Strategy Note /

Malaysia political dysfunction persists, more middle income mediocrity ahead

  • PM Muhyiddin's resignation is merely the latest episode of the political flux since Mahathir's resignation in Feb 2020

  • Stable new political blocs have not emerged after split and electoral defeat of the Barisan Nasional coalition in 2018

  • An early election, prevented by Covid anyway, would not fix politics and there is no economic crisis to prompt unity

Malaysia political dysfunction persists, more middle income mediocrity ahead
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
17 August 2021
Published byTellimer Research

Malaysia has not been plunged into political flux by PM Muhyiddin's resignation on 16 August. It has been in this state since former PM Mahathir's resignation in February 2020 and politics is not about to get more constructive.

There is no imminent economic crisis in Malaysia, its equities have underperformed regional small EM peers and are not expensive on an absolute basis. But there is little to like about the top-down story for those interested in high growth (Vietnam and Bangladesh), a mix of reform and value (Indonesia, Pakistan, Philippines), or post-Covid recovery (Thailand).

The underlying driver of Parliamentary dysfunction is that stable new political blocs have not emerged following the split and electoral defeat of the Barisan Nasional coalition in 2018. In turn, this is partly because there are seemingly irreconcilable splits between Malaysia's most entrenched and aged politicians: the perennial bridesmaid, Anwar Ibrahim (aged 74), the former eminence grise, Mahathir Mohamad (96), and the corruption convict who remains untainted in the eyes of his supporters, Najib Razak (68), as well as a coterie of potential successors all jockeying to inherit the pieces of their respective legacies.

An early election would not resolve splits between the country's leading politicians and Covid prevents one anyway. Hence the process of the King discerning, effectively behind closed doors, which prime ministerial candidate might command a majority in Parliament, is underway but will lead to no more stable a government.

Malaysia's hung parliament: No stable majority for any PM

Because Malaysia is not in a state of macroeconomic crisis this political rivalry put aside: according to IMF forecasts for 2021 and 2022, real GDP growth is c5%, inflation is merely 2%, unemployment is 4.5%, the current account is in a surplus of over 3.5% of GDP, and the fiscal deficit is c4%. There is a Covid crisis, despite a fully vaccinated rate of 33%, but the government is not bankrupt (gross debt to GDP is 67%), the currency is not about to collapse (FX reserves are 6 months of import cover, REER implies the spot FX rate has 20% upside, and the current account is in surplus), and per capita income levels (about US$12k) are not at distressed levels.

All of this portends more middle-income trap mediocrity ahead for Malaysia and little implementation of the structural reforms it needs to escape this trap. Ironically, there appears to be no major difference of opinion between different political camps on policy, but obstructionism prevails. All seemingly accept the need for economic orthodoxy (inflation and fiscal deficit control), structural reform to raise productivity (ie better infrastructure, more efficient public procurement, empowering anti-corruption institutions and practices, raising education standards, increasing female labour force participation, improving the ease of doing business), to pander to domestic ethnic concerns (ie promising inclusive growth for all but prioritising the 50% ethnic Malay population), and to balance the geopolitical pull of the US-centric and China camps.

Malaysia equities, measured by the FTSE Bursa Malaysia Top 100 index, are down 9% year-to-date, in US$ total return terms, substantially underperforming MSCI EM (flat) and MSCI Asia ex-Japan (down 2%). Among regional small EM peers, only the Philippines (down 11%) is a worse performer. Malaysia's forward price/book is 1.4x (for 11.3% consensus ROE), a c10% discount to the 5-year median, and its forward price/earnings is 14x (for approximately flat consensus earnings growth in 2022), a c15% discount to the 5-year median.

Without a stable Parliamentary majority to support reforms, the most important drivers of the Malaysia investment case remain external: global demand for technology hardware, trade relations between the US and China, and crude oil and palm oil commodity prices.

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