Malaysia’s return to 1998 is as sudden as it is predictable. This economic bookend is making headlines as Covid-19 fallout drives Malaysian gross domestic product down 17.1% in the second quarter compared to a year earlier.
It’s not enough, though, to point out that this is the worst gross domestic product (GDP) contraction in 22 years. It’s vital to explore why one of Southeast Asia’s most event-rich economies is cratering.
The coronavirus may be doing the pushing here, but it’s a political crisis dating back to 1998 that best explains why Malaysia is, by some metrics, dropping faster than peers.
Neighboring Indonesia is indeed veering off the road toward high living standards, with GDP dropping 5.32%. Thailand is set for quite a downshift as key growth drivers exports and tourism hit a coronavirus wall. South Korea’s economy shrank 3.3% between April and June.
These three economies were directly embroiled in the 1997-98 Asian financial crisis. Each went hat-in-hand to the International Monetary Fund (IMF) for giant multibillion-dollar bailouts.
The IMF made myriad mistakes, not least of which demanding austerity when Jakarta, Bangkok and Seoul should’ve loosened fiscal policy. But all three were rocked to the core by the crisis and their financial systems forever altered by the experience.
Malaysia, or so goes the popular narrative, nimbly avoided the meltdown. As the IMF advised one set of policies, then-Prime Minister Mahathir Mohamad pegged the ringgit, imposed capital controls and increased support for state-champion companies, avoiding humiliation and social unrest.
Yet Malaysia has been paying for it ever since.
The reason it’s no coincidence that Malaysia is slowing the fastest among Association of Southeast Asian Nations is internecine politics. Two decades of squabbling kept Malaysia from raising its game and basic competitiveness. It left Malaysia with serious pre-existing conditions that Covid-19 is exploiting ruthlessly.
The 1998 bookend is worth considering as Malaysia’s newish prime minister, Muhyiddin Yassin, grapples with the biggest GDP drop since then.
In March, Muhyiddin managed to maneuver Mahathir back into retirement. Back in 2003, Mahathir stepped aside after 22 years in power. At the time, the zeitgeist was about dismantling the economic model Malaysia harnessed to great effect to raise living standards and morph Kuala Lumpur into a cosmopolitan metropolis with one of the globe’s most impressive skylines.
When Mahathir passed the baton to Abdullah bin Ahmad Badawi, there was hope their United Malays National Organization (UMNO) party would finally deemphasize affirmative action policies in place since the early 1970s favoring the Malay majority. This preferential access to business licenses, civil service jobs, education, government contracts and real estate smacks of economic apartheid.
From the IMF to the Organization for Economic Cooperation and Development, officials warn the model stymies innovation and productivity at a moment when regional peers are focused on building economic muscle.
It creates a brain train, prompting many ethnic China and Indian Malaysians to migrate to more meritocratic locales. Singapore’s only tech “unicorn,” it’s worth noting, is compliments of two Chinese Malaysians.
Harvard MBA classmates Anthony Tan and Tan Hooi Ling created ride-hailing giant Grab in a Kuala Lumpur garage. Yet they headquartered it in business-friendly Singapore.
A solid macroeconomic narrative often distracts investors from the micro deficiencies acting as headwinds.
“Malaysia’s productivity levels remain weak and the economy is still highly dependent on, and driven by factor inputs, especially non-ICT capital accumulation,” says Hidekatsu Asada, a former OECD economist who’s now at Japan’s Saitama University, referring to information and communication technologies.
In 2020, Malaysia should be looking to move upmarket into higher-value niche technology sectors. That means attracting more investment in communication equipment, hardware and software to make the economy more productive. Too much now flows into old-economy machinery equipment and commercial real estate.
As a result, he argues, “Malaysia’s productivity level continues to lag behind most advanced countries. For instance, based on purchasing power parity terms, Malaysia’s productivity level in 2019 was about half that of the United States and Singapore.”
And even though Malaysia’s productivity levels may be competitive with regional peers like Thailand, China, Indonesia, India and Vietnam, “these countries experience higher productivity growth than Malaysia, implying a rapid catching up of these countries.”
Rather than upset these vested interests, Badawi, like Mahathir before him, left Malaysia largely on autopilot, reform-wise. His government put virtually all its time and energy into keeping GDP at, or above, 5% while protecting the status quo.
Enter Najib Razak, who took power in 2009 promising to level playing fields in Malaysia once and for all. There was a certain poetry to Najib, a Mahathir mentee, decommissioning the “New Economic Policy” that his prime minister father launched in 1971. Instead, things turned downright Shakespearean in short order.
One of the first notable developments on Najib’s watch was the launch of state fund 1Malaysia Development Berhad. Rather than propel Malaysia into the OECD orbit, 1MDB produced modern history’s wackiest financial scandal.
Billions of missing dollars found their way into high-end real estate, art, a superyacht, Leonardo DiCaprio’s hit movie “The Wolf of Wall Street” and model Miranda Kerr’s jewelry box.There was even a starring role in the scandal for Goldman Sachs.
Just as it takes a village to raise a child, it takes an entire political system to produce, enable, protect and attempt to rationalize misdeeds for which Najib was indicted and convicted. Ditto for the bull market in global investigations into 1MDB from Washington to Zurich to Singapore.
This political system was spectacularly unready for primetime in 2014, when Beijing-bound Malaysia Airlines flight MH370 disappeared. Putrajaya’s chaotic, opaque and paranoid response exposed, just like probes into 1MDB, a national leadership structure unaccounted to the most basic accountability. Malaysia was livid when foreign media dare mentioned that it’s hapless then transport minister, Hishammuddin Hussein, was Najib’s cousin.
Two months before Najib’s arrest in July 2018, Mahathir, then 92, came out of retirement to free Malaysia from a leader “bent upon abusing the law.”
In all the chaos and political jockeying, though, Mahathir 2.0 got little done in its two-year existence. He is widely viewed as reneging on a promise to install his 1998 deputy prime minister and later his nemesis, Anwar Ibrahim, as his eventual replacement.
Now, with Muhyiddin holding the reins and Covid-19 fallout closing in on Putrajaya, Mahathir is eyeing yet another comeback while fearing Najib might be plotting his own return to the premiership.
Amid all this intrigue, who is looking out for the cratering economy?
Not surprisingly, Muhyiddin’s team is bullish. Finance Minister Tengku Zafrul Abdul Aziz claims not just to see economic green shoots on the horizon, but a “V-shape recovery” that started in May and has yet to feed into national data. May was when businesses began a gradual reopening from Covid lockdowns.
Such optimism is belied by numbers suggesting tremendous damage under the surface. Between April and June alone, exports declined 21.7% and consumer spending nosedived 18.5%. Construction activity plunged 44.5%, manufacturing 18.3% and service fell 16.2%.
To economist Trinh Nguyen of Natixis, Malaysian GDP simply “collapsed” in the second quarter. As there are few signs of life in demand and business activity since then, Malaysia is “heading into a recession,” says economist Wan Suhaimi Saidi of Kenanga Investment Bank.
Lim Guan Eng, finance minister from 2018 until early 2020 and the latest Malaysian politician to be slapped with corruption charges, says the focus now must be to “prevent deflation.”
He recommends more aggressive efforts to boost financial aid to small and medium enterprises and extend a moratorium on bank loans by another six months when it expires on Sept 30. The “political spin” about a rebound, he says, is unconvincing as Indonesia, the Philippines and Singapore all register smaller growth drops.
The good news is that Nor Shamsiah Mohd Yunus, governor of Bank Negara Malaysia, is on the case. Her team has cut interest rates by 125 basis points to 1.75% so far this year. Analysts expect more cuts in 2020 as coronavirus fallout intensifies.
“The onus is on the domestic engine to offset the external weaknesses as internal trade gradually recovers,” says economist Mohd Afzanizam Abdul Rashid of Bank Islam Malaysia Bhd.
Yet the central bank can only treat the symptoms of Malaysia’s troubles, not the underlying ailment: complacency. The government rolled out nearly $70 billion of spending to help consumers and businesses weather the pandemic. Given the risk of second infection waves, though, Malaysia needs to think bigger.
Political shenanigans are getting in the way. The government has been angling to raise the debt ceiling to fund more stimulus for the first time since 2009. Statutorily, Putrajaya’s ability to borrow is capped at 55% of GDP. The political impasse is strangling the economic response, putting the central bank in the driver’s seat.
It is equally important that Muhyiddin get serious about structural changes. Top of the list is modernizing Malaysia’s incentive matrix.
Daim Zainuddin, finance minister from 1984 to 1991, during Mahathir’s first incarnation, argues affirmative action directives must be based on economic need, not race. Malaysia would get far more traction, he says, if the “B40” demographic — the poorest 40% of the 32 million-person nation — were “given priority.” Anwar has tiptoed toward a similar needs-based recalibration of the 49-year-old New Economic Plan.
Muhyiddin should take a couple of recent political wins out for a ride. In the space of a few days in late July, Malaysia’s judicial system sentenced Najib Razak to 12 years in prison for looting 1MDB (many worried current leadership might let Najib off). Malaysia also scored penalties of as much as $3.9 billion from Goldman Sachs for its alleged role in the fiasco.
These are the kinds of victories that can alter political trajectories. Trouble is, Muhyiddin enjoys only a razor-sharp majority in parliament. He has a former two-time premier gunning to be a kingmaker in Malaysian politics – if not a wholesale for a Mahathir 3.0 return to power – to contend with.
Najib’s cronies are scheming for his return to power and Anwar, another of the assorted ghosts of political crises past, is ready to pounce on any Muhyiddin misstep.
Malaysia’s political bickering isn’t taking place in a vacuum. It comes as China journeys upmarket at bewildering speed. It comes as Indonesia, with per capita just 37% Malaysia’s, produces far more tech unicorns.
The more Malaysia’s leaders prioritize protecting turf over disruption, the greater the odds the Philippines, Vietnam, and others they took for granted will leave Malaysia in the dust.
The toxicity pervading the halls of power in Putrajaya has made it hard for Malaysia to extricate itself from 1998. Yet there’s no stopping the preponderance of economic data from reminding us the nation’s reform process remains stuck in the past.