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Succession risk in FM and EM as Malaysia's Mahathir turns 94

  • Prime Minister Mahathir's 94th birthday this week prompts us to reiterate our cautious view on Malaysia

  • Delayed and unclear succession is allowing political rivalry beneath Mahathir to fester

  • This is distracting the ruling coalition from implementing structural and fiscal reforms

Succession risk in FM and EM as Malaysia's Mahathir turns 94
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
11 July 2019
Published by

The occasion of Malaysian Prime Minister Mahathir's 94th birthday this week prompts us to reiterate our relatively cautious view on Malaysia versus other Asian markets in our coverage: delayed and unclear succession is allowing political rivalry beneath Mahathir to fester and distract the ruling coalition from the structural reforms to escape middle-income trap and fiscal reforms to reduce the deficit. 

More broadly, across frontier and emerging markets, we screen for leaders' ages and tenures as a proxy for succession risk. Tenure matters more than age, in our view, because patronage networks, commercial norms and domestic political alliances become increasingly embedded during a long period of rule under one leader, making them potentially more vulnerable to disruption if political succession is uncertain. FM and EM countries with leaders over the age of 65 and in power for over a decade include the following: Bahrain, Bangladesh, Iran, Jordan, Kuwait, Oman, Russia, Turkey, UAE, and Uganda. 

The example of Kazakhstan shows how the resolution of succession risk (the managed transition from Nazarbayev, aged 78, after 29 years as leader, to Tokayev, aged 66) can act as a powerful positive catalyst, at least in the short-term, for the equity market: MSCI Kazakhstan has outperformed the MSCI FM and EM indices by 13% and 19%, respectively, since the start of the transition in mid-March 2019.

Malaysia: the distraction of succession

Mahatir Mohamad, Prime Minister of Malaysia, turned 94 this week. His unwillingness to transition control to Anwar Ibrahim (71), parliamentary leader of both the overall ruling Pakatan Harapan coalition (58% of seats in the lower house) and of the largest component of that coalition (People's Justice Party, with 23% of total seats), increases risk in the Malaysian investment case. 

There is no indication of a handover over the next year, as reportedly agreed when the two former political rivals united prior to the 2018 election campaign. Furthermore, Mahathir's recent overture to the ethnic Malay voter base represented by the UMNO (the United Malays National Organisation, the party that led the Barisan Nasional coalition which ruled for over 60 years until the 2018 election, and from which Mahathir himself defected) are likely an attempt to strengthen his position (along with allies such as Mohamed Azmin Ali, 54, Minister of Economic Affairs). 

Political succession will therefore likely remain a distraction. The economy is growing (4.8% real GDP growth pa over the next five years, according to IMF forecasts) and, according to the World Bank's ease of doing business rankings, there is positive regulatory change (a jump to 15th in 2018 rankings from 24th in 2017, out of 190 countries). But fiscal deficit widened to 3.6% in 2018 (from 2.4% in 2017). And there is need for structural reform: 

  • Tax/GDP is 14%, which is low given GDP/capita of US$11k; 
  • Transparency International ranks Malaysia merely 61st out of 180 countries on anti-corruption; 
  • Female labour force participation is merely 51% compared with 60% in Thailand and 73% in Vietnam; and 
  • Malaysia ranks below Thailand and the Philippines on the World Bank human capital index.
Mahathir is the oldest FM-EM leader (with Kuwait's Sabah close)

Source: Press reports

Succession risk (old age and lengthy tenure) across FM-EM

Global FM and EM countries with leaders over the age of 65 and in power for over a decade include the following: Bahrain, Bangladesh, Iran, Jordan, Kuwait, Oman, Russia, Turkey, UAE and Uganda. We regard the combination of old age and lengthy tenure as a useful starting point for a discussion of succession risk for investors. 

Clearly, this metric does not tell nearly enough of the story of succession risk on its own; it does not account for the case of charismatic leaders like Mahathir in Malaysia or Imran Khan in Pakistan, or the case of durable, deep-states which outlast a long-standing leader (eg the war veterans in Zimbabwe or the military in Egypt) or de-facto one-party state structures which may outlast their leader (eg Bangladesh).

Countries with leaders over 65 and in power over 10 years in darker shade

Source: Tellimer Research