The Effect of Malaysia’s Political Situation on Foreign Investments

A country’s political situation plays a big role in the way it is perceived to other countries, especially when taking into consideration when the country is still a developing country which relies a lot on investments and good relationships with other countries. A large amount of funds is needed to carry out multiple development projects, and in order to obtain said funds, the country typically would need to outsource money from other sources, primary foreign investors. As such, the current political state of a certain country matters to external parties as it is a representation of the current stability of the particular country. Therefore, a country should aim to stabilise its political situation at all costs to maintain a good repertoire with other nations.

Over the years, Malaysia’s political situation has been fluctuating. Before finding out what the current state of the political climate is, it requires a brief touch on what has happened in the past. After Malaysia’s independence on 31st of August 1957, it was set to become one of the leading countries in south east Asia as it innately holds a lot of valuable natural resources (e. g. pewter, palm oil, etc. . ) that are not inherently found in most other countries, hence the need for countries to import said materials for their own countries. Besides, it’s strong relations with partner countries for trading, Malaysia was making steady progress from an industrialisation perspective, especially during the fourth Prime Minister; Tun Dr. Mahatir with contributions such as announcing the national car project ‘Proton’ as well as a vision for Malaysia which was appropriately dubbed, “Wawasan 2020”. Malaysia looked promising and seemed like it was on the right path of achieving its goals set by the ‘Bapa Pemodenan Malaysia’. In 2009, a government investment company, “1MDB” (1Malaysia Development Berhad) took form under the authority of Najib, Malaysia’s 6th Prime Minister who lead its advisory board and was directly involved the company as a whole. Its intentions were to attract Foreign Direct Investors and subsequently turn Kuala Lumpur into a global financial hub, with its motto being, “Forging Partnerships, Advancing Growth”. This was a smart move by the former Prime Minister, Najib Razak as turning Kuala Lumpur into a financial hub was a stepping stone to further cement Malaysia in becoming a powerhouse country.

Kuala Lumpur, being the capital of Malysia was a strategic position to form the financial hub. Aside from the existing revenue that is obtained through tourism, it also meant that the establishment of financial institutions had higher chances of increasing overall tax revenue of the country. Furthermore, the prices of land around the financial hub area would increase significantly as the demand of housing near the capital also increases due to new labour and workers being brought in. However, the one question that might be raised for this matter would be would the benefits of turning Kuala Lumpur into a financial hub outweigh costs to citizens with low salary as overall living standards of the city would just keep escalating higher. The question remains valid as turning a city into the prime place for business transactions, means that it will also become a capitalist goldmine as businesses be it local or foreign, would want to base their main headquarters there. The low-income citizens will surely be affected by this as they will not have the necessary amount of disposable income to purchase necessity goods. This means that there would most likely be a segregation of social classes not just within Kuala Lumpur by itself but between the state and all the others. A way to overcome this would be to involve said low-income citizens with the activities of the growing state through education or general training. However, as promising as things looked for Malaysia, the country would find itself in a predicament not too long after.

Over the years, 1MDB has begun accumulating large amounts of debt in order to start/continue its development projects, something that is usually considered normal as most investors believe that the return would be much more profitable than the initial amount of money they invested. However, a red flag was raised when in 2015 Malaysia failed to repay a loan which amounted to around RM2 billion to local banks resulting in the drop in quality of bonds of Malaysia. Soon, more controversies and suspicious activities started to surface which hurt the overall image and disenfranchises the 1MDB project. The amalgamated allegations of mismanagement and accusations of money laundering resulted in staining the name of both Malaysia and Najib Razak as the face of both Malaysia and 1MDB. This global incident lead to a lot of implications for the economic side of Malaysia. As per referring to earlier paragraphs, the political situation of a country is one of the primary factors of the investor’s confidence and with Malaysia under fire from a lot of corruption allegations from international and local communities, investment prospects seem like it is going to go down.

As a result of the scandal, foreign investments started lessening and eventually pulling out of Malaysia and other international countries are hesitant to open up or even continue their businesses in the country by itself. This is probably because companies are cautious of any associations with government-linked companies because as it seems to them, the 1MDB project as a whole has been mismanaged by the government. They fear any contributions towards the current embezzlements of funds, would lead to a detrimental effect on their company, as such, their own stock prices will go down just for being related in this incident. Moreover, if there lies uncertainty with how the government is handling its own flow of cash, foreign investors are hesitant to trust a government under heavy allegations.