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Political uncertainty could drag growth further as investors caution prevails

KUALA LUMPUR, 26 February 2020 – Malaysia’s GDP is driven by consumption, while private investment is weak. In the present scenario, the situation is not going to improve, says Ferlito

The collapse of the Pakatan Harapan (PH) government and Tun Dr Mahathir Mohamad’s resignation as prime minister (PM) has ushered in a period of uncertainty that could drag the already-weak economic growth as investment and private consumption slow down.

The present political situation comes just after Malaysia recorded its slowest GDP growth in 10 years at 4.3% for 2019, dragged by external challenges, commodity shocks and contracting public investment activity.

For now, the government cannot implement anything new, but can only manage current affairs as the general climate of uncertainty is surely holding back investors, Institute for Democracy and Economic Affairs senior fellow Dr Carmelo Ferlito told The Malaysian Reserve.

“Let’s not forget that Malaysia’s GDP is mainly driven by consumption, while private investment has been weak for quite some time. In the present scenario, the situation is not going to improve.

“Now we need two things: A rapid solution of the crisis and the establishment of a new Cabinet which can both guarantee stability and show clear intentions in the political economy,” Ferlito said, adding that he believes these two factors are more important than any stimulus package.

An economic stimulus package was supposed to be unveiled tomorrow (Feb 27) to combat the effects of the coronavirus, which the central bank has warned is likely to affect domestic growth, particularly in the first quarter of this year.

However, following the recent turn of events, former Finance Minister Lim Guan Eng said Dr Mahathir “indicated that the economic stimulus package will go ahead on a date to be announced by him in his capacity as the interim PM”.

Dr Mahathir’s resignation as PM was accepted by the Yang di-Pertuan Agong, who then appointed him as an interim PM.

During the interim period, Dr Mahathir will manage the country’s administration until a new PM is appointed and a new Cabinet is established.

Given that the interim PM has the support of both sides of the political divide, Dr Mahathir has the opportunity to appoint a “stronger PH 2.0 Cabinet line-up”, Sunway University Business School Prof Dr Yeah Kim Leng said.

This can be done by retaining ministers who have demonstrated their effectiveness, as well as mobilising experienced and capable former ministers to replace the previous line-up.

Such a move could quickly regain public confidence and reverse the slide in the financial and currency markets, which have been spooked by the recent collapse in government, Yeah noted.

“If the political situation is resolved quickly over the next few days, the economic impact will be minimal, otherwise there could be the double-barrel negative effects of the coronavirus epidemic and political turbulence,” he said.

Should the political tussle continue to distract policymakers from focusing on the economy, the country’s short-term and long-term investment, as well as GDP growth trajectory, will likely see a decline, Yeah added.

It is unclear as to how or when a new government will be formed, Moody’s Investors Service sovereign risk group assistant VP and analyst Christian Fang wrote in a statement yesterday.

“Such uncertainty weighs on private investment, and if prolonged, will compound growth challenges and add downside risks to the country’s credit profile, particularly if the new government changes the policy emphasis away from fiscal consolidation and institutional reforms.

“Malaysia’s 2020 real GDP growth should slow to 4.2% from a 10-year low of 4.3% in 2019, with downside risks from ongoing global trade tensions and the coronavirus outbreak,” Fang said.


First published in Themalaysianreserves, 26 February 2020

2020-02-26T14:18:24+00:00 26th February 2020|News|Comments Off on Political uncertainty could drag growth further as investors caution prevails