Najib leaves sound economic legacy for Mahathir

Alicia Garcia Herrero's picture

HONG KONG – In a comment on Mahathir’s victory in Malaysia’s election, Alicia Garcia Herrero, Chief Economist Asia-Pacific for the French banking group, Natixis, says the win has been read with suspicion by many analysts. “My take on it is positive,” she says.

“First of all, the Opposition’s victory confirms the importance that Malaysians attach to the future of their country and their own welfare, despite the heavy weight of history, which would have called for political continuity.

“Second, the election results should not be seen as a one-off event soon to be diluted by the populist announcements made by Mahathir during his campaign, especially as concerns the scrapping of the low –but still annoying - GST tax introduced by Prime Minister Najib.

“To me, this reading of Malaysia’s electoral results is somewhat short-sighted. When citizens ask for a change, they mean it, and Mahathir, especially given his age, will not want to pass to history without, at least, trying to deliver it (after several failed attempts in the past).

“In fact, this is Mahathir’s last chance to set the right tone for Malaysia’s economic and social reform and, more generally, its modernisation.

“In other words, Mahathir will need to leave Malaysia in “good” hands so that the country finally escapes the middle income trap after three disappointing decades since the Asian financial crisis.”

Garcia-Herrero says that beyond all the negative aspects about Najib’s tenure (massive corruption, as depicted but the 1MDB case, and social stagnation being the most obvious ones), one thing cannot be denied: Malaysia’s macroeconomic management has been relatively good, certainly much better than many other oil-exporting economies.

“After 2015’s massive negative shock, stemming from the collapse of commodity prices, Malaysia managed to get its act together by hiking taxes (GST being the best example) but also cutting Petronas’ capex.

“In addition, Bank Negara dared let the RMB depreciate enough to absorb the negative shock in Malaysia’s terms of trade, which helped the country keep quite high growth rates.

“Such growth rates have remained even recently with a much stronger Ringgit (although the fiscal push from a pre-electoral campaign has certainly helped.

“More generally, fiscal consolidation has continued during the last few years with a reduction in the budget deficit from over 6% in 2009 to 3.1% in 2017, and notwithstanding the negative effect of Najib’s corruption cases and other populist subsidies to gain political support from UMNO’s electoral base.

“Beyond growth and a relatively good fiscal stance (which could however be somewhat challenged once the new Government assesses the extent of its contingent liabilities), inflation seems to be under control and the current account has remained in surplus even after the commodity price shock in 2015.

“All in all, an important point to make to rating agencies looking into Malaysia after this surprising election is that, notwithstanding Najib’s obvious weakness, Mahathir has inherited a relatively well- managed economy, at least macro-economically speaking.

“It is now time to conduct the relevant economic reforms to increase the productivity of Malaysia’s workforce and bring Malaysia to another level, by surpassing the middle income trap.”