This article first appeared in The Edge Financial Daily on February 25, 2020 - March 2, 2020

KUALA LUMPUR: Malaysia’s long-term economic prospects are likely to be dimmed as a result of political uncertainty and increasing polarisation, said Fitch Solutions Group (FSG).

The Fitch Ratings Inc affiliate said in a report yesterday that the political instability in Malaysia is shaping up to be a longer-lasting phenomenon than just a temporary issue after the 2018 general election.

It noted that the ability to implement sensitive but much-needed reforms to the country’s affirmative action policies, needed to correct inefficiencies and reverse a heavy outflow of talented individuals from ethnic minorities, to especially neighbouring Singapore, will be heavily curtailed.

The state of political affairs in the country remains blur after Prime Minister Tun Dr Mahathir Mohamad’s resignation yesterday, with reports indicating that the formation of a new government is on the cards.

The King has accepted Dr Mahathir’s resignation as the prime minister, but has appointed him as interim premier until a new prime minister is appointed.

According to FSG, two likely scenarios could take place in the following days which are either that Pakatan Harapan dissolves, and a new coalition forms the government with Dr Mahathir as prime minister, or that there is no new government but Pakatan dissolves, leading to new elections.

“In either case, we expect the economy to be weighed down further in the short term due to paralysis in government, posing downside risks to our already bearish revision of real gross domestic product growth in 2020 to 3.7% from 4.5% previously,” it said.

FSG noted that the Pakatan government was supposed to announce this week a stimulus package in response to the health and economic risks posed by the Covid-19 outbreak.

With political upheaval facing the nation, FSG said it expects significant delays in meaningful fiscal measures to support the economy, even if they were announced as planned.

“Malaysia’s situation in this regard is in stark contrast to most other Asian economies which have moved relatively quickly to announce and implement additional spending, such as China, Taiwan, Hong Kong, Singapore and Thailand,” it said.

In light of the political developments, FSG said it has revised down its Short-Term Political Risk Score to 69.8 (out of 100) from 72.5 previously, to reflect the risks to social stability, policymaking and policy continuity.