Update from Steve Hagger, Credit Suisse…

Happy Friday,

Events in Malaysia have been moving very fast. As a result, I have updated an augmented an email that I first sent out last Sunday, having digested the events of the last few days.

A new hope

A peaceful transition
Malaysia has done the impossible and achieved a peaceful transition of power away from Barisan Nasional (BN), which has been in continuous power since independence. The 7th Prime Minister (PM) was eventually sworn in by the king. Dr M’s coalition has a comfortable majority, which will allow him to carry out his task without having to cut deals with the opposition and without having to look over his shoulder.

BN is in opposition for the first time in six decades. Thus, Malaysia has achieved a harmonious transition to two party politics over two election cycles via the ballot box. This alone is incredible.

The Social Media Election
Thanks to social media, every voter was both equally and instantaneously informed. This played out in the lead-up to the election and will be a significant factor afterwards. Historically, the opposition has never had access to mainstream media, which was hugely biased in favour of BN. With the majority of voters now having a smart phone, the people turned to social media to find out what was really going on in the country. Thus, information on the various wrong doings was instantly available to all. Political rallies remain an important part of the election process, for Malaysians to gauge the thinking of their fellow Malaysians. This election, Malaysians were able to attend Ceramah’s in person or virtually, via Facebook live. It was then very evident which rallies were the most popular. On election night, social media must have played a crucial role in getting the truth out about the results, whether it be from vote counters, witnesses, good people within the Election Commission or the police. This enabled Dr M to claim election victory via a press conference way before the official results showed he had the majority. Thus, it was too late for Najib to trigger a plan B. Efforts to call a meeting of the National Security Council failed, with the police and army being fully aware that the people had spoken. Social media will continue to play an important role in keeping Dr M and his government on track with their election promises.

Who is running the country?
The country is being run by an uncomfortable coalition, led by the man who delivered the election victory, but who’s own party controls the least number of seats. This inevitably will present some problems. The ‘original’ opposition, was set up 20 years ago to throw out Dr M, after he put his then deputy PM, Anwar, in jail. For the first 18 years, this opposition toiled away against BN, often with Dr M as the target, making some progress, but never able to deliver a knockout blow. In a bizarre twist of fate, Dr M left BN, having discovered the 1MDB scandal and joined the ranks of this same opposition that was originally set up to oust him. In early January 2018, the opposition was in so much disarray, that if an election had been held then, Najib would probably have comfortably won. It was Dr M who then used all the guile and cunning gained from his 22 years in power, to herd the opposition cats into an outwardly winnable team. The two uncomfortable truths for the ruling coalition MPs about this election are: 1) The people voted for ‘the opposition’, they did not vote for a particular party within the coalition. 2) Dr M made a huge contribution to the election victory.

Why can this only be done by a 92 year old?
Malaysia punches above its weight when it comes to international headlines. The list is long and glorious, and includes global match fixing, global kleptocracy, international assassinations as well as airline tragedies. The fact that a 92 year old man was standing for election already made global headlines, let alone that he actually won. The fact that he was standing alongside a team, many of whom he had once put in jail, only added to the incredulity. It is going to be very hard to convince the world that Malaysia’s problems can only be fixed by one man and one man only, Dr M. It is a classic case of poacher turned gamekeeper. He wrote the book. I believe that Dr M is genuine in his wish to repair mistakes that he made last time he was PM and to do the things that he needs to do. The fact that he is 92 has three advantages. First, he does not know how much time he has, so he is not hanging around. Secondly, he can be ‘bad cop’ as he does not have to worry about getting re-elected. Thirdly, it is all about his legacy. During his first 22 years in power, he had a reputation for micro-management and making all decisions. If he is to deliver on the manifesto, he has to delegate.

The Jedi Council
A ‘Council of Elders’ has been formed to advise the government. It is now apparent that the council will be very active for up to 100 days. When we met the council, a beaming Dr Zeti was very clear in her market calming message, pointing out that Malaysia’s economy is still growing well, with a steady inflow of FDIs, has ~US$100bn reserves & diversified equity & bond markets. She highlighted the risks in the system being the high level of debt in households and a handful of corporates. She was relaxed about the external debt situation, given that much of it is MYR denominated. She then went on to discuss the new government’s pledges:

First up was 1MDB. The auditor general’s report is now no-longer an official secret and it is clear that the authorities are going to go for it. While 1MDB does not pose systemic risk per se, the complete investigation & prosecution will demonstrate systemic change. A task force has been set up to do this. The government will honour all 1MDB debt. The police have already raided Najib’s three residences in KL.

The objective of removing GST and introducing targeted petrol subsidies, is to lower the burden on the people, particularly the B40.
Making up the fiscal shortfall is clearly work in progress, but she highlighted a few methods:

· Leakages and wastage. Instructively, she quickly dropped using the term ‘leakages’, replacing it with ‘corruption’.
· Reform of government to improve efficiencies. Dr Zeti noted that this is extremely difficult to do politically, but clearly a PM interested in legacy, can do this.
· Re-prioritising of large projects and investments as was done in the 1990s.
· To formulate a total reform of the fiscal regime, within 100 days.
· The objective is a balanced budget.

The Star Wars imagery of the occasion was completed with the entrance of the sprightly, good humoured, 80 year old Daim, who played the part of Yoda very well, being small, slightly stooped and now carrying a cane.

The ‘Jedi Council’ has an average age of 75 and comprises:

· Zeti: The former BNM governor who steered Malaysia out of the Asian Crisis and prevented Malaysia from being touched by the Global Financial Crisis. She has won the Oscars for central bankers numerous times. She could play a role in overseeing BNM, which would be well received by investors.
· Daim: Aged 80. A former finance minister and Dr M’s former ‘money man’ from the 1990s. He mixed his own business, UMNO’s business & his MoF portfolio with apparent ease, never troubled by any conflict. The ‘Crony Godfather’ of the 1990s is the chair of the Jedi Council. He is clearly shrewd & pragmatic & will be Dr M’s ears & eyes on the council.
· Hassan Merican: Aged 66. Former CEO of Petronas with a stellar clean reputation. He stepped down from Petronas in 2010, on a point of principle.
· Robert Kuok: Aged 95, an extremely well respected tycoon. He could play a key role in keeping good relations with China.
· Jomo: Aged 66. Not to be confused with the ‘new FOMO’ is a respected economist who is an expert on the political economy, spending many years at the UN.

The Cabinet
Dr M has shrunk the cabinet considerably, from ~35 ministers during Najib’s tenure to initially just 10 pax with a view to expanding it to 25 pax. A smaller cabinet will not only save money, but will speed up decision making. This will be a difficult task, given that it is a coalition of five parties, while race, geography & gender will need to be taken into account. It is however helpful that Anwar has stated that he is not immediately looking for a cabinet position and has told his party not to be greedy for cabinet seats. It is also extremely helpful that Anwar has backed Lim Guan Eng. At the time of writing, the first 5 positions have been announced. Dr M has appointed himself Minister of Education, indicating that something radical could be in store. This has already raised eyebrows given that a manifesto promise was that the PM should not hold any other ministerial posts.

· Finance: Lim Guan Eng, who was chief minister in Penang and is largely responsible for its transition from backwater to vibrant economy. This is a clever move, as it gets him out of Penang, which, after two terms, he has been in the job too long. He is a trained accountant & holds an economics degree from Monash. Incidentally, he is the first ethic Chinese to hold this position in 44 years. He has promised full transparency of public expenditure, in particular off balance sheet financing. Information on contract awards will be available on-line. The MoF will review all infrastructure contracts involving foreign countries. No doubt, the ECRL will be a priority. Ironically, he was jailed by Dr M.

· Home Affairs: Muhyiddin is the 2nd most experienced person in the cabinet after Dr M. He has never run this ministry before, but he has been Chief Minister of Johor, Minister for Youth and Sports, Domestic Trade, Agriculture, International Trade, Education and Deputy PM. While he played the 1990s game, he enjoyed a reputational renaissance when he was sacked by Najib in 2016, for asking questions about 1MDB. He has never been jailed by Dr M.

· Defence: Mat Sabu, a former PAS man who presides over its splinter group, Amanah. Ironically, he has been twice jailed by Dr M, where he became friends with Lim Guan Eng.

The Manifesto
The manifesto can be divided into two parts, getting elected and fixing Malaysia.

  1. Getting Elected
    To get elected, the new government had to promise to scrap GST & to right the wrongs of 1MDB, FELDA etc. When GST was introduced, it was the first time that many Malaysians had ever paid tax. As a result of paying tax, they began to care how UMNO was spending their money, particularly when details of 1MDB were revealed. GST generates ~RM40bn. Replacing this with a sales & service tax will lead to a shortfall of ~RM20bn. Thanks to $70+ oil, there will be increased revenues of ~RM5bn. The manifesto promises to go after illegal cigarettes & booze, this will generate at least RM5bn in excise revenue. The cost of Najib’s PM’s department ballooned to ~RM17bn. The new govt aims to get the cost down to ~RM8bn, saving ~RM9bn. There will no doubt be plenty of other ways money can be saved, but these three alone just about makes up the GST shortfall. The manifesto states that there are too many agencies, such that they will be consolidated, presumably with eventual savings. The public procurement budget is ~RM100bn. Open tenders have been promised, as used in Penang, which will provide significant savings. It is however a shame that GST has to go, but that is the political price that has to be paid for fixing Malaysia. It will be reduced to zero on 1st June. Tolls will be abolished in stages. No timeline is given & compensation will be awarded. This is easier said than done given bond markets & the cost involved. Blanket petrol subsidies have been brought back, but will eventually be targeted, rather than wholesale.

  2. Fixing Malaysia
    While few people read the manifesto beyond the headlines, it is a dream guide to fixing Malaysia. It has been written by the 5 component parties of the coalition with very different priorities (socialist to capitalist), such that the result appears comprehensive, logical, ambitious and do-able. If it is achieved, then Malaysia will be incredibly well set to prosper for the long term. It is hard to do this great document justice, but some of the institutional fixes mentioned in the manifesto are as follows:

· The Attorney General (AG) and the public prosecutor will be separated. The AG will be an MP & act as a legal advisor to the government. The public prosecutor will be autonomous.
· Key positions will need to be approved by parliament, via select committees, notably the Election Commission (EC), MACC (Anti-corruption), AG, Bank Negara (BNM), Securities Commission (SC), senior judges & the national audit department.
· The MACC will be upgraded & will report to a select committee in parliament & not just the PM as it was under Najib. It will have the power to prosecute.
· All MPs and government officials above a certain rank will have to declare their assets.
· A new freedom of information act will be introduced. The Whistle Blower Act and Official Secrets Act will be amended, together with witness protection.
· The chairman of the Public Accounts Committee (PAC) to be chaired by the opposition.
· PM’s question time will be introduced weekly, for 30 mins.
· The EC will be independent. It will lower the voting age to 18, have automatic voter registration and re-formulate the size of the constituencies. Political funding will be transparent & regulated.
· The police force will get properly paid, modernised & have a complaints commission.
· Oppressive laws will be repealed, like the Sedition Act & the Dictator Act.
· Free media. Sarawak Report has already been unblocked!
· Cash handouts (BR1M) will continue, but will be handled by an independent agency, rather than politicians.
· The education system will be revamped.
· A Norwegian style SWF will be set up, funded by Petronas.
· Foreign workers will be reduced from 6mn to 4mn & the minimum wage will be increased from RM1000 to RM1500, with the burden shared by the government. Refugees will be allowed to work (hurray!). 10% of new hires for Government Linked Companies (GLCs) and government must be ethnic Indian.

Honest government: The Penang case study
Penang is a great case study on what can happen if you have honest, logical government. When the opposition, led by Lim Guan Eng, took control of Penang in 2008, Penang got back its mojo. He had no great skill, training or experience, just simple, honest logic. Over time, the change became apparent. First, rubbish was cleared from the streets & buildings got a lick of paint. Penangites (notorious for being tight) began to spend money on themselves & their homes. The brain drain stopped & then reversed. There was a property boom. Capital & tourists came back. Penang is now hip & booming. All this happened while Najib’s federal government did everything in its power to choke the Penang economy. Just think what can happen to Penang now that the federal government is on-side? The new government has promised to devolve power & funding down to the state level. Great things can now happen to the country, greater things to Penang. Lim Guan Eng is of course now Minister of Finance. I have already had comments from overseas Malaysians like, “thank god I didn’t change passports” and “now, I may be able to come back” and from resident Malaysians like “now I don’t need to emigrate.” There are some 2mn overseas Malaysians out there. Just imagine what can happen to the economy should they bring their money and brains back? The Penang case study shows us what is possible.

What next for Anwar?
On release from prison, Anwar has said that he wants to spend time with his long suffering family. He then plans to spend some time overseas, presumably to re-establish his previously strong Washington connections. At some point, his wife & seat warmer, Deputy PM Wan Azizah, will resign as an MP, triggering a by-election. This could allow Anwar to become an MP and a cabinet member within 6 months. Dr M plans to step down in ~2 years, ideally in time to deliver on his ‘Vision 2020’, namely that of a developed nation. He will in theory then hand over to Anwar who will then lead the country into the next general election. The quick release of Anwar has removed the single largest risk i.e. the single-man risk in Dr M being the sole person that can hold the disparate opposition together. Anwar’s greatest asset is his charisma. He will be able to provide the glue that can hold the opposition together. Hours after release, he has told The Associated Press that affirmative action policies for the country’s Malay majority must be discarded.

Heads are rolling
Dr M’s most important task is to restore the independence and integrity of the key institutions. The genesis of Malaysia’s problems dates back to the 1980s, when, on Dr M’s old watch, the judiciary lost its independence. The appointment of an independent Attorney General (AG) is the top of the list & is in progress. This will likely be followed by the two senior judges. This should be a straight forward process. Once the Bar Council gets a voice, the renaissance of the judiciary should fall into place. Other institutions with corrupt or incompetent leadership will likely see change. The Registry of Societies (ROS) frustrated the then opposition. The Election Commission (EC) appeared to work hand in hand with BN to frustrate the opposition and voters. The MACC (Anti-corruption commission) appeared to show selective prosecution. The MACC head has already resigned. The key Government Linked Investment Companies (EPF, Khazanah & PNB) are very well run by honest technocrats & are unlikely to see change. Indeed, it would be a great shame if the excellent work currently being undertaken by Wahid and Rahman at PNB were to be interrupted. Dr M has already stressed that any changes in institutional leadership will be carried out in accordance with the law and that in future, heads of institutions will need to be approved by parliament.

Just a 1MDB ‘trim’ or ‘a brazilian’?
Corruption has become so institutionalised in Malaysia, that it is unlikely (but not impossible) that Malaysia would follow Brazil’s example & carry out a full-blown anti-corruption investigation and prosecution. Malaysia’s prisons are already over-crowded as it is. It is however a certainty that the new administration will conduct a full investigation & prosecution of 1MDB. The work has all been done, curtesy of the journalistic heroes at Sarawak Report, The Edge and WSJ. The international regulators have done their work and are already cooperating with the Malaysian authorities. The manifesto has promised a full investigation into 1MDB, FELDA, MARA & Tabung Haji. Will the government investigate wrong doings in Sarawak? Will the real murderers of Mongolian Altantuya Shaariibuu and Kevin Morais be revealed? The people will demand ‘scalps’ & will want to see the repatriation of stolen trophies (jewels, artwork, yachts etc.). Malaysian Official No 1 will become former prime minister Najib and will no longer be immune from prosecution as a sitting head of state. His wife, Rosmah Mansor will emerge as this century’s Imelda Marcos. All of which will serve as a useful distraction for the people, as the new administration carries on down a bumpy road of reform.

M for Machiavellian
Dr M is The Master. He may lead a disparate coalition of 5 parties, but he will ultimately get his way. It is an advantage that he is an extremely fit 92 year old. He is a man in a hurry. Superhero that he is, he knows that he only has 2 years and quite possibly less, to right the wrongs and see through the necessary institutional reforms. He knows that it was on his watch that the culture of cronyism and corruption (politely called ‘money politics’) became synonymous with UMNO and BN. While he jokes about being a Dictator, there is so much to do, he cannot do it alone & he will be heavily reliant upon the energy and ideas of his coalition partners to see through the reform. His controversial track record is very well documented in the late Barry Wain’s book, “Malaysian Maverick”. While in the last few weeks he has attained the reputation of a saint, it was not always the case.

Dr M is incredibly pro-business
Dr M invented the term ‘Malaysia Inc.’. This was the bringing together of the business community & politicians for the common good. In his maiden speech as PM, within minutes he mentioned the stock market, the ringgit & his pro-trade stance. He has rightly pointed out in the manifesto that many of Malaysia’s cost of living problems go away with a stronger MYR. With 22 years in power, he lived through several boom & bust cycles. In the 1990s, GLIC controlled companies like Tenaga were at worst, troughs in which politicians fed or at best, socio-economic tools for politicians. There was government directed lending by the banks. All that changed under the Abdullah Badawi administration. With the excellent leadership of Azman Mohktar, Khazanah revamped the boards & management of previously un-investable companies like Bank Bumi into great companies like CIMB. Any sign that Malaysia would go back to the 1990s, would be met by a market rout.

Born again cronies?
Dr M and his then finance minister, Daim, carried out an economic experiment in the 1990’s, ‘Crony Capitalism’. The theory was that by creating Malaysian billionaires, the economic benefits would trickle down. The results were mixed. While Dr M will no doubt call on help from old friends, especially those that helped him in his hour of need, right now, his priority is institutional reform. It is most unlikely that he will attempt to repeat this economic model. In any case, his coalition partners are unlikely to let this happen. Right now there is a frantic reshuffling of framed ‘show off’ photos going on in boardrooms and living rooms. Out with the ‘shaking hands with Najib’ & in with the ‘shaking hands with Dr M’, taken in the 1990s. One day a peacock, tomorrow a feather duster.

Kiss and make up with Singapore
Whenever Dr M’s domestic chips were down, he appeared to pick a fight with Singapore, to distract the nation. While he admittedly remains scarred by the experience he had when he was a medical student in Singapore, it was his relationship with the late Lee Kuan Yew that was difficult. Najib on the other hand, cultivated an excellent relationship with Singapore. It seems likely that Dr M no longer has a beef with Singapore. The two countries will cooperate in the 1MDB investigation & with the High Speed Train, which will likely get built at some point. The prime minister of Singapore is due to visit Dr M on Saturday 19th May.

Dr M, with the help of Robert Kuok, will need to tread a difficult path with China. It is quite apparent that China exploited the weakness of PM Najib, when it was rolling out its OBOR into Malaysia. Dr M enjoyed excellent relations with China in the 1990s, but he has stated that these projects will need to be reviewed (by the MoF) to ensure that they are in Malaysia’s best interests. Unlike PM Najib, he will not give up sovereignty of Malaysia’s ports. It is tricky, but he has the experience, charm and tenacity to pull this off. This is of course critical for the construction and tourism sectors. The most contentious project of all is the East Coast Rail Link, which is a future white elephant.

What happens to the new opposition?
Najib has been stopped from trying to flee the country on a private jet and has been barred by immigration from leaving the country. He has stepped down from his leadership positions in BN and UMNO. He will now faces the prospect of arrest. BN is now an almost pure Malay party, rather than being multi-racial. Zahid Hamidi is the acting head, until UMNO overdue elections are held. He enjoys a strong friendship with Anwar. Things will of course be very different going forward. The party still has a significant number of seats, but will need to undergo significant reform, before it can make a meaningful challenge. PAS, the Islamic Party, has a record 18 seats and controls the two East Coast states. At the federal level, PAS will have little influence, which gives Dr M the opportunity to reverse the political influence of religion in politics & cut government spending on religion, which had ballooned under Najib. Most BN MPs would never have dreamt that they could end up on the opposition benches. Potential defectors to Dr M’s party appear not be welcome, thankfully reducing the risk that the new government simply morphs into UMNO 2.0. It would appear that Khairy Jamalludin offers UMNO’s best hope. He has the brains, experience & popularity among the young. He was quick to admit defeat. He has the ability to reform & rebuild UMNO which could then have a decent crack at winning the election in 10 years.

Proud to be Malaysian
Overnight we have seen a change in behaviour of Malaysians. Political jokes and comments are being made without fear on social media. Such behaviour, would pre 9th May have resulted in the authors (or senders) being arrested. Social media, which played a monumental part in the election result, will continue to play a huge role in keeping the new administration in check. This will be formalised by the repeal of the printing presses act and the anti-fake news act. Pride in the nation has returned. Everyone has big smiles. The blackened left finger is a mark of honour, as are the tear gas tales. Incredibly, attempts to politicize race or religion are receiving firm rebukes from both government leaders & social media. Long may it last.

People tell me that the mood among the people is similar to that of the Merdeka period. It does feel like the rebirth of Malaysia and a real chance to get it right this time. We are of course in a honeymoon period. Politicians will make both mistakes and compromises, which will lead to disappointment. The check & balance will however continue to be provided by the newly empowered people via social media and ultimately via the ballot box.

Malaysia is back!

Have a wonderful weekend

S.J.W. Hagger
Credit Suisse Sec (M) Sdn Bhd | Malaysia Equities, PZZC 3
Menara Imc | Kuala Lumpur 50250 | Asia-Pacific