Tuesday, 14 July 2020
News Analysis

Mahathir’s resignation plunges Malaysia into uncertainty

By Justin Tamang

The surprise resignation of Malaysian Prime Minister Mahathir Mohamad has stirred doubt over what happens next for the country’s political and economic landscapes.

  • Malaysian Prime Minister Mahathir Mohamad resigned from his position, relieving ministers from their duties and prompting a shuffle amongst the country’s political parties
  • King Sultan Abdullah Ri'ayatuddin accepted the resignation but reappointed Mahathir as interim Prime Minister
  • The resignation has brought about uncertainty in Malaysia’s economy, raising questions about policy continuity and the formation of a new government

Uncertainty looms over Malaysia after the shock resignation of Prime Minister Mahathir Mohamad on Monday, 24 February. King Sultan Abdullah Ri'ayatuddin of Malaysia accepted Mahathir’s resignation, sacked the cabinet, but subsequently appointed Mahathir as interim Prime Minister. These events follow the collapse of the ruling coalition over the past weekend and mark yet another chapter in the Southeast Asian country’s longstanding power struggle.

Uncertainty stifles economic growth

Speculations abound about what will happen next, but nothing is certain just yet. As the turmoil brews and the outcome remains unclear, analysts have warned about the situation’s potential impact to the economy, especially if this period of uncertainty drags on.

At the moment, it is “unclear as to how or when a new government will be formed”, said Moody’s Investor Service Sovereign Risk Group analyst Christian Fang in a statement. “Such uncertainty weighs on private investment, and if prolonged, will compound growth challenges and add downside risks to the country’s credit profile, particularly if the new government changes the policy emphasis away from fiscal consolidation and institutional reforms”, Fang added.

BNY Mellon Investment Management senior sovereign analyst Aninda Mitra has echoed the same sentiment. In a statement, he said that, “appointing a new cast to ministerial positions will take a few weeks and could throw into doubt policy continuity and the current administration's emphasis on fiscal transparency and good governance”.

Investors are starting to feel the effect of this political instability, with Malaysia’s benchmark stock index entering a bear market for the first time in 12 years. The ringgit has also seen a slump and plummeted to a six-month low. Should the turmoil continue, all signs point to the ringgit weakening further and the overall situation worsening.

Moody’s has also cut Malaysia’s real gross domestic product growth projection for 2020 to 4.2% – a 10-year low from 2019’s 4.3% – citing the ongoing political turmoil, global trade tensions and the coronavirus outbreak.

Mitra, however, has expressed confidence that Malaysian bond yields will be able to weather this period of political stress and that any underperformance in investments will be short-lived. “The country’s deep pool of institutional savings and ample onshore financing capability help insulate bond yields against excessive volatility in sentiment or non-resident capital flows; and Bank Negara Malaysia’s (BNM) easing bias should ensure that any underperformance in the long-end remains temporary”, he said.

BNM has made clear in a statement that they are staying on top of the situation. "While ringgit movements will continue to be market determined, BNM’s market operations will ensure sufficient liquidity and orderly financial market conditions”, the central bank noted.

Looking into Malaysia’s political turmoil

The resignation of the 94-year-old leader comes amidst rumours that he will form a new ruling coalition that will effectively exclude Anwar Ibrahim, his supposed successor. Mahathir has had a complicated relationship with Anwar spanning decades, having been both the best of friends and the worst of enemies.

In 2018, Anwar and Mahathir put aside their differences and formed the coalition Pakatan Harapan (PH), a group meant to go against the Barisan Nasional coalition led by former Prime Minister Najib Razak, who remains in trial over the 1Malaysia Development Berhad scandal. To the surprise of many pundits, PH won – and Mahathir was, once again, named Prime Minister.

Prior to the general election, Mahathir assured that he would hand over power to Anwar after one or two years – a promise that remains unfulfilled. Some supporters of the 94-year-old PM, however, remain adamant that Mahathir should fulfil his role until the end of the five-year term. Multiple political parties in Malaysia have splintered following differences in opinion on whether Mahathir or Anwar should be the one in power, causing uncertainty over who would be the next head of state.

In Malaysia’s constitution, the constitutional monarch must appoint a prime minister who commands a majority in parliament, which translates to 112 out of 222 members of parliament (MPs). No one group has the numbers to form that majority at the moment, passing the burden onto Malaysia’s monarch, who can either invite a new leader to establish a new administration or call for a fresh general election.

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