KUALA LUMPUR -- Malaysia's economy may be turning a corner after a record decline in the second quarter, with experts seeing an opportunity to reset and rebuild in a way that could attract more foreign investment in the post-pandemic world.
In a country where the only certainty is political uncertainty, however, that might be easier said than done.
"There is no doubt that politics and economy are intertwined," said Lee Heng Guie, director of the Socio-Economic Research Centre, a nonprofit think tank.
Malaysia's central bank last week announced that gross domestic product plummeted 17.1% in the April-June period, well below expectations and far worse than regional peers. The result -- largely attributable to a sharp drop-off in private sector spending and exports, as supply chains were slammed by the crisis -- prompted Malaysia to lower its official estimate for the full year to a contraction between 3.5% and 5.5%.
To control COVID-19, the country had imposed some of the strictest social distancing rules with its movement control order, resulting in hundreds of millions of dollars in lost daily output. But after a gradual reopening began in May, the economy is expected to pick up from the third quarter, backed by government stimulus. "I am cautiously optimistic that the worst is behind us," central bank Gov. Nor Shamsiah Yunus told the media earlier this month.
For 2021, the International Monetary Fund projects a rebound to 6.3% growth.
To cushion the pain and support the recovery, the government has pledged a total of 295 billion ringgit ($70 billion) worth of stimulus measures, including a direct fiscal injection of 45 billion ringgit. A moratorium on bank loans is also helping households to free up some cash.
Prominent economists expect Malaysia to maintain its expansionary fiscal policy over the next year. But they warn that the government can only spend so much, and that two important growth engines -- domestic consumption and property development -- may have hit their limits.
"There are also some limitations in terms of pushing fiscal expansion," said Peck Boon Soon, head of ASEAN economics research at RHB Bank. "This year we see a sharp fall in [the country's] revenue. Although the expansionary mode will continue to the next year, we expect it to be smaller than this year's."
Peck and Lee agreed that now is the time for an economic rethink. They suggested that while the country has depended heavily on domestic consumption for growth over the past decade, policymakers should seek to broaden Malaysia's horizons for the longer term.
Both said Malaysia should aim to increase exports and, to improve margins, promote more innovative products in industries like palm oil. Boosting private investment, which has been slowing over the past decade, was another common theme.
"We should look at how we can rejuvenate domestic private investment and FDI," Lee said, stressing the importance of political stability to do that.
Peck said: "We need to look at our regulatory framework -- come up with a more investor-friendly kind of policies, which is easier to follow, and avoid flip-flops."
A fair corporate tax structure, he added, "is equally important."
But even before the pandemic, the abrupt resignation of Prime Minister Mahathir Mohamad showed how quickly the political ground can shift.
After pushing Mahathir out of power, current Prime Minister Muhyiddin Yassin's government depends on the slimmest of parliamentary majorities, or perhaps just half the 222 seats.
In a move seen as taking advantage of Muhyiddin's vulnerable position, the parties he counts on for support -- the United Malays National Organization (UMNO) and the Malaysian Islamic Party (PAS) -- declined to join his coalition. Instead, last weekend, Muhyiddin said his own Malaysian United Indigenous Party (Bersatu) would join their coalition.
Together, UMNO and PAS hold 57 seats, versus Bersatu's 31.
Without a comfortable majority, Muhyiddin's attention remains divided between fighting the pandemic and staying in power. Speculation continues to swirl about a possible snap election. All this could give prospective investors pause.
On the other hand, another recent political bombshell -- the guilty verdicts against former Prime Minister Najib Razak on corruption charges last month -- could increase investor confidence.
Muhyiddin's reliance on the UMNO, Najib's party, had caused some to doubt the prospects for a conviction in Najib's first of a series of trials stemming from the scandal over defunct state fund 1Malaysia Development Berhad, or 1MDB. Nevertheless, the ex-premier was sentenced to 12 years in prison and ordered to pay a 210 million ringgit fine.
Many took this as a message that leaders will be held accountable if they abuse their power. At least, it was seen as a win for judicial independence -- Malaysia passed the "rule of law" test.
Much could still change, of course -- Najib's conviction is pending appeal, and he still faces over 30 other charges.
In the meantime, economists are eyeing the upcoming announcement of Malaysia's national budget for 2021.
They expect the government to temper its expansionary policy in 2021 but are hoping for continued cash subsidies to boost consumption, tax relief for middle-income earners and support for the digital economy, as well as new solutions to tackle unemployment.
Lee said there is still room for more monetary easing as well, but stressed lowering interest rates alone should not be the focus. He noted that the movement control order in March had already led to a 125-basis-point reduction in the overnight policy rate this year, to a record low of 1.75%.
The central bank is widely expected to cut the rate again in September. This would be the longest spell with a record-low OPR since the 2008 global financial crisis.
The economists said that the low-interest-rate environment may encourage speculators in the capital markets, and that easier, cheaper credit may not be healthy in terms of household or corporate debt.
On the flip side, the low rates may be good for the Malaysian government, since it needs to borrow to support its massive economic stimulus plans.
Despite the gradual economic reopening, COVID-19 remains a threat and it will take time for demand to reach pre-pandemic levels. The economists think that whoever leads the country will have their work cut out for them on multiple fronts -- politics, the economy and public health.
"The government of the day is accountable and there should be no compromise on the fiscal discipline and governance," Lee said. "A stable political condition must prevail to reboot the economy and enhance investors' confidence where the country is heading."