How will GE15 affect the economy?

Lee: The magnitude of the impact on the economy and businesses would depend on how the political parties come to terms with cutting a deal to govern.

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WITH the 15th General Election (GE15) looming, it is understandable that investors are cautious. The FBM KLCI recorded a slide of 23.53 points for the week ending Oct 14, with a late rally yesterday itself settling it at 1,382.47 points.

GE15 has to be held within 60 days of the dissolution of Parliament, which took place on Monday, and market and economic experts are having to project a number of different outcomes and scenarios, as well as how these outcomes could affect the Malaysian equity market, economy and businesses in general.

That investment and economic pundits are being guarded in their approach only serves to outline the fact that this could well be a closely-fought general election.

Basically, the three outcomes that could occur in GE15 are a majority government, a minority government or a hung Parliament.

A majority government would be a government where the dominant party in the winning coalition has control of more than 50% of the 222 Parliamentary seats, which means 111 seats or more.

Conversely, if the dominant party in the ruling coalition is controlling less than 50% of total seats, that government would be a minority government.

Meanwhile, a hung Parliament, which could result in a complete scratch-off with a re-election having to be recalled, would be when there has to be a minority government but parties then cannot agree on a coalition government.

On the surface, from a business, economic and investment standpoint, particularly from the perspective of foreign funds, a majority government is the ideal situation.

However, economists believe that may not be as simple as it seems, and how GE15 will affect the immediate future of the country will hinge on several possibilities. By and large, they agree that whether the winning coalition is a majority government is not nearly as important as its commitment to sticking to a pro-growth economic agenda.

Socio-Economic Research Centre executive director Lee Heng Guie points out that Budget 2023 would need to be re-tabled and debated in Parliament, regardless of who forms the new ruling coalition.

“If there is a majority government, then we expect minimal changes to the budget’s original allocation in terms of revenue, operating and development allocation unless there is a significant deterioration in the economic variables.

“We should also not be seeing substantial recalibration of economic policies, as the priority is still to mitigate the impact of the heightening global recession risk and inflation pressures on the domestic economy,” says Lee.

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However, should a hung Parliament materialise, Lee opines it will likely stall the passage of Budget 2023, and could jeopardise economic growth and business investment prospects, amid the risk of a sharp global economic slowdown in 2023.

He adds: “The magnitude of the impact on the economy and businesses would depend on how the political parties come to terms with cutting a deal to govern.

“The consequences of a hung Parliament would weigh down on the equity and bond markets as well as the ringgit when equity prices and indices are already drifting lower on the weakening prospects of domestic economic growth and lower corporate earnings, capital flow volatility induced by higher US interest rates, inflationary concerns and the risk of a global recession.”

Director of Economic Studies Programme at the Jeffrey Cheah Institute on South-East Asia Yeah Kim Leng concurs on the point that while a majority government could bring about political stability, much will still depend on the policies, good governance, political will and effectiveness of that government to achieve sustainable economic growth and resilience.

“A strong government, as the country had experienced in the past, could still experience an erosion of ‘checks and balances’ that are essential to prevent any leakages and wastages through corruption and abuse of power.

“Hence, irrespective of a majority or minority government, if the institutional and structural reforms are not followed through, the country will remain in a development trap such as the ‘middle-income trap’,” Yeah tells StarBizWeek.

He opines, therefore, it is not a major issue whether the winning coalition would form a majority or minority government, as long as it is able to forge a consensus and undertake the necessary critical reforms and policy changes to realise the country’s development aspirations and goals.

Aside from also advocating the idea that the commitment of the next federal government to recreate an investment-conducive environment is more crucial than how many Parliamentary seats it controls, senior fellow at the Institute of Democracy and Economic Affairs and economics author Carmelo Ferlito hopes the upcoming “snap” general election would force the respective parties to “reveal their cards” on the economic vision they wish to embrace.

He says: “It is most important to reproduce an ecosystem favourable to both domestic and foreign investments. To achieve that, Malaysia firstly needs to rediscover its vocation to openness – including in terms of labour legislation – and to revise red tape and government control over the economy, which have grown over the past few years.

“Secondly, Malaysians can hopefully see a tax reform centred on a lower income tax structure and a reformed goods and services tax or GST, but also better collection enforcement and a radical fiscal discipline, with an eye on rationalising operational expenditures.”

Meanwhile, Asia-Pacific economists at Coface Services South Asia Pacific Pte Ltd Bernard Aw and Eve Barre expect the voter base to grow by around 40% in GE15, due to the lowering of the legal voting age from 21 to 18 by the government back in September 2019.

Aw and Barre are of the opinion that a partnership government could be the most probable result for GE15, as they see no coalition being strong enough this time around to assemble a simple majority.

“This will mean that assembling a strong and stable government is not likely, although some semblance of continuity and stability is still expected,” they say in an email reply to StarBizWeek.

They add that the next federal government would also need to secure a Confidence & Supply Agreement with the Opposition to ensure Parliamentary approval of Budget 2023, to ensure it does not need to be re-tabled.

“There are a few common concepts that both sides of the aisle could agree on, including fiscal consolidation, and plans for most major infrastructure projects,” they add.

Recent positive domestic numbers have also led the Coface duo to believe a consequent shift of focus of government development spending, coupled with income tax cuts, would be beneficial to the construction and consumer sectors.

Aw and Barre, however, expect crude oil prices to average around US$95 (RM446) per barrel in 2023, as constraints on supply – largely due to the Organisation of the Petroleum Exporting Countries and its allies or Opec+’s decision to decrease supply by up to two million barrels per day from November – will keep oil prices elevated.

“This means the potential introduction of a targeted fuel subsidy scheme could partially mitigate the tax cut benefits to households,” they remark.

What does it mean for the market?

Seeing a silver lining despite the uncertainty, Principal Islamic Asset Management chief investment officer Mohd Fadzil Mohamed says that market softness going into any general election is to be expected for any country.

He says that the current younger generation is also more exposed to the political workings of the country and this would contribute to a more mature Malaysian society.

Fadzil says: “Our market is relatively calm and civilised. Once the white noise that comes with the political unpredictability has been resolved, we would be on a stronger footing.”

He reckons that foreign and local investors alike would be looking at local stocks for value-buying opportunities once the political clouds clear, and is confident the market can stage a rebound.

Fadzil is positive on the infrastructure and construction sectors to best ride out the temporary uncertainty in the country, especially counters in these two sectors which are capable of generating their own order books.

While it makes sense that economists like Yeah and Ferlito could be looking at matters from a wider and longer-term perspective, investment analysts and fund managers, on the other hand, would be seeing things from a more immediate context.

Fund managing firm Tradeview Capital Sdn Bhd and Phillip Research Sdn Bhd both hold the view that should a majority government be formed by the winning coalition in GE15, investors could see a rally on the FBM KLCI.

Tradeview chief investment officer Nixon Wong says based on historical statistics, political stability has been a significant driver of the FBM KLCI in the past since independence, highlighting that the market has slid 23% to date since the Pakatan Harapan (PH) coalition took over in May 2018, on the back of three federal governments ruling in the last four years.

“Whether a minority or majority government is formed, we could see market recovery as some form of stability in the political landscape would be achieved.

“That being said, if a minority government is formed, despite the likely market recovery, some policy implementation risks would still remain that may deter the return of foreign investors, capping market upside,” Wong says.

On the other hand, he adds, if GE15 is able to restore political stability, the market would likely see solid recovery, with inflows of foreign interest, given the attractive market valuation and relatively healthy economic growth.

Wong says: “A simple majority government is sufficient to pass the latest proposed Budget 2023, which is a rather expansionary budget with cash handouts, tax cuts and numerous targeted social spending, benefitting overall domestic consumption growth.”

Wong expects investors to be cautious leading up to polling day on what he calls a “multi-cornered fight”, and warns of another round of selling if no majority government emerges, or if Budget 2023 fails to be passed. He likes the banking, consumer staples, eCommerce, energy and tech manufacturing sectors beyond GE15 and into 2023.

Phillip Research senior analyst Nurul Farhana Noor Saidi acknowledges that a majority government would be positive for the market, and vice versa.

Farhana adds that she believes foreign funds could make a comeback in the event a majority government is formed, as this means reduced political uncertainty.

“However, the return of foreign funds depends largely also on external factors, such as an aggressive Federal Reserve monetary tightening policy and the slowing down of the US economy, as well as the possible escalation of the Russia-Ukraine conflict into a tactical nuclear warfare. Therefore, in the near term, we may not see significant inflows of foreign funds yet,” she cautions.

Sectors that investors can continue to keep an eye on would be those emerging from the effects of the lockdowns, says Farhana, as normalisation of the economy continues apace. These would include the consumer, construction, oil and gas, and export sectors, she notes.

Steadying the ship at home the way forward?

With so much volatility, uncertainty, complexity and ambiguity or VUCA generated both on the domestic and external fronts, Malaysia University of Science & Technology economist Geoffrey Williams concurs with the government that 2023 could see a slower gross domestic product or GDP growth rate of between 4% and 5% for the country.

He says: “Earlier in the year, we had warned of a slowdown or even a recession in the second half of 2022. There was extra money from the Employees Provident Fund or EPF withdrawals and the economic recovery, so we had a massive 8.9% growth rate in the second quarter (2Q). There was also a sales and service tax or SST waiver on cars which helped vehicle manufacturers.

“This has pushed the slowdown and possible contraction to Q4 and also into 2023. This is consistent with the scenario given by the government.

“Basically the injection of extra demand has put off the worst of the possible effects of the global economy for now, but that is a short-term effect. As the government is telling us, 2023 will be worse and we will see the start of that before the end of 2022.”

Adopting a realistic stance, Williams adds that the risks to the global economy are real and depend on whether the conflict in Ukraine and the political instability in Europe and the United States will worsen, which he believes are likely at the moment.

“This makes it more important to have a clear election outcome, with a clear budget and more importantly, a clear long-term strategy for domestic-led growth and development,” he says, a view also echoed by SERC’s Lee.

Lee remarks: “The impact of GE15 on the economy and business would depend on the election outcome, economic priorities outlined in the election manifesto of various parties and the state of domestic and external conditions pre- and post-GE15.

“Political stability is an important driver of economic growth and investment. It encompasses many aspects, including the strength of institutions and the rule of law as well as good governance.

“Political stability is key to macroeconomic stability and growth amid the risk of a global recession in 2023 that could disrupt the domestic economic recovery path.”