Shamim Adam
Bloomberg
May 9, 2016

A state election win for Malaysia’s ruling coalition has given Prime Minister Najib Razak breathing space after months of political turmoil, while serving as a reminder he needs to focus on the economy to avoid becoming a liability to his party before the next national vote.

Barisan Nasional secured a bigger majority in Sarawak, the nation’s largest state located on Borneo island and across the South China Sea from peninsular Malaysia.

Najib visited the state frequently over the past two months, shifting last week’s cabinet meeting there as he campaigned alongside Chief Minister Adenan Satem.

Even as he carries back the message to his United Malays National Organisation — the lead party in BN — that he can still help win elections, the Sarawak polls show Najib can’t afford to let bread-and-butter issues slide with voters. Malaysians are contending with rising prices that are eating into disposable incomes and eroding consumer confidence, while a debt default by a government investment fund could pose a threat to state finances.

“UMNO loves a winner so Najib will try to build on this momentum,” said James Chin, director of the Asia Institute at the University of Tasmania. Still, “if Najib cannot get the economy right, and the ringgit keeps falling again, then he will be in deep trouble.”

The Malaysian currency is the worst performer in Asia this quarter after outperforming all others in the first three months of 2016. Debt-ridden fund 1Malaysia Development Bhd. — whose advisory board the premier has chaired — defaulted on a $1.75 billion bond last month and faces another coupon payment this week. The investment company is the subject of global investigations into alleged money laundering and embezzlement.

“As the Sarawak state election gets done and dusted, it’s time to shift the focus back” to 1MDB, Tony Pua, an opposition lawmaker with the Democratic Action Party, said in a Facebook post on Saturday. 1MDB has denied any wrongdoing over its finances.

Mahathir’s Campaign

Questions are still being asked by Najib’s detractors, including former premier Mahathir Mohamad, of the $681 million that appeared in his accounts before the 2013 election. The ruling coalition, in power since independence in 1957, won that vote by its slimmest margin yet, with the next national poll due by 2018. The government said the money was a private donation from the Saudi royal family, and most of it was later returned.

While the powerful divisional chiefs in UMNO have largely backed party president Najib through his worst political crisis since coming to power seven years ago, their support may wane if they believe he is a liability to lead them into the next election.

Ethnic Malays make up the bulk of supporters for the UMNO-led coalition, and Najib has often relied on handouts to the poor to bolster his standing. With the economy slowing, he needs to close the door on the funding scandals to focus on improving living standards for voters, while staying on an austerity path to satisfy credit rating companies. There is still public anger over a goods and services tax implemented last year.

Funding Development

Pledges of development probably swung ballots in Sarawak, and a “weak” opposition failed to capitalize on dissatisfaction over the GST, said Faisal S. Hazis, head of the Centre for Asia Studies at the National University of Malaysia. Opposition parties fielded multiple candidates in some seats.

Najib told reporters on Saturday that voters saw the benefits the consumption tax would bring in improving the nation’s finances and funding development. BN under Najib has promised money for everything from roads to hospitals.

“This is the first election after the introduction of GST” and serves as an important barometer on its impact on the electorate, Faisal said.

Najib called on civil servants at a regular meeting on Monday to monitor the needs of voters in Sarawak and neighboring Sabah state, ensuring they have quality roads and equipping longhouses with utilities, according to the official Bernama news agency.

Sarawak Shares

Shares of Cahya Mata Sarawak Bhd., a manufacturer of building materials based in Kuching, rose as much as 2.3 percent Monday, while Gamuda Bhd. gained as much as 2.1 percent. Infrastructure and construction companies are expected to benefit from Barisan Nasional’s win as projects announced by the state government are set to proceed.

Gross domestic product is forecast by the government to increase 4 percent to 4.5 percent in 2016, after an expansion of 5 percent last year. The economy grew at the slowest pace in more than two years in the final quarter of 2015 and data this week may confirm economists’ predictions that it eased further last quarter.

Indifference to the Najib and 1MDB-related scandals was one factor cited by analysts for Barisan Nasional winning 72 of 82 seats in the Sarawak assembly. Over on the peninsula, voters may be more attuned to the turmoil surrounding the premier.

“Confidence is a major issue for Malaysia, and Najib needs as much political boost as he can get at the moment,” Trinh Nguyen, an economist at Natixis Asia Ltd. in Hong Kong, said in a report earlier in May. “The 1MDB saga is likely to continue to sap confidence on his management of the economy.”

Potential By-Elections

Najib may have to test the public mood again soon. A helicopter crash in Sarawak last week killed six people including two UMNO parliamentarians, whose deaths could trigger by-elections for the vacated seats. That decision lies with the Election Commission.

For now, the prime minister’s supporters are claiming the Sarawak win as a defeat for Mahathir’s campaign against him. Mahathir, who was premier for over two decades, has repeatedly said UMNO will lose the next general election if Najib is leader.

“The people have again approved BN’s policies that have brought new jobs, inclusive development, and security and stability to all Malaysians,” said Abdul Rahman Dahlan, minister for housing, local government and urban wellbeing. For Mahathir, “the result also proves his claim that the prime minister must be removed as BN will lose elections under his leadership is just another lie.”