What investors will be looking out for from the Malaysia election

While Malaysia’s economic fundamentals have been encouraging, the general election on 9 May will be closely watched as investors will want policy continuity, which is crucial to longer-term stability.

By: Irvin Seah, Senior Economist — DBS Group Research

This is an excerpt of a deep-dive into Malaysia’s election and economy which we published on Friday (4 May, 2018). For the full report, please click on the link at the bottom of the page.

Malaysia is headed for a hotly contested general election on 9 May. The incumbent government, led by Prime Minister Najib Razak, will be challenged by the opposition coalition led by former Prime Minister Dr Mahathir Mohamad.

In the previous election in 2013, PM Najib’s coalition won 133 out of a total of 222 parliamentary seats but secured only 47.38% of the popular vote. In recent years, issues such as the 1MDB scandal, as well as the introduction of an unpopular Goods and Services Tax (GST), have complicated matters for the incumbent government.

Despite the politically charged climate, economic fundamentals are stronger on multiple fronts today compared to the previous election. This could work in the ruling party’s favour.

GDP growth registered 5.9% in 2017, up from the commodity-/oil-driven slump in the preceding two years and significantly stronger than the 4.7% in 2013. While expected to be a tad slower at 5.0–5.5%, this year’s growth will be more broad-based and led mainly by robust domestic growth.

The generosity in the last fiscal budget also added some short-term support for private consumption. Total budget allocation increased by 7.5% to MYR 280.25bn for FY18, up from MYR 260.8bn previously. Subsidies and the social assistance scheme, which accounts for 11.3% of total operating expenditure, is projected to rise by 15% after two consecutive years of declines.

Overall, Malaysia is back on the radar screen of foreign investors. As such, investors would certainly be looking forward to Malaysia carrying on its current progressive policies, especially those pertaining to foreign investment and economic transformation, after the election.

Despite their unpopularity, the decisions to abolish fuel subsidies and introduce the GST have been largely positive for the fiscal position. Fiscal deficit is projected to fall to 2.8% of GDP in FY18 from 3.8% in the last election. Government debt has since improved markedly, within a short period, from its 55.6% peak in mid-2015 to 50.8% as of end-2017.

Malaysia’s reliance on petroleum-related tax has also more than halved to 9% of total tax revenue from 27% between FY12 and FY17. This has helped buffer Malaysia’s fiscal position against the volatility in global energy prices. Concomitantly, the intake from the GST has risen to a whopping 25% of total revenue since its introduction. The GST is now the second-largest contributor to the fiscal coffer behind corporate income tax (36.3%).

Overall, Malaysia has made significant progress on the fiscal front. This has put the incumbent government in a very strong position to implement the next phase of economic transformation under the 11th Malaysia Plan (11MP).

Politics is often controversial, and election outcomes can be unpredictable. But beyond the election and political uncertainties, Malaysia has made significant progress over the year in terms of ensuring growth stability and fiscal sustainability. In this context, effective implementation of her economic transformation strategies as well as continuity of many of her more progressive policies will be crucial to its longer-term outlook. Both internal and external stakeholders will be looking to the next government in this respect.

To read the full report, click here to Download the PDF.