Despite Election Jitters, Malaysia on Solid Ground

Malaysia Kuala Lumpur

Malaysia is facing its share of uncertainty in 2013, with both the local stock market and the national currency registering unusually high levels of volatility. Much of the turbulence can be linked to elections that will take place later this year. But strong domestic demand and booming foreign investment indicate that the economy remains strong, regardless of how uncertain the political situation may appear.

 

Key to the country’s economic resilience is an ambitious investment program launched by the government in 2009, which helped boost private expenditure by more than 20 percent in both the second and third quarters last year. In a recent report, Credit Suisse analyst Santitarn Sathirathai praises the initiative, known as the Economic Transformation Program (ETP), for putting Malaysia in a strong economic position.

 

While the ETP includes a number of elements, including infrastructure improvements and a shift towards supporting industries that create jobs providing high-value services, the meat of the program is focused on making the country a more attractive destination for foreign investors. The aim is to make it easier for businesses to navigate the country’s regulations and bureaucracy.

 

So far, it appears to be working. In the last two years, Malaysia has jumped from 23rd to 10th in the World Bank’s “Doing Business” survey, which tracks how easy it is to start and operate a firm in a country. In the latest survey, Malaysia jumped over 20 spots in the categories dealing with registering property and obtaining construction permits, two items that are important to foreigners with cash to invest.

 

The resulting surge in private investment has not only helped drive domestic demand, but has also provided a buffer against the generally gloomy global economy. The World Bank stated that Malaysia is well positioned to dodge the worst of an anticipated global slowdown created by Europe’s ongoing malaise. Sathirathai predicts real GDP growth will hit 5 percent in 2013, better than many of Malaysia’s neighbors and an upward revision from an earlier Credit Suisse prediction of 4.8 percent.

 

Along with Malaysia, neighboring Indonesia has also passed comprehensive land reform legislation to modernize its public infrastructure and boost direct foreign investments into the country.

 

Still, there is concern in some quarters that the country’s economic output could suffer if upcoming parliamentary elections fail to provide a strong mandate to a single party. Prime Minister Najib Razak is required to call elections by the end of April, but has been hesitant to name a date. Although his ruling coalition, the Barisan Nasional, has not lost a general election since the country gained independence in 1957, many expect a tight race. Close elections could seriously hamper Kuala Lumpur’s ability to set decisive economic policies, especially since the next government will be forced to curb spending to fight a persistent budget deficit.

 

In the short term, at least through the campaign season, the government is not expected to curb spending, a move designed to curry favor with voters. Once the elections are over, however, the Parliament will be forced to get its fiscal house in order, probably by cutting easy targets, such as fuel subsidies.

 

A tighter national budget may take some of the wind out of consumers’ sails, but Sathirathai points out that significant investment in ETP projects could offset the impact of austerity budgets, meaning that private investment will likely be the key to Malaysia’s continuing strong economic performance.