Malaysia: Political crisis amid an intensified pandemic

Event

The United Malays National Organisation (UMNO), the most important member of the ruling Perikatan Nasional coalition, has dropped its crucial support to the government at a time of rising popular discontent related to the health crisis. Hence, snap elections look increasingly likely as the vote of confidence scheduled in September might confirm PM Muhyiddin Yassin’s loss of majority. The timing of those elections is still very uncertain though, given the ongoing Covid-19 upsurge due to the Delta variant. Until their organisation within the next six months and the Covid-19 wave is under control, the PM could be replaced by an interim PM.

Impact

Between early January and 1 August, the country was under a state of emergency due to the Covid-19 pandemic. Like all other neighbouring countries, Malaysia has been experiencing its worst Covid-19 wave since the outbreak of the pandemic. While the number of cases has not yet reached its peak, currently being at 19,000 cases per day, Malaysia’s highest vaccination rate (28% fully vaccinated) in South-East Asia after Singapore only gives some cautious hope for the coming months. In the light of the current political crisis, the state of emergency and parliament’s suspension have been a means for the government to ensure political stability and prevent criticism from the opposition and the population. In fact, it only postpones problems linked to an instable and short majority led by a prime minister nobody had seen coming up and considered as temporary. Now, it seems that PM Muhyiddin Yassin has ambitions to stay in power through the ballot, as he would still be supported by many UMNO lawmakers.

A political crisis and a further two-week delay in the re-opening of the parliament are unfortunate in this intensifying health crisis. This being said, during the pandemic, economic damages have been mitigated by a strongly supportive government policy. In the second half year, fiscal and monetary policies are expected to remain rather accommodative. Fiscal space is nevertheless much narrower compared to 2020, as fiscal deficit exceeded 5% of GDP last year and public debt is at its highest in 29 years, above 67% of GDP. The weak domestic demand amid strict lockdown, the tourism crisis and decreased exports led to a 5.6% real GDP dive in 2020. Even though a mechanical rebound is expected this year, notably thanks to the stronger first months of the year, the sharpest Covid-19 shock and prolonged tourism gloom could significantly mitigate recovery to 4.7% (revised down from 6.5% by the IMF in the end of July) in 2021. As for 2022, economic forecasts will remain largely exposed to the evolution of the Covid-19 pandemic, particularly to vaccination rollouts and new variants. In this context, Credendo’s strong to moderate ratings for short-term political risk and business environment have a stable outlook.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com