Why the election could make Malaysia’s economic problems worse

Malaysia ringgit notesMalaysia ringgit notes

Malaysia’s election on May 9 will do nothing to solve its institutional problems, no matter who wins, and may even make some issues worse, Capital Economics said in a note on Monday.

“With neither side in Malaysia’s election offering the kind of economic and political reforms the country needs, the long-term outlook is unlikely to improve after next month’s election,” the note said. It estimated trend growth would stay around 4.5 percent on-year, compared with around 6-7 percent in Taiwan and South Korea, when their gross domestic product (GDP) per capita as Malaysia’s current level.

The election pits the incumbent prime minister, Najib Razak, against a former prime minister, 92-year-old Mahathir Mohamad, who has left the ruling coalition to run as a member of the opposition. Mahathir was said he is running because of what he sees as corruption in the current government. Najib is generally considered the front-runner.

But neither candidate is likely to improve government finances or institutional problems, Capital Economics said.

“With Najib promising to almost double cash handouts to low-income households and Mahathir pledging to scrap the Goods and Services Tax, the budget deficit is likely to widen this year,” it said. “Once the election is out of the way, however, the government is likely to want to get fiscal consolidation back on track, which would imply a sharp tightening of fiscal policy in 2019.”

The election outcome also appeared unlikely to improve the “affirmative action” system, which purports to grant privileges to ethnic Malays, the note said. Najib has no incentive to end the program, while Mahathir, who did noting to end it while in power from 1983-2003, hasn’t mentioned it on the campaign trail, the note said.

Corruption issues are unlikely to be a priority for either candidate, the note said. Najib was accused of involvement in embezzlement from state-fund 1MDB in recent years, but remains the front-running candidate, it noted. Najib has repeatedly denied the accusations.

“There is unlikely to be a dramatic improvement if Mahathir wins either,” it said. “Corruption was, after all, rife while he was prime minister, and it seems unlikely that he would be able to tackle the broader system of corruption and patronage that ties the political system together.”