Malaysian Voters Are Content Just to Muddle Through Again

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(Bloomberg) -- Predicting political events has become a mug’s game, especially since Donald Trump’s ascension to the U.S. presidency and the Brexit vote. So pardon investors for not caring to overthink the outcome of today’s Malaysian general election.

The most recent survey by pollster Merdeka Centre says the ruling Barisan Nasional coalition will win with 37.3 per cent of the popular vote, down from 47.4 per cent in 2013. This supports investors’ base-case scenario: Prime Minister Najib Razak will retain power, but it may be close.

What investors aren't prepared for is the possibility that Najib’s 92-year-old mentor-turned-foe Mahathir Mohamad will unseat him. The end of unbroken single-party (or group) rule in the Malayan peninsula would be an event of long-term significance: Even in Singapore – which exchanges goods, people and ideas with its northern neighbor on a daily basis – politics could become more contestable.

The reason investors aren't positioned for a regime change is that they think the next government – whoever forms it — won’t rock the boat. And why should it? The economy is in the midst of a cyclical upswing, thanks to firmer commodity prices and booming exports. A crackdown on offshore derivatives has choked trading in ringgit contracts in Singapore, prompting exporters to bring cash home and improving dollar liquidity.

Although they’re two-and-a-half times richer on a per-capita basis, Malaysians are cranking up output at a faster pace than Indonesians. Despite a slight wobble, the Malaysian currency is by consensus opinion the second-most undervalued in Asia. Even the 4-percent-plus yield on the 10-year bond is judged by some analysts to be a tad excessive.

In other words, investors aren't looking for an excuse to leave Malaysia. An election upset, while causing some knee-jerk selling, would be unlikely to lead to capital flight. For one thing, investors don’t believe Mahathir is really serious about his pledge to do away with the unpopular goods-and-services tax. While the high cost of living is a hot-button issue, the three-year-old, 6 percent GST has become too important a part of government finances to be scrapped altogether. A more likely scenario is higher outlays for education and healthcare. That won’t be such a bad thing. 

While investors will expect politicians to leave the cyclical upswing alone, they will also wonder whether either faction is capable of delivering a much-needed structural reset.

The two seminal economic events in Malaysia in the last 20 years have been Mahathir’s capital controls of 1998 and the multibillion-dollar 1MDB corruption scandal under Najib.

Both have had consequences that aren't immediately apparent. Mahathir’s capital controls are often touted as a success; Malaysia returned to growth after the Asian crisis more quickly than other affected countries. However, the short-term victory has had a long-term cost. By tossing aside the painful IMF prescription of deep restructuring, and jailing of then-Deputy Prime Minister Anwar Ibrahim, Malaysia also signaled its unwillingness to smash the country’s “relationship-based system of capitalism.” 

It continues to compete on costs, but apart from the odd success such as Tony Fernandes’s AirAsia Bhd., Malaysia doesn't have much of a startup culture. The economy may be destined to remain stuck in its middle-income trap, despite being blessed with a young workforce. The technology transfers that pulled Hong Kong, Singapore, South Korea and Taiwan into the ranks of high-income economies just don’t happen as easily with nations that pursue capricious policies seen as out of line with Western rules. Retribution doesn't always have to be as obvious as the Trump administration’s ban on China’s ZTE Corp. Small countries like Malaysia often just get ignored.

If the now-revoked capital controls have left an unpleasant aftertaste, the brazenness of the 1MDB incident reeks of worse. About $4.5 billion was allegedly stolen from the state investment fund and laundered around the world. When a political system proves incapable of self-correction after a plunder of this scale — described by U.S. Attorney General Jeff Sessions as “kleptocracy at its worst” – there’s a reason to worry. Perhaps the institutional strengths that Moody’s Investors Service says underpin the country’s stable A3 sovereign rating are overrated.

The risk then is that Malaysia will buttress a fraying institutional framework with the brute power of Chinese money. As my colleague Shuli Ren has noted, $34 billion of China-backed belt-and-road infrastructure projects are underway. The investment will no doubt allow Malaysia to keep muddling through, and paper over the deep cracks of the country’s race-based economic policies.

Only if growth and governance come unstuck simultaneously will investors worry about the politics. For now, one of those two planks is holding up.

©2018 Bloomberg L.P.

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