• STRATFOR ANALYSIS

    Malaysia’s Prime Minister Najib is secure for now Forecast

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    The ruling coalition’s win in state elections will further entrench embattled Malaysian Prime Minister Najib Razak, at least in the near term.

    Continued financial problems at state investment fund 1MDB, along with probes into its financial irregularities, will prolong political and economic uncertainty.

    Malaysia’s disparate states will seek to exploit the ruling coalition’s vulnerability to exact greater concessions ahead of the next general elections.

    Analysis

    A recent landslide electoral victory for Malaysia’s ruling coalition is a testament to Prime Minister Najib Razak’s enduring strength, despite a steadily intensifying corruption scandal. After winning more than 63 percent of the popular vote in Sarawak state elections on May 7, the Barisan Nasional alliance expanded its majority in the state’s 82-seat legislative assembly to 72 seats. The election—Malaysia’s only such vote this year—highlights several of the factors keeping Najib in power, particularly Barisan Nasional’s ability to turn on the patronage taps to consolidate support and the opposition’s continued disarray. It also eases concerns that the political pressure on the ruling coalition would exacerbate divisions between the politically influential “Bumiputera” (the umbrella term for ethnic Malays and indigenous groups) and economically powerful ethnic minority populations.

    Malaysia’s geographic challenge

    Yet the Sarawak elections understate the challenges facing Barisan Nasional—and by extension, Najib’s United Malays National Organization (UMNO), which leads the coalition—at the national level. Moreover, the ongoing corruption scandal regarding Najib’s role in the 1Malaysia Development Berhad (1MDB) sovereign wealth fund has entered a critical phase. Along with Malaysia’s broader economic woes, the scandal will prolong political uncertainty until at least the next general elections. But until the crisis visibly threatens Barisan Nasional’s electoral prospects, whether by alienating voters or by undermining the power of its pork, Najib will remain relatively secure in his position.

    The election in context

    For much of the past year, Najib has faced intense pressure related to irregularities at the state investment fund. Among other points of controversy, Najib came under fire for nearly $1 billion found deposited in his personal account, much of which allegedly originated from 1MDB and moved through myriad intermediary entities. Najib disputes the origin of the funds, though he admits they were used to secure Barisan Nasional’s victory in the 2013 general elections. The scandal has sparked mass protests, the defection of senior UMNO figures, domestic and international probes, and an attempt by opposition parties to remove the prime minister with a no-confidence vote in Parliament. In March, former Prime Minister and UMNO chief Mahathir Mohamad joined with civil society groups and erstwhile opposition adversaries to launch a broad campaign demanding Najib’s ouster.

    So far, none of this maneuvering has succeeded. The majority of UMNO has closed ranks around Najib, and coalition partners have stayed put. Meanwhile, the prime minister has
    fired officials investigating him, and their replacements have cleared him of wrongdoing.
    He has also exposed the 90-year-old Mahathir, who forced Najib’s predecessor to resign in 2009, as essentially powerless.

    Still, the question remains whether the scandal will taint the ruling coalition’s electoral prospects, compelling UMNO to change leadership ahead of the next general elections, which must take place by 2018.

    The importance of Sarawak

    The Sarawak elections are a particularly useful test of Barisan Nasional’s lasting strength, and perhaps a singularly important state for the ruling coalition to hold on to. One of two Malaysian states on the island of Borneo, Sarawak is separated from the Malaysian peninsular core by 600 kilometers (373 miles) of water and numerous ethnic and socio-economic chasms. Malaysia’s largest state, it is also the country’s most rural and partially as a result has the most inadequate transportation infrastructure. Yet Sarawak is home to vast reserves of natural resources, including oil, the revenues from which are controlled by the federal government.

    These factors make flows of revenue and patronage from the capital, whether in the form of large-scale infrastructure projects, extraction licenses or small-scale cash transfers, essential political tools in Sarawak and neighboring Sabah. They are also critical in avoiding flare-ups in separatist sentiment kept dormant since the two states joined the geographically fractured Malaysia in 1963. Sensing Barisan Nasional’s growing weakness, Sarawak has been pressing for greater powers and oil revenues from the central government.

    Consequently, Sarawak has regularly benefited from UMNO-led coalitions, which have ruled Malaysia since the country’s 1957 independence. For example, the state’s previous chief minister, in power for 33 years, used his relationship with the capital to become a multibillionaire. And ahead of the 2013 general elections, Barisan Nasional pledged some 13.5 billion ringgit (around $4.5 billion) to the state in development projects.

    In exchange, Sarawak governments have kept a lid on secessionist sentiments, and the state has generally been a reliable political stronghold for UMNO and its allies. Sarawak and Sabah currently account for nearly one-third of Barisan Nasional’s 133 seats in the national parliament, primarily through the locally dominant party, Parti Pesaka Bumiputera Bersatu. Sarawak’s support proved decisive in the 2013 elections when Barisan Nasional lost the popular vote nationwide and was left with its narrowest parliamentary majority since independence. However, the opposition had been gaining in Sarawak in recent years, with its share of the popular vote jumping from 29 percent in the state’s 2001 elections to 44 percent in 2011. In 2013, opposition parties won an unprecedented six seats in the national parliament.

    The political risk of losing Sarawak, along with Najib’s desire to demonstrate to his party that 1MDB would not be a major factor with voters, made the state elections a priority for the prime minister. Ahead of the vote, Najib promised more than $7 billion this year in development projects, including a 1,796-kilometer highway spanning Malaysia’s share of Borneo. He also announced a new monthly minimum wage and countless smaller projects.

    In Sarawak, like most places dominated by single parties, opposition parties have no power to make such assurances. Instead they are forced to run on ethnic or ideological platforms, which prevent them from gaining widespread support so long as incumbents can deliver on their promises.

    Sarawak’s opposition parties are also divided and disorganized—a problem afflicting the opposition on a national scale—and they competed with one another for several seats.

    Notably, Barisan Nasional regained most of the seats it lost in 2011 in large part by winning back urban, Chinese voters (25 percent of the population). The predominantly Chinese Democratic Action Party (DAP) lost five of the 12 seats it won in 2011. For the time being, these results ease concerns within UMNO that policies meant to cement the pre-eminence of the Bumiputera, combined with anti-minority rhetoric and occasional violence, would strain the ethnic balance that has long underpinned Malaysia’s stability.

    1MDB and the uncertain road ahead

    The 1MDB saga has clearly had little political effect in Sarawak. Still, the vote only says so much about the national political landscape going forward. The state elections largely hinged on local interests and priorities, and Barisan Nasional’s success can be attributed in part to the popularity of the state’s new chief minister, Adenan Satem, who has reversed policies seen as marginalizing the state’s ethnic minorities. Opposition parties across Malaysia will be compelled to cooperate with one another as the general election draws near. (Without a unifying figure like jailed opposition leader Anwar Ibrahim, though, such cooperation is unlikely to reach 2013 levels.) The 1MDB scandal will also likely prove to be more politically toxic among the urban and professional circles on the peninsula. The national political picture will become clearer soon, with by-elections expected to be held to replace two UMNO lawmakers killed recently in a helicopter crash.

    Moreover, with the Malaysian economy and government budget getting hammered by low commodity prices and a weak currency, it is unclear whether Barisan Nasional can maintain its patronage networks and ensure loyalty throughout the country. Other Malaysian states say devolution of power is the only viable check on central government abuses like those seen in the 1MDB scandal. (This is particularly true of Johor, where talk of secession has increased markedly since the ruling coalition lost its two-thirds supermajority in parliament in 2008.) These states will seek to harness such sentiments to exact costly concessions from Kuala Lumpur. Even in Sarawak, despite increasing patronage funds ahead of the recent vote, Najib said that falling oil prices will prevent Kuala Lumpur from boosting the state’s share of oil royalties.

    Questions about the power of the ruling coalition’s patronage will loom larger if the 1MDB saga escalates appreciably. Since the beginning of the year, international investigations into 1MDB’s alleged misdeeds have deepened, including in key financial hubs such as Singapore, Switzerland, Hong Kong and the United States, and the fund’s board is set to resign by the end of May. Most notable, 1MDB has defaulted on two payments to bondholders since late April following a dispute with an Abu Dhabi sovereign wealth fund. The defaults triggered cross defaults on other 1MDB bonds, increasing risks to Malaysia’s credibility with investors and the government’s fiscal stability. Already, the Malaysian government is expecting a revenue shortfall of 40 billion ringgits this year.

    So far, investors appear to believe 1MDB’s argument that the defaults stem solely from its dispute with the Abu Dhabi fund, not from its ability to meet its debt obligations. Ratings agencies likewise have yet to downgrade Malaysian credit, citing the country’s recovering economic fundamentals, and they say the 1MDB affair does not yet pose a systemic threat to the government. Meanwhile, recent sales of 1MDB assets, mostly to Chinese firms, have helped pay down much of the $11 billion in debt the fund had racked up since 2014. But the whims of the bond markets will keep the investment fund in a tenuous position, and international scrutiny will stoke the scandal, prolonging political and economic uncertainty in Malaysia for the foreseeable future.
    Lead Analyst: Phillip Orchard

    © STRATFOR GLOBAL INTELLIGENCE

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