Political turmoil in Malaysia stifling economy, investment

Analysts say foreign funds are pulling out and confidence is waning

The political crisis in Malaysia since March elections that humiliated the ruling coalition has stifled the stock market, deterred foreign investment and crimped growth forecasts.

And economic observers said that with Prime Minister Abdullah Ahmad Badawi still clinging to power despite mounting calls for a speedy departure, there is no end in sight to the uncertainty.

Abdullah has said he may not seek re-election as ruling party leader in internal polls next year, but the coalition also faces an unprecedented challenge from the opposition, which says it has the numbers to seize power.

The prospect of a messy change of government - the first in the history of Malaysia, which has been ruled by the Barisan Nasional coalition since independence in 1957 - is making investors very nervous.

The Kuala Lumpur Composite Index, which reached an all-time high of 1,524 points in January, dived to 1,157 shortly after the March elections that saw the government lose its two-thirds majority in parliament for the first time.

On September 18, the bourse plunged to a two-year low of 963, and ended last week at 1,020.53, in a malaise worsened by the stream of bad news from Wall Street.

"It has been on a downtrend since the general elections and we expect it to remain so as there are no signs that the political situation is easing," said Stephen Soo, a senior analyst at local brokerage TA Securities.

"Investor sentiment is still weak and foreign funds have been pulling out of the market. The political scenario is definitely a deterrent to foreigners," he added.

Unsustainable policies

Citigroup chief economist for Singapore and Malaysia, Kit Wei Zheng, said the political situation has forced the government to resort to unsustainable policies that could widen the budget deficit.

"When you have an unstable political situation, you are forced to make populist promises needed to secure power," he told Agence France Presse.

Abdullah's 2009 budget offered tax cuts and sweeteners designed to restore support for the beleaguered coalition and spur growth in the face of a global slowdown.

Kit said the premier's flip-flop on petrol prices - with two cuts that partly reversed a deeply unpopular 41 percent price hike in June - "is not a good signal to foreign investors."

"As long as this political situation does not resolve itself, even if there is a global recovery, Malaysia might be passed by in favour of other destinations," he said.

Growth forecast

Despite the gloom, the government's forecasts remain relatively rosy.

Deputy premier Najib Razak, who last week took over the finance portfolio from Abdullah as part of a succession plan, said the government still expected the economy to grow by 5.7 percent this year.

However, the Malaysian Institute of Economic Research - a government think-tank - has cut its 2008 growth projection to 4.6 percent, partly due to the domestic political turmoil.

"The government has been unable to respond to the economic crisis with even a basic plan of action," said Tengku Razaleigh Hamzah, a veteran figure in the ruling party and one of Abdullah's most vocal critics.

"Business confidence has plummeted as capital flees the country," he said in a statement.

"Political crises come and go, but the present crisis might well be the beginning of a cascade of failures leading to long-term instability and destruction."

- By Ivy Sam
Agence France-Presse