Investors are suddenly on the fence about whether Mahathir Mohamad is up to the job of transforming Malaysia into a globally competitive economy.
When Mahathir won a shock election in May, markets gushed with enthusiasm about the former prime minister's return. Since then, concerns about high government debt and the revival of some policies from his first stint as leader prompted investors to withdraw capital. The ringgit has softened beyond 4 to the U.S. dollar from a post-election strong point of 3.94.
There are many reasons why punters may be acting rashly, why they should not give up on Mahathir so easily. Perhaps the best is Nor Shamsiah Mohd Yunus, his pick to run a central bank that has had a turbulent couple of years.
First, the bad news. Mahathir irked fiscal conservatives by scrapping the national goods-and-services tax. While that honored a key campaign promise, economists dislike the implications for state finances. His moves to cancel giant infrastructure projects upset vital sectors of the stock market. And his renewed obsession with building a national car brand is remarkably wrongheaded.
It is not as bad as it seems, though. The ends of killing the GST may justify the means: it helped him oust scandal-plagued Najib Razak, a politician few thought Mahathir could beat. And ditching giant schemes, including a high-speed rail link with Singapore, will offset some of the tax revenue slack. Just as important, Mahathir has moved with bewildering speed to hold Najib's government accountable for corruption.
Enter Nor Shamsiah, who for a time was a bane of Najib's existence. In 2015, investigators from Washington to Zurich to Singapore began looking into billions of dollars missing from a state fund Najib created, 1Malaysia Development Berhad, or 1MDB. Nor Shamsiah, then a deputy Bank Negara governor, helped oversee the probes on the Malaysian side.
Things got messy when Nor Shamsiah decided to actually do her job. While U.S. authorities allege that at least $4.5 billion was stolen from the fund, Team Najib called it a witch hunt. When The Wall Street Journal tracked $700 million to Najib's personal accounts, his cronies cried "fake news."
The central bank, then run by Zeti Akhtar Aziz, urged the attorney general's office to file criminal charges against 1MDB; the attorney general refused. And then the political knives came out for Nor Shamsiah. One moment, she was tipped to become the next central bank governor; the next she was leaving quietly, with none of the typical press releases or fanfare. Her profile suddenly disappeared from the bank's website.
The man Najib handed the top job to instead in 2016 -- Muhammad Ibrahim -- resigned in June under a 1MDB cloud. News reports alleged that roughly $500 million used to purchase land from the Finance Ministry was deployed to reduce 1MDB's debt load.
In choosing 54-year-old Nor Shamsiah as governor, Mahathir showed he is keenly aware of the need to cleanse the financial system. As Nor Shamsiah proved in 2015 and 2016, she is an independent player who cares far less about politics that strengthening the economy's foundations.
A banking sector expert by background, she joined Bank Negara in 1987 and worked alongside Zeti. In 2010, Nor Shamsiah was elevated to deputy governor. Through the years, Nor Shamsiah developed a reputation as an institutionalist, somebody who sticks to the law and the rules, something Malaysia needs badly right now.
Najib's nine years in power saw sustained efforts to undermine the judiciary, legislators, the media and the central bank. One might say Najib learned that trick from Mahathir, whose first stint as prime minister often veered toward autocracy. Yet Mahathir seems to have learned much from past sins.
Case in point: transparency is king. The kleptocracy Mahathir perfected over 22 years nearly fell like a house of cards in 1997. Kuala Lumpur's labyrinthine network of overlapping interests obscured the true state of public and private debt levels. Mahathir's first act this time around was make a full accounting of obligations. While some investors wince at the $250 billion national debt load, 65% of GDP, they also should cheer a leader working to restore trust in markets.
The same goes for Mahathir allying with former nemeses. One is Anwar Ibrahim, the deputy Mahathir had arrested in the late 1990s. Another is finance Minister Lim Guan Eng, whom Mahathir tossed in jail twice. Lim is the first ethnic Chinese to hold that job in 44 years. The symbolism in Muslim-majority Malaysia, where ethnic Malays get all the perks, is hard to overstate.
Returning Nor Shamsiah to the fray sends its own powerful signal. It telegraphs continuity from Gov. Zeti's day. During her 2000 to 2016 tenure, Zeti was the glue holding Southeast Asia's No. 4 economy together. Malaysia's bureaucratic and patronage-driven system is dysfunctional. Zeti was there to keep the ringgit in line, curb bond-yield gyrations and reassure investors.
Nor Shamsiah's institutional knowledge and determination to rebuild Malaysia's global stature should comfort markets. Barely three weeks on the job, Nor Shamsiah is upending organizational charts. The Financial Intelligence and Enforcement Department, for example, now has greater authority. Bad news for corrupt public officials and money launderers.
The chief of staff role has been eliminated to ensure Nor Shamsiah gets direct and unfiltered reports. Most of Bank Negara's eight assistant governors will swap portfolios. So will several department directors. These seemingly small steps will shine daylight on unscrupulous or inefficient policies.
Mahathir needs to do his part, too. He has yet to present a detailed roadmap to greater competitiveness or catalyzing a startup boom. He must curb affirmative action policies that give Malays preferential access to education, jobs and public contracts.
Equally important, Mahathir should respect Bank Negara's independence and not interfere as he did in his previous term in office.
Mahathir should let Nor Shamsiah's team lead the 1MDB probe, not political apparatchiks exacting revenge. Bank Negara must do its job unencumbered by political considerations.
On July 11, in her first policy meeting as governor, Team Nor Shamsiah left short-term interest rates alone. Leaving the overnight policy rate at 3.25% provides support for Mahathir's reform aspirations. That stands in contrast with Jakarta, which is hiking rates to stabilize the currency. Thankfully, the ringgit's declines pale in comparison to the Indonesian rupiah and Philippine peso. Scrapping the GST, meantime, may further restrain an inflation rate already below the 2% target.
Nor Shamsiah must remain vigilant, of course, as an escalating trade war between the U.S. and China darkens the outlook. As Malaysia's two biggest trading partners brawl, hopes this year's 5% economic growth target can survive seem overly optimistic.
But let us keep a sense of perspective. Malaysia has the monetary latitude to safeguard top-line growth, while Nor Shamsiah works to restore trust.
For all his challenges and early missteps, key Mahathir staffing decisions suggest Malaysia is in good hands. Just something for investors voting with their feet to consider.
William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia, for his work for the Nikkei Asian Review.