A man sets up a Malaysian flag outside his shop in Kuala Lumpur.

Jimin Lai | AFP | Getty Images

Malaysia’s weak economy needs a boost as the new coronavirus outbreak threatens to slow it down even more — but it isn’t clear it can get the support it needs given the latest political upheaval in the country.

Mahathir Mohamad, a 94-year-old veteran politician, unexpectedly resigned as Malaysia’s prime minister this week. Events that followed his resignation broke apart the coalition of parties that was governing the country.

Such developments have come at a time when many of Malaysia’s regional neighbors have announced, or are planning, stimulus packages worth billions of dollars to support their economies through the coronavirus outbreak.

Singapore last week announced what some economists said is its largest government deficit yet to help businesses and households manage economic challenges from the coronavirus outbreak. Further afield, Hong Kong on Wednesday also announced spending that will lead to a record deficit, including cash handouts of 10,000 Hong Kong dollars ($1,283) to residents age 18 and above.

Asian economies, including Malaysia, are among the most exposed to China, where a fast-spreading coronavirus disease  and the government’s effort to contain it have crippled manufacturing capacity, consumer spending and overseas travels.

Some economists have questioned the Malaysian economy’s ability to withstand the current slowdown if political uncertainties drag on.

“When and how this political crisis will be resolved will be key to Malaysia’s ability to navigate both domestic and external economic weakness,” Trinh Nguyen, an economist from French investment bank Natixis, wrote in a Tuesday note.

She added that “limited political space” to support the economy amid the virus outbreak means that Malaysia’s growth could slow to 3.6% this year from 4.3% in 2019.

Wellian Wiranto, an economist from Singapore’s OCBC Bank, agreed that Malaysia’s economy “will suffer more than it already has” if the political situation is not resolved soon.

“The economy was already reeling from a slowdown even before the threat of global pandemic stares at us. Now, the outlook may dim further, with investment activities likely to be hit the most, if the uncertainty persists,” he wrote in a Wednesday note.

Next government likely to be weak

Malaysia’s latest political upheaval was sparked by Mahathir’s sudden resignation on Monday, which set off events that broke apart the Pakatan Harapan ruling coalition that unexpectedly won the 2018 general elections.

Mahathir was then appointed interim prime minister by the Malaysian king to oversee administrative matters in the country until a new premier and cabinet emerged. The 94-year-old also initially had the backing from all political factions to continue leading the country, but that has changed.

While Mahathir still has support from some members of parliament, the different political factions have thrown up other names of whom they want as prime minister. None of the possible prime minister picks have the backing of 112 members of parliament — the simple majority needed to lead and form a government in Malaysia.

Political analysts said the country is set to move into uncharted territory: To be governed by a weaker government with minority support in parliament or head into a snap election.

Those are unprecedented situations for Malaysia but common in larger democracies, such as in Denmark and the U.K., said Ahmad Fauzi Abdul Hamid, a political science professor at Universiti Sains Malaysia.

But even with a snap election, it isn’t clear that any political factions have the upper hand to secure a decisive win to form a strong government, analysts said.

So, regardless of who becomes Malaysia’s next leader, that person faces an “uphill battle” to get the country back on track, said Tricia Yeoh, a fellow at think tank Institute for Democracy and Economic Affairs.

The new government “will be inheriting the problems in the economy,” Yeoh told CNBC’s Martin Soong in Kuala Lumpur, Malaysia.

“Whatever solutions they come up with will also be difficult because … they will be coming in as a relatively weak government,” she added.

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Malaysia’s economy is missing out on a boost after Mahathir resigns

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