KUALA LUMPUR (Sept 21): Malaysia is expected to face continued challenges to policy-making, despite the conclusion of recent state elections for six of the country’s 13 states, as the unity government comprises parties with diverse ideologies, which could slow reform momentum, according to BMI Country Risk & Industry Research, a unit of Fitch Solutions Group Ltd.

Challenges also arise from increased influence of opposition Perikatan Nasional in the country’s political scene, BMI said in a report on Wednesday.

“Although the composition of state legislatures does not directly affect the national legislature, the state elections were a bellwether of the electorate’s political mood,” it said.

Nonetheless, BMI expects Malaysia’s improved inflationary backdrop and resilient labour market to help keep the nation’s social stability risks low.

Malaysia’s consumer price index has been improving since peaking at 4.7% year-on-year in August last year, and has most recently fallen to a 23-month low of 2.0% in July 2023.

“The decline in inflation suggests that the central bank’s real policy rate is now in positive territory — a development which since 2006 has typically coincided with the end of the monetary tightening cycle.

“Additionally, the labour market has remained relatively robust, with the participation rate sitting at an all-time high of 70.1% as of July 2023,” it said.

The research house maintained Malaysia’s short-term political risk index score at 71.7 out of 100, lower than Asia's regional average (gross domestic product-weighted) of 77.3.

“In light of the weaker-than-expected performance of PH (Pakatan Harapan), we believe that the unity government will be inclined to roll out race-based policies that favour the Bumiputeras (ethnic Malays) to shore up support among this core group,” it said. 

“However, there are two main implications of this. First, doing so would cause the coalition government to backtrack from its commitment to implementing needs-based policies as opposed to race-based policies. 

“Second, while such policies could prove popular with the support base of the once-dominant Barisan Nasional (BN), which is part of the unity government, it could stoke tensions with other members of the coalition government, including Gabungan Parti Sarawak and Gabungan Rakyat Sabah, leading to a slowdown in reforms and/or a policy gridlock,” it added.

BMI also noted that there are already “nascent signs” that the unity government could face gridlocks over policy in the future, citing Muar Member of Parliament Syed Saddiq Syed Abdul Rahman's withdrawal of his support for the unity government, following the public prosecutor’s decision to temporarily drop 47 corruption charges against Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi from BN.

Although Syed Saddiq’s withdrawal of support does not threaten Prime Minister Datuk Seri Anwar Ibrahim’s position as the country’s leader, BMI believes that such developments could raise doubts about the PH chairman’s commitment to fighting corruption.

“If the case is perceived to be handled lightly, we believe PH would risk losing its current support base, while deepening divisions within the already-fragmented government, and ultimately slowing the pace of Anwar’s reform agenda,” it said.

The unity government, which came into power in November 2022, comprised 148 MPs before Syed Saddiq revoked his support, just enough to secure a two-thirds majority in government.