A Pyrrhic victory

Malaysia poll offers only short-term relief

Malaysia's ruling coalition has narrowly survived a strong challenge to its 56-year-old rule. While the results of the country's general election on May 5 came as a relief for investors, the poll showed a widening racial divide. That doesn't portend well for the economy.

The ruling Barisan Nasional's worst-ever electoral performance - the coalition claimed 133 out of 222 parliamentary seats - was good enough for investors who feared a regime change. The cost of insuring Malaysia's sovereign debt against default fell to 75 basis points in early Asian trading on May 6, about eight basis points lower than the pre-election level. Kuala Lumpur's benchmark equity index jumped as much as 6.8 per cent, and CLSA strategist Christopher Wood suggested investors increase their holdings of Malaysian stocks because the "immediate spectre" of political uncertainty has been removed. The ringgit strengthened against the U.S. dollar.

Yet, while the opposition Pakatan Rakyat's defeat eliminates the risk of policy reversals in the short run, the unhealthy polarisation of the society along racial lines poses a longer-term threat. The fault lines were evident in the poll numbers, as the minority ethnic Chinese community, unhappy with state policies that discriminate in favour of the majority Malay Muslims in jobs, education and housing, all but deserted Barisan.

Prime Minister Najib Razak blamed the "Chinese tsunami" for the coalition performance and called for "national reconciliation." But it isn't clear whether he will get that opportunity. Najib may leave the top job - or be asked to step down - by the end of the year, Reuters reported, citing a senior official from the prime minister's party. A leadership change will cast doubt on the continuation of both Najib's social unity project and his economic transformation programme, which has ended a decade-long drought in private investment.

It is also unclear if a reduced parliamentary majority will constrain the government's ability to pare subsidies and boost tax revenue by introducing an already-delayed goods and services tax. The failure to do so could make Malaysian bonds riskier to hold. Investors' relief may prove to be short-lived.