. The ECRL is a mega-project that came under intense scrutiny, as it was seen to be heavily in China’s favour. The PH government had announced it would cancel the 640km rail line development, meant to cut across the underdeveloped east coast of Peninsular Malaysia. But it backtracked on the decision to avoid paying RM22 billion in compensation to the Chinese company involved. The contract was renegotiated, and the cost was slashed from RM65.5 billion to RM44 billion.

Hutchinson figures that it is only a matter of time before the PH government begins addressing other projects that have been put on hold. “The pending infrastructure projects with Singapore in the form of the High-Speed Rail and Johor Bahru-Singapore Rapid Transit System Link (RTS) have been put on hold. I would anticipate that now that progress is being made with China, attention will soon turn to the pending issues with Singapore,” he tells The Edge Singapore.

How quickly will these projects be addressed? And, how long will it take for the PH government to demonstrate that it is doing something about the cost of living and other bread-and-butter issues? “The new administration is understandably eager to demonstrate quick wins and improvements in a wide range of areas. Furthermore, it also has a crop of new cabinet ministers who, while very able, are needing to learn on the job. In this context, the potential for change also brings the possibility of disagreements,” Hutchinson says.

Neighbourly ties

Whatever the case, Singapore has good reason to root for stability and growth in Malaysia. BowerGroupAsia’s Hazree says, “Singapore as a highly trade-reliant country needs the stability of its neighbours. Malaysia is one of Singapore’s major trade partners, and the last thing it needs is a Malaysia in chaos to disrupt the supply chain.”

For example, food is one of the most basic yet crucial imports from Malaysia. According to the Agri-Food and Veterinary Authority of Singapore website, only a small amount of food is produced locally — 8% of vegetables, 8% of fish and 26% of eggs. Just about everything else, including more than a third of chicken and three-quarters of eggs, come from Malaysia.

Moreover, there was a dispute between Malaysia and Singapore last year over Singapore’s implementation of the Instrument Landing System in the new Seletar Airport, which Malaysia claimed would restrict developments at Pasir Gudang town, which is near Seletar Airport. This led to Firefly, the budget airline arm of Malaysia Airlines, cancelling all its flights to Singapore for four months. The suspension was lifted only on April 22.

In an earlier research paper co-­written by ISEAS’s Hutchinson, it was pointed out that each country is the other’s second most important trading partner, in both ­cases surpassed only by China and outranking traditional commercial allies such as the US and Japan.

“The economic linkages between Singapore and Malaysia are longstanding, far-reaching, spanning trade in goods and services, as well as foreign direct investment and movement of talent,” he says. “Due to this, the two nations are closely integrated into regional and global production networks, an intertwining process that began during Mahathir’s first tenure.

“Building upon their geographical and social cultural proximity, complementary factor endowments and familiar regulatory environments, the ties between Singapore and Malaysia have grown in breadth and depth over the past three decades.”

Nevertheless, there is a silver lining. The strength of ties between the two nations is resistant to short-term changes in policy, he says. “Ties of this quality take time to cultivate but, while they are resistant to short-term changes in policy, should not be taken for granted,” Hutchison says.

Malaysia-Singapore disputes

Since the Pakatan Harapan (PH) government came into power in Malaysia, several bilateral issues have resurfaced. While the meeting between Singapore Prime Minister Lee Hsien Loong and Malaysian Prime Minister Dr Mahathir Mohamad at the 9th Singapore-Malaysia Leaders’ Retreat in April appeared amicable, it remains to be seen how events will pan out.

May 28, 2018: Slowdown on high-speed rail

Less than three weeks after Mahathir took office, he expressed a wish to scrap the KL-Singapore High Speed Rail, a project Singapore inked in 2013 when former prime minister Najib Razak was in power.

Last September, both countries agreed that the service would now be expected to commence by Jan 1, 2031. Under the new deal, Malaysia also agreed to reimburse Singapore $15 million by end-January 2019 for costs incurred as a result of the deferment of the mega project.

June 25, 2018: In a flux over water

“I think it is manifestly ridiculous that we should sell water at 3 sen per thousand gallons. That was okay way back in the 1990s or 1930s. But now what can you buy with 3 sen? Nothing.”

Mahathir’s comments in an interview with Channel News Asia reignited a dispute between the two countries about the sale of raw water from Malaysia to Singapore. At the time, Mahathir said he would make a presentation to Singapore to renegotiate the terms of the water supply deal.

Singapore maintains that Malaysia has lost its right to renegotiate the terms of the water agreement. However, the Leadership Retreat in April ended with both premiers agreeing to have their attorneys-general meet to go over the agreement; if an agreement cannot be reached, they will go for arbitration.

Oct 25, 2018: Maritime mess

Malaysia announced changes to the Johor Bahru port limits that reportedly extended significantly eastward beyond the territorial sea claim. In December, Singapore extended its port limits off the coast of Tuas.

Shortly after, Malaysian vessels were found to be intruding into Singapore waters, including one which was visited by Johor Chief Minister Osman Sapian, who claimed he had been given the green light to do so. Osman’s claim was later denied by Malaysian Foreign Minister Saifuddin Abdullah. On Feb 9, 2019, there was a collision between Malaysian buoy-laying vessel Polaris and a Greece-registered ship, Pireas, in Singapore waters.

On April 8, Singapore and Malaysia agreed on a permanent suspension of the new port limits and reverted to the limits before October and December 2018.

Dec 4, 2018: Airspace restriction

Malaysian Transport Minister Anthony Loke declared in Parliament that Malaysia wanted to reclaim control over its airspace in southern Johor. The airspace had been managed by Singapore according to an agreement inked in 1973. Loke also described Singapore’s newly implemented Instrument Landing System procedures for Seletar airport as a “violation” of principle. He said the ILS would interfere with developments and shipping operations in Pasir Gudang.

On Dec 25, Malaysia announced the establishment of a permanent restricted area (RA) of the airspace over Pasir Gudang, to take effect on Jan 2, 2019. Firefly, the regional carrier of Malaysian Airlines, was prevented from operating in Singapore. It was to have moved its operations from Changi Airport to the new Seletar Airport beginning Dec 1 last year.

On April 8, Singapore agreed to withdraw the contentious ILS for Seletar Airport, while Malaysia suspended the permanent RA over the Pasir Gudang airspace indefinitely. A high-level committee has also started reviewing the Operational Letter of Agreement between Kuala Lumpur and Singapore Area Control Centres concerning Singapore Arrivals, Departures and Overflights 1974.