Chance for better politics has passed
Muhiyuddin Yassin (aged 72) was appointed the new prime minister of Malaysia on 29 February, succeeding Mahatir (94). Previously, Yassin was interior minister under Mahatir's government post-2018. Prior to that, he was deputy PM under Najib (removed as he became publicly more critical during the 1MDB scandal).
This does not reduce the risk of political obstructionism to much needed pro-active policy and reform. The source of that obstructionism is personal legacy, ambition, and survival more than differences over economic, social, or foreign policy. A window for a stronger and broader coalition under Mahatir's leadership appears to have passed and it is too early to tell if Yassin has the ability to run a coherent coalition independently of the three personalities who have dominated politics for decades and have unresolved competing agendas: Mahatir, Anwar, and Najib. The day before Yassin's appointment, Mahatir was claiming he enjoyed majority support (including a renewal of support from Anwar).
There is also a risk that in a coalition run by Yassin, who has a track record of pro-ethnic Malay policy and rhetoric, and incorporating significant representation from an Islamist party (PAS, which is less moderate than the Amanah party in Mahatir's coalition), that ethnic tensions with the Chinese part of the population increase. Muslim Malay make up c50% of the population and Chinese c25%.
We remain cautious on Malaysia equities: while they are cheap relative to history and FX rate vulnerability is low, growth will likely remain in the middle-income trap because of a weak political mandate.
The post Mahatir-Anwar-Razak era? Not so fast.
The issues between the three biggest political personalities has not been resolved:
(1) Mahatir Mohamad: wants broad coalition but without succession to Anwar and with no place for former PM Razak.
(2) Anwar Ibrahim: wants a broad coalition but under his leadership, or with a public timeline for his succession.
(3) Najib Razak: wants any coalition under any leader which results in less pressure to pursue convictions in the criminal cases he faces for corruption and money laundering.
New government, old personality-driven splits. Does a new ethnic stress loom?
Yassin is leading a multi-party coalition consisting of the following parts:
(1) Bersatu (16.2% of the lower house of parliament, although there is uncertainty over this percentage): part of the previous ruling coalition (the now-defunct Pakatan Harapan), previously led by Mahatir, and it is unclear at this stage whether Bersatu is still unified (i.e. still accounts for 11.7% of seats) or if there is a split between Yassin loyalists and Mahatir ones.
(2) UMNO and ethnic Chinese and Indian Barisan Nasional partners (18.9%): part of the previous opposition, now the largest single party in parliament, still the party of pre-2018 PM Najib, the Barisan Nasional coalition dominated every government from Malaysia's independence in 1957 to the electoral loss to Pakatan Harapan in 2018, at one time the party of Mahatir, Anwar, and Najib.
(3) PKR defectors (4.5%): part of the previous ruling coalition, defectors led by Azmin Ali, who broke away from the PKR, which is led by Anwar.
(4) PAS (8.1%): Islamist party (moderate enough to participate in electoral and parliamentary politics but, in terms of social policy, significantly less moderate than Amanah.
(5) GPS (7.7%): Sarawak regional party (formerly part of Barisan Nasional prior to the 2018 defeat).
Mahatir did ultimately rebuild his pact with Anwar but was not able to gather support from the two parties he has previously led (Bersatu and the UMNO). This is likely in part due to his refusal to work with any bloc that included Najib.
However, over time, we would not be surprised to see either of the following:
(1) Mahatir-Anwar 2.0: if both Mahatir and Anwar find themselves out of a government which includes Najib, and the wounds of the recent split heal, perhaps they more formally resurrect their alliance of convenience to challenge for government again (first by pushing for a vote of no confidence).
(2) UMNO split further: divisions between those loyal to Najib and those who view association with him as either an electoral liability or an obstacle to winning a senior post in government, should Najib suffer a setback in his criminal cases.
(3) Tension with ethnic Chinese (25% of population): PM Yassin has a track record of pro-ethnic Malay rhetoric and policy (e.g. removing English as the language medium for science and maths in public schools during his tenure as education minister) and his coalition includes the Islamist PAS (away from which its more moderate members split and formed Amanah).
In any event, the soap opera of politics in this parliamentary term likely has more episodes ahead. The next election is due in May 2022 (unless there is a successful vote of no confidence and failure to form a working coalition prior to this).
Context of Mahatir's resignation, economic challenges and investment case
For a discussion of the following...
(1) Context for the collapse of the previous ruling coalition (fragile Mahatir-Anwar pact against Razak, Mahatir's age, divisions in Anwar's won party),
(2) Economic challenges ahead (US-China trade war and coronavirus negative shocks, risks to China FDI, fiscal control, middle-income trap), and
(3) Equity investment thesis (trailing PB is on over a 10% discount to the 5-year median, FX rate vulnerability is low but growth is low)
...please see our report from 25th February 2020, Malaysia: Mahatir "resignation" may be a step to a more coherent coalition.