GRAPHICS

In Malaysia, Political Uncertainty Hinders Economic Growth

Oct 23, 2015 | 21:49 GMT

Stratfor's graphic of the day features a standout geopolitical map, chart, image or data visualization reflecting global and regional trends and events.

(Stratfor)

This week, with Malaysia's parliament back in session, the opposition is renewing its efforts to oust Prime Minister Najib Razak through a no-confidence vote. The effort follows the prime minister's involvement earlier this year in a scandal surrounding the heavily indebted 1Malaysia Development Berhad (1MDB) sovereign wealth fund. Among other points of controversy, Najib is struggling to explain the source of nearly $700 million deposited to his personal account.

Even without the political crisis, Malaysia is already facing economic headwinds because of low commodity prices and a looming interest rate hike by the U.S. Federal Reserve. But the scandal may be worsening the situation. Malaysia's once globally esteemed financial institutions are now in question, and 1MDB is involved in nearly every part of the Malaysian economy, including energy, agriculture, tourism and real estate. Meanwhile, Najib's influence over those purportedly investigating the sovereign wealth fund — in July, for example, he fired the Attorney-General — has raised questions about regulatory transparency and rule of law in the country.

A leading concern is that the scandal is diminishing Malaysia's credibility with investors and driving down the value of its currency, the ringgit, which hit a 17-year low this month. Investors reportedly pulled more than $4.5 billion from Malaysian stocks and bonds in the third quarter of 2015, while approved foreign direct investment declined by more than 40 percent through the first half of the year. Currencies have been racing downward across Southeast Asia, but the ringgit has performed worse than its regional counterparts — despite Malaysia having more favorable economic fundamentals and substantial foreign exchange reserves available.

The political crisis in the capital comes at a particularly bad time for Malaysia. With or without Najib at the helm (but particularly if he holds on until 2018), the years leading up to next elections will be turbulent. An array of challenges is threatening Malaysia's economic dynamism, and political uncertainty is likely to hinder a return to growth.