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Malaysian coalition stability

24 May 2018 Deepa Kumar

On 16 May, Malaysia's Ministry of Finance repealed the Goods and Services Tax (GST), thereby fulfilling one of the key election campaign promises of the new government's 100-day programme, despite widespread concern over how lost revenue will be funded.

  • On 15 May, Anwar Ibrahim, a leader of the newly elected Hope's Pact (Pakatan Harapan: PH) coalition government, was released from prison after being granted a full royal pardon. Separately, on 16 May, the new Ministry of Finance effectively repealed the Goods and Services Tax (GST).
  • Both measures met the PH's election campaign promises due to be fulfilled soon after taking office.
  • The PH will probably remain internally stable until a by-election is triggered for Anwar's entry to the parliament, which is a prerequisite for him to assume the premiership; there is currently no elected alternative to Prime Minister Mahathir Mohamad within the PH who can navigate the interests of its four parties.
  • The repeal of the GST will probably be followed with further populist measures such as the reintroduction of fuel subsidies, but balancing measures to trim public expenditure, possibly involving scaling back large infrastructure projects, are probable.

On 15 May, Anwar Ibrahim, a leader of the newly elected Hope's Pact (Pakatan Harapan: PH) coalition government, was released from prison, three weeks ahead of his previously scheduled release date of 8 June. Before his release, he was granted a full royal pardon, making him eligible once again to enter the parliament, which is a prerequisite for current Malaysian prime minister Mahathir Mohamad to be able to transfer the premiership to him.

Separately, on 16 May, the Ministry of Finance repealed the Goods and Services Tax (GST) by reducing the rate from the current 6% to 0%, effective from 1 June. On 17 May, as an alternate revenue-generating measure, the ministry introduced the Sales and Services Tax (SST), although no tax rate was announced. Both measures were part of the PH's election campaign promises and were meant to be fulfilled soon after taking office.

Coalition likely to remain stable until by-election for PH leader
The stability of the PH relies on the balance of power between Mahathir and Anwar and is particularly sensitive to the transition of the premiership from the former to the latter. Following Anwar's release that effectively implies that the PH now has two strong leaders, this introduces an ongoing challenge to future coalition stability. However, the PH will probably remain stable until a by-election is triggered to facilitate Anwar's entry to the parliament. The share of seats within the PH is favorable for Anwar to influence the coalition's direction, as his People's Justice Party (Parti Keadilan Rakyat: PKR) holds 47 of the PH's 113 seats, compared with 11 seats held by Mahathir's Malaysian United Indigenous Party (Parti Pribumi Bersatu Malaysia: PPBM). Other than Mahathir, there is currently no elected representative within the PH whom we assess to be capable of leading the coalition and navigating the interests of its four parties.

Anwar has stated he is not seeking an entry into the parliament for another year to give Mahathir space to govern. In the one-year outlook, Anwar's wife and current deputy prime minister, Wan Azizah, is expected to resign from her seat to refute claims that Anwar's family is engaging in dynastic politics, thereby triggering a by-election in which Anwar can stand.

Repeal of GST signals government intent to uphold election campaign promises
The PH's campaign promise of repealing the GST, part of its 10-point 100-day programme, had been important to its electoral prospects given discontent among voters facing higher living costs. The Ministry of Finance's decision to repeal the GST within the timeline - despite concerns about the potential loss of fiscal revenues - is indicative of the government's intent to uphold its election promises. A subsequent introduction of the SST, designed partly to offset the lost revenues from the GST, will probably be more acceptable at the popular level, given that the new sales tax will be levied on manufacturers rather than consumers.

Outlook and implications
As the PH continues to pursue its 100-day programme, which includes measures that all of its parties have agreed upon, the coalition will probably appear united. The government is further likely to reintroduce fuel subsidies, at least while oil prices are relatively high. Given that Malaysia is a net oil exporter, higher energy receipts should help fund such popular measures. However, these measures will probably be balanced with a reduction in public expenditure primarily in large infrastructure projects and a possible cut in the number of civil service jobs.

Beyond the three-month outlook, in the absence of a common policy platform, a slowdown in policy implementation is probable, given the competing interests of the PH's different parties. Divergence may be greatest regarding policies perceived to benefit ethnic communities disproportionately. One of the PH's parties, the Democratic Action Party (Parti Tindakan Demokratik: DAP), will probably pursue policies favorable to ethnic minorities, but the PH was elected on the back of support from the majority Malay community given Mahathir's popularity among them. However, policy differences are unlikely to result in any party threatening to leave the PH since no single party would be able to form a majority government outside the coalition.

Soon after his release, Anwar stated that Malaysia's affirmative action policy granting preferential access for the majority Malay community in public universities and government jobs should be amended to benefit individuals meriting preferential treatment regardless of race. Mahathir's electoral commitments towards the Malays would make a blanket reversal of this policy untenable. Accordingly, further public statements from Anwar that contradict Mahathir's position would indicate growing instability within the ruling coalition.

Furthermore, if Mahathir continues to implement policies that are expected to dampen Malaysia's fiscal health, particularly affecting periods subsequent to 2018, this will probably trigger criticism from Anwar of Mahathir. Mahathir and Anwar have currently agreed on a one-to-two-year timeline to transition the premiership, but Anwar will probably seek a faster timeline if he believes Mahathir's seemingly populist policies will require him to address a weakening economy once he assumes the premiership. Statements to this effect would be a key indicator of a potential split between the two.

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