Malaysia Country Forecast

BN Can No Longer Assume Victory

The timing of the next election remains a subject of speculation. The current parliamentary term expires in April 2013, but Prime Minister Najib Razak has the option of scheduling an earlier vote. An election held this year would most likely take place in November, after the budget has been unveiled and the annual Haj has been completed, but before the monsoon season brings the threat of flooding to the eastern states in December.
However, given the governing BN coalition’s sagging popular support in recent polls, Najib may well decide his interests are best served by putting off the election until the last minute. The extra time would enable the government to implement some of the crowd-pleasing pre-election spending initiatives that are sure to be crammed into the 2013 budget, while also putting some distance between recent controversies, including an April 2012 police crackdown on protesters calling for free and fair elections and a corruption scandal involving alleged financial impropriety at the National Feedlot Corporation, and the electorate’s return to the polls.
Regardless of when the election is held, various indicators suggest that it will be the closest contest ever in Malaysia. The opposition PR alliance will fall short of handing the BN its first-ever election defeat, as the governing coalition’s organizational and financial advantages, to say nothing of the benefits of incumbency, will give it a decisive edge. However, the BN’s majority will be eroded once again.
Policy continuity can be expected, but the government’s relatively weaker mandate will increase the risk of political instability, and the regime’s greater susceptibility to public pressure will bring an added risk of populist gestures designed to dampen discontent.
Political Obstacles to Fulfillment of Business-friendly Agenda
While many of the stated objectives of the current development plan jibe with the government’s declared acknowledgment of the private sector’s superiority in terms of spurring rapid economic development, the retention of preferential advantages for bumiputra, the emphasis on PPPs, and the lack of any substantive steps to streamline the civil service indicate that Najib’s top priority is retaining the solid support of the Malay majority, UMNO’s principal base of support.
As such, it is likely that foreign investors will continue to encounter significant obstacles. The government will continue to heavily regulate the economy, and firms with connections to government will enjoy competitive advantages. Foreign operations will also continue to face restrictions in areas such as hiring and local procurement, although the government will show greater flexibility in the case of investment in high-priority sectors or targeted locations, and where shortages of trained executive and technical personnel would make enforcement of the rules unfairly onerous.
Nevertheless, Malaysia will remain a favored destination for foreign investment, particularly in those sectors that the government has granted highest priority under its development plan for 2011–2015, which include oil and gas.
Over the medium term, the maintenance of a flexible exchange-rate policy will reduce the threat of imported inflation and lower the cost of both consumer and intermediate imports, providing the central bank with greater flexibility in setting interest rates, increasing the purchasing power of consumers, and lowering the unit costs of manufacturers, all of which will benefit the broader economy.
More generally, Najib’s efforts to promote development of the services sector and attract increased levels of foreign investment will provide a foundation for real GDP growth averaging 5.4% per year through 2017. Although moderately healthy growth levels will create persistent upward pressure on prices, responsible fiscal management and the use of monetary levers will help to hold inflation to an annual average of 3.4% through 2017.

Economic Forecasts for the Three Alternative Regimes

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