AN UNSTOPPABLE OUTRAGE SEETHES IN MALAYSIA: NO MORE BIG ‘AMERICAN PIES’ FROM JHO LOW, BUT FOREIGN INVESTORS WILL CHEER IF MAHATHIR RETURNS TO POWER

International investors are supposed to be a cynical lot. Corruption scandals in emerging markets provide amusing chatter over cocktails, but business is business. As long as the local supremo follows IMF/bond market orthodoxy, all should be well.

This, though, is no longer the case — and the Malaysian federal election on May 9 could illustrate how the world has changed.

According to the old wisdom, Prime Minister Najib Razak should have no problem sweeping back into office with a firm majority for his Barisan Nasional (National Front) coalition. After all, the country has a 5 per cent-plus growth rate, there is huge infrastructure investment in the works and, to make things even easier, Anwar Ibrahim, one of Najib’s principal opponents, is still in prison on (dubious) sodomy charges.

Najib’s Umno party has barrels of cash to pay for its political organisation and, if history were a guide, would have the informal support of the security services and other parts of the government. Foreign investors, particularly fixed income investors, might take comfort from his government’s recent imposition of a Goods and Services Tax (GST), which is providing the revenue stream to balance the national Budget by 2023.

This is just the sort of slide presentation that investors have wanted to see in off-site workshops at IMF meetings. Only this time it is not quite working to plan. Barisan Nasional is at risk of losing its hold on the federal government thanks to popular outrage over corruption. The internationally notorious 1MDB scandal has been linked during the election campaign to the unpopular GST.

While Anwar, leader of the Opposition Pakatan Harapan (Alliance of Hope) group, might be in prison at the moment, Mahathir Mohamad, the former Prime Minister, has re-entered politics at the age of 92 under the PH banner. He has been energetically campaigning in the rural Malay heartland, making the case that there would be no unpopular sales tax if the people’s money had not been stolen through 1MDB.

Mahathir has promised that if PH takes power it will repeal the GST and claw back the billions allegedly misappropriated from 1MDB. He also says he will seek a royal pardon for Anwar, who would then be free to contest the next open seat. If Anwar is then elected, Mahathir says he would allow Anwar to succeed him as prime minister.

For international investors, a PH victory would be an interesting moment. For one thing, it makes better politics than arithmetic to suggest that the hole put in the Budget by GST repeal could be filled by any recovered 1MDB billions. More likely, there would be an increase in the federal Budget deficit, which could lead to higher interest rates and lower bond prices.

While Malaysia has a current account surplus, its currency reserves are not large in relation to its short-term debt. Older emerging market investors remember Mahathir’s imposition of capital controls in the 1990s…and shudder.

I believe their concerns are misplaced. Yes, the Budget deficit may increase relative to Barisan Nasional government projections but the Malaysian public is right to be angry over 1MDB and other transparency shortcomings.

Also, Malaysia has changed a lot since Mahathir’s capital controls. The country is less dependent on commodity markets and more integrated with global industrial supply chains. An advanced industrial economy depends more on the general assumption of honesty than does a resource-based economy. It may seem easier for foreign investors to deal with a powerful, predictable and eternal ruling party but the risk of corruption and popular alienation has made this a poor long-term model for investment and development.

Historically the IMF has not taken a moralistic view of official corruption. Get the macro policy right, keep reserves at a prudent level, ensure inflation is within an acceptable band and you get a good grade on your “Article 4” review. That is changing.

At this year’s spring meetings in Washington, the IMF adopted a policy designating corruption as a “macro-critical” issue. That “enhanced fund engagement” means that stealing money from the public will be taken seriously when the IMF is reviewing member state conduct.

In the 1990s when Mahathir was making his bones as a nationalist, he was opposed to the IMF orthodoxy. Now he and the IMF are on the same side of the good-governance issue.

As for foreign direct investment, Mahathir, Anwar and the rest of the PH group are likely to take a closer look at foreign-backed megaprojects. The opposition is especially sceptical of a plan for a railway financed by China.

In general, though, Opposition parties accept the economy’s integration with supply chains and financial markets. If they break Barisan Nasional’s hold on power, foreign investors should welcome the repudiation of the culture of corruption.

– http://www.theedgemarkets.com