Though it is not without opposition, Malaysia's ruling coalition is expected to win convincingly the upcoming general election. It will be the first leadership test for newly appointed Prime Minister Abdullah Badawi, and the election is expected to spur spending, adding more fuel to the propeller of an economic recovery which could see GDP growth of 6 percent in 2004.
The passing of the prime ministerial baton in October from Mahathir Mohamed, who had been in power for 22 years, to Abdullah was one of the smoothest ASEAN power transition in recent times, even though it also signaled a major change of leadership.
Already in his second month at its helm, the new prime minister has made a mark on the economy, announcing a tough new stance against graft while canceling a major but controversial $$@$!3.8 billion infrastructure contract awarded by the previous government. Observers believe the cancellation could pave the way for a re-examination of other large infrastructure projects approved under Mahathir, such as the Bakun Dam project.
The ruling Barisan Nasional (BN) coalition party has essentially been in power since independence and is currently made up of 14 component parties with the United Malay National Organisation (UMNO), headed by Abdullah, the dominant party.
Although a victory by this ruling coalition is not in doubt, the new administration needs to strengthen its support among Malay voters, ahead of elections likely to take place by the end of the first quarter.
In recent years, Barisan Nasional has come to rely increasing on the Chinese vote, while the opposition PAS Islamic party, which took control of two states in the Northeast of Malaysia in the last election in 1999, has attracted more Malay votes by becoming increasingly radicalized.
Its ability to bounce back from the 1999 setback will be a key test for Barisan, observers said.
But to reverse these losses, Abdullah will have to reach out to disaffected Malay voters, especially in the rural areas, who have started to feel left out from urban prosperity. Well-heeled Malays have also been disenchanted by the necessary restructuring of the Bumiputra policies, which Mahathir had started to implement before he left. Through these policies, the government supported the emergence of chosen Malay entrepreneurs and helping them create large conglomerates by awarding their companies key contracts. However, as many of these conglomerates have fallen flat on their faces, the government has started to review this support policy.
Indeed, economists said the economic promotion of Malays is now taking place through support extended to small and medium sized firms rather than through the promotion of some individuals and the new administration is trying to kill public perceptions that political connections are used to secure unfair economic advantages.
In the run-up to the election, Abdullah will benefit from improving economic fundamentals, which have been underpinned this year by a stimulus package and an interest rate cut.
In 2003, GDP growth is expected to have reach 4.5 percent. That number is anticipated to increase further to 6 percent in 2004. The recovery has been driven by a strong rebound in exports, as well as domestic consumption. The Malaysian Institute of Economic Research has forecast private consumption to grow at 7.6 percent next year and at 8.1 percent in 2005, in part, due to a buoyant stock market and lower interest rates.
Interestingly, government expenditures which had been the main source of growth fell 1.6 percent year on year in the third quarter, the first contraction in 3 years, while private consumption became the main driver, contributing almost 50 percent of the third quarter growth. Consumer spending rose at its fastest pace in more than a year, up 5.4 percent year on year.
Going forward, economists see demand for car and housing rising further. They point that given current incomes levels and property prices, housing affordability is at a 13-year high and property purchases should increase significantly in the first half of 2004 on the back of the one-year waiver of stamp duty on the purchase of properties priced below $$@$!47,368.
But despite the positive economic outlook, some economists point the country still has to tackle a fall in competitiveness within the region and move from a production-based economy to a knowledge-base economy to compete more adequately.
In the meantime, it will benefit from the weakness of the U.S. dollar as its currency, the ringgit, is pegged to it, making Malaysian exports cheaper. Economists believe the ringgit's 5-year-old peg against the dollar will stay in place for at least another year, having served the country well.