Thursday, May 24, 2018

Does Mahathir herald change?

Malaysian voters dealt a surprise defeat last week to the ruling Barisan Nasional coalition, ousting it from power for the first time since independence in 1957 and returning former strongman Mahathir Mohamad to the national stage.

The transition to a new government for the first time in the country’s history comes at an interesting time for the insurance industry. With foreign insurers expected to reduce their ownership in Malaysian units to 70% by the end of June, there is perhaps even greater incentive than ever to stall the process and gauge the new administration’s attitude.

However, it may be optimistic to expect a change in direction. On the face of it, the central bank remains in charge of the process and continues to insist that foreign-controlled direct insurers are obliged to sell stakes to local investors. And central bank governor Muhammad bin Ibrahim is not a partisan appointee likely to be removed — he first joined Bank Negara in 1984 and rose through the ranks during Mahathir’s previous 22-year reign.

Also, the victory of Mahathir’s Pakatan Harapan over his rival Najib Razak gives power to a coalition of left-leaning, nationalist and Islamist political parties that agree on few things besides their opposition to the former ruling coalition. Resistance to foreign influence is one of those few things they agree on.

The party’s manifesto promises to slash the number of foreign workers in the country from 6 million to 4 million in its first term, initiate a comprehensive review of all megaprojects that have been awarded to “foreign countries” and complains that the former government’s policies have “focused too much in attracting foreign investors interested only in manufacturing and services”.

Most of this bile is directed at Bangladeshi workers, who are seen as too cheap, and Chinese investors, who are seen as too rich. But none of it implies a positive shift towards welcoming foreign investment in the insurance sector.

As an aside, the review of infrastructure projects creates significant political risk, with the obvious implication that contracts may be breached if a review concludes unfavourably.

Billions of dollars of Chinese investment could be up for “renegotiation”, including projects that are part of China’s belt-and-road initiative such as the East Coast Rail Link, a US$13 billion railway being built by the state-owned China Communications Construction Company to connect Port Klang on the Straits of Malacca to Pengkalan Kubor in north-east peninsular Malaysia.

Perhaps the most controversial development is the US$100 billion Forest City special economic zone under construction by Country Garden in Johor, across the water from Singapore. It is billed as Malaysia’s Shenzhen — a 20-year project to build an entire city, largely to soak up excess Chinese demand for residential real estate investments. Mahathir is not a fan.

“I hope Forest City will truly become a forest… its residents will consist of baboons, monkeys and so on,” he said at a convention last year. “We should realise that once we sell land to others, we no longer have any ownership over it.”

The 92-year-old even dredged up a historic Malaysian grievance: “Once upon a time, the island of Temasek, which is today known as Singapore, was also sold off,” he said. “We sold the land to the British. Now it is no longer our country.”

Mahathir has tied similar land sales to the scandal at state fund 1MDB, which was at the centre of his campaign to oust Razak, who he has described as a “thief”. The US Department of Justice alleges that US$3.5 billion has gone missing from the fund.

Despite the nationalistic rhetoric, the coalition has tried to avoid spooking foreign investors in its formal policy statements.

“We will maintain Malaysia as a country that is economically open, able to attract foreign investments and strong enough such that our companies can invest abroad,” the party says in its manifesto. “The Pakatan Harapan government will encourage continued investment from China and other Asian countries.”

Instead, the review of megaprojects is framed as an effort to undo any potentially corrupt agreements entered into by the previous government.

“Our goal is to ensure that investments from China are high-quality investments that will benefit Malaysians as a whole, especially Bumiputera and other SME contractors of all backgrounds, not just monopolised by those with vested interest,” the manifesto continues. “We will also ensure that the projects will not increase our debt level irresponsibly.”

Adding to the uncertainty is the return of Anwar Ibrahim, the former leader of the opposition who was jailed under Razak and was released from prison this week. Mahathir, who himself jailed Ibrahim in 1999 on a bogus sodomy charge, has promised to hand power to his former enemy within “one or two years”.

With Ibrahim as prime minister, Malaysia’s direction may be even harder to judge. The original source of the rift with Mahathir was fuelled by Ibrahim’s willingness to follow the IMF’s post-Asian financial crisis policies of austerity, no bailouts and liberalisation. Although the IMF has now abandoned austerity as a policy tool, Ibrahim was hailed at the time as a free-market hero. He was also strongly opposed to cronyism under Mahathir. Yet he has a reputation among non-Muslims in Malaysia as a religious conservative with an agenda to increase the country’s drift towards theocracy.

How he will govern when he takes over is anyone’s guess.

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