While Thailand’s policy uncertainty risk premium has been rising during a year of political upheaval, Malaysia has been charting an economic comeback by being unusually quiet and stable politically.
Malaysia had been the poster child of unstable politics with three prime ministers in the four years since Najib Razak left office in 2018 due to the 1MDB scandal that tainted not just his administration but also the country. Populist policies were given priority as political survival took precedence over longer-term strategic economic considerations.
As a result, Malaysia lagged more politically stable and reform-minded countries such as India and Vietnam in attracting investors seeking to diversify away from China. From a widening fiscal deficit to low growth, Malaysia joined Thailand as an economic laggard in Southeast Asia.
Fast-forward to today and Malaysia is quickly rising in investors’ perceptions as the comeback kid of Asia, leaving behind its troubled past and attracting more portfolio inflows and long-term capital. Due to his Pakatan Harapan alliance in parliament, Prime Minister Anwar Ibrahim is likely to stay in power until the next general election, expected in 2027. This opens more policy space in the short term.
More politically difficult reforms have taken center stage. These include rationalizing the diesel subsidy, raising the sales and services tax to 8% from 6%, and reviving a new light-rail transit system in Penang. The budget deficit is expected to narrow this year to 4.3% of gross domestic product from 5.1% in 2023 due to efforts to reduce subsidies.
This political space has also allowed Malaysia to attract more foreign investment and focus on industrialization. The government last year introduced its New Industrial Master Plan 2030, targeting sectors including aerospace, chemicals, electrical and electronics, pharmaceutical, and medical devices. It also pinpointed four new growth areas: advanced materials, electric vehicles, renewable energy, and carbon capture, utilization and storage.
Rising U.S.-China tensions have made Malaysia a beneficiary of companies seeking a location with solid infrastructure, talent and an existing ecosystem of high-tech manufacturing. Malaysia is well-positioned to benefit from medium to high-tech capital-intensive supply chain diversification, from semiconductors to data centers. The Johor-Singapore Special Economic Zone (JS-SEZ) agreement is expected to be signed in September to capitalize on Malaysia’s relatively cheaper input costs for strategic sectors such as data centers.
FDI inflows increased to $58 billion in 2023 from $34 billion in 2014. Net FDI fell to $9 billion last year from $17 billion in 2022 as Malaysian companies took advantage of growth in regional counterparts such as Vietnam and the Philippines.
According to Bloomberg, despite weak regional deals so far in 2024, the volume of mergers and acquisitions has surged 87% from a year ago to $8.3 billion. As Malaysia gains traction as an attractive destination for high-tech investment and as a key player in the semiconductor, data processing, renewable and electric vehicles value chain, interest has garnered not just from Western companies, but also those in the Middle East and China.
In contrast, Thailand is embarking on a populist budget that includes digital cash handouts that will widen the fiscal deficit and are unlikely to add a productivity lift to the country. The country’s fragile politics have motivated Prime Minister Srettha Thavisin to prioritize short-term gains that undermine longer-term fiscal sustainability. From monetary policy to fiscal prudence, the government is also clashing with the Bank of Thailand.
Such short-termism reflects Thailand’s undulating political landscape: The fate of the prime minister is uncertain as the Constitutional Court weighs whether Srettha should be dismissed, and the opposition Move Forward Party, which won last year’s elections and is the largest party in parliament, awaits a court decision on disbandment. Both cases have spooked investors and raised Thailand’s risk premium, leading to portfolio outflows.
While Malaysia appears to be turning things around, there are signs that political risks lurk ahead of the 2027 general elections.
The recent low turnout of Chinese Malaysians and Indian Malaysians in a local Penang election might be a cautionary tale of dissatisfaction with Anwar’s alliance that could be a harbinger of Anwar’s base becoming alienated while his alliance fails to make inroads with Malay voters.
Anwar is yet to fully address his campaign promise to push for needs-based rather than race-based affirmative action economic reforms. He has also had to contend with corruption, following the halving of Najib’s sentence, and anti-graft chief Azam Baki remaining in his post despite a stock-ownership scandal.
Still, Anwar has taken important steps in rationalizing subsidies and increasing tax revenue. While the window of reform remains open, however, he needs to do more to gain much-needed foreign investment and pave the way for expanding economic opportunities.
MALAYSIA SHEDS SHORT-TERMISM TO BECOME ASIA’S COMEBACK KID
While Thailand’s policy uncertainty risk premium has been rising during a year of political upheaval, Malaysia has been charting an economic comeback by being unusually quiet and stable politically.
Malaysia had been the poster child of unstable politics with three prime ministers in the four years since Najib Razak left office in 2018 due to the 1MDB scandal that tainted not just his administration but also the country. Populist policies were given priority as political survival took precedence over longer-term strategic economic considerations.
As a result, Malaysia lagged more politically stable and reform-minded countries such as India and Vietnam in attracting investors seeking to diversify away from China. From a widening fiscal deficit to low growth, Malaysia joined Thailand as an economic laggard in Southeast Asia.
Fast-forward to today and Malaysia is quickly rising in investors’ perceptions as the comeback kid of Asia, leaving behind its troubled past and attracting more portfolio inflows and long-term capital. Due to his Pakatan Harapan alliance in parliament, Prime Minister Anwar Ibrahim is likely to stay in power until the next general election, expected in 2027. This opens more policy space in the short term.
More politically difficult reforms have taken center stage. These include rationalizing the diesel subsidy, raising the sales and services tax to 8% from 6%, and reviving a new light-rail transit system in Penang. The budget deficit is expected to narrow this year to 4.3% of gross domestic product from 5.1% in 2023 due to efforts to reduce subsidies.
This political space has also allowed Malaysia to attract more foreign investment and focus on industrialization. The government last year introduced its New Industrial Master Plan 2030, targeting sectors including aerospace, chemicals, electrical and electronics, pharmaceutical, and medical devices. It also pinpointed four new growth areas: advanced materials, electric vehicles, renewable energy, and carbon capture, utilization and storage.
Rising U.S.-China tensions have made Malaysia a beneficiary of companies seeking a location with solid infrastructure, talent and an existing ecosystem of high-tech manufacturing. Malaysia is well-positioned to benefit from medium to high-tech capital-intensive supply chain diversification, from semiconductors to data centers. The Johor-Singapore Special Economic Zone (JS-SEZ) agreement is expected to be signed in September to capitalize on Malaysia’s relatively cheaper input costs for strategic sectors such as data centers.
FDI inflows increased to $58 billion in 2023 from $34 billion in 2014. Net FDI fell to $9 billion last year from $17 billion in 2022 as Malaysian companies took advantage of growth in regional counterparts such as Vietnam and the Philippines.
According to Bloomberg, despite weak regional deals so far in 2024, the volume of mergers and acquisitions has surged 87% from a year ago to $8.3 billion. As Malaysia gains traction as an attractive destination for high-tech investment and as a key player in the semiconductor, data processing, renewable and electric vehicles value chain, interest has garnered not just from Western companies, but also those in the Middle East and China.
In contrast, Thailand is embarking on a populist budget that includes digital cash handouts that will widen the fiscal deficit and are unlikely to add a productivity lift to the country. The country’s fragile politics have motivated Prime Minister Srettha Thavisin to prioritize short-term gains that undermine longer-term fiscal sustainability. From monetary policy to fiscal prudence, the government is also clashing with the Bank of Thailand.
Such short-termism reflects Thailand’s undulating political landscape: The fate of the prime minister is uncertain as the Constitutional Court weighs whether Srettha should be dismissed, and the opposition Move Forward Party, which won last year’s elections and is the largest party in parliament, awaits a court decision on disbandment. Both cases have spooked investors and raised Thailand’s risk premium, leading to portfolio outflows.
While Malaysia appears to be turning things around, there are signs that political risks lurk ahead of the 2027 general elections.
The recent low turnout of Chinese Malaysians and Indian Malaysians in a local Penang election might be a cautionary tale of dissatisfaction with Anwar’s alliance that could be a harbinger of Anwar’s base becoming alienated while his alliance fails to make inroads with Malay voters.
Anwar is yet to fully address his campaign promise to push for needs-based rather than race-based affirmative action economic reforms. He has also had to contend with corruption, following the halving of Najib’s sentence, and anti-graft chief Azam Baki remaining in his post despite a stock-ownership scandal.
Still, Anwar has taken important steps in rationalizing subsidies and increasing tax revenue. While the window of reform remains open, however, he needs to do more to gain much-needed foreign investment and pave the way for expanding economic opportunities.