The political uncertainties in Malaysia following the resignation of its Prime Minister are seen as ‘short-term’ risks as the tech industry in the country is expected to continue its growth momentum amid the ongoing COVID-19 pandemic, according to tech investors.

Muhyiddin Yassin stepped down as Malaysia’s eighth prime minister on Monday after losing his parliamentary majority after 17 months in office. Malaysia’s Cabinet has also been dissolved following his resignation.

Malaysia is set to have a third prime minister and Cabinet within three years. On Friday, the palace Istana Negara said Malaysia’s King Al-Sultan Abdullah has appointed Ismail Sabri Yaakob as Malaysia’s ninth prime minister.

In a statement on Friday evening, the palace said Ismail Sabri, who was the Deputy Prime Minister in Muhyiddin’s government, will be sworn in as Malaysia’s ninth prime minister on Saturday at 2:30 PM at the palace.

The resignation of Muhyiddin and the appointment of a new PM came as Malaysia’s daily COVID-19 cases have been hitting a new daily high despite the rollout of the vaccination program since the beginning of the year. On Friday, Malaysia posted 23,564 COVID cases, crossing the 23,000 mark for the first time.

On Tuesday, Fitch Solutions Country Risk & Industry Research said continued government instability in Malaysia will continue to undermine investor confidence.

“However, given that the government has appeared unstable for months, Muhyiddin’s resignation itself is unlikely to prove a surprise to the markets and we do not expect an outsized impact on both the equity and bond markets in Malaysia,” it wrote in a note.

Venture capitalists TechNode Global contacted opined that political issues will have little impact on investors’ confidence in Malaysian tech startups. The tech industry in the country will continue to grow due to the ongoing pandemic which has accelerated digitalization.

VCs typically take a long-term view when they invest in tech startups, venture capitalists told TechNode Global. The new government is also expected to continue supporting the tech industry in the country.

“Political uncertainty has little effect on investors’ confidence in Malaysian startups. As we know this is just a short-term risk,” Kejora Ventures and Sun SEA Capital venture partner Raymond Hor told TechNode Global.

“Long term concerns that we should be watching are which segments are heavily affected due to COVID-19 and the changing consumer behavior instead,” Hor said in a brief interview.

Malaysia’s private equity and venture capital markets have been lagging as compared to its peers.

According to DealStreetAsia’s report SE Asia Deal Review: Q4 2020 published in January, total deal value raised by Malaysian startups dropped to $146 million last year from $171 million in 2019, the report which tracks fundraising by startups in Southeast Asia showed.

This was despite a jump in the number of deals. Malaysia registered 79 deals in total in 2020, more than double the 36 inked in the previous year.

In comparison, Singapore recorded 280 deals with a combined value of $3.66 billion, followed by Indonesia with 134 deals and $3.37 billion in total funds raised.

Pandemic amplifies the importance of the digital economy

Another Malaysia-based venture capitalist Ng Sai Kit said he expects the tech ecosystem in Malaysia will continue to grow as tech investors focus on a longer-term outlook.

“VCs are about patient capital and not investing in the short term. The ecosystem will grow, nevertheless. The pandemic has amplified the importance of the digital economy,” he told TechNode Global. “I believe the next government will continue to recognize the contribution of this sector to the economy.”

“Investors will focus on a longer-term outlook. This may be an excellent time to position for recovery from the pandemic. A short-term political whirlwind should not have much impact on most investment decisions by VCs in the tech sector,” he explained, concurring Hor’s view.

Ng, however, warned that prolonged political uncertainty may slow economic recovery.

On Monday, Fitch Solutions has slashed Malaysia’s 2021 gross domestic product (GDP) growth to 0 percent from its earlier estimate of 4.9 percent. The revision came as the second quarter 2021 GDP growth numbers were below its expectation, at 16.1 percent year-on-year (YoY) but a contraction of 2 percent quarter-on-quarter.

The research unit of the Fitch Group noted that the daily COVID-19 cases in Malaysia have not come down despite the nationwide lockdown.

Better policies needed to boost PE/VC space

Meanwhile, with a new prime minister, followed by a new Cabinet soon, Ng hopes there will be more improvements in regulation and policies to help build the private fund management sector and transactions of privately-held entities.

“Some fiscal policies stimulating the deployment of capital in venture capital/private equity space will be welcomed,” he added.

Earlier, Moody’s Investors Service said it expects to see a period of uncertainty in Malaysia but opined that the country’s institutions limit the impact on its macroeconomic policies and credit profiles.

“Although a period of political uncertainty may occur in Malaysia given the resignation of Prime Minister Muhyiddin Yassin, we expect the country’s credible and effective institutions to limit the impact on its macroeconomic policies and credit profile as demonstrated over past episodes of abrupt political change,” said Moody’s Investors Service Vice-President – Senior Analyst Christian Fang on Monday.

He said the coronavirus pandemic remains the key risk in Malaysia, as the elevated number of new infections and ongoing restrictions – although less stringent compared to the second quarter of 2020 – will continue to weigh on the economic recovery this year.

“As such, if fiscal deficits remain wide for some time because of further economic stimulus or weak revenue, resulting in a persistent rise in the government debt burden that fiscal authorities are unable to reverse, this has the potential to materially weaken Malaysia’s credit profile,” he added.

As for the stock market, analysts expect market sentiment to remain soft until more clarity on the political situation.

“We expect market sentiment to remain soft until more clarity on the political situation surfaces. During the last political crisis in Feb 2020 following the ‘Sheraton Move’, the KLCI fell -4.2 percent during the week that there was no ruling government in place,” Hong Leong Investment Bank said in a note on Tuesday.

“From a market perspective, policy continuity, particularly on the vaccination rollout and economic reopening, is our key concern from this political fluidity. Our 2021 GDP forecast is 3.1 percent and year-end KLCI target at 1,580 (15.7 times price-to-earnings ratio),” analysts Jeremy Goh and Felicia Ling wrote.

On Friday, the benchmark FTSE Bursa Malaysia KLCI closed 0.2 PERCENT higher at 1518.03. The KLCI was up 1.4 percent from 1496.74 on Monday.