Malaysia’s election this May sent shockwaves across the world as the then-opposition Pakatan Harapan (PH) coalition defeated the Barisan Nasional (BN), ending 61 years of one party rule.
International observers like the Eurasia Group had given BN an 85% chance of winning the election, and yet PH, led by 93-year-old former prime minister Mahathir Mohammad, beat the odds by campaigning on promises to reign in corruption and eliminate the widely unpopular goods and services tax (GST).
The defeat of former PM Najib Razak, now charged under the Anti-Money Laundering Act for his role in the 1MDB scandal, raises confidence in the country’s political future and is a victory for democracy especially when illiberal, authoritarian governments are increasingly gripping power in Southeast Asia and across the globe.
At the same time, the transfer of power has brought many drastic policy shifts proposed by the new government which have led to uncertainty around the country’s near-term economic future.
We’ll look at what a PH-run government means for investors as the new ruling party has already made several significant changes to infrastructure funding, development planning and business laws in the country.
Some of the changes already implemented include:
1. Cancelling major infrastructure projects – days after being elected, Prime Minister Mahathir announced his government was cancelling the planned MRT 3 subway line, the East Coast Railway Link (ECRL), the high-speed (HSR) KL to Singapore railway and Bandar Malaysia, the HSR’s proposed terminus south of downtown KL, with a proposed gross development value of 150 Billion Ringgit.
Tun Mahathir has been especially critical of China due to its part in the 1MBD scandal and fears that its heavy investments via the Belt and Road initiative would spur a debt trap, which he referred to as a “new version of colonialism”.
He’s called for banning foreigners from buying property in the $100 billion Forest City project (about 2/3rds of which thus far have been Chinese) and canceled the $20 billion ECRL and $2.3 billion Trans-Sabah Gas Pipeline (TSGP), both of which were funded by Chinese loans.
In recent months, the government has now walked back some of these decisions saying that they are “under review” rather than being canceled outright, such as the HSR, which will only be postponed by 2 years rather than canceled.
2. Ending the unpopular 6% goods and services tax (GST) and replacing it with a sales and service tax to be implemented in September 2018 (which should yield about half of the revenue that GST had). 3. Prosecuting corruption and bringing transparency to government finances – in the days following the election, Finance Minister Lim Guan Eng announced that he had calculated the government’s debt to be over 1 trillion MYR, or roughly 80% of the country’s GDP, as well as the stating the true costs of infrastructure projects, such as the HSR, were more than double their stated estimates.Moody’s Investors Service, however, has estimated the country’s debt-to-GDP ratio at 50.8 percent, which is still much higher than the median 40.1 percent for similar countries.
4. Raising the minimum real estate purchase price for foreigners- the government is looking into raising the minimum property purchase price for non-Malaysians. The minimum purchase price is currently 1 million MYR (excluding Perlis, Penang Island, Kedah, Sarawak and Melaka, where it is higher).As mentioned above, the government has also now forbidden foreigners from buying property at the Forest City development adjacent to Singapore, another megaproject with heavy Chinese investment launched under the Najib regime.
5. Reviewing the TPP agreement – Tun Mahathir is not only taking a making a more confrontational stance towards Chinese influence, he’s making a broader move towards protectionism, reviewing the TPP agreement (which Malaysia was one of the first signers), and pushing for another national car company to be accompanied by further tariffs on international car imports. We spoke with Hayden Briscoe, Head of Fixed Income APAC at UBS and Bala Vijayasingam, Associate Director at CBRE in Malaysia to see how the recent political developments are affecting their business strategies in Malaysia:I.
We’ll start with Mr. Briscoe’s thoughts on the new government and what he’s monitoring in Malaysia.
Firstly, he stated that the cancellations of these large-scale projects have improved investor confidence as they show that the new government is serious about deleveraging the economy (by slowing down infrastructure spending), particularly when the long-term benefits of many of these projects were dubious.
Additionally, though the announcements of unexpectedly high government debt and costs of proposed infrastructure projects uncovered a worse-than-imagined economic situation, which may hurt investment flows in the short term, being transparent with rating agencies has given those monitors more confidence in the government.
Beyond domestic policy changes, Mr. Briscoe sees a few other external factors influencing the investment climate in Malaysia:
Low interest rates in the US and Japan following the Financial Crisis a decade ago created a huge boom in real estate investments in emerging markets, particularly in ASEAN.
These low rates have now come to an end, while capital controls have also been recently strengthened China, both of which will lead to increased pressure on Malaysia’s real estate sector.At the same time, ASEAN currencies are also under pressure with emerging markets implementing their own interest rate hikes in response to the US raising its own.
Malaysia will go down the same track as the other ASEAN countries, but thus far the Ringgit hasn’t been under as much pressure as other ASEAN currencies and it’s worth noting that the country has been clamping down on non-deliverable forwards (NDFs), or offshore market trading, since November 2016, which puts it under less pressure than currencies that have not, such as the Indian Rupee, Chinese Yuan or Korean Won.The US-China trade war will have some effect on all ASEAN countries, as all of them are interlinked with China’s economy, and this combined with the greater effect of the slowing of China’s economy in general, will continue well into 2019.
This means that there will be fewer exports to China and lower Chinese and emerging market demand for oil, which will lead to lower oil prices, which effect Malaysia as oil exports are about 10% of the country’s GDP.
All of these factors will lead to a slowing phase in Malaysia, with fewer investments coming into the country, in addition to any effect induced by the new government.
Finally, many investors are still in wait-and-see mode before committing to investments under the new government, opting to judge actions taken over campaign rhetoric.
Specifically, if Anwar Ibrahim replaces Mahathir as PM in two years, as was promised during the election, this will indicate that the Mahathir and the PH are serious about liberal, transparent rule, but if this doesn’t happen it will be a sign that the dictatorial rule of Mahathir’s past will continue.
II.
For insight into the commercial real estate market, we spoke with Mr. Vijayasingam, on what the new government could mean for the sector.
In the real estate industry, the cancellation of infrastructure projects is a concern for him, as many developing projects were commissioned based upon speculation surrounding new MRT or HSR lines, which have now been canceled.
The uncertainty surrounding the future of the mega-projects has also hurt affected suppliers, contractors and vendors who had mobilized for delivery of the mega-projects.
However, the government’s tone has now softened to “putting projects on hold for review” as opposed to outright cancellations, which gives some hope to those effected.
It’s also worth noting that beyond limiting the rate of debt increase, the government also wants to ensure any expenditure on mega-projects does not include inappropriate payments that may have been enabled by the previous administration, as stamping out corruption is one of their major focuses right now, which as Mr. Briscoe noted, will have a long-term positive effect on the macroeconomic picture.
The long-term hope is to rid government projects of corruption through direct award of contracts on government projects without open tenders.
The government is also focusing on housing for the lower end of demand, which is an area that had been neglected under the previous regime.
Regarding commercial real estate, office space is not in short supply in Malaysia, but certain areas (particularly popular office areas in Bangsar South, Sentral and Mid Valley) will continue to have high occupancy to the detriment of older, existing space in the city.
It is a tenant’s market and the relatively good local skills-base should hopefully continue the expansion of multi-nationals and other businesses in the greater Kuala Lumpur region.
This fact coupled with a general positive longer-term economic and political outlook means CBRE’s business arms focused on transaction, project management and facilities management should continue to perform well.
Reasons for this positivity are that the short-term pains due to the project cancellations and other government changes such as the abolishment of GST are being offset with decent oil prices, for now.
Finally, the BN party now has a much larger representation in the media than the PH ever did as an opposition party, which improves the level of government transparency and ultimately strengthens the check and balance mechanisms necessary in a democratic process.
The outlook therefore for governance is positive. The long-term outlook for the economy is positive. There remains a marked feeling of goodwill towards the new establishment.
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