Malaysia is going through tumultuous times as the country grapples with political and economic instability amid the ongoing COVID-19 health crisis. The passing of the 2021 budget has thrown Prime Minister Muhyiddin a political lifeline, but the future of his government remains uncertain.
This Asia House Advisory briefing provides an update on the situation in Malaysia and the implications for investment. It also provides a background to the issues shaping current events.
– The passing of the budget means the Muhyiddin administration continues; had the budget not passed, the administration’s powerbase would have collapsed
– Political uncertainty will continue, with a general election likely in the first half of 2021 as PN government leaders seek a fresh mandate
– The budget for 2021 has signalled to foreign investors that Malaysia intends to improve its competitiveness as a regional hub in Southeast Asia, with a range of measures to this end
– Malaysia’s economy, hit hard by COVID-19, is expected to grow at between 5.5 and 7 per cent in 2021
Budget boost for Muhyiddin
The Muhyiddin administration’s biggest litmus test was the supply bill (budget), which faced stiff opposition from critics over concerns it doesn’t do enough to address the challenges of COVID-19. However, following additional concessions, the 2021 budget was approved in parliament. It includes the largest expenditure allocation in Malaysian history, at RM322.5 billion (US$79 billion), and seeks to protect citizens’ livelihoods and businesses with direct assistance and expanding subsidies, primarily to low-income households. In addition, the budget introduces incentives to improve the attractiveness of Malaysia’s investment environment for both local and foreign investors. Measures to spur foreign direct investment include:
- New tax incentives to establish a regional trading hub at a concessionary rate of 10 per cent up to 10 years
- Special income tax at a flat rate of 15 per cent for five years for senior executives relocating to Malaysia
- Extension of a preferential tax rate for selected manufacturers, including those in high technology, research and development and medical-related services
- Manufacturers of pharmaceutical products (including vaccines) investing in Malaysia will enjoy tax rates capped at 10 per cent for the first 10 years.
A number of UMNO party MPs – members of Muhyiddin’s coalition – and the opposition had framed the budget vote as a test on Muhyiddin’s parliamentary support as Prime Minister. It came amid speculation that Anwar Ibrahim, leader of the People’s Justice Party (Parti Keadilan Rakyat – PKR) had built sufficient support to challenge the government. However, despite initial reports of Muhyiddin struggling to muster the bare minimum to pass the budget, his PN coalition fell in line after the budget amendments. While aspects of the budget still need to be debated, it is likely to pass subsequent stages of scrutiny, thereby reaffirming Muhyiddin’s position, at least for now. The passing of the budget has also dented Anwar’s credibility as leader of the PKR.
Political uncertainty remains
Political stability was once one of Malaysia’s key strengths as a destination for foreign investors. Following the drama of the budget vote, a general election is likely in the first half of 2021 as PN government leaders seek a fresh mandate. A lot rests on the handling of the pandemic and Malaysia’s economic recovery.
UMNO party and BN coalition leaders, although ideologically similar, remain at loggerheads as they compete for the same Malay/Muslim-majority constituencies. UMNO is expected to win the lion’s share of the parliamentary seats as the Malay-majority are perceived to be returning to their fold after a disappointing 22 months of the PH government prior to the current PN coalition. The two major political coalitions — the ruling conservative PN and the multiracial PH opposition — are fractured, and political realignment between the parties within these coalitions is a possibility.
Foreign investment policy unchanged
The budget for 2021 has signalled to foreign investors that the government intends remain competitive as a regional hub in Southeast Asia. A new KPMG report has ranked Malaysia fourth among 17 economies as a competitive manufacturing hub. The country has always fared well in the World Bank’s ease of doing business rankings, scoring high on competitiveness, attractive investment incentives and developed infrastructure. Malaysia also joined the world’s biggest trading bloc, the Regional Comprehensive Economic Partnership (RCEP), on 15 November 2020. However, the economy’s reliance on natural resources (oil and gas) and commodities, coupled with political uncertainties, pose significant long-term challenges.
COVID-19 and the economic challenge ahead
The political manoeuvring takes place against the backdrop of rising COVID-19 cases, despite the initial success of containing the pandemic. Malaysia has recorded more than 60,000 cases with more than 300 deaths. The second wave that started in September 2020 has been linked to an election in Sabah, a state located in northern Borneo. In response, the government imposed targeted lockdowns in districts across Malaysia. In addition, the government will be joining the global COVID-19 vaccine development platform, COVAX Facility, covering ten per cent of the population at a cost of US$22.6 million.
While the initial lockdown successfully limited the spread of COVID-19, Malaysia’s economy (GDP) contracted by 17.1 per cent in the second quarter of 2020. The government responded by introducing three stimulus packages totalling RM305 billion (US$75 billion) which are expected to contribute 3.7 per cent to 4 per cent of GDP. The Minister of Finance expects the economy to contract by 4.5 per cent this year, rebounding to between 6.5 per cent and 7.5 per cent. However, the opposition and analysts are skeptical – the average growth projection by the Asian Development Bank, IMF and World Bank is 5.35 per cent.
All things considered, the Malaysian economy has fared relatively well through 2020. Malaysia’s public health response has not been as exemplary as neighbouring Thailand, and its economic forecasts are not as solid as its other ASEAN colleague Vietnam. The passing of the budget, and the aspects related to foreign investment, will help Malaysia maintain its position as a regional hub in some key supply chains. But political uncertainty, on top of issues such as the global 1MDB scandal, are not helping Malaysia’s reputation.
2021 could be a turning point for Malaysia to position itself in global value chains as they continue to resettle after the Trump-driven US-China trade war and the COVID-19 economic crisis. Equally, political infighting could distract from achieving economic goals, in which case Malaysia may continue to cruise in the middle lane among its ASEAN neighbours, as others shift up a gear. A decisive outcome from the elections likely to be held in 2021 will be an important determinant of Malaysia’s future.
Background: Malaysia’s dramatic political journey
The 2018 general election ended the political monopoly of the National Front coalition (Barisan Nasional – BN) which was led by the United National Malays Organisation (UMNO). The election took place with UMNO leader Najib Razak embroiled in the 1MDB scandal (he is currently in court appealing a 12 year prison sentence) and led to the formation of the reformist Pact of Hope (Pakatan Harapan – PH) government, headed by former premier Mahathir Mohamad. However, that government imploded in February 2020 due to infighting between Mahathir and his ‘frenemy’ Anwar Ibrahim.
Mahathir refused to hand over power to Anwar, leader of the People’s Justice Party (Parti Keadilan Rakyat – PKR), culminating in a faction of Mahathir’s Malaysian United Indigenous Party (Parti Pribumi Bersatu Malaysia – PPBM), a splinter party of UMNO, leaving the PH government. This led to its demise. Mahathir, who has since formed his own party, is now very much on the periphery of power.
Mahathir’s second-in-command Muhyiddin Yassin and Anwar’s estranged deputy Azmin Ali cobbled together a number of MPs from the PH coalition to form the National Alliance (Perikatan Nasional – PN) government. The PN government under Prime Minister Muhyiddin comprises a mixed bag of conservative parties dominated by UMNO and the Malaysian Islamic Party (Parti Islam Se-Malaysia – PAS), albeit with a wafer-thin majority in parliament.
Head of Advisory,
Asia House Advisory
Asia House Advisory
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Charles Hay MVO, British High Commissioner to Malaysia, will brief Asia House Corporate Members on 9 December. Find out more and register interest here