"Malaysia Boleh?" (Can Malaysia do it?)
Following the recent election result, can Malaysia’s economic and stockmarket fortunes turn around or will the brain drain continue to hamper progress?
26 June 2018
Malaysia Boleh! - a popular local slogan that literally translates into “Malaysia can” but loosely means “Malaysia can do it”.
On 9th May, history was made when the former Malaysian prime minister Tun Dr Mahathir Mohamad, at the age of 92 years old, became the world’s oldest elected leader. In a political earthquake that was once again unforeseen by the polls in the fashion of Brexit and Trump, the opposition coalition Pakatan Harapan (PH) won 113 of the 222 seats in parliament to clinch a stunning victory in Malaysia’s general election, ending the six-decade rule of the Barisan Nasional (BN).
A police investigation into the missing billions from the government investment fund 1Malaysia Development Berhad was launched swiftly afterwards. However, even as the media pores over the hundreds of containers of cash, jewellery and designer handbags that were seized from the three residences of the outgoing prime minister Najib Razak and his wife Rosmah Mansor, the real drama was unfolding somewhere else.
A few days after being sworn in, Prime Minister Mahathir appointed the DAP secretary-general Lim Guan Eng as the country’s new finance minister, making him the first Chinese to helm the ministry in 44 years. Four weeks later, Tommy Thomas was appointed as the attorney general, the first non-Malay to take up this position. In our view, this is noteworthy.
One of the perennial drags on the Malaysian economy over the last few decades has been its brain drain. Brain drain is essentially the emigration of highly-skilled individuals from a country, and represents a depletion of the country’s human capital stock which necessarily dampens economic growth and reduces tax revenues, while imposing negative externalities on those remaining. When left unchecked, it can often create a vicious circle that traps a country into an undesirable equilibrium of low levels of human capital and a large technological gap.
According to the World Bank, the problem of brain drain in Malaysia is acute. Based on its estimates, one in every ten skilled Malaysians is now choosing to leave the country, a rate that is double the global average. Clearly, against a population backdrop of 28 million people, it signifies a massive loss of talent, and erodes an already narrow skill base that is lacking in compensating inflows of skilled migrants. When surveyed, 60% of the respondents have pointed at “social injustice” as being one of the top three reasons as to why they have chosen to leave.
Figure 1: Malaysia’s brain drain is not alleviated by a compensating inflow of skilled migrants
Source: World Bank
Two-thirds of the local Malaysian population are made up of Malays (or the Bumiputra), and the Constitution affords them various special privileges such as mandatory discounts on property, quotas for educational opportunities, preferential treatment for government contracts, extra assistance when starting businesses etc. This often places the other ethnic groups, especially the Chinese, at a considerable disadvantage when embarking on their own economic progression paths, and conjures a strong feeling of unfair treatment and non-inclusiveness. It is therefore not surprising that amongst the diaspora headed to the popular destination of Singapore, Chinese makes up the largest ethnicity (figure 2).
Figure 2: Share in Malaysian resident diaspora in Singapore, by ethnicity
Source: World Bank
The Malaysian government is clearly well aware of the problem and has undertaken many efforts over the years, including the launching of the 1Malaysia programme and the establishment of the Talent Corporation, to address this. However, these efforts have thus far been met with limited success. In fact one of the by-products of the 1Malaysia programme, the 1Malaysia Development Berhad (1MDB), is currently at the front and centre of the ongoing probe into corruption and graft of epic proportions.
Is Malaysia heading in a new direction?
While still early days, if the recent appointments of non-Malays to key political positions are an indication of the direction the country is moving in, then perhaps the brain drain can finally be stemmed, and this will have important positive implications on the country’s longer-term economic prospects.
Until then, investors are generally more mixed in their views of the new ruling government. Part of their reticence lies in the election promises made by Pakatan Harapan which, when implemented, are likely to increase the fiscal burden of the country.
For example, the rollback of the current Goods and Services Tax (GST) system and reintroduction of fuel subsidies run the risk of adversely impacting the country’s balance-of-payment, and can trigger a sell-down of government bonds of which about one-third is currently being held by foreigners.
There are further fears that some of the discussed populist measures aimed at curbing the rising cost of living will be at the expense of certain industries such as toll roads, utilities, telecommunications and essential goods. Uncertainty is also hanging over the current investment cycle story as Mahathir vows to review the mega projects favoured by the ousted Najib, such as the high speed railway project with Singapore, as well as various infrastructure projects promoted under China’s One Belt One Road initiative.
We have had minimal exposure to Malaysian stocks in our portfolios. This is probably not a bad thing as over the last five years the local market has declined by -15% in USD terms even as the general region thundered ahead by +42%.
Figure 3: MSCI Malaysia has fallen by -15% while the regional index has risen by more than 40%
Source: Factset, Schroders
Past performance is not a guide to future performance and may not be repeated.
Malaysia “Tak Boleh”?
Our view on the Malaysian market is unlikely to change in the near-term. From a top-down valuation perspective, the market is still not cheap, and is pretty much sitting in the neutral territory. Meanwhile, our bottom-up analysis continues to find limited stock opportunities offering positive upside to fair values.
Until positive signals emerge, we suspect that it is probably still a case of Malaysia “Tak Boleh” (Malaysia can not).
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