NO time was wasted in swearing in Datuk Seri Najib Razak as the country's prime minister for a second term. This happened on the very next day of the 13th general election, in which Barisan Nasional won more seats than Pakatan Rakyat in Parliament but lost the popular vote.
With a smaller majority and a stronger opposing voice from the rakyat, Najib now has a more difficult task ahead of him than five years ago when he took over the prime minister's office from Tun Abdullah Badawi in April 2009.
He has to deliver what Barisan Nasional promised in its manifesto and at the same time, tackle the economic issues that will erode the fundamentals of the domestic economy if left unattended.
Among the issues that the prime minister needs to resolve are:
• Narrow the budget deficit;
• Contain national debt, including government guarantees;
• Retain talent and strengthen the education system;
• Improve governance; and
• Sustain the transformation of the economy.
These issues were there even before Najib retained control of Putrajaya. His administration had indeed put in place measures or rather plans to transform the economy for long-term growth.
The point is, can these plans be executed, seeing that they involve hard and unpopular decisions? More so since the ruling coalition lost the popular vote in the recent polls?
Some quarters say it is unlikely that Najib will implement any painful measures, such as reducing the petrol subsidy and raising the electricity tariff, as they would hurt Barisan Nasional's popularity even more.
"Reform momentum could hit a snag. Without a strong mandate from the people as well as the likelihood of months of political infighting after the general election, some of the policy reforms could be put on the backburner or progress slowly," comments CIMB Research's strategist Terrence Wong in his latest research note.
"This will throw off the government's reform credibility and dent investors' confidence in the sustainability of the country's growth momentum," he says, adding that the country's fiscal reduction plan could be at risk.
Budget deficit
This is the thrust of the country's fiscal policy reform and determines Malaysia's sovereign rating.
If Najib keeps his election promises, the government will spend more — at least an additional RM12.48 billion in the first year of undertaking the programme pledged in the Barisan Nasional manifesto, including raising BR1M to RM1,200 per family and RM600 for single people.
The government had managed to bring down the deficit in the past two years, thanks to an increase in income tax collection after the Inland Revenue Board tighten the screw on tax evaders and higher oil revenue as a result of strong crude oil prices.
Public revenue is forecast to rise marginally to RM208.65 billion in 2013 from RM207.2 billion the year before, according to the Economic Report 2012/13, while public operating expenditure is expected to drop to RM201.9 billion from RM202.6 billion the year before. Including net development expenditure of RM46.7 billion, the country is expected to have a budget deficit of RM40 billion this year, which is equivalent to 4% of GDP.
However, these estimated figures do not take into account the goodies that Barisan Nasional has promised the people. Back-of-the-envelope calculations show that with an extra spending of RM12.48 billion, the country's budget deficit will balloon to RM52.48 billion this year based on the forecast public revenue of RM208.65 billion.
Economists say the increase in income tax revenue could shrink as time goes by and reckon that the government needs to broaden its tax base by introducing the Goods and Services Tax (GST).
"The revised BR1M implies the setting-up of a safety net or mitigation measures for the lower-income households for the eventual resumption of the subsidy rationalisation programme and introduction of GST," says Maybank IB Research in a recent report. "The only question is the exact timing, in view of the election's outcome where Barisan Nasional won but with a smaller majority."
While raising public revenue, the government also needs to be careful about public expenditure — it cannot afford to give out goodies all the time.
Fuel subsidy rationalisation — a political hot potato — is an obvious problem. This subsidy accounted for 12.4% of government operating expenditure in 2012, creeping up from 8.8% in 2011 and 6.3% in 2010.
According to Wong of CIMB Research, unpopular measures such as GST and subsidy cuts could be delayed on worries of a political backlash.
If Najib chooses to be a populist leader and delay fiscal reform, a possible outcome is that the country's dependency on oil revenue — which already contributes 40% to the government's coffers — will increase.
But if there is a sharp fall in crude oil prices during a crisis, a direct consequence is that the government's coffers will be half empty and insufficient to revive the domestic economy.
National debt
The current national debt-to-GDP ratio of 53.7% is no cause for alarm, say economists. But it will be a concern when the growing government-guaranteed debt paper is taken into account. The ratio would then surge above 60% — the acceptable ceiling based on global standards is 55%.
Meanwhile, federal government debt is expected to increase 10.1% to RM502.4 billion on account of higher domestic borrowings to meet funding requirements.
CIMB Research estimates national debt to rise to RM542.4 billion or 54.1% of GDP this year due to net borrowings of RM40 billion based on proposals in Budget 2013.
Hence, when entities such as 1Malaysia Development Bhd (1MDB) raise fresh funds through government-guaranteed bonds, Najib may have to intervene as such moves will add to the country's debt burden.
With regard to 1MDB, some quarters observe duplications between the entity and Khazanah Nasional Bhd. "Having Khazanah as the country's investment arm is good enough," says an economist.
What is puzzling is that 1MDB has funds in Cayman Islands waiting to be invested. "This is something for the new finance minister to tackle," says a banker.
Improve governance
Before Barisan Nasional lost its long-held two-thirds majority in Parliament in 2008, the coalition saw a landslide victory in the 2004 general election.
This big win was simply because voters believed a change of guards would result in a cleaner and more transparent government. Both Abdullah and Najib promised meritocracy and better governance.
But the recent groundswell of opposition to Barisan Nasional is a clear indication of what the voters think about governance in the country.
In fact, the Najib administration had come under constant attack from the opposition for its lack of governance that led to the government's bloated balance sheet.
The National Feedlot Corporation and the National Defence Research Centre scandals and the presence of Tan Sri Syed Mokhtar Albukhary in almost every segment of the economy were well capitalised on in the run-up to GE13.
Pakatan Rakyat's main theme was that when the excesses and wastage due to poor governance were eliminated, the savings would be enough for it to carry out its election pledges.
Towards this end, Najib will have to significantly improve governance without taxing the people over the next five years. So far, not all public contracts are awarded through open tender — a fair process that creates cost saving.
"To be fair, the situation has improved compared with previous administrations. However, there is room for improvement," says an economist.
In 2012, Malaysia scored 49 out of 100 on the Corruption Perception Index, which put in 54th place among 176 countries assessed by non-governmental organisation Transparency International. Was that good enough? Not when compared with neighbour Singapore, which came in at fifth place with a score of 87.
Transformation momentum
Najib's economic transformation plan to lift Malaysia out of the middle-income trap and turn the country into a high-income nation is well documented. However, there is scepticism that he can attract the kind of private-sector investment that will boost the economy.
Moody's notes that private gross fixed-capital formation grew at an annual average of 16.6% between 2010 and 2012 compared with barely 2.9% in 2005 to 2009.
That said, economists observe that resistance to the implementation of a minimum wage is early indication that more investments will not necessarily transform the economy, which has relied on cheap foreign labour and subsidised fuel all these years.
They say although an increase in private investment is good for the economy, the country has failed to attract high value-added industries that are essential to make Malaysia a high-income nation.
"We think it is more important for the government to focus on sustaining our growth momentum and seeing to it that the benefits of that growth are spread out," says Malaysian Rating Corp Bhd's chief economist Nor Zahidi Alias.
"Over the medium to long term, issues like education, reskilling the labour force and managing household debt are more on our radar screen as crucial for the government to tackle."
Retaining talent
Another tough battle that Najib needs to keep fighting is stopping talent from leaving the country and at the same time wooing it back from abroad.
Najib set up TalentCorp Malaysia to bring back local talent from overseas with such incentives as a 15% flat tax rate on employment income for five years. But this does not address a brain drain as many professionals, particularly those in R&D, leave for better prospects.
What Najib needs, say economists, is a vibrant economy with high value-added industries that offer well-paying jobs to retain talent and an environment that people would choose out of all the places in the world.
Unfortunately, Malaysia still lacks knowledge-driven industries that require R&D talent, hence the brain drain to countries that do offer such job opportunities.
Also, the relatively high income tax scheme compared with other countries in the region does not help retain talent. Moreover, the country's social security system is not up to the mark.
The above-mentioned five deep-rooted problems of the local economy may be staring Najib in the face, but his priority now may not be fixing them. The prime minister, who is also the president of Umno, needs to get the mandate of the members to remain in power at the party's election that is likely to be held later this year.
For Najib, it will not do to rock the boat now, especially since he failed to perform better at the polls than his predecessor who was forced out after a poor show in the 2008 general election.
But if the problems are not fixed, Barisan Nasional will continue to lose the people's confidence. More importantly, can the country's economic and financial health take the strain?
This story first appeared in The Edge weekly edition of May 13-19, 2013.