Malaysia regains its momentum, but questions remain over durability

By Daniel Moss

 

It's a small taste of the good old days for Malaysia. The currency is buoyant, growth is strong and the premier just hosted a summit where he was hailed for his dealmaking and diplomatic nous. The country, once lauded as a role model for development, was declared resurgent. 

Prime Minister Anwar Ibrahim should savour the moment, because challenges are piling up. While there was plenty of pomp for US President Donald Trump and leaders at the recent Association of Southeast Asian Nations meeting, exports will take a hit from American tariffs. An accord struck with the White House to mitigate some of the damage is running into local opposition. And the government has made little headway on reining in the budget deficit, one of its top domestic priorities. 

 

Anwar did score some important successes at Asean. Kuala Lumpur became the setting for a raft of agreements on tariffs and critical minerals, and even the stage for a pact between Cambodia and Thailand to end months of military skirmishes. Anwar, who spent years in prison after a sodomy conviction that he insisted was a political conspiracy, quipped that it only took him a quarter century to preside over so momentous a gathering. He joked with Trump about falling afoul of the law, a risky ploy that the premier appeared to get away with. By the end of his stay, the president called him “a very good man.” 

 

There is some good news. The ringgit is Asia's best-performing currency against the dollar this year, climbing 7 per cent and heading for its biggest annual gain in almost a decade. Gross domestic product jumped more than 5 per cent in the third quarter, surpassing all forecasts. Shipments abroad are holding up. Unlike counterparts elsewhere in Southeast Asia, the central bank feels no pressure to lower interest rates. A new special economic zone with Singapore will, hopefully, support future growth.  

Politics also look better, on the surface. The sprawling coalition that Anwar stitched together has endured; no small feat considering that a series of governments have come and gone since the long-time ruling party was toppled in 2018. (Anwar rose to prominence in that bloc, and formed his own movement after being kicked out.) But this has come with some drawbacks. Plans to reduce public spending and subsidies, especially on fuel, have been watered down or shelved. In opposition, and behind bars, Anwar styled himself as a champion of civil society who would clean up the system of patronage that defined ties between successive administrations and big business. In practice, the premier has found doing so far easier said than done.

 

The trade deal negotiated with the US, and hailed by the two leaders, is getting some uncomfortable scrutiny from lawmakers. Any agreement with Trump is probably better than none; the nation is a major exporter of electronics to America, as are its neighbors. US corporations are the largest source of foreign direct investment in Southeast Asia. Malaysia is the world's sixth-largest chip exporter, and America is its No. 3 customer. The country based an entire growth model on becoming an essential link in supply chains.

 

So Anwar couldn't just hold out indefinitely for a better deal. But is it really a breakthrough to boast about? Tariffs will remain at 19 per cent, the level the White House agreed to in August, and similar to what much of Southeast Asia secured. That's down from the 25 per cent threatened earlier, and some Malaysian exports will be exempt. In return, Kuala Lumpur gave up a lot. US shipments of chemicals, machinery, metals, cars and farm products will receive favorable treatment. Malaysia’s rare earths will be developed with American companies.

 

Critically, for a country that has long sought to play off Washington and Beijing, it is also expected to follow US trade curbs imposed in the name of national security on other nations. The pact commits Malaysia to align with US export controls and sanctions on sensitive technologies, and to prevent its companies from helping circumvent those measures. Anwar was being squeezed. If America's relations with China can settle into something short of an all-out commercial conflagration, then Malaysia can muddle through. If not, life will become very difficult. (Asean leaders insist they don't want to choose between the superpowers and, until Trump, occupants of the Oval Office haven’t tried to force the issue lest the choice be the wrong one.)

 

With the boom years gone, Malaysia has to swallow some uncomfortable terms. The theatrics and superlatives of today are brushing up against a tougher set of realities. The work just got harder.

  (Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)