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Malaysia’s ruling Pakatan Harapan (PH) coalition has been forced to defend its fiscal policies as the country reels from a swath of gloomy economic prediction – and as PH reels from a bruising loss in last month’s Cameron Highlands by-election, partly due to constituents feeling that the economy had worsened under Prime Minister Mahathir Mohamad’s administration. PH’s “steamrolling” in the Cameron Highlands has kicked off a remarkable renaissance for former prime minister Najib Razak – who campaigned heavily ahead of the by-election, making an effort to be seen as approachable and reminding constituents of some of his key economic initiatives.

Veteran PH lawmaker Lim Kit Siang implored Cameron Highlands voters to prevent Najib from making a comeback – but the administration’s dubious economic policies, which are now translating into flagging investor confidence and a sinking ringgit, gave Najib the opening he has eagerly seized.

Worrying economic indicators

Data out this week, in fact, confirmed that Kuala Lumpur is in increasingly choppy economic waters compared to its neighbors. The ringgit has slumped to record lows against the Thai baht. While Indonesia’s economy is picking up faster than expected, Malaysian manufacturing is in a protracted downturn, and institutions including the OECD and the World Bank have recently revised their outlook for Malaysia downwards.

Exogenous factors are certainly at play – notably a sluggish regional economy as the simmering trade conflict between Washington and Beijing provokes continuing uncertainty, while the faltering Chinese economy may badly hit exports from Asia’s emerging economies over the next 12 months.

Domestic problems

Kuala Lumpur is struggling significantly more than its neighbors, however. Malaysian economist Firdaos Rosli remarked, “We are losing steam in a big way when you look at the trajectory of Thailand and Vietnam’s economies.” It’s clear that the wider economic pressures are being exacerbated at home by cuts in government spending and a marked slowdown in private and public investment: a notable setback for 93-year-old Mahathir, who led an unlikely coalition to electoral victory last May.

Mahathir, who already served as Malaysia’s hard-handed PM from 1981 to 2003, is a study in contrasts: charismatic yet sharp-tongued (even anti-Semitic), ambitious yet conservative. He’s been credited for transforming his country from an agricultural economy to an industrialized nation, but also frequently branded an authoritarian leader and the “enemy of the press.”

Mahathir’s single-mindedness

These contradictions have defined the PM’s approach to leadership. At the core of the various challenges Mahathir has faced is the PM’s blind spot when it comes to the economy. Mahathir’s economic theories and priorities have always been unconventional at best, if not outright reckless – yet the PM only becomes more stubborn when confronted with the flaws in his fiscal policies.

For instance, Mahathir spent years indulging his obsession with a ruinous national car project – Proton auto manufacturing – which he is now resurrecting. In three decades of development, the car could be most charitably described as a disaster. At one point, Proton was losing RM35,000 ($15,000) on every vehicle sold – and yet a new national car project is scheduled for launch by 2020, despite widespread public opposition.

Nor is Proton an outlier. Many of Mahathir’s pet projects resulted in ignominious U-turns once their unprofitability became clear, peppering the premier’s record with failed experiments. Proton’s rekindling, combined with other vintage-Mahathir economic policies which have popped up in Pakatan Harapan’s plans, is a worrying sign sure to spook investors – as well as voters; Mahathir’s right-hand man, Anwar Ibrahim, noted that the Cameron Highlands loss was “a reminder to be sensitive towards the people’s concerns about the economy.”

Political feuds

Anwar, credited as an “economic wizard,” has long objected to Mahathir’s tendency to fly in the face of conventional economic wisdom; in fact, a 1998 disagreement between the two men over how to respond to the Asian financial crisis fundamentally changed the course of Malaysian politics. Anwar had been Mahathir’s heir apparent, but the premier had his deputy sacked and thrown into prison on suspicious sodomy charges.

In a surreal twist, Mahathir has since reconciled with Anwar, now again the aging premier’s chosen successor. As Anwar has improbably re-entered Mahathir’s good graces, tensions have ratcheted up sharply with another protégé-turned-enemy, Mahathir’s immediate predecessor Najib Razak. Mahathir has claimed that Najib was “totally responsible” for the spectacular 1MDB financial scandal, in which Malaysian officials are alleged to have looted more than $4.5bn in public funds. Najib has denied any wrongdoing and claimed that the accusations against him are politically motivated.

They certainly have been a focus of Pakatan Harapan’s administration so far. In the wake of the Cameron Highlands election, commentators have suggested that Malaysian voters are tired of the outsized place 1MDB has held and are ready for PH to make progress on its other priorities, notably regarding the economy.

Market jitters

Worryingly, in addition to going after Najib through the judiciary, Mahathir is also trying to dismantle Najib’s economic initiatives – a move which has shaken markets and exposed Kuala Lumpur to financial risk. The ringgit has entered a prolonged slump, while Moody’s has warned that Malaysia’s A3 rating could be reviewed if the government’s debt obligation grows.

The abolishment of the goods and service tax (GST) – which the Najib administration implemented to wean Malaysia off oil rents – has squeezed the country’s revenue base and tied it to collapsing oil prices. Public infrastructure investment is being throttled as well: Mahathir has delayed a high-speed rail link to Singapore until 2020 and canceled $3 billion in gas pipeline projects. These moves have further dented investor confidence in Kuala Lumpur and boosted opposition lawmakers.

As PH licks its wounds post-Cameron Highlands, Anwar is right: the coalition must turn its attention to righting the Malaysian economy. While policymakers in Kuala Lumpur have little control over the external factors dampening their economy, from China’s plummeting exports to US President Donald Trump’s erratic foreign policy, they would be wise to refrain from controversial economic policies rattling investors’ – and voters’ – nerves.

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