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Malaysia Special May 2018

Malaysia: Malaysians head to the polls in most unpredictable election yet

Malaysia is set to hold a general election on 9 May that is widely expected to be the greatest challenge yet to the ruling coalition following 61 years in power. Although polls still show Prime Minister Najib Razak and his incumbent Barisan Nasional (BN) coalition retaining a majority in the 222-seat parliament, disaffection among Malaysians due to rising living costs and financial scandals surrounding prominent members of the government have increased the possibility of an electoral upset. While the opposition remains splintered, the main challenge to the status quo will come from the Pakatan Harapan (PH) coalition, which is led by a former prime minister, Najib’s former mentor Mahathir Mohamad.

In the economic arena, a victory for the ruling BN coalition would imply policy continuity. BN authorities are currently aiming to turn Malaysia into a high-income economy by 2020. To this end, the government is targeting GDP growth of 5–6% through 2020 and is attempting to lift the wage share of GDP from below 35% in 2015 to at least 40% in 2020. The BN manifesto showcases the government’s commitment to these goals, mainly through increases to minimum wages in both peninsular Malaysia and Borneo; and higher caps for cash handouts to low-income households. In recent years, officials have emphasized infrastructure spending and pro-FDI policies, and the government has made progress in reducing the fiscal deficit from 7.0% of GDP in 2009 to 3.1% in 2017. These goals would likely remain in place if the BN coalition obtains a majority of seats in the election.

In the event of an opposition victory, however, there could be a significant shift in fiscal policy. Both major opposition groups—the Pakatan Harapan coalition and the Malaysian Islamic party (PAS)—have released manifestos calling for the abolition of the Goods & Services Tax (GST), which is seen as detrimental to Malaysians’ purchasing power. In turn, both groups call for revival of the former Sales & Services Tax (SST), which in the short term would likely lead to net revenue losses. The GST was introduced in 2015 and allowed the government to pursue fiscal consolidation even as oil-related dividends and royalties plunged. Given that GST is more efficient than SST due to sales tax collection loopholes, reverting to the SST would effectively also cause the deficit to widen unless offset with expenditure cuts, which are not included in the opposition plans.

In a similar vein to the Barisan Nasional manifesto, the Pakatan Harapan coalition is calling for an increase in the minimum wage to USD 386 per month within the next five years, from USD 257 per month currently. Both groups also stress the need for increased welfare spending and infrastructure development. However, and unlike the BN, the PH coalition would reintroduce selected fuel subsidies, which were scrapped in 2014 as part of the government’s fiscal consolidation drive. Higher expenditure, would, however, need to be offset by cuts elsewhere or improved revenue collection, given that the public debt has a ceiling of 55.0% of GDP and currently sits at 52.7%.

Meanwhile, Pakatan Harapan has proven particularly belligerent towards Barisan Nasional’s pro-FDI bias. In particular, Mahathir is dismissive of Najib’s cooperation with China’s One Belt One Road plan, while his coalition has emphasized the need for detailed studies of any large infrastructure projects awarded to foreign entities. A comprehensive review of FDI projects could threaten the up-trend seen in foreign infrastructure investment in recent years, but it could also improve the sustainability of the projects and reduce the build-up in contingent liabilities.

All told, as investors and analysts hold their breath ahead of election day, Prime Minister Najib—who is himself beleaguered by massive corruption scandals—has made the most out his firm grip on power. Elections have been called on a weekday for the first time in decades, and the campaign period is set to last 11 days, factors expected to weigh on voter turnout and benefit Barisan Nasional. Parliamentary approval of a contentious redrawing of electoral maps ahead of the election has also sparked protests among the opposition, while policymakers have pushed through an anti-fake news bill that critics say favors Najib.

Be that as it may, a Barisan Nasional victory would signal policy continuity, boding well for the government’s medium-term fiscal consolidation agenda and assuaging investors who are concerned over a political change after six decades of BN-dominated politics. This is the most likely scenario, due to a combination of a healthy macroeconomic backdrop, BN’s powerful grassroots apparatus and the advantages of incumbency. Conversely, an unprecedented Pakatan Harapan win—more likely than ever before as citizens are disgruntled with rising costs and unchecked corruption—could lead Malaysia into uncharted waters. Fiscal concerns aside, the immediate aftermath would likely see the ringgit weakening as some foreign investors would opt out of the country, an effect that would be compounded by heightened global trade risks.

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