Malaysia’s Market Gets Nervous

Driven downward by concerns over Malaysia’s government-linked companies and questions over confidence in the country’s newly-potent opposition, the Kuala Lumpur Stock Exchange dived limit-down by more than 10 percent Monday, closing the market for an hour before it reopened to lose fractionally more.

Opposition parties taking power in some of the country’s most populous states announced plans to review major government spending projects as well as seeking to examine the books of some of the big government-linked companies, pushing down the Kuala Lumpur Composite Index by another half point after the market reopened at 4 pm. Among the hardest hit were Sime Darby, the bluest of Malaysia’s blue chips; Malaysian Resources Corp., a construction company; and UEM World Bhd, a construction company that has historically been closely tied to the United Malays National Organisation, the leading ethnic political party in the ruling national coalition, the Barisan Nasional.

Although the Barisan has retained power, holding 140 of the 220 seats in the Dewan Rakyat, or parliament, and retaining majorities in seven of Malaysia’s 13 states, and Prime Minister Abdullah Ahmad Badawi was immediately sworn in again as premier, concerns are that he has been fatally weakened. There are also concerns that the opposition coalition of three parties including Parti Keadilan Rakyat, headed by former Deputy Prime Minister Anwar Ibrahim, as well as the Democratic Action Party and the fundamentalist Parti Islam se-Malaysia, or PAS, will be out to frustrate government plans at every opportunity.

It was by far the coalition’s biggest drubbing in Malaysia’s history as an independent country and was bigger than analysts had expected. The question now is whether the opposition, having broken the coalition’s historic hold on a two-thirds majority in parliament and possessing outright power in five states, will go after the web of crony connections that have allowed money-losing state behemoths to remain alive despite their apparent lack of commercial viability.

The stock exchange was forced to issue a statement saying that “The Security Commission and Bursa Malaysia would like to assure the public that market integrity remains intact, in spite of the activation of a market-wide circuit breaker today."

Probably the most important thing to note about the market’s downward slide, however, is that it wasn’t caused by racial tensions, analysts in Malaysia say. Despite comparisons to May 1969, when a rising slice of the vote went to the opposition and victory parades ended in racial violence, there is no indication that any such problems are apparent today. Crime and inflation played a role in the government’s defeat, along with long-running disillusionment with the corruption in the ruling parties.

“In my talks with the village rural folk, race wasn’t an issue,” said a Malay political campaign adviser to an UMNO candidate. “They ALL voted opposition. The Chinese voted for PAS, Malays voted for the DAP, Keadilan got mixed races, village folk were sympathetic with Chinese and Indians. They all just are sick with Abdullah Badawi and (his son-in-law, Khairy Jamaluddin) and the whole deal.”

Abdullah Badawi “failed to move the country from the corrupted system created by Mahathir owing to large vested interests,” said a Kuala Lumpur-based economist for an investment bank. “With slower economic growth post the Asian Financial Crisis, Malay Inc. (the web of companies whose existence depends on their relationships with UMNO stalwarts) started to further infringe on the rights of the non-Malays to maintain UMNO's patronage structure. Frustrations over these infringements and bias over economic and religious freedom created the backlash that is the result of the election.”

Ng Shun Sheng, a senior analyst with SBB Securities, told Reuters: "All the while we have enjoyed the political stability premium but now it has been removed. When foreigners look at it, they just exit."

It is almost certain that a period of market instability is going to follow after given the alteration of Malaysia’s political landscape Saturday. In particular, the Malaysian Chinese Association and the Malaysian Indian Congress, the parties representing ethnic Chinese and Indians in the ruling coalition, lost ground on growing discontent among minorities who feel that their interests are not being protected. Voter turnout ranged as high as 84 percent in some districts.