Anwar Ibrahim on a changing Malaysia

Emerging Markets, ADB editions, Madrid, May 2008

March 8 was a day of mixed emotions in Malaysia. The country’s general election saw the worst performance for the ruling party in almost 40 years, losing its two-thirds majority. Some observers saw it as a victory for democracy, and sign of irreversible progress towards transparency and good governance. Investors thought differently: the Kuala Lumpur Composite Index lost 9.5% on the next trading day.

Few would have watched events with greater interest than Anwar Ibrahim, the former deputy prime minister of Malaysia, and now very much the public face of opposition. At the time of writing, Anwar did not actually hold a seat: the general election, perhaps not coincidentally, took place before his ban on standing for office (a consequence of his conviction on corruption charges under former colleague Mahathir Mohamed) expired in April. However he is widely expected to return to parliament through a by-election, and thereafter to become leader of the opposition coalition.

He puts the market ambivalence about the opposition’s performance down to “global sentiment” and “the fact that there’s a bit of uncertainty because the opposition have won very strong support – in fact, had the election been free and fair, we would have won. So because of that uncertainty and because the prime minister is under siege, there is anxiety among investors.”

One could argue the investor response was a touch more complicated, and specific, than that. Malaysia had been weathering the storm of the global credit crunch rather better than most of its neighbours, and part of the reason for that was that the country has been able to offset any expected decline in exports by boosting domestic spending through the so-called mega projects envisaged in the Ninth Malaysian Plan, the latest of the five-year blueprints the country comes up with to govern long-term policy in areas like infrastructure development. When Barisan Nasional, the ruling coalition, lost its two thirds majority (it won 63% of the seats contested, and now controls only eight of Malaysia’s 13 states) it lost its ability to push through any major infrastructure spending without challenge in parliament; some investors departed the market in expectation that the opposition would delay some of these big projects, and thus dent the short-term resilience of the Malaysian economy.

Analysts have focused in particular on a project called the Northern Corridor, given that three key states affected by it – Perak, Jedah and Penang – are now in opposition hands. That, says Citi analyst Wei Zheng Kit, “makes coordination between the state and Federal government much more problematic. State governments have jurisdiction over land, water and forestry while the Federal government will likely be the main source of funding. There could also be possible delays of major projects that have already been awarded if the new state governments decide to review them.”

For his part, Anwar says: “We honour the agreements involving both domestic and foreign investors,” but makes exceptions for “one or two contentious issues.” One example is the Penang Global City Centre, which Anwar describes as a RM25 billion project (other sources say RM18 billion), and which is considered closely linked to the ruling coalition. Anwar challenges the legitimacy of the land approvals involved in this project and says that on projects like this, “it is difficult for us on the platform of transparency and anti-corruption to condone these excesses.” A water privatisation in the state of Selangor is also likely to undergo review.

Another matter of considerable commercial impact is what the opposition will (or can) do about reform of government-linked companies. A state agency, Khazanah, is tasked with the restructuring or revamping of more than 50 companies wholly or partly-owned by the state; it is generally seen as having been largely successful in its mandate, with the largest 20 companies under its control outperforming the KLCI since 2004, and aggregate earnings from those companies trebling since 2005, according to data from Kazanah.

Anwar, though, does not share the positive view, which has implications for what might happen to the process were the opposition to make further strides. “This is actually renationalisation in the name of reform,” he says. “You can’t have a reform agenda of any GLC if it is in effect renationalisation. If you want Malaysia to remain competitive we have to accept there are certain rules to follow, which means that the private sector must take the lead.”

So just how big a change has taken place in Malaysia? The headline numbers are compelling enough – only one state was outside government hands in the previous election compared to five now – but the underlying picture is more dramatic still. Analysis of the vote suggests that in terms of the total number of votes cast, the government won only 51% of what was available. The other important point is that unlike in 1969 – the last time the government lost its two thirds majority – the voting was not based along racial lines. Instead, all races, including Malays who have in fact been protected by legislation from the ruling party, demonstrated a wish for change. Kedah, one state now under the opposition, is Malay-dominated. “The election results are likely a watershed event and could bring about tectonic shifts in Malaysia’s political landscape,” says Wei.

In the short term, political uncertainty is generally bad for markets, if not overall economic performance, and the tension between federal and state governments – as is perennially the case in India – is not conducive to getting anything done. But many think that in the long run it is good news for citizens and investors alike. The logic here is that even if opposition gains no further power than it already has (and it is, it must be said, a very loose and untested coalition) the gains may prompt the existing government to change a few things that drag on Malaysia today. “The good news is that the government is now under pressure to deliver on its promises and the opposition coalition is right on their heels,” says one observer. “Doing business in the ‘new’ Malaysia should be more transparent and should favour companies with strong track records and the ability to execute in a timely fashion… it may even slow down the pace of brain drain to Singapore, Hong Kong or China.” This observer, though, doesn’t expect to see any sign of this for at least a year.

“A stronger opposition raises the potential for greater accountability,” says Wei, adding that the shifts “raise the potential for reduction of problems associated with the NEP, including cronyism and corruption.”

The NEP is the New Economic Policy, a controversial affirmative action approach adopted in 1971 designed to protect ethnic Malays and guarantee their participation in commerce and wealth; some have criticised it as a crutch to that community which has in turn harmed Malaysia’s competitiveness on a world scale. Anwar himself says he can see the need for affirmative action – “the poor and marginalised must be assisted” – but objects to the fact that “at the moment it is race based and not merit based.”

Some analysts think there are already signs of positive behaviour from the incumbent government, with the appointment of former Maybank president Datuk Amirsham to the cabinet as head of the Economic Planning Unit particularly warmly received. Some believe this, among other things, suggests a more transparent open-tender system for major projects in future.

Analysts, ever pragmatic, have been trying to work out who wins in this new environment.  One broker is recommending companies that do not rely on government contracts to sustain growth; adding this to screens for sustainable dividend yields, low valuations, and high recurring income, it particularly likes Public Bank, Resorts World, Gamuda and IGB Corp. Macquarie’s Edward Ong, who believes the election result “could mean stronger checks and balances and potentially spur reform in the medium term,” particularly likes telcos like Telekom Malaysia and Digi.com who were battered in the immediate aftermath of the election but who logically ought to have nothing to fear by the change in the composition of the nation’s parliament. Macquarie is positive on Malaysia on a relative basis.

A rather scarier outlook is suggested if one looks at what happened in 1969 during the last such hotly-contested election in 1969. Then, there were race riots; and it’s certainly true to say that protests about alleged race discrimination have become considerably more vocal in recent years, particularly from the Indian community. A more optimistic appraisal points to the fact that since Malays have swung in their voting preferences along with Indians and Chinese, the disaffection demonstrated by this election is probably not about race, or at least not entirely. But the way the ruling party responds to this election – by reaching out to all races, or by instead stoking fears to win back the support of ethnic Malays – may prove to be the most important variable of all for the country’s future, commentators say. “Will UMNO [United Malays National Organisation, the largest political party in the country and founder of the ruling coalition] play up the race card to win back the Malay vote?” asks one. “This could raise the potential for further polarisation and social instability. On the other hand, should UMNO decide to re-invent itself and adopt a more moderate tone in going forward, this could well be the proverbial wake up call.”