Malaysia: Climate for change; Despite impressive economic growth, there is pressure for change ahead of Sunday’s election

May 2, 2013 6:31 pm

Malaysia: Climate for change

By Jeremy Grant

Despite impressive economic growth, there is pressure for change ahead of Sunday’s election

Suhail Anwar Mohamed gathers a ball of rice and fish in his right hand and puts it in his mouth. The 24-year-old fire safety engineer is having lunch with a friend at a food court in Shah Allam, a town an hour’s drive from Kuala Lumpur, the Malaysian capital. Like many his age, Mr Suhail Anwar is a first-time voter in the country, whose 13.3m eligible voters go to the polls in a general election this Sunday – widely expected to be the closest in Malaysia’s history. The ruling coalition, which has dominated Malaysian politics since independence from Britain in 1957, faces a struggle. For the first time in generations it cannot count on the support of younger voters, such as Mr Suhail Anwar. He plans to vote for the opposition coalition because he is disgusted by what he says is pervasive corruption and an out-of-touch leadership. “I think we need a change in the economy and society,” he says. A Muslim, he especially likes the opposition coalition’s Islamist party, which he thinks will tackle corruption hard.

Mr Suhail Anwar’s words should strike fear into theBarisan Nasional coalition as it fights to retain its hold on power. He is one of an estimated 2.5m first-time voters flooding on to the electoral roll, far more than any previous election.

The new voters’ intentions are not known but, if Mr Suhail Anwar is any indication, the news is not good for Barisan and its largest party, the United Malays National Organisation (Umno). A resurgent opposition, headed by its de facto leader Anwar Ibrahim, survivor of years in jail and acquitted last year of sodomy charges, is riding a wave of optimism.

At stake is the future of a moderate Muslim country – and important US ally – that has been a beacon of stability and helped to generate economic prosperity in southeast Asia. But in spite of impressive economic growth and a solid industrial base, Malaysia’s living standards still lag behind those of South Korea and Taiwan.

The country, once known as a “tiger cub economy”, has still not developed world-class private sector companies such as South Korea’s Samsung or HTC, the Taiwanese smartphone maker. One of its best-known companies is carmaker Proton, which sells mostly in Malaysia and loses money.

The outcome of the election will be closely watched in the region for any sign that an opposition win signals a broader societal backlash against longstanding one-party regimes. Neighbouring Singapore will be looking on nervously since its ruling party – in power two years longer than Umno – lost a key by-election in January amid frustration over income inequality.

Mr Anwar’s Pakatan Rakyat (people’s alliance) coalition consists of his own Keadilan (justice) party, an Islamist party (Pas) and the Democratic Action party, an ethnic Chinese opposition group. Polls show Pakatan has a good chance of improving on its result in 2008, when it robbed Umno of its two-thirds majority in parliament for the first time.

Mr Anwar, 65, is taking his last shot at running Malaysia. He has pledged to eliminate corruption and make the country a “mature democracy” in what he calls a “Malaysian spring”.

Over the years, Umno has displayed an authoritarian streak and maintained an affirmative action policy favouring the majority Malay population.

But Najib Razak, Umno’s leader and the country’s prime minister, is framing the fight as a choice between sticking with a reform-minded government or risking the country’s prosperity on what he calls a “fractious, inexperienced opposition”.

With only one more full day of campaigning, the outcome is too close to call. In a sign of rising tension, police have reported more than 100 instances of election-related violence.

A close outcome would give a weak mandate to whichever side wins and threaten the country’s slow progress towards advanced economic status.

“Malaysia’s election is about whether the country is willing to embrace a new Malaysian model based on better, non-corrupt governance, inclusion and non-racialised politics,” says Bridget Welsh, a political scientist at Singapore Management University.

At first blush Malaysia has been doing well. In its latest report on the country the International Monetary Fund praised Mr Najib’s administration for its economic performance. Gross domestic product growth last year was 5.6 per cent, which “surpassed expectations”.

A massive “economic transformation programme”, involving billions of dollars of government investment in large-scale infrastructure, transport and industrial projects, has helped.

Domestic demand is strong in a country that has one of the highest savings rates in the world at 34 per cent.

Yet Malaysia was supposed to have started moving beyond a “middle income trap” by now. Last year’s GDP growth figure was barely above the 5.2 per cent achieved in the year Mohamad Mahathir, former prime minister, stepped down in 2003.

The IMF this week lumped Malaysia with Thailand and Indonesia as laggards in raising their living standards as South Korea and Taiwan have.

“Malaysia has always been a very rich country. Its economy used to be one of the most envied at the end of the Mahathir period, but we see that it is not doing as well as other countries that are seen as our real competitors. It’s stuck,” says Ooi Kee Beng of the Institute of Southeast Asian Studies (Iseas) in Singapore.

Many argue that the blame lies with the longstanding affirmative action policy. They say it has bred a crony capitalist model with Umno at its centre, which has acted as a drag on the economy.

Launched in the wake of race riots in 1969 by Mr Najib’s father, the “new economic policy” ensured that Malays and other indigenous people would own and manage at least 30 per cent of commerce and industry, mostly through the imposition of quotas.

This policy in favour of bumiputra – or “sons of the soil’ – means government contracts are often awarded to indigenous businesses. The document for the initial public offering last year of palm oil producer Felda – the largest IPO after Facebook’s at the time – allocated a percentage of the shares to unnamed bumiputra investors.

. . .

A reformist, Mr Najib has sought to dilute the policy. Yet his reforms have stalled amid resistance from Umno’s right wing. That is why Chinese voters, who make up about a quarter of the population, have deserted Barisan since the 2008 election.

According to one Malaysian businessman: “Non-Malay businesses say ‘we’re having to compete against these guys who are getting the best land and opportunities, so why bother?’ ”

As well as the defection of Chinese voters, another consequence has been capital flight. Financial watchdog Global Financial Integrity said in December that the level of illicit flows from Malaysia in 2010, at $64bn, was the highest for 10 years.

Mr Anwar’s coalition has pledged to fight cronyism the moment it takes power by dismantling monopolies in rice, sugar and telecoms.

But this will not be easy, argues Daniel Martin at Capital Economics.

“In the long term, a fight against cronyism would benefit the economy, but it could be messy in the short term. Uncertainty over which firms would be affected would undoubtedly hit the stock market,” he says.

There are also worries over the fiscal health of the country. Malaysia’s public finances are among the worst in the region. Its debt-to-GDP ratio is forecast to rise to 53 per cent this year, the highest in Asia after India and Pakistan.

Yet to help shore up support, Mr Najib has distributed cash to the poor, civil servants and even the 40,000 employees of Petronas, the profitable state oil and gas company. Barisan argues that this helps to stimulate the local economy by putting cash in the pockets of the less well-off, such as Amirul Nizam, a 29-year-old government employee who received M$500 ($165) in March. “I spent it on my daughter, clothes and food,” he says.

While many see this as a crude form of vote-buying – Mr Nizam says he will vote for Barisan – economists worry it will only add to fiscal strain.

Chua Hak Bin, head of emerging Asia economics at Bank of America Merrill Lynch in Singapore, says both sides “have largely ignored the fiscal reality of rising public and household debt, promising generous programmes if they are elected”.

He thinks that Malaysia’s household debt is the highest in Asia, having risen to 80.5 per cent of GDP last year from 75.8 per cent in 2011.

Iseas points to another concern. It says that Malaysia’s exports are increasingly dependent on commodities such as oil, palm oil and rubber, rather than electronics. Where previously they were a mainstay of the export market, demand from the eurozone and US has weakened.

. . .

There is little confidence that either side has the means to tackle these problems head-on. Clive Kessler, emeritus professor at Australia’s University of New South Wales, says: “The government has done precious little in the way of showing why it should be re-elected and the opposition has not convinced anybody very much that they are ready to govern.”

There has, however, been little outward sign that investors are unnerved. Since the middle of March the Kuala Lumpur Stock Index has been rising, although it has been the worst performer in Asia so far this year. The ringgit has remained steady against the dollar for weeks.

Last week BASF, the German chemicals group, and its Malaysian joint venture partner Petronas Chemicals said they would invest $500m in a new project in Malaysia to make aromas and flavours.

“If anything, foreign investors are looking through the election and saying we don’t consider it an ‘event risk’ whatever the outcome,” says one Kuala Lumpur-based foreign banker.

A slim victory by Barisan could lead to Mr Najib being replaced as Umno head, possibly by Muhyiddin Yassin, the deputy prime minister, whose reformist credentials are suspected to be weak.

Some fear that an opposition win could lead to creeping Islamicisation of Malaysia. The push for hudud, a controversial form of sharia law, by Pas is opposed by the Democratic Action party. But most observers say the issue has been overblown and that Pas would be pragmatic in government.

In an interview with the Financial Times last month, Mr Najib made the case that Malaysia remains one of the world’s best models for managing a complex, ethnically mixed society.

“There’s no other country which has the degree of complexity that we have. But the very fact that we have been successful and where we are today means that we must have got it right.” Malaysia’s voters will decide whether they agree.

Radio: London calling to tell a different tale

In the kitchen of her flat in London, Clare Rewcastle is cursing unnamed forces for blocking internet access to her fledgling radio station as she empties crockery from her dishwasher.

“We’re investigating who’s behind these denial-of-service attacks,” she says, visibly frustrated. Her new radio station, Radio Free Malaysia, has only been broadcasting to Malaysia for a month.

In that time the station’s output has been blocked periodically by people who appear to dislike its message. Ms Rewcastle suspects elements linked to Malaysia’s ruling Barisan Nasional coalition.

The station’s aim, she says, is to bring to voters in rural Malaysia – from remote palm oil plantations on the island of Borneo to the coasts of peninsular Malaysia – an alternative view to the government’s.

Most leading newspapers and television and radio stations in the country are controlled by media companies close to political parties in the Barisan coalition. The opposition Pakatan Rakyat coalition has pledged to liberalise the media if it gains power.

In urban areas voters have access to opposition views, or just those of interested bloggers, through an increasingly lively online press.

Rural areas, however, have little access to anything but government media. Radio Free Malaysia was set up a few weeks before the Malaysian election campaign began last month “almost as a kind of protest”, after Najib Razak, the prime minister, said opposition parties would be allowed some time on state-controlled airwaves – albeit far less than the ruling coalition.

Ms Rewcastle, who is married to the brother of Gordon Brown, the former British prime minister, is better known for running a radio station uncovering alleged corruption in the timber and oil-rich state of Sarawak on Borneo.

This project relies on the distribution by volunteers of short-wave radios from China, given to villagers in Sarawak and elsewhere. Many of the population have mobile phones and have texted into the station instances of corruption – the single biggest electoral issue for many Malaysians.

“People are desperate,” says Ms Rewcastle. “The urban people already know what’s going on but it’s in these rural areas that it counts.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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