Malaysia elections – rising risk of a lose-lose outcome

I concede – Najib beats me to procrastination, a trait I’m shamefully infamous for, including dragging my feet to write this column.

I was in KL nearly a month ago to do a ground survey. I came back with plenty of fresh thoughts that I had wanted to put down but well, I procrastinated… Anyhow, my conclusion then was that the worst-case scenario would be a “narrow win” outcome i.e. one that has votes split about 45-55% between the two sides, regardless of which side wins. And after surveying the ground, I realized that the fight was so close, the chances of a “narrow” outcome are actually the highest. At that time, I would roughly put the probability ratios as 30-20-50- for BN wins over 55% majority, PR wins over 55% majority and all other outcomes from a 45-55% split. With this probability in mind and thinking of how things could go wrong in the narrow split outcome, I decided that going short MYR is the strategy but there’s no rush to do so. The bigger morass comes “after” the elections, not now. Interestingly, as the election announcement keeps being pushed back, investors both onshore and offshore have become complacent and MYR has been rallying against the EUR meltdown, I fear a bull trap is awaiting these MYR bulls when the election is called and in the aftermath of election, the situation gets even uglier. Here are my reasons.

Malaysia allows “horse trading” after the elections i.e. parliamentarians migrate from camp to camp, bringing along their seats (I heard the going rate could be MYR1mn and no more to buy a guy over). So a narrow margin will highly encourage such horse trading that could stretch for months. In the meantime, the parliament can’t move on and get work done. Not only would the horse trading takes up time, it might also come to nought i.e. they will still be stuck with a hung parliament. Both sides would end up spending precious time bickering over politics than getting back to usual business. Indeed, the vested interest from both sides would be to drag down the economy to prove each other as a poor partner in government. Knowing how much Malaysia’s economy has depended in the past two years on fiscal pump priming, this is worrisome.

Until now, the market consensus of the worst case scenario is that the Pakatan Rakya (PR) wins and the ruling Barisan Nasional (BN) loses. But you think about it, if PR wins with a big enough margin, why would they not want to quickly get down to business and shore up the economy? That vested interest would surely be that than to crash the economy if they want to prove to the people that their choices have been right. Have people forgetten the legacy of Anwar Ibrahim who presided over the country’s go-go days in the 1990s? He was a savvy finance minister, very eloquent in front of foreign investors. So in the off chance that PR wins, I would even bet on market euphoria. The ground sentiment against BN is not smelling good. There are enough capable candidates within the PR ranks to be able to form a government that would not lose to the incumbent which has fortunately set a relatively low bar. On the other hand, if the BN wins, life goes on and everyone from the small to large businesses and the government can get back to their spending and investment plans which most likely have to been held up, waiting for the elections to be over – goodness, we even hear of common folks putting their holiday plans on hold because of this election.

Alas, the chances of either PR or BN wining with a clear majority are slipping by the day, thanks to the procrastination in calling for this election. This means the risk of a “hung” government is rising and that to me, is hugely negative for the MYR for the reasons spelt above.

In the long run, which government will serve Malaysia and its people better – a PR or a BN government? A month ago when I met with a couple of the opposition party members, I felt positive and happy that Malaysians could get an uplift in their government because I was impressed by the calibre of the people I met. However, today, I became a little concerned, reading about the Anwar-led PKR enrolling retired army generals to its ranks. Never in Malaysia’s history have they linked the military to the government – i.e. top military officials “retire” from the service to join the ruling party which is an “arrangement” easy to set up if a ruling party rules for long enough so as to be assured of a sworn allegiance from the military. I do worry about such “allegiance” between the political parties and the military, practiced in the past in Thailand (until Thaksin comes along) and in Indonesia even until today, just to name a couple. Even in Singapore, you see some of this – the ruling party has the tendency to pick its candidates from the army ranks. At this juncture, of course, it’s premature to say that this is how Malaysia is moving forward. Let their PM call this election and we can start taking our hedges on the MYR.