Key political risk to watch in Malaysia

Mon May 31, 2010 3:21am EDT

By Razak Ahmad

KUALA LUMPUR, May 31 (Reuters) - Malaysian Prime Minister Najib Razak has reached a critical point after just over a year in office -- will he enact economic reforms and cut subsidies and risk alienating his voter base, or will he back off?

Poorer Malays could be hit initially by Najib's pledge to reduce subsidies and roll back a controversial racial affirmative action policy. Many analysts believe the promised economic reforms, aimed at winning back foreign investment, will be delayed, watered down or abandoned to avoid losing votes.

Malaysian bonds have rallied this year, returning 4.99 percent for dollar-based investors in the past three months, according to the industry benchmark JPMorgan Government Bond Index-Emerging Markets, outperforming the wider Asia index which rose 2.67 percent. Malaysia's outperformance is largely due to rate hikes and the ringgit's proxy as a China revaluation play.

By contrast, Thailand is up 4.77 percent and high-flying Indonesia scored a 6.81 percent return in U.S. dollars, although all markets are off their highs, roiled by global risk aversion.

Following is a summary of key Malaysia risks to watch:

* POLITICAL CONFLICT

Political tensions spiked after the 2008 general election when unprecedented opposition gains transformed the political landscape. The National Front coalition's dominance through 52 years in power was dented as it lost control in five states and its once iron-clad two-thirds control of parliament.

The ruling coalition has since lost in several by-elections including one last month in its own bastion state of Sarawak.

The political uncertainty has weighed on foreign investment with net portfolio and direct investment outflows MYFLO=ECI reaching $61 billion in 2008 and 2009 according to official data. While money has flowed into the bond market recently, according to central bank statistics, little has flowed into equities.

What to watch:

-- Opposition leader Anwar Ibrahim's sodomy trial, which ends in late August. Anwar says the case is a political conspiracy, and a contentious verdict would anger his supporters. Any marked increase in political tensions could see more foreign money pulled from stocks .KLSE, bonds and the ringgit MYR=. But with limited foreign portfolio investment still in the country, the impact will be muted. [ID:nSGE60I0BQ]

-- Elections in Sarawak which expected by the end of this year. The Front's shock defeat last month at a parliamentary by-election in Sarawak has raised doubts whether it can maintain its support levels in the state. A further weakening of Najib's coalition in the coming Sarawak elections could spell more losses for the National Front in the next general election which analysts say could be held as early as next year.

* ECONOMIC REFORM

The government's commitment to economic reform is being put to the test with a plan to cut subsidies presented to the public last month, with a decision expected in the coming months.

Malaysia spent 15.3 percent of total federal government operating spending on subsidies in its 2009 budget when its deficit surged to a 20-year high of 7 percent of GDP.

Key to investor confidence will be whether the government has the courage to significantly unwind the crippling subsidies amid a potential voter backlash. Najib's political will to reform will also be tested by the "New Economic Model" (NEM), a blueprint to replace a four-decades-old Malay affirmative policy known as the New Economic Policy (NEP).

The controversial NEP was adopted after 1969 race riots and gave a wide array of economic benefits to ethnic Malays who make up 55 percent of the population. Investors complain that abuse of the policy spawned a patronage-ridden economy, causing foreign investors to favour Indonesia and Thailand. [ID:nSGE62E002]

Najib has rolled back elements of the NEP, and axed the rule that companies must offer stakes to indigenous ethnic Malays. But his plans face growing opposition from conservative Malay rights groups who want the NEP preserved, including Perkasa (Strength) which is backed by a significant number of people within Najib's own United Malays National Organisation (UMNO) party.

What to watch:

-- The phased rollout of the NEM and how far Najib will accommodate conservative Malay pressure groups. The NEM's broad outline was released on March 30 and public reaction will be sought before the final measures are announced. Markets barely shifted when it was announced, reflecting scepticism over implementation after some key reforms were put on hold.

-- Moves to reduce crippling fuel and food subsidies. Past fuel price hikes have drawn an intense public backlash which Najib appears wary of attracting. Malaysia was supposed to cut its fuel subsidy bill from May this year as part of the 2010 budget to tackle its budget deficit which hit a more than 20-year high of 7 percent of GDP in 2009, but the measure was withdrawn.

(For a graphic on Malaysia's subsidy bill, click here)

-- The 10th Malaysia Plan, a five-year economic masterplan. Set to be tabled in parliament on June 10, the plan will contain Malaysia's revised growth and budget deficit forecasts.

* RACE AND RELIGION

Race and religion have always been explosive issues in Malaysian politics. Najib took power pledging a more inclusive approach to ethnic Chinese and Indian minorities, but his UMNO party is beginning to cast this approach aside in a bid to woo conservative Malays. The caning of three women under strict Islamic laws in February for having illicit sex signalled the government's increasing adoption of a stronger Islamic agenda, and this has worried some investors. [ID:nSGE61I07S]

A heated row over the use of the word "Allah" by Catholics, which sparked attacks on religious establishments, is also threatening to prolong minority unhappiness with the government.

What to watch:

-- Efforts to resolve religious disputes. The government has set up an interfaith committee to promote religious harmony and is trying to reach an out of court settlement with the Borneo Evangelical Church, which went to court over the "Allah" dispute.

-- If the government tries to woo Muslim voters with more conservative policies based on Islam, investors may be spooked.

-- A severe worsening of tensions could raise the spectre of sectarian unrest, but this is not regarded as likely for now.

* CORRUPTION

Malaysia used to be regarded as one of the region's more reliable countries, but worsening corruption and a perceived lack of judicial independence have damaged investment.

What to watch:

-- Government efforts to deal with a scandal over a port trade zone close to Kuala Lumpur that exposed links between politics and business. False government guarantees given when the bonds were sold have triggered concerns among holders of $1 billion of bonds that they might not be repaid.

(Editing by Andrew Marshall)

To make money, go Indonesia

There is a kind of theory which says a country's destiny can be read from the countenance of its head of state or government.

President Hu Jintao's auspicious look reflects China's continued prosperity; Barack Obama's bony cheeks signify the tortuous path America's economy takes; Gordon Brown's weathered look indicates that Britain is heading downhill, while Nicolas Sarkozy's sophistry is the manifestation of France's dwindling significance in this world.

I took special note of Indonesian President Susilo Bambang Yudhoyono when visited Kuala Lumpur lately.
Susilo sports a well built figure, a broad face with a straight nose, an energetic look that hardly reminds us any of the countless Indonesian workers walking around our streets.

When he stepped out of the aircraft, his eyes were fixed to the far front. He walked in steady gaits with his head lifted up, fully confident of himself and his country.

He, too, did not resemble his predecessors in whatever way.

Such a posture reflected the destiny of Indonesia.

It appeared to me that it was no easy task if we tried to take advantage of him, who came to KL to talk about bilateral issues.

Forget about RM350 monthly pay, Indon maids have to work 365 days a year.

Forget about getting locked in a tussle with our neighbour over the sovereignty of some unknown islet.
Susilo is no Habibie nor Megawati, and Indonesia is no longer the Indonesia we used to know.
A US military school graduate, Susilo is resting on a powerful support base in his country, which is the Big Brother in ASEAN, a G20 member, and an emerging BRIIC powerhouse.

The 1997 regional financial meltdown, the 1998 riot, 2002 Bali bombing, 2004 Indian Ocean tsunami made many think that Indonesia had gone to the dogs.

But having experienced the damned fate, this country is staging a decisive comeback.

Susilo has drafted a series of major strategies upon taking office as the vast archipelago's president: To liberate the country's immense economic potentials, to batter corruption and beef up national security.

While these objectives are simple, few have achieved them.

He has shown the results, especially in lifting the Indonesian economy.

A friend in oil palm industry told me Indonesia had long overtaken Malaysia as the world's top palm oil exporter. If we were thinking of making big money from the industry, Indonesia was where we should head to.
A friend from IT industry told me customers at Jakarta's electronic stores demanded nothing but the latest computer and handphone models, whatever the prices.

Malaysia is no longer the prime regional market for automobiles. Automakers from around the world have zeroed in their focus on setting up plants in Indonesia, which boasts massive potentials, for both domestic consumption or export.

Thanks to the regional crisis, Indonesia was on the brink of bankruptcy during the final says of Suharto. They took the loans from IMF, and became the laughing stock of our Dr Mahathir.

Today, Indonesia has settled all its debts with IMF, and its economy has emerged healthier hence. Malaysia, which swore not to kowtow to IMF, is still struggling with the restructuring of its economic structure and a sluggish growth, with its debt ratio far outpacing the giant neighbour.

Notably, Indonesia's racial reconciliation, along with its equitable policies has not only liberated its vast economic potentials, but also energised the society.

This is a critical lesson Malaysia can pick up from Indonesia. (By TAY TIAN YAN)

When can we create a miracle?

There was a miracle in the 2010 Uber Cup. It was not Malaysia, but South Korea has created the miracle.


The Malaysian team, which is backed by the country, has failed to repeat the miracle 18 years ago and was defeated in semi-finals. Meanwhile, the South Korean team has created history when it defeated China and won its first ever Uber Cup title. It was definitely not an accident.


In the 1970s, the Malaysian national soccer team used to be ranked among the highest in Aisa. But today, it is ranked 147 in the world. And the South Korean team, which was the first Asian team to reach a semi-final, is now ranked 47.


In 1980, the GDP for South Koreans was US$1,645, which was even lower than the Malaysian GDP of US$2022. In 1991, former Prime Minister Tun Dr Mahathir Mohamad introduced the Vision 2020. In the end of year 1997, South Korea asked for a loan from the International Monetary Fund (IMF) while Malaysian took the "closed door" capital control policy.


After the Asian financial crisis, South Korea started to actively reform and within a decade, the per capita income of South Korea has grown by 104.3% while Malaysia only achieved an increase of 68.4%. Malaysia has been remaining as a middle class country for 15 years.


Today, the per capita annual income of South Korea is US$20,000 and Prime Minister Datuk Seri Najib Tun Razak set a target under the New Economic Model (NEM) to increase the per capita annual income of Malaysia to US$15,340 in 2020.


Our target for 10 years later is even far less then the current amount achieved by South Korea.


Both the countries have experienced rises and falls over all these years, but there is nothing by chance. There are a few factors that have made the current different statuses of South Korea and Malaysia. These factors include the soft power, quality and mental outlook of the people, management of the government and education.


The South Korean badminton team has a strong "never-say-die" spirit while the Malaysian team has no will to fight. These have portrayed the spirits of most South Koreans and Malaysians.


Malaysia is very lucky to be abundant in natural resources. However, it is also a misfortune as when the country is rich, the government does not step up to develop human resources and strengthen national education. As a results, Malaysians have developed a value and work culture of overly dependent on the government. It is an underlying cause.


The country is now facing all sorts of problems but as the authority is worried of losing votes and support of the people, it continues adopting a liberal policy. For example, when the rankings of national universities is dropping, the Education Ministry still wants to reduce the workload of teachers and offer cash incentives.


How can we have a reform for education then?


In addition, we wonder whether the government will take firm action to collect more than 15 million of traffic summon fines. The National Higher Education Fund Corporation (PTPTN) loans in arrears serve as the best example.


The government, as well as the people need to change in order to achieve the vision of transforming the country into a high-income economy.


If the government is afraid of removing the safety net, how can the people move forward? How can the people have a sense of crisis if we do not step up the reform?


Politicians should also set aside "racial privileges". Instead of keep talking about "the rise of Malays", it is better to focus on improving the people's fighting spirit and ability to bear hardships, in order to improve the quality of the people in terms of mentality.


Political leaders are having a lot of scruples and their primary task is to fight for regime. Improving the people's quality will never be their first consideration. In this case, when can the country create a miracle? (By Lim Sue Goan)

A real estate bubble

 By Lim Sue Goan

 

MAY 14 — Economic data are usually released by Bank Negara. Prime Minister Datuk Seri Najib Razak rushed all the way from Sibu to Putrajaya yesterday (May 14) to announce that the Malaysian economy has recorded a robust growth of 10.1 per cent in the first quarter of 2010.

He was trying to tell the people that, under his governance, the country has walked out from the impact brought by the financial tsunami, ended the negative growth and started to recover.

Similar to other Asian countries, the main factor for the strong economic rebound is because of the country’s fund injection and huge stimulus plans. But when the market confidence is restored, hot money will flood into Asia, giving birth to assets bubbles.

There are also bubbles in Malaysia, particularly because of high-priced housing.

From newspaper advertisements, we can find that housing prices around Klang Valley have been rapidly surging. A terrace house was sold at about RM400,000 two years ago but today, it costs over RM700,000 per unit. And it is common to find semi-detached and detached houses to be sold at more than RM2 million.

When being asked to comment on the soaring prices, those in the industry will always say: It is still cheap compared to foreign countries, the prices are reasonable.

But please do not forget that only 20 per cent of the people in this country are high income earners, while 40 per cent are middle income earners and the remaining 40 per cent are earning less than RM1,500 per household. Some of them even earn only a few hundred ringgit per month. They can never afford a million-ringgit-house even if they starve themselves.

I believe those who buy expensive houses are rich people, permanent residents and foreign citizens. Would these people be able to accept and digest all the houses that have been continuously introduced to the market? Many developers are competing to build high-priced houses as they bring high profit margins. But once the market collapses, who is going to clear up the mess?

High-priced housing speculation will also bring up the prices of other houses and eventually lead to inflation.

Middle- and low-income earners will be the victims of the plight.

It is worrying that the government’s economic development strategy is actually stimulating the bubble. For example, the government and the Employee Provident Fund (EPF) will form a joint-venture to develop a 3,000-acre tract of land in Sungai Buloh into a new hub for the Klang Valley.

In addition, the government has been partnering Naza TTDI KL Metropolis Bhd to build a RM628-million premier convention centre, the country’s largest exhibition and convention centre, in Jalan Duta, Kuala Lumpur.

The prime minister’s New Economic Model (NEM) should be heading towards a knowledge-based, high value-added and high-tech development. It is not the government’s responsibility to take part in the real-estate industry. And real-estate is also a non-productive economic activity.

China, Hong Kong and Singapore are in the implementation of control measures to cool down the housing market frenzy. After the outburst of the European sovereign debt crisis, the world economy may face another decline. If we do not address the issue of assets inflation now, once there is another financial crisis and the bubble bursts, the consequences will be more severe.

Starting from end of last year, China has raised minimum down payment for second homes while Hong Kong has increased stamp duty for luxury houses, cancelled internal pre-sale and provided that first released units can only be sold to individual buyers.

The government should uphold the principle of “people first” and control housing prices as the people will be the one who suffers when housing prices keep soaring.

Too much of international spare and hot money will create a crisis while the real estate bubble will bring the biggest calamity. — mysinchew.com

Nuclear power plant

 

The government wants to build a nuclear power plant. But, do we really need this thing?

What's going to happen if this thing is to be built near my house?

There are two kinds of reactions in response to the building of a nuclear plant.

Some say it is a good thing, a high-tech and efficient energy source.

In addition, it will not emit waste gases that will pollute our air and is therefore a whole lot more environment-friendly than coal or petroleum.

Others call it a devil. Other than exorbitant cost, it will also produce radioactive waste which if leaked will mean an environmental catastrophe.

While many can forget the numerous earthquakes and volcano eruptions that have taken place on this planet, few will not shudder at the thought of the Chernobyl meltdown in Ukraine 24 years back.

Good thing or bad, we will leave the scientists to argue about it, but having debated over this issue for over half a century, 11 answers could come out from ten top-notched scientists--none a standard one.

Let's put aside safety concerns now and concentrate the its economic implications.

Lim Guan Eng said the country's electrical energy reserves have reached a high of 40%, double the rational level of 20%, and this coupled with the massive amount of power to be supplied in the future by Bakun and Murum dams in Sarawak, will easily make Malaysia a country with an enormous power surplus, and therefore construction of a nuclear plant is redundant.

Of course, it is also logical that the government intends to cut down the use of coal and petroleum as fuels for power generation, and substitute part of them with nuclear power.

Having said that, any potentially polluting activity will have to face a mountain of problems before it can come to Malaysia.

What's going to happen if this thing is to be built near your house?

Let's put aside nuclear plants. Even much lower grade garbage incinerators have met with bumpy fates in this country.

The government wanted to build a few garbage incinerators here more than ten years ago, but do we see any of them today?

Controversies and protests have risen over the tendering procedures right up to the choice of location. In the end, the project died a premature death.

At a time when neighbouring Singapore is already having four incinerators, we are still scrambling to find new dump sites!

This is, as a matter of fact, an issue of public sector efficiency.

This efficiency is reflected not on the size of police force we could mobilise, but whether the government's actions could gain the recognition and support of the public.

Public recognition and support are derived from their trust towards the government, as well as their satisfaction towards public policies.

If the tenders are awarded in a transparent and equitable manner, social backlash will be minimised.

If the government could communicate with local residents on the choice of location, offering safety assurances, then the public's fears and suspicion will be allayed (By TAY TIAN YAN/Translated by DOMINIC LOH/Sin Chew Daily)