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Malaysia’s Unity Government grapples with policy challenges in the wake of Six-State Elections

The Unity Government in Malaysia, composed of diverse political parties, faces hurdles in implementing reforms after recent state elections.

While social stability remains stable, political diversity may lead to policy gridlock and a shift towards race-based policies, potentially impacting the country’s reform agenda, as indicated by BMI, a unit of Fitch Solutions.

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MALAYSIA: BMI, a unit of Fitch Solutions, has expressed concerns about the challenges to policymaking even after the conclusion of state elections.

The reason for this apprehension is that the unity government is made up of multiple political parties with diverse ideologies.

This diversity within the government could potentially hinder the speed and effectiveness of implementing reforms.

Despite the election results showing no change in state governments, the opposition party Perikatan Nasional (PN) has gained additional seats in State Assemblies.

“However, we expect Malaysia’s improved inflationary backdrop and resilient labour market to help keep social stability risks low,” it said in a statement on Thursday (21 Sep).

The research house maintains Malaysia’s Short-Term Political Risk Index (STPRI) score at 71.7 out of 100, which is lower than the regional average (GDP-weighted) of 77.3.

Malaysia’s six-state elections concluded with the status quo being preserved

Malaysia’s Prime Minister Anwar Ibrahim’s Pakatan Harapan (PH) coalition retained control of Penang, Selangor, and Negeri Sembilan, while Kedah, Kelantan and Terengganu remained under PN’s leadership.

“The election results clearly highlight that PN had secured a higher number of seats across all six states.

“The opposition party won more than 95% of seats in the three states it currently governs, and made gains in the remaining three states held by PH,” it said.

State Elections serve as a barometer for national politics

Although the composition of state legislatures does not directly affect the national legislature, the state elections were a bellwether of the electorate’s political mood.

“We expect PN’s increased influence to pose challenges to policymaking at the central government level.

In light of the weaker-than-expected performance by PH, we believe that the unity government will be inclined to roll out race-based policies that favour the Bumiputras (ethnic Malays) to shore up support among this core group,” it said.

However, there are two main implications of this, it said, first, doing so would cause the coalition government to backtrack from its commitment of implementing needs-based policies as opposed to race-based policies.

Second, while such policies could prove popular with the support base of the once-dominant Barisan Nasional party, which is part of the unity government, it could stoke tensions with other members of the coalition government including the Gabungun Parti Sarawak and Gabungun Rakyat Sabah, leading to a slowdown in reforms and policy gridlock.

“The government has announced a targeted fuel subsidy system and is considering a voluntary progressive wage policy to propel the labour market.

“There are nascent signs that the unity government, which comprises multiple parties, could face gridlocks over policy in future,” it said.

In September 2023, Syed Saddiq, Member of Parliament (MP) for Muar announced his withdrawal of support for the unity government in response to the public prosecutor’s decision to drop all 47 corruption charges against Deputy Prime Minister Ahmad Zahid Hamidi.

Saddiq is the president of the Malaysian United Democratic Alliance (MUDA), a very small party.

While Saddiq’s withdrawal does not pose a serious threat to Anwar’s position as prime minister, we believe that the reprieving of the Deputy Prime Minister, who is also the leader of the United Malays National Organisation (UMNO) – the sole Malay nationalist and a crucial component party in the unity government – could raise doubts about Anwar’s commitment to fighting corruption.

Component parties of the unity government and opposition parties alike have cast doubts on Anwar’s anti-corruption drive.

“Anthony Loke, secretary general of Democratic Action Party (DAP) – a component party of the PH coalition – has since demanded an explanation in order to uphold the public’s confidence in Malaysia’s legal system.

“Additionally, hundreds of opposition protesters have taken to the streets and threatened further protests should no action be taken to reverse the public prosecutor’s decision.

“If the case is perceived to be handled lightly, we believe PH would risk losing its current support base, while deepening divisions within the already-fragmented government and ultimately slowing the pace of Anwar’s reform agenda,” it said.

Easing inflation and a tight labour market will help suppress risks to social instability

Malaysia’s consumer price inflation backdrop has been improving since peaking at 4.7% y-o-y in August 2022 and has most recently fallen to a 23-month low of 2% in July 2023 (see left-hand-side chart above).

The decline in inflation suggests that the central bank’s real policy rate is now in positive territory (see right-hand-side chart above), a development which since 2006 has typically coincided with the end of the monetary tightening cycle.

Additionally, the labour market has remained relatively robust, with the participation rate sitting at an all-time high of 70.1% as of July 2023 (see chart below).

“Against this backdrop, we are maintaining Malaysia’s STPRI score at 71.7 out of 100. The policymaking process component (53.3) has previously been lowered to account for the challenges the unity government is likely to face and its reduced ability to push through with reforms while holding the multi-party coalition together.

“We caution that social instability could rise should protests persist, but we remain comfortable with Malaysia’s social stability component (67.5) for now,” it said.

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