KUALA LUMPUR - MALAYSIA'S troubled politics is taking a toll on the country's economy, undermining investor sentiment and distracting Prime Minister Abdullah Badawi's administration away from implementing much-needed reforms.
What's more worrying is that the political fallout from the March general election is likely to get worse before the situation improves in Malaysia, analysts say.
'That's the view of most of our clients,' says the head of research for a foreign stockbroking firm who requested anonymity. 'The level of uncertainty is the highest it has been in a long time.'
Mr Leong Wai Ho of Barclays in Singapore is less pessimistic, because he believes that oil and commodity exports will continue to provide strong cushions to the Malaysian economy. But he too is concerned about the country's politics. 'Hopefully, these clouds are removed soon.'
The gloomy outlook for Malaysia is largely due to the political nature of its economy. Unlike neighbouring Thailand and Indonesia, where the private sector plays a key role in economic activity, its economy is dominated by the state.
Since the early 1990s, the country's decades-old state-guided development programme has mutated into a kind of command capitalism where the government determines the direction of the economy through massive amounts of development spending on big-ticket projects awarded to a select group of firms.
This nexus between business and politics spawned a patronage system which allowed for the parcelling of sub-contracts to companies and individuals lower in the political food chain.
But the general election result has exposed the pitfalls of the politically charged economy. The loss of its two-thirds majority in Parliament resulted in the control of five key states - which have consistently contributed roughly 50 per cent to the national economic output - falling into opposition hands.
That in turn, has prompted a review of federal government projects in these states. The government has already cancelled plans for a monorail system in opposition-controlled Penang. But many private economists say that the reluctance to bring development to key states led by the opposition will only undermine the national economy.
Analysts and private economists say that public demand for greater transparency in the awarding of government contracts has also made it more difficult for Datuk Seri Abdullah's administration to dispense political patronage. Economic management has also been complicated by the knock-on effects of rising fuel prices.
One senior government official said that during the first four months of the year, all revenue collected by the government was absorbed by operating expenses, which include everything from paying civil servants' salaries to footing the bill for food and oil subsidies.
'There are severe limits on development spending,' said the official.
The weaker fundamentals are starting to show in the raft of economic data coming out in recent weeks.
The country's stock market has been buffeted by weak foreign and local investor sentiment. The benchmark Composite Index has fallen by more than 20 per cent since early January.
Inflation is also rising fast.
Leslie Lopez
The Straits Times
Singapore
15/07/08
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