Singapore-Malaysia Economic Relations: Deep Interdependence

Abstract

Malaysia’s new government swept into power on May 9 last year. While greater clarity regarding bilateral relations between Singapore and Malaysia was expected as the transitional period ended, this appears not to have been the case. Indeed, the past few months have been characterized by uncertainty on a number of established issues between the two countries as well as several new ones. Part of the reason for this is that the Pakatan Harapan government faces important domestic challenges, including financial legacies inherited from the previous administration. At present, the Malaysian government owes more than RM 1 trillion in direct debt, contingent liabilities, and lease payments.1 Furthermore, a number of very large government-linked entities such as Tabung Haji and FELDA Global Ventures are struggling with toxic assets.2 And, the new administration eliminated the reviled GST to replace it with the Sales and Service Tax which – while in line with pre-election pledges – has entailed a reduction in government revenue. In a bid to improve its fiscal health, the PH government has scrutinized large-scale infrastructure projects. A number of them, most notably the East Coast Rail Link and several KL-based public transport initiatives have been scrapped or put on hold. Of most direct relevance to the city-state, following a request by Malaysia, construction on the KL-Singapore High Speed Rail project will be deferred until 2020 and come on line 5 years later than initially planned.3 The drive for cost rationalization may also affect the much-awaited Rapid Transit System (RTS), linking Singapore and Johor Bahru. While the PH administration has reiterated its intention to proceed with the link – slated to ferry 10,000 passengers per hour in each direction – there has been little information forthcoming as to when construction will start.4 In addition, a number of older issues between the two countries have resurfaced, including: the price of water supplied by Malaysia to Singapore; whether the Causeway should be replaced by a ‘crooked bridge’ that would allow ships and water to flow beneath it; and whether the governments of both countries should invest in a Third Link connecting Singapore’s eastern portion to Johor.5 In October, two new issues unexpectedly emerged, namely: the management of airspace over southern Johor Bahru, which is currently handled by Singapore; and the precise delimitation of the maritime border between the two nations in the Strait of Johor.6 What makes the handling of these issues more complex is that there are now a greater number of ‘moving parts’ to factor in. The new Malaysian coalition is comprised of different parties with distinct perspectives. Furthermore, the cabinet is a mixture of known personalities such as Prime Minister Mahathir Mohamad and Home Minister Muhyiddin Yassin, as well as less-familiar decision-makers. Also, not to be forgotten are the crop of new state governments, which are still in the process of finding their feet. The Johor state government has been at the forefront of some of these issues, including the nature and placing of the hypothetical Third Link.7 Consequently, how bilateral relations evolve in the months ahead and what issues become salient will be pivotal for both countries. However, rather than dealing with these questions directly, this Perspective will frame them by analysing how and to what extent the economies of Malaysia and Singapore are intertwined. This will be done through examining data on the flow of goods, services, investment, and people between Singapore and Malaysia over the past three decades and, where relevant, comparing them with key economic partners.