Previous Quarterly Editions
Expropriation Risk: 38 38 39 41 Political Violence Risk: 38 38 39 39 Terrorism Risk: 34 34 34 34 Exchange Transfer and Trade Sanction Risk: 45 45 45 45 Sovereign Default Risk: 27 27 27 27
TREND ►
As with other South-east Asian countries, the impact of COVID-19 has affected key metrics in the Ma-laysian economy, which contracted by 5.6% in 2020. The central bank predicts that the economy will return to its 2019 pre-pandemic levels by mid-2021 and forecasts growth for this year at 6-7.5%. This forecast assumes that Malaysia’s vaccination programme will roll out as planned; the government has moved up its target date for vaccinating 80% of the population from February 2022 to December 2021.
By early May 2021, the rise in COVID-19 cases caused the government to impose new movement re-strictions, due largely to new virus variants. A series of stimulus packages has helped to keep the economy afloat and in March 2021 a new USD4.86bn package was announced. However, the political establishment is also accused of contributing to coronavirus spread by allowing critical elections in Sa-bah state (in East Malaysia) to be held in September 2020. The polls created a miniature COVID-19 surge, which spread to other states in West Malaysia.
The greater risk to near-term stability may not be COVID-19 but the political situation. Prime Minister Muhyiddin Yassin came to power unexpectedly in March 2020 through a backdoor political coup against the then Prime Minister Mahathir Mohamad and, over a year later, remains an appointed leader.
Selected by the monarch, Sultan Abdullah Ri'ayatuddin (of Pahang), after polling members of parlia-ment, Muhyiddin has not yet called a general election to legitimate his rule further. The government coalition Pakatan Harapan, which includes the United Malays National Organisation (UMNO), the for-mer ruling party, is unstable and its parliamentary majority tenuous. However, the opposition, led by former Deputy Prime Minister Anwar Ibrahim, is equally unorganised; attempts to depose Muhyiddin through political manoeuvre have failed.
Currently, parliament is suspended under a COVID-19 emergency rule decree, which extends to August 2021. However, the king could lift it before then. Constitutionally, Muhyiddin has until September 16, 2023 to hold elections, yet his administration is unlikely to last another two years in its present state. Muhyiddin has promised to hold elections as soon as the pandemic is over, but that point will be open to wide interpretation.
Fundamentally, Pakatan Harapan will be driven more by its own political chances rather than COVID-19’s course. The underlying struggle that has ensued since UMNO’s hold on power ended in 2018 will continue through the near term, eroding confidence among Malaysia’s international trading partners and investors. That said, political tumult is largely confined to a small circle of the mainstream ethnic Malay political elite, with little possibility of an overthrow of the government by Islamist extremist par-ties or ethnic minority parties.
TREND ▲
Despite the political situation and a long history of communal strife, the expropriation risk for foreign investors is relatively low in Malaysia. Since independence, the country has attempted to internationalise its economy and the government looks to expanding and diversifying exports as its main strategy for COVID-19-related economic recovery.
The government provides tax incentives to foreign investors in certain strategic sectors, including bio-technology and integrative connective technology. The government also seeks to incentivise foreign companies to redirect their investments from China, although that is in flux because of COVID-19’s im-pact on regional supply chains. However, in recent years, domestic consumption has increased while reliance on foreign direct investment has receded, which could soften attitudes on internationalisation of the economy over the long term.
Malaysian internal instability usually derives from two sources: Islamist extremism that seeks to impose shariah law over the country, and ethnic tensions largely based in economic inequities. These tensions are primarily between ethnic Malays, who have a thin majority (50.1%), and ethnic Chinese, who make up roughly 22.6% of the population and have historically dominated the financial sector. However, in recent years, religious movements have also adopted an anti-Hindu agenda, directed against the minority Indian population (6.7%).
The government aims to contain Islamist extremism through strong internal security measures and a ‘big tent’ approach to political parties, allowing Islamist parties to contest elections. The Islamic Party of Malaysia (PAS), the longstanding Islamist party, has been assimilated into the political system and is now in the government coalition. For the past 40 years, the government has attempted to reduce anti-Chinese sentiment, and its implied economic threat, through the New Economic Policy (NEP), which seeks to elevate economic levels in the ethnic Malay population.
The political situation, combined with COVID-19, raises the risk of political violence in several quarters. Widespread protest demonstrations have grown since 2018 and a serious misstep by the government, such as an overly long delay in holding new elections, could re-energise them. If the economy re-bounds as expected, ethnic conflict over income gaps and a greater appeal to Islamist extremism (as seen following the 1997 Asian financial crisis) should be avoided.
Malaysia’s powerful Internal Security Act (ISA) historically largely prevented major attacks on Malaysian territory in comparison to Indonesia and the southern Philippines. To maintain its political viability, PAS eschews affiliation with external terrorist networks, although its demands to make Malaysian government more theocratic feeds these extremist groups’ agendas. In 2012, public objection to the ISA’s broad impact on human rights forced the parliament to repeal the law and replace it with the Special Offenses Act, which focuses more narrowly on terrorism.
Nevertheless, the rise of Islamic State (IS), and the return of South-east Asian IS fighters to the region, have intensified the terrorism threat in Malaysia and the government’s response. In 2015, the government uncovered and foiled an IS plot to launch an attack in Kuala Lumpur. This accelerated the promulgation of two new laws, the Prevention of Terrorism Act and the Special Measures Against Terrorism in Foreign Countries Act, and tightened controls on terrorist financing. The new laws give police greater powers to arrest and detain individuals and expand detention facilities.
Several external economic conditions, including a drop in the oil price and a slowdown in the Chinese economy, had a negative impact on Malaysia’s economy before COVID-19. The pandemic has dam-aged Malaysia’s tourism and hospital sectors plus aviation, agriculture and extractives. This is unlikely to incur greater protectionism unless Malaysia’s economic slump exceeds government expectations. However, in keeping with the NEP, the government requires local equity participation in some sectors, which can affect licenses and approvals for foreign companies.
In March 2021, the central bank announced a series of foreign exchange adjustments to strengthen Malaysia’s position as a foreign direct investment destination. These include the removal of export conversion rules and permission to allow resident exporters to settle domestic trade in foreign currency with other resident companies in the global supply chain. The government also signalled that it in-tends to maintain a flexible exchange rate for the Malaysian ringgit, to promote resilience against external shocks.
Malaysia continues to struggle to overcome the negative image of the 2015 corruption scandal attached to its sovereign wealth fund, often called 1MDB (1Malaysia Development Berhad). This has improved slightly with the country’s removal from the watch list of the World Government Bond Index (WGBI).
With exclusion no longer a threat, confidence in Malaysian bonds has risen, although challenged by China’s inclusion in the WGBI. However, Chinese bonds will have a long phase-in period, which will provide some relief for Malaysian bonds on the global marketplace. Malaysia’s more open economy compared to others in the region leaves it more vulnerable to fiscal weakening and consequent down-grades of its sovereign credit rating.
Sovereign debt is pushing against the statutory limit of 60% of gross domestic product, which was raised in August 2020 from 53.6%. In 2019, the debt was 52.6% and increased to 56.19% in 2020, largely because of COVID-19’s economic impact. The debt limit is the object of considerable controversy since changes in its levels are perceived as driven more by politics than economic planning.
Return to contents Next Chapter
