By Jason Koutsoukis and Yudith Ho
Malaysian Prime Minister Mahathir Mohamad’s vigorous questioning of deals involving foreign money helped him pull off a surprise election win in May. Yet even as his stance continues to play well at home, the economic risks are rising.
Seemingly targeted at China, Mahathir’s rhetoric has left investors uneasy over the future of some big-ticket projects, including a housing development in the south of the country. At the same time as warning against a “new version of colonialism,” however, the 93-year-old leader has also said he’s open to investment that benefits local companies and workers.
That reflects the balance Mahathir must strike between placating a public concerned about being left out of the financial spoils of infrastructure projects, and the reality of the budgetary need for revenue. He axed an unpopular goods and services tax and introduced costly petrol subsidies in his first 100 days, and still needs to make good on an ambitious list of election promises. The economy is growing at its slowest pace in more than a year.
Mahathir, in his second stint in power after ruling from 1981 to 2003, sent shares in Hong Kong-listed Country Garden Holdings Co.’s tumbling last month when he said its $100 billion housing project would be off-limits to foreigners. Then last week he changed tack, saying foreigners were welcome to buy into the project, but Malaysia would not “give them a visa to come and live here.”
“The vague, ambiguous statements and inconsistent policies by our new government leaders recently may dent the existing, and even potential, investors’ confidence,” the Malaysia-China Chamber of Commerce said in an e-mailed statement. “This may bring a serious impact to our country’s economy.”
Mahathir has adopted a version of U.S. President Donald Trump’s protectionism, saying “free trade must be fair.” His willingness to put on hold key projects while they are reassessed is a departure from the broad welcoming of foreign investment under former leader Najib Razak. His administration oversaw a 700 percent jump in foreign direct investment from China over the last decade, the biggest increase compared with any other source country.
While Malaysia runs a trade surplus with China, with total commerce of $96.3 billion last year, Mahathir has repeatedly expressed concerns that Malaysia has borrowed money from China that it could not repay and spent it on unnecessary infrastructure. The country is struggling to rein in spending and seek new revenue sources to narrow the budget deficit to 2.8 percent of GDP this year, from 3 percent in 2017.
Anwar Ibrahim, who’s expected to be Mahathir’s successor, sought to calm investors by saying that investigations are limited to specific “dubious” projects and shouldn’t be interpreted as a snub to China. “Mahathir took the initiative, visiting China, assuring them that the bilateral relations, trade, investments with China must and will continue,” he said in a Bloomberg Television interview on Wednesday in Hong Kong.
The focus on China feeds also into the race-based politics that is a feature of Malaysia. Mahathir for many years led a coalition that promoted the rights of ethnic Malays. Anti-Chinese riots in 1969 eventually led to a policy of preferential access for Malays to things like education and some jobs.
That policy remains in effect today. While Mahathir initially said he would be open to reexamining it, since winning the election he has indicated it will remain. Ethnic Malays make up the bulk of the voting population and any party wanting to stay in power needs their votes.
Last week, Malaysia delayed until 2020 work on a high-speed rail link to Singapore after earlier suspending a $20 billion East Coast Rail Link project backed by China Communications Construction Co. Mahathir has also canceled three gas pipeline projects worth $3 billion, of which two are linked to a unit of China National Petroleum Co.
Anwar, who had clashed with Mahathir over how to face the Asian financial crisis, now concurs with him on deferring and scrapping certain projects to help the government rein in debt. “Mahathir represents the sentiments in the country that firstly we cannot continue with these mammoth projects at a time when the economy is struggling,” he said.
Mahathir has cited a sentiment analysis survey done by a private company tracking social media with nearly 500,000 respondents, which he said shows there’s more positive views for his administration than negative ones. Still, China’s rise as an economic power since he was last prime minister means he will have to walk a careful line between political expediency and economic self-interest.
China’s state-run Global Times newspaper has cautioned against “piercing” remarks by the Malaysian premier, which “will definitely make Chinese investors worry about Malaysian public opinion and whether such an atmosphere will affect investment in the country.”
Mahathir has shown some awareness of this. On a visit to Beijing last month, he said Chinese companies were still welcome, as long as they employed Malaysian workers and improved local efficiency without harming local manufacturers in industries like steel production.
“Mahathir does seem to be giving a lot of mixed signals,” said Sian Fenner, lead Asia economist for Oxford Economics in Singapore. “I see him playing a balancing act between carrying his manifesto promises forward, while still ensuring that investors remain confident in the business environment.”
Fenner expects more projects to be deferred, plus tighter restrictions on foreigners buying land and residential properties.
“As such, investment is likely to slow, at least in the coming quarters until there is a clearer picture from the review,” Fenner said. “While we do not think it will lead to a sharp fall in investment it will likely curb GDP growth and partly offset strong household spending.”
Still, Gary Rangel, a senior lecturer in finance at Universiti Sains Malaysia in Penang, said Mahathir didn’t curtail foreign direct investment during his previous stint in power, including in the 1998 Asian financial crisis when he allowed the repatriation of revenue to foreign firms.
“What he severely wanted to curtail was foreign portfolio investment which is ‘hot money’ as it brings little productive benefit to Malaysia,” Rangel said. “ Mahathir Mohamad has been consistent in his adversity towards foreign portfolio investment, but highly encourages foreign direct investment.”
© 2018 Bloomberg L.P