SINGAPORE: As if the COVID-19 scare is not enough, Malaysia has had to experience an overdose of bizarre political drama of late. Prime Minister Mahathir Mohamad quit on Monday (Feb 24) only to come back in an interim role.
The acute uptick in political uncertainty could not have come at a worse time. The economy was already reeling from a slowdown even before the threat of a global COVID-19 outbreak.
Now, the outlook may dim further, with investment activities likely to be hit the most, if the uncertainty persists.
READ: Mahathir announces RM20 billion economic stimulus package to mitigate COVID-19 impact in Malaysia
Given the multi-front challenges facing the economy at a time of relative political vacuum, the central bank’s role will be ever more crucial. Apart from its steadying hands on the currency markets and such, the economic uncertainty could compel the Bank Negara Malaysia (BNM) to ease interest rates further on Mar 3.
TWISTS AND TURNS
A lot has happened and nothing has happened at the same time.
The opposition parties – the United Malays National Organisation (UMNO) and the Malaysian Islamic Party (PAS) - reportedly met with some members of the Pakatan Harapan (PH) ruling coalition, including then Minister of Economic Affairs Azmin Ali of the People's Justice Party (or Parti Keadilan Rakyat – PKR) and then Home Affairs Minister Muhyiddin Yassin of the Bersatu party at the Sheraton Hotel in Petaling Jaya on Sunday (Feb 23).
The agenda was apparently to form an alternative coalition to support the continued leadership of Mahathir as PM. The catalyst was said to be attempts by some within the PH coalition to compel the PM to hand over the reins to the long-time PM-in-waiting Anwar Ibrahim of PKR.
The “Sheraton Gang” then proceeded to have an audience with the head of state, the Agong - Sultan Abdullah Sultan Ahmad, ostensibly to present their case for a new government. What transpired is not known precisely, but the attempt apparently fell flat, perhaps because the PM himself was not present.
Fast forward to Monday this week, and the hitherto silent PM Mahathir shocked the country by submitting his resignation to the Agong, only to be reinstated right away as the interim PM.
Hence, nothing has changed on the fact that Mahathir remains the PM, albeit with the moniker interim attached to the title.
ELECTION NO PANACEA
As of Wed (Feb 26), the Agong was still in the process of interviewing each and every one of the 222 MPs to ascertain where their support lies in terms of the PM candidate, or if they prefer to have an election.
While, at one point, it appears that every single political group across the spectrum was adamant that Mahathir should still be the PM – which would have left him spoilt for choice in forming a new coalition – the situation changed yet again.
UMNO and PAS, which had backed the purported move to form a new coalition with Bersatu and Azmin’s split bloc from PKR, announced that they would now opt for a snap election, instead, perhaps sensing that they can improve their seat counts following a string of recent by-election wins.
From the perspective of the economy, a new election is by no means a panacea, however.
Unless it brings forth a massive win for one of the major parties, with seat wins of close to 90, allowing the party to be on a strong footing despite having to take on a coalition partner or two, we might well see a repeat of the current political carousel.
Given the fractious state of play, however, such a victory for any party looks unlikely.
IMPACT ON ECONOMY
Hence, political uncertainties would dominate for a while, unless we see a resolution of the current quagmire in one way or another soon.
For instance, to play the numbers game optimistically, if Mahathir manages to charm at least some of his Bersatu party members to switch their support back to what remains of the PH coalition now, a new government can be formed. But the fall of the PH state government in Johor may make this scenario unlikely too.
However, latest reports suggesting that PKR members may prefer Anwar as the PM immediately may put paid to that scenario too – highlighting just how fluid the situation is.
If the uncertainties persist into March and beyond, however, economic growth will suffer more than it already has from the slow momentum from the last quarter plus the ongoing COVID-19 outbreak scare that is reverberating through the world economy.
We have already shaved down our first quarter growth forecast to 3.5 per cent from the previous year and for the full-year GDP to grow at 4 per cent from 4.2 per cent previously. If the political situation does not improve in the coming week or two, we might have to take into account a greater hit on the investment and consumption fronts in particular.
Moreover, over the medium-term, Malaysia could stand to gain from a reconfiguration of regional supply-chains, particularly in the technology sector. It has already benefited from the recent trade war-induced foreign direct investment relocation, but unless it can put its house in order, politically speaking, the momentum might be lost.
With those risks in mind, we think the chances of the BNM pursuing another rate cut in the upcoming meeting on March 3, to bring the overnight policy rate to 2.5 per cent, has risen sizably.
A quick political resolution may dampen the chances somewhat, but the COVID-19 threat that is looming larger now would still tip the balance for a cut in aggregate.
Wellian Wiranto is an Economist at OCBC Bank. This is an abridged version of a commentary first published on OCBC Group’s research section.