SINGAPORE -- Two months after Malaysia's first transfer of power since independence in 1957, capital is flowing out of the country as investors remain unconvinced that Prime Minister Mahathir Mohamad can chart a viable growth path.
The ringgit was stable immediately after Mahathir took office in May as he promised a greater focus on markets. But the currency has since softened beyond 4 to the dollar, remaining there since late June, amid mounting concern about the country's finances. The revelation that government debt was far higher than previously believed at more than 1 trillion ringgit ($248 billion) added fuel to the fire.
The benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index, which held firm early in the year, dropped off after Mahathir took the reins and has since fallen nearly 10%. Though escalating trade tensions between the U.S. and China have weighed on Asian stocks more broadly, the new government's policies hastened the decline in Malaysia.
Over the past two months, Kuala Lumpur has fulfilled Mahathir's campaign pledge to scrap a goods and services tax, which has raised concerns about state finances. The government is also reassessing major infrastructure projects advanced by predecessor Najib Razak. A high-speed rail link with Singapore fell victim to this policy shift,with infrastructure-related stocks such as YTL taking a beating.
Mahathir has been relentless in holding the previous government accountable for corruption. Najib has been indicted on charges of embezzlement from state fund 1Malaysia Development Berhad.
But the government has offered little of substance in terms of new economic policy. Mahathir has revived policies from his previous stint as prime minister from 1981 to 2003, including looking to establish a new national automaker and learning Japanese quality control practices as part of a renewed "Look East" policy.
But with the global auto industry changing at a dizzying pace, any new venture would face unclear prospects of success. Proton Holdings, the fruit of Mahathir's previous effort to create a national carmaker, is hardly a runaway success, posting sluggish sales in recent years. The company is now 49.9%-owned by China's Zhejiang Geely Holding Group.
Kuala Lumpur will need to get Malaysia on track toward fiscal health to stem the ringgit's decline. This will require a clear growth strategy alongside the belt-tightening measures already underway.