State Elections Have Reduced Near Term Political Risk, Says Analyst

Last weekend saw droves of Malaysians doing their civic duty by going out to vote in the state elections that saw state assembly seats in three states being contested.

The results of the elections saw the status quo being maintained, with both the Pakatan Harapan – Barisan Nasional (PHBN) coalition retaining power in three states, and the Perikatan Nasional (PN) coalition also retaining power in the other three states.

If you missed it, here’s a quick rundown of local state elections results

According to international credit rating agency, Fitch Ratings, the results of the state elections have reduced short term political risk.

“We believe this outcome will be sufficient to ensure the continuity of the coalition in the near term, but BN’s losses may aggravate underlying tensions between the coalition partners over the longer term. We expect the result to add to the pressures on the BN Chairman, Ahmad Zahid bin Hamidi, who also serves as Deputy Prime Minister but faces corruption charges,” Fitch Ratings highlighted in a commentary on their website.

Further complications further down the road

Moreover, Fitch Ratings also believes that the results may spark of further complications down the line for the federal government.

“The results may also further complicate the government’s fiscal consolidation efforts. Prime Minister Anwar Ibrahim, in his EKONOMI MADANI Framework, has targeted a deficit of 3% of GDP or lower within 10 years, and the government has given many indications that it is looking to reform subsidy regimes to target them more efficiently,” continued Fitch Ratings.

Subsidy reform can be a source of public discontent

Speaking on the upcoming 2024 budget, Fitch Ratings believes that the Unity government headlined by PHBN will advance subsidy rationalisation, with a likely focus on electricity and diesel subsidies.

Before this, the Unity government had already reduced electricity subsidies.

“Broad removal of subsidies is likely to be unpopular, especially as it may put upward pressure on inflation in the near term. Inflation, while low compared with many countries in the region at an average of 3.2% year on year in 1H23, was a source of public discontent ahead of the state elections.”

“The election outcomes could encourage the government to prioritise other aspects of the MADANI agenda, such as those focused on containing living costs, raising wage growth and improving welfare,” concluded Fitch Ratings.

Although Fitch Ratings believe that political instability might be reduced in the short term thanks to the state elections, it’s quite clear that the Perikatan Nasional thinks otherwise, with them framing the state election results as a referendum of the people towards the Unity government.