All square after Malaysia’s state polls, but no smooth ride for Anwar’s unity government

[KUALA LUMPUR] The conclusion of elections in six states of Malaysia with widely expected results has signalled an end to political turbulence in the country. But analysts say that there is a rocky road ahead for the unity government, especially in fixing economic problems.

As expected, the fight between the governing coalition Pakatan Harapan (PH) and its ally Barisan Nasional (BN) against the opposition coalition Perikatan Nasional (PN) ended peacefully in a 3-3 stalemate situation.

The state elections last Saturday (Aug 12) were seen as a test of mandate for the unity government, led by Prime Minister Anwar Ibrahim.

While the PH-BN allies managed to retain majorities in Negeri Sembilan, Penang and Selangor, they failed to penetrate further in the three states controlled by Parti Islam Se-Malaysia (PAS), a component party of PN.

PN continued to retain dominance in Kelantan and Terengganu, and gained a sizeable majority in Kedah.

Led by former prime minister Muhyiddin Yassin, PN garnered more support from Malay voters; the coalition’s winning seats rose from 88 to 146, while the PH-BN coalition’s winning seats fell from 114 to 80.

“The ‘green wave’ is real,” said Liew Wui Chern, political analyst and lecturer at Universiti Tunku Abdul Rahman. He was referring to the term used to describe the rising support of Malay voters for the opposition coalition.

“We observed that a majority of the state seats previously dominated by BN, especially in Kedah, have fallen to PN’s hands, as Malay voters shifted their support to the opposition,” he told The Business Times.

He attributed this phenomenon to rising “anti-Zahid” sentiment among Malay voters, and the frustration over current economic conditions in view of escalating costs of living and stagnant wage growth, as well as dissatisfaction over government handouts. Zahid Hamidi is the president of Umno, the linchpin party of BN.

Although the unity government is eager to implement structural reforms in the country, Liew expects it to take a pause on any drastic changes and adopt a populist approach in policy-making to regain Malay voters’ trust.

Fitch Ratings said in a note that the outcome of the elections will be sufficient to ensure the continuity of the coalition in the near term, but BN’s losses may aggravate underlying tensions among coalition partners over the longer term.

The agency noted that the results may further complicate the government’s fiscal consolidation efforts.

The unity government has already taken some steps to reduce electricity subsidies for non-domestic users and high-voltage users, while leaving the majority of households unaffected. Most food subsidies and costly fuel subsidies were maintained this year.

“We believe that Budget 2024, due on Oct 13, will advance subsidy rationalisation,” Fitch said, adding that there will likely be an initial focus on electricity and diesel subsidies.

Unlike in the aftermath of the general election last November, the results of the recent state elections did not catalyse the market, as the ringgit continued to depreciate against the greenback.

As at 6 pm on Tuesday, the ringgit had slipped 1.1 per cent to RM4.63 against the US dollar from RM4.58 on Aug 12. In the year to date, the ringgit has depreciated 5 per cent against the greenback, from RM4.40 on Jan 1.

Performance in the Kuala Lumpur Composite Index (KLCI) was flattish on the first trading day after the state elections, with the index ending at 1,475 points on Monday, a slight dip from 1,475.16 points last Friday.

At Tuesday’s close, the benchmark FBM KLCI rose 3.28 per cent to 1,460.28 points, with gainers outnumbering losers 603 to 369. This came after nearly 3.9 billion shares changed hands in deals worth RM2.1 billion (S$614.7 million).

In a report on Monday, TA Research said that the rising influence of the opposition coalition could be a sentiment dampener for local equities due to the growing popularity of fundamentalism.

“We are inclined to maintain our end-2022 KLCI target of 1,515 points and propagate buy-on-weakness undervalued blue chips, (as well as) defensive plays in the consumer, utilities, healthcare and construction,” it noted.

Nevertheless, analysts from investment banks are taking more positive views on the polls.

CGS-CIMB Securities managing director and head of market research Chehan Perera said that the removal of political uncertainty has paved the way for medium-term policy clarity and continuity.

“It is reasonable to expect a period of potential US dollar weakness, which could be positive for flows into surplus currency countries, such as Malaysia, especially given the massive build-up in US money supply and public debt since 2010,” he added.

CGS-CIMB maintained its KLCI target of 1,610 points by the end of 2023 and 1,800 points by the end of 2024.

Areca Capital chief executive officer Danny Wong shared a similar view, noting that a more stable political situation will improve investors’ sentiment. “Some investors were sitting on the sidelines, and now they will be less likely to hold back their investments,” he said.

Alexander Chia, head of regional equity research at RHB, was also upbeat on the future outlook. However, he pointed out that effective public messaging, managing market expectations, and steady execution of the reform agenda will be critical.

For the near term, he said that the market’s attention will be on the second phase of the National Energy Transition Roadmap, which will be announced at the end of this month, as well as the mid-term review of the 12th Malaysia Plan in September, and the tabling of the 2024 Budget in October.

“Key risks impeding the headroom for equities include fragile corporate earnings, weak ringgit performance and the uninspiring pace of economic recovery in China,” Chia added.