Fitch Ratings: Political uncertainty continues to affect Malaysia’s outlook

This is despite the financial markets appear to have welcomed the new govt, with the ringgit appreciating 1.1% against the US dollar


POLITICAL uncertainty continues to weigh on Malaysia’s economic outlook, Fitch Ratings said, despite the political agreement between the Perikatan Nasional government and the Opposition.

The rating agency noted that the new majority government and memorandum of understanding with the Opposition should make it easier to pass bills in the Parliament, including the Budget 2022 (to be presented on Oct 29) and the bill to raise the debt ceiling to 65% of GDP from 60%.

Fitch Ratings added that financial markets appear to have welcomed the new government, with the ringgit appreciating 1.1% against the US dollar.

“Political uncertainty, nonetheless, continues to weigh on the economic policy outlook, in our view. It remains to be seen how long the agreement will last and the government could still lose its narrow majority before the next elections, to be held by July 2023. Government spending pressures could also arise,” the firm’s director (sovereigns) Thomas Rookmaaker said.

“Political dynamics may also weigh on prospects for an improvement in governance standards. Measures to improve transparency were introduced in 2018, and it remains to be seen whether the new government will continue to implement them,” he added.

According to Rookmaaker, uncertainty over medium-term policies could continue to undermine investor sentiment and constrain economic growth.

“Private investment was already weak pre-pandemic, contributing on average only 0.4 percentage point to GDP growth year-on-year in the six quarters following the 2018 elections, compared to 1.2 percentage point in the previous six quarters. This is particularly striking considering Malaysia’s high scores on international competitiveness rankings,” he explained.

Rookmaaker said uncertainty about medium-term economic policies remains.

“Near-term political risk has been alleviated following a change in government in August and a working agreement reached soon thereafter between the governing coalition and the Opposition. Nevertheless, uncertainty about medium-term economic policies remains. We downgraded Malaysia to ‘BBB+’/Stable in December 2020 reflecting, in part, lingering political uncertainty,” he said.

Fitch Ratings affirmed the rating in July, when it also emphasised medium-term trends in the government debt-to-GDP ratio and governance standards as key rating sensitivities.

The latest change in the government, led by Prime Minister Datuk Seri Ismail Sabri Yaakob, is the third since May 2018.

Fitch Ratings further said that support for the previous government, in power since March 2020, had gradually eroded with political infighting and the impact of the pandemic.

Malaysia is set to have another state by-election due to the political infighting that resulted in the withdrawal of support from four assemblymen towards the Umno-led government in Melaka last month.

The assemblymen were Datuk Seri Idris Haron (BN-Sungai Udang), Datuk Nor Azman Hassan (BN-Pantai Kundor), Datuk Norhizam Hassan Baktee (Independent-Pengkalan Batu) and Datuk Noor Effandi Ahmad (Bersatu-Telok Mas) who declared that they have lost confidence in Melaka Chief Minister Datuk Seri Sulaiman Md Ali’s leadership.

Umno had sacked both Idris and Nor Azman last week, while Bersatu also announced the termination of Noor Effandi’s membership due to their actions.

The Election Commission (EC) has set Nov 20, 2021, as the polling date for Melaka’s by-election. Nomination day for the by-election will be on Nov 8 while early voting will be conducted on Nov 16, 2021.

EC said the campaigning period will run for 12 days and will commence after the nominees have been named, until 11.59pm on Nov 19, 2021.

Critics and observers have expressed concerns over this election, taking cue from the Sabah state election in Sept 2020, which was blamed to cause the third Covid wave in the country.