A hung parliament, what are its economic consequences?

22 Nov 2022 12:16am
Source: NewsPublish
Source: NewsPublish

The 15th General Elections has concluded with a whimper and with no clear winner in sight.

None of the two leading coalitions - Perikatan Nasional nor Pakatan Harapan have a runaway lead to garner a simple majority.

It's been 48 hours and the country still has a hung parliament until a government is possibly formed by today.

Until then, the prospect of a gloomy economic outlook looms in the horizon.

Unless a solution is found, Malaysia's economy may continue to be in the doldrums like it has been for the past four years.

How will a hung parliament impact the economy?

Economists say a hung parliament is the worst outcome in terms of economic and business stability.

This harks back to the problems and issues the country have seen since 2020 such as the Sheraton Move and changing of prime ministers.
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"It is the same unstable situation with the same personality politics at the centre of a very unstable situation.

The results show that the political scene in Malaysia has become very split as in many other countries," economist Professor Geoffrey Williams told Sinar Daily.

It is a situation never seen before in Malaysia and could adversely affect economic sentiments in the future.

Will Islamic-based Pas scare away investors?

During this election, Perikatan Nasional has done surprisingly well, particularly Pas which has become the biggest single party garnering 49 seats.

"This will be very worrying to many people in Malaysia and overseas as it might scare away international investors," said Williams who is a professor at the Management, Science and Technology University.

"It shows when moderate Malay-centred parties are split, the more fundamental Islamic party gains strength. This will scare foreigners and international investors," said Williams.

How would the numerous combination of coalitions affect the economy?

There are various equations possible such as Barisan Nasional with Pakatan Harapan or Perikatan Nasional.

The track record of PN-BN does not inspire confidence and has caused two recessions, high inflation and higher interest rates.

"So if we see a coalition between PN and BN, things will deteriorate, especially if the former finance minister (Tengku Datuk Seri Zafrul Aziz) is reappointed because he served under Tan Sri Muhyiddin Yassin and Datuk Seri Ismail Sabri Yaakob before which caused the problems.

If Budget 2023 is put in place, we will see higher inflation and higher interest rates," said Williams.

Could PH fix the economy?

Based on it's past performance circa 2018, the Pakatan Harapan (PH) economics team headed by Datuk Seri Anwar Ibrahim could deal with the structural issues more effectively.

PH is stronger on economic reforms necessary to underpin growth and recovery and they pledged to eradicate cartels and promote competition, reduce bureaucracy in government agencies, create export tax incentives, and more free trade zones.

"This is a free enterprise spirit as part of the essential supply-side reforms.

PH had pledged to support micro, small and medium-size enterprises through digitalisation, productivity, and venture capital grants.

"Their policy to establish a parliamentary budget office will allow independent scrutiny of economic policies and a layer of credibility in assessing the costs, benefits and overall impact of any economic proposal.

Will this in anyway regain investors confidence in Malaysia? Only time will tell.

The ringgit will be cautious

As for the ringgit, the markets will react cautiously until they see the formation of the government.

Once a government is in place, there will be a normalisation period and there could be post-election rebound.

However in the long term, nothing has changed and the markets will see much the same decline in investment and underperforming stocks on Bursa Malaysia.

"The ringgit will stabilise according to the international scenario and it has very little to do with political considerations which are largely irrelevant to forex (foreign exchange) markets.

"We will see a lot of cautious investors if we return to the same government as before with the same prime minister and ministers because it was very unstable then and their economic track record was not good.

"If we see a strong Pas agenda this could harm investor confidence even more," Williams told Sinar Daily.

Economy still on track

Meanwhile, RHB Bank Group Bhd economist Chin Yee Sian said in line with market expectations and since there is no single coalition party is in a position to form the government, there will be a period of uncertainty until a coalition government is formed.

"Regardless of the outcome, we view that people-oriented measures and gradual fiscal consolidation would remain top priorities for the new government.

"We maintain our 2022 gross domestic product growth forecast of 7 percent followed with 4.5 percent in 2023.

Meanwhile, Associate Professor Dr Ahmed Razman Abdul Latiff based on past historical trends, the outcome of the election will not affect the ringgit, foreign direct investments or even Bursa Malaysia.

"However, certain stocks will experience volatile movement due to their shareholding affiliation to politicians

"I think the economy and ringgit will continue to strengthen for the next couple of months as regardless of the outcome, each political components already had experience in managing the government," Razman concluded.