Trinh Nguyen, Nikkei Asia
While Thailand’s policy uncertainty risk premium has been rising during a year of political upheaval, Malaysia has been charting an economic comeback by being unusually quiet and stable politically.
Malaysia had been the poster child of unstable politics with three prime ministers in the four years since Najib Razak left office in 2018 due to the 1MDB scandal that tainted not just his administration but also the country. Populist policies were given priority as political survival took precedence over longer-term strategic economic considerations. As a result, Malaysia lagged behind more politically stable and reform-minded countries such as India and Vietnam in attracting investors.
Fast-forward to today, and Malaysia is quickly rising in investors’ perceptions as the comeback kid of Asia. Due to his Pakatan Harapan alliance in parliament, Prime Minister Anwar Ibrahim is likely to stay in power until the next general election, expected in 2027. This opens more policy space in the short term.
Politically difficult reforms have taken center stage, including rationalizing the diesel subsidy, raising the sales and services tax to 8% from 6%, and reviving a new light-rail transit system in Penang. The budget deficit is expected to narrow this year to 4.3% of GDP from 5.1% in 2023 due to efforts to reduce subsidies.
Rising U.S.-China tensions have made Malaysia a beneficiary of companies seeking a location with solid infrastructure, talent, and an existing ecosystem of high-tech manufacturing. Malaysia is well-positioned to benefit from medium to high-tech capital-intensive supply chain diversification. The Johor-Singapore Special Economic Zone (JS-SEZ) agreement is expected to be signed in September to capitalize on Malaysia’s relatively cheaper input costs.
FDI inflows increased to $58 billion in 2023 from $34 billion in 2014. Net FDI fell to $9 billion last year from $17 billion in 2022 as Malaysian companies took advantage of growth in regional counterparts.
According to Bloomberg, despite weak regional deals so far in 2024, the volume of mergers and acquisitions has surged 87% from a year ago to $8.3 billion. As Malaysia gains traction as an attractive destination for high-tech investment and as a key player in the semiconductor, data processing, renewable, and electric vehicles value chain, interest has garnered from Western companies, but also those in the Middle East and China.
In contrast, Thailand is embarking on a populist budget that includes digital cash handouts that will widen the fiscal deficit and are unlikely to add productivity. The country’s fragile politics have motivated Prime Minister Srettha Thavisin to prioritize short-term gains that undermine longer-term fiscal sustainability.
The recent low turnout of Chinese Malaysians and Indian Malaysians in a local Penang election might be a cautionary tale of dissatisfaction with Anwar’s alliance that could be a harbinger of Anwar’s base becoming alienated while his alliance fails to make inroads with Malay voters.
Anwar is yet to fully address his campaign promise to push for needs-based rather than race-based affirmative action economic reforms. He has also had to contend with corruption, following the halving of Najib’s sentence, and anti-graft chief Azam Baki remaining in his post despite a stock-ownership scandal.
Still, Anwar has taken important steps in rationalizing subsidies and increasing tax revenue. While the window of reform remains open, he needs to do more to gain much-needed foreign investment and pave the way for expanding economic opportunities.
[Abridged]
Courtesy Trinh Nguyen/Nikkei Asia
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