Malaysia - New prime minister but hardly primed for political longevity

A year and a world apart

One year can feel like an eternity. Last September, Malaysia’s government was lauded by many observers for its effective COVID-19 response and was recording daily new cases in the double digits. Fast forward to 12 months later and the contrast can hardly be more striking. Malaysia is in the throes of its worst-ever COVID-19 wave, averaging more than 19,000 daily new cases as of early September. 

Political volatility partly explains the unravelling of the COVID-19 situation. Former prime minister Muhyiddin Yassin (2020-21) and his allies had been heavily distracted by the imperative of political survival, leaving limited bandwidth to tackle the pandemic and its economic implications. Muhyiddin’s successor Ismail Sabri Yaakob – freshly appointed on 21 August – appears likely to remain in the same siege mode for as long as he reigns, however brief that might be.

The price of politics – paid by businesses

Businesses have paid – and continue to pay – a heavy price amid the incessant politicking. A slow start to vaccinations in the first half of 2021 has forced the government to rely on repeated tightening of COVID-19 curbs, which have caused major disruptions to the production of components, from semiconductors to capacitors and automotive parts. These threaten to undermine Malaysia’s position in the global supply chain. Thousands of small and medium-sized enterprises (SMEs) that form the backbone of supply chains for foreign multinationals in Malaysia are facing significant financial challenges and credible risks of closure. Companies have also struggled with inconsistent state interpretation and enforcement of the standard operating procedures (SOPs) put in place to curb COVID-19. 

The confluence of complications can sometimes push companies – even the largest ones – to consider a temporary hiatus in operations until the COVID-19 situation stabilises. Several leading Japanese semiconductor suppliers, automakers, electrolytic capacitor makers, and smartphone component manufacturers have suspended operations at their Malaysian factories in June and July. 

Foreign multinationals that do not operate in or directly source components from Malaysia are unlikely to be spared given the intricate linkages in regional and global supply chains. Car plants in Thailand, Indonesia, Vietnam, Japan and as far as the US and Brazil rely on Malaysian-manufactured parts such as mirrors and lights. A major US automaker in late August said it would suspend production of a popular truck at a US plant because of semiconductor shortages related to Malaysia. Malaysian semiconductor component manufacturers, collectively managing an annual export value of USD 2bn, support module makers in countries such as China, Taiwan, South Korea and Vietnam.

What comes next?

The Malaysian public, local businesses and foreign investors are keen to see a resolution to the COVID-19 crisis, which is likely to occur if the political imbroglio no longer takes centre stage. But is there an end in sight? In our view, there are five ways that the political crisis could play out in the next 3-6 months: 

• Fragile Majority: Ismail retains a fragile parliamentary majority through continued offers of incentives to legislators on both sides of the political divide.
• Minority Rule: Ismail lacks a parliamentary majority but remains in power because no other contender can muster more support than him.
• The Ides of March: Ismail is ousted by a rival from within his party, the United Malays National Organisation (UMNO; ruling coalition member).
• Snap Polls: Ismail dissolves parliament, paving the way for a snap election within 60 days. 
• Opposition Rule: The main opposition Alliance of Hope (Pakatan Harapan, PH) coalition forms a new government.

It may be useful to think of these as transient “states of matter” in which the situation could abruptly change from one to another, instead of fixed and stable outcomes that will last for years.

“Fragile Majority” describes the status quo. Ismail has a slim parliamentary majority of 114 legislators, which means that it would only take five legislators to withdraw support for him to lose his mandate to rule. Ismail is unlikely to be able to count on support from the opposition to observe a political ceasefire mooted in late August while his government tries to get a grip on the pandemic, chiefly because Ismail has hardly inspired hope for bipartisanship with a slew of unimpressive, largely politicised appointments to government posts in his first three weeks in office. Parliament sittings will double up as opportunities for legislators to display a lack of confidence in Ismail. 

Under “Fragile Majority”, which we expect to persist in the coming months, businesses can expect the following:

• Limited immediate improvements in COVID-19 pandemic management. This will prolong operational difficulties and frustration for companies trying to resume activities in a compliant manner. Clear, nuanced measures to facilitate business resumption will continue to lag behind announcements of new restrictions. Intervention to clarify exemptions to curbs will come only after days, if not weeks, and in response to industry and public backlash.
• Increasingly opaque decision-making and regulatory processes as Ismail copies Muhyiddin’s playbook to minimise parliamentary discussions. This will deprive legislators of opportunities to scrutinise draft laws and amendments. The worst-case scenario sees new laws that enable enforcement against businesses in arbitrary ways without transparent avenues for appeal. Less dramatically, these laws could impose unrealistic and cumbersome compliance requirements, driven by weak governmental understanding about supply chain and business needs. 
• A persistently challenging compliance environment. Anti-corruption standards are likely to remain dire under Ismail with the continuation of deeper politicisation of state appointments, independent institutions, and government-linked companies (GLCs), whose corporate governance standards were not perfect to begin with.
  
  

Enduring value proposition

The good news – and there is some – is that Malaysia is administering around 350,000 daily vaccine doses, the second-fastest among South-East Asian countries (after Cambodia; excluding Singapore which has already fully vaccinated 80% of its population) and is likely to see 80% of eligible adults complete their vaccination by December 2021, if not earlier. Steady vaccination progress is likely to reduce the need for blunt lockdowns and enable more targeted restrictions within the third and fourth phases of the National Recovery Plan (NRP). 

Easing COVID-19 pressures will allow the government to pay greater attention to regulatory reforms for emerging sectors to facilitate high-quality foreign investment. Efforts are underway to develop supporting frameworks for 5G (commercial services are likely to begin by end-2021), data centres, and cloud services. State efforts to encourage digitalisation in supply chains will continue, especially in manufacturing. Plans to enhance transport and logistics infrastructure will eventually proceed. Malaysia is also on track to register an economic rebound in 2021, albeit at a modest 5% growth before picking up to a robust 6.6% in 2022. In sum, though the trajectory of Malaysian politics in 2022 remains murky, there are good reasons to believe in a more encouraging prognosis for its economy and consequently for businesses.

Companies need not react to every political development reported in the media but ought to watch out for key triggers that would signpost possible shifts in the political state, which would consequently increase the risk of governmental change, policy discontinuity and regulatory and operational disruption. Triggers for increased volatility include: growing discontent in UMNO over Ismail’s concessions to ruling coalition partners; internal UMNO manoeuvring against Ismail ahead of party polls in 2022; and royal intervention to correct endemic politicking among legislators from the ruling coalition.

Meanwhile, companies will also need to devote resources to mitigating key risks. They will need to actively clarify the nature, extent and likely duration of future supply chain disruptions amid poor governmental co-ordination in pandemic responses. They will also need to monitor for indications of upcoming regulatory changes, given the government’s likely opaque decision-making. Regular compliance reviews, remediation and training remain essential amid persistent integrity challenges. Engaging the right government and industry stakeholders will also help companies to clarify regulatory and operational requirements that are often communicated vaguely, as well as securing timely and direct support to resolve operational impediments.