Region faces 'higher socio-political risks'

While proposed charter changes and reconciliation bills could add to the tension in Thailand, upcoming elections in Malaysia and Indonesia raise concerns over the future of reforms, Su Sian Lim said.

In her research released last month, Lim said the Malaysian general election should be held by June 27, and the outcome would be closely watched, after the Barisan Nasional (BN) coalition, which has ruled Malaysia since its independence in 1963, unexpectedly lost four out of thirteen states – and its two-thirds parliamentary majority – in 2008. It also lost the federal territory of Kuala Lumpur. BN currently holds 140, or 63 per cent, of the 222 seats in parliament. Prime Minister Najib Tun Razak has vowed to regain a super majority for BN, but it will not come without its challenges. 

“Leadership change may have significant implications for fiscal reform,” the economist said. 

A lack of popular will and the post-Lehman economic recovery has resulted in Malaysia recording a deficit and debt of nearly 5 per cent and 52 per cent of GDP respectively – much higher than regional averages. Najib intends to reduce the deficit- and debt-to-GDP ratios to 3 per cent and 50 per cent, respectively, by 2015 through subsidy cuts (particularly to fuel) and eventually a goods and services tax. If these reforms are not carried out, HSBC estimates that public debt could touch 55 per cent this year – the government’s internal cap. 

“Leadership change may also mean loss of momentum behind the Economic Transformation Programme [ETP], which aims to lift gross national income per capita to over US$15,000 (Bt446,000) by 2020, from $9,700. Admittedly, even if Najib does remain PM, 

some reforms, particularly subsidy changes, will not be easy to push through,” the economist added.

Subsidised petrol currently costs nearly 30 per cent less than the market price, so even gradual implementation could prove unpalatable to the public. Indeed the experience of 2008 comes to mind – the government had hiked fuel prices 41 per cent in June 2008, only to unwind them two months later amid mass protests. To be sure, the government’s poor electoral showing just three months prior did not help, though this only means even greater pressure on Najib to win a strong mandate this time round if reforms are to be pushed through.

Meanwhile, in Indonesia, there is a risk of regression in economic reforms, following the presidential and legislative elections due in 2014. 

Indonesia has a stronger fiscal position than Malaysia, but its longer-term growth prospects have been likewise constrained by significant public spending on subsidies, particularly fuel. In 2011, nearly 23 per cent of budget spending (4 per cent of GDP) went towards subsidies, nearly double that spent on education and health combined, and 2.5 times that spent on capital expenditure at a time of dire infrastructure need. The fuel subsidy also injects a significant degree of uncertainty into the budget, since it fluctuates with global crude oil prices. 

Weakening of the Malaysian currency also compounds the situation, which was witnessed in 2005 and 2008, when huge adjustments to the price of subsidised fuel had to be made.

“Arguably, President [Susilo Bambang] Yudhyono is best placed to push on with further subsidy reform – because after having served two full five-year terms he is unable to run for the presidency in 2014, and in that sense has nothing to lose. Yet it may be neither strategic nor easy for him to do so,” the economist said.