Do Investors Have the Right Narrative on Malaysia?

SINGAPORE (May 28): It has been another dramatic week in Malaysia. The new Pakatan Harapan (PH) government has revealed that the country’s total debt and liabilities have breached RM1 trillion ($336 billion). It has also come to light that the previous Barisan Nasional (BN) government had been bailing out the scandal-ridden 1Malaysia Development Bhd (1MDB), paying off nearly RM7 billion worth of its debts since April last year. In the Ministry of Finance’s 2017/18 Economic Report, total federal government debt was reported to be just over RM685 billion as at end-June 2017.

Now, the new PH government is trying to stabilise Malaysia’s finances. Among other things, salaries for ministers will be cut by 10%, and about 17,000 “political appointees” on the government payroll will be dismissed, according to Prime Minister Dr Mahathir Mohamad. In addition, a number of government agencies answerable to the PM’s office will be closed. The authorities are also going after members of the previous government who may have broken the law. Former prime minister Najib Razak was himself hauled into the Malaysian Anti-Corruption Commission’s headquarters this past week to answer questions about 1MDB.

There was, of course, little doubt that things were going to change after Najib was booted out of office. And, so far, just about all the suspected excesses of his government are proving to be true. Notably, the Auditor-General’s report on 1MDB in 2015, which was declassified on May 15, corroborated much of what was said by the US Department of Justice in its civil forfeiture complaints of July 20, 2016. Separately, the police have reportedly found that the bags of cash seized over a week ago from residences in Kuala Lumpur as part of their probe into 1MDB added up to an eye-watering RM130 million.

So, it must be rather ­perplexing for Malaysians who voted for change that analysts and media commentators appear to think that the new PH government led by Mahathir will not be as good at formulating and implementing economic policies as the ousted BN government led by Najib. A commentary by Bloomberg on May 17 suggested Mahathir’s supposed contempt for markets, demonstrated by his calling George Soros a moron and bringing down a protective curtain of capital controls during the Asian financial crisis, is consistent with his decision to bring an end to the Goods and Services Tax.

A separate commentary in The Straits Times (ST) on May 16 actually stated that Najib’s economic policies were good for Malaysia and should be preserved, with specific reference to the introduction of GST as well as the scrapping of fuel subsidies and the building of the high-speed rail that will link Singapore and Kuala Lumpur.

Things were not fine

On the face of it, these ideas are easy to defend. A good sovereign credit rating is crucial for countries such as Malaysia to maintain the confidence of global capital markets. Fuel subsidies can be a huge fiscal burden when oil prices rise. And, many countries — including Singapore — see GST as a means of widening their tax base and efficiently raising government revenue. There are also certainly a lot of positive economic spin-offs that would come from a high-speed rail link between Singapore and KL.

Yet, many Malaysians would probably disagree that Najib left their economy in “reasonably good shape”, as the ST commentary asserts. For one thing, US$1 is now equivalent to RM3.95. At the beginning of 2009, the year Najib took office, US$1 was equivalent to RM3.47. Also, even based on just the borrowings that have been officially disclosed, Malaysia’s federal government ended up more indebted during Najib’s time in office. Last week, The Edge Singapore reported that Malaysia’s federal government debt averaged 53.1% of GDP from 2008 to 2017, versus only 38.7% from 1998 to 2007.

There were also complaints that wage growth was not keeping up with the cost of living. In fact, the fiscal discipline Najib pursued could well have added to the pain felt by ordinary Malaysians. Anushka Shah, a senior analyst at Moody’s Investors Service, notes in a May 14 report that although the previous government achieved eight consecutive years of fiscal deficit reductions to 2.8% budgeted for 2018, lower expenditures mainly drove the consolidation, with revenue falling as a share of GDP since 2012.

Then, there is the monumental scandal surrounding 1MDB. While there was evidently a cover-up in Malaysia, the affair was investigated in other jurisdictions. Notably, the Monetary Authority of Singapore began an investigation as far back as in March 2015, and was bringing bankers who had aided Low Taek Jho, or Jho Low, a key figure in the scandal, to book the following year. So, it cannot have escaped the notice of anyone with an interest in Malaysia that something very bad was happening in the country. Indeed, by May 9, a clear majority of Malaysian voters knew they needed to take back their country from an utterly corrupt and dishonest government.

Caricatured by analysts, media

Despite all of this, the narrative in financial markets on Malaysia’s PH government remains focused on the fiscal risks related to its promise to scrap the GST and reintroduce fuel subsidies, and the fallout that could come from its promised review of mega projects such as the KL-Singapore High-Speed Rail link. Worse, it seems that some commentators are promoting a caricature of PH and its leaders to support this narrative.

Invoking the memory of Mahathir’s tangle with Soros and experiment with capital controls during the Asian financial crisis is a case in point. Analysts at the time (myself included) feared these moves would result in investors fleeing. However, Mahathir also fixed the ringgit at a low enough level to spark an export boom, and Malaysia soon recovered from the crisis.

One could argue that analysts are barking up the wrong tree again. While they have been demanding to know how the shortfall in GST revenue will be addressed, Mahathir appears to be simply taking an axe to government expenditure. A smaller budget might be temporarily negative for the economy, but surely a leaner and more efficient government will provide a better platform to spur long-term growth.

Another example of the PH government being caricatured by the media is a reference in the ST commentary to well-known economist Jim Walker describing the PH manifesto as being “economically illiterate”. A full reading of Walker’s comments on SmartKarma shows that he was actually reiterating a bullish stance on Malaysia despite the surprise outcome of the May 9 elections. The way he sees it, “the economy is doing very well and Chinese investment flows — although Beijing has clearly backed the wrong horse — will not stop because of this setback.”

As for his comment about PH’s policy manifesto being “economically illiterate”, he said that the same was true of the former Pakatan Rakyat coalition that Anwar Ibrahim led five years ago. “The likelihood is that the worst aspects of the proposed policy programme will be ditched as politics clashes with economic reality,” Walker added.

Malaysia Inc again?

Ultimately, the real task ahead for the new PH government is not just to keep a lid on Malaysia’s fiscal deficit. To win the confidence of financial markets as well as Malaysian voters, it needs to find a way to stimulate economic activity and spur investor enthusiasm.

Mahathir’s recent references to “Malaysia Inc” could be an indication of where things are headed. During his first time around as PM, he promoted a business-friendly form of government focused on drawing investment and fostering growth. He also pushed the sale of government-linked companies to the private sector. It was not an unqualified success. It led to accusations of crony capitalism, and companies such as Perwaja Steel and Malaysia Airlines ran into financial trouble.

Yet, with some of Mahathir’s biggest critics back then now sitting in his cabinet, insisting on a greater emphasis on transparency and good governance, re-visiting this economic strategy could lead to a more positive result. Whatever the case, it’s about time analysts and media commentators widen their narrative on Malaysia to the possibilities that lie ahead instead of focusing on the risks of veering away from fiscal conservatism.

News Source: Link