Heightened uncertainty in Malaysia post-election

In a massive political upset, the incumbent Barisan Nasional (BN) coalition led by Najib Razak was ousted by a resurgent opposition led by former Prime Minister Mahathir Mohamad in Malaysia’s 14^th general election. The result brought an end to BN’s 61-year hold on power. Financial markets initially took the shock election result in their stride, but the new finance minister’s recent revelations that public debt could be as high as 65% of GDP, compared with the previous government’s estimate of 54%, have spooked investors in more recent days. The new government’s decision to scrap the 6% Goods and Services Tax (GST) from the start of next month without putting in place any measures yet to plug the hole and the likelihood of other populist campaign pledges such as the reintroduction of fuel subsidies being fulfilled further add to concerns about the country’s fiscal health. Meanwhile, the change of government also puts into question the future of a number of major infrastructure projects, including the East Coast Rail Link and the Kuala Lumpur-Singapore high-speed rail. If these projects are cancelled, investment growth would drop sharply. Given all the uncertainty, the risks to our pre-election growth forecast of 5.5% in 2018 are to the downside. We will be reassessing our forecasts in the next Emerging Asia Outlook, to be published in early Q3.