In March 2020, lockdown and social restrictions were put in place due to COVID-19, and Malaysia has never been the same since. Although cases were manageable at first, Malaysia's third and ongoing wave of COVID cases hit an all-time high of over 20,000 new infections and though it has recently opened up, it is still an ongoing issue. In a country with a population of 31.85 million, these figures are alarming indeed. While in the midst of battling the pandemic and one of the country's worst economic disasters, ongoing political turmoil in Malaysia is further adding fuel to the already menacing fire. 

What does all this mean for the Malaysia startup ecosystem? 

A new Prime Minister for Malaysia 

There haven't been many positives coming out of the Malaysian news cycles lately. After months of pressure and criticism, (former) Prime Minister Muhyiddin Yassin resigned after losing the confidence of parliament, with Malaysia's ruling monarch acting as caretaker leader until the appointment of a new Prime Minister. Following his resignation, the former PM's cabinet was dissolved. 

Are egifts the solution to Malaysia's struggling retail market

Meanwhile, the Malaysian currency fell to a one-year low. Analysts expect even more intense duress on Malaysia's economic state as the prime minister's resignation plunged Malaysia into yet another political vacuum. The ringgit traded its lowest since July 2020 at 4.2410 per dollar, with the FTSE Bursa Malaysia index, KLSE falling 0.6% within the first few minutes of trading. Because of this, investors are concerned about the impact of prolonged political upheaval and instability in hindering much-needed state spending while the pandemic's rampage ensues.

Before long, Ismail Sabri Yaakob, the former deputy PM, became Malaysia's ninth Prime Minister, ending a week of uncertainty. This will be the second government change in two years, after Pakatan Harapan toppled the long-serving Barisan Nasional government in May 2018, only to be replaced by the Perikatan Nasional government in March last year. However, the new governing coalition appears to be very similar to the one that collapsed last week, with analysts predicting that the change will have minimal impact on Malaysia's current volatile political and economic climate. 

Waning investor confidence in the Malaysian market

The political crisis, coupled with the pandemic's proliferating spread, is weakening investor confidence and paralysing the Malaysian economy. Unemployment is at an all-time high, and household consumption will not serve as the primary driver. Simultaneously, the use of the government budget to drive future growth will almost certainly be hindered by elevated debt. A backlog of non-performing loans will jeopardise bank lending. And given the pandemic's impact on corporate balance sheets, investments will be unable to fill in the gaps. 

Foreign direct investment in Malaysia decreased by 54.8% last year, with a net inflow of RM14.6 billion in 2020, compared to RM32.4 billion in 2019. Aside from a $2 billion USD investment from Austrian semiconductor company AT&S in June, there have been no significant investment announcements this year.

Due to the resurgence of COVID-19 cases driven by the highly contagious Delta variant and new lockdown measures, the Malaysian central bank expects its full-year gross domestic product growth forecast to be around 3.0 to 4.0%, down from an initial ambitious prediction of 6% to 7.5%. Compared to other countries in Southeast Asia, Malaysia's private equity and venture capital markets have been lagging behind their regional counterparts. 

From the beginning of the funding life cycle to mature startups in 2018, Malaysia saw 143 deals totalling $4.2 billion USD in deal flows. While this amount appears promising, it was nothing compared to its neighbouring country Singapore, which raked  in $31.1 billion USD with a total of 717 transactions. 

COVID-19's threat to economic recovery

The pandemic remains the most serious threat to Malaysia's economic recovery. Malaysia's credit profile may suffer if financial deficits protract for an extended period due to additional economic stimulus or weak revenue. As for the political drama, investors anticipate that the country's credible and effective institutions will cushion the impact on its macroeconomic policies and credit profile. 

Malaysia has previously dealt with tumultuous events, and the current crisis is unfolding in familiar ways. Economic progress in the country has always triumphed over political anarchy, as demonstrated by Malaysia's previous experiences in addressing abrupt political change. 

The situation of COVID-19 and Malaysia facing uncertainty politically dramatically reduces the likelihood of any significant economic reform anytime soon. Ongoing political turmoil in Malaysia also considerably dampens investor confidence in the local stock market. However, it is hopeful that recovery will resume in the latter second half of 2021 and improve further going into 2022. 

To navigate such a volatile environment, the Malaysia startup ecosystem will need to dedicate resources to mitigating key risks while actively monitoring for signs of emerging trends and changes to capitalise upon if they are to survive and thrive.