Economist Azrul Azwar Ahmad Tajudin, who was suspended by Bank Islam for predicting a Pakatan Rakyat win in the next general election, believes the country's economy will face an initial shock if his prediction comes true - but the impact will be imited.

"After the 13th general election, we can expect some knee-jerk overreaction on the first day of trading due to fears of political instability and administrative inconsistencies...

"Because of this, we may see increased volatility and a sharp pullback in equity bonds and forex markets.

NONE "There could also be a surge in capital outflow for portfolio or direct investment businesses," Azrul ( right ) told a forum on political transition yesterday evening.

However, Azrul - who is now an analyst with PKR-linked Institut Rakyat - said the impact would be minimal as the business community had already factored in the possibility of a Pakatan win.

"For example, given the erratic performance of the stock and forex markets, and the movements of portfolio funds in a rotational fashion within the equity and fixed income markets, it could suggest that the investment community has factored in this possibility," he said.

He pointed out that even now, foreign shareholding of the Kuala Lumpur Composite Index is at its low of around 20 percent.

"As such, there are not much foreign funds left to trigger a foreign capital flight post-GE13," Azrul told the forum titled ‘Economic management during political transition: Experience from East Asia and Eastern Europe'.

"The downside risk of the Malaysian financial market and economy is rather limited. I can confidently say that our economy will not plunge into disaster, given its ability to absorb any short-term shocks," added Azrul.

He noted that other external factors such as the global economic recovery and the signs of resolution of the Eurozone crisis would also help mitigate the shock.

"Precedence wise, countries like Indonesia in 1998 and the Philippines in 1986 have seen their economies return to normalcy in less than a year, and achieved new highs in less than three to four years," he said.

Other panellists at the forum were Penang Institute executive director Woo Wing Thye and Universitas Indonesia economics professor Anwar Nasution. The forum was moderated by Penang Institute fellow Wong Chin Huat.

'Beholden leaders can't reform'

Woo, who had advised the Polish government during its transition of power, claimed that the current reforms instituted by the BN government only addressed the "symptoms" rather than the underlying causes.

He gave the example of the government-formed Talent Corp, which was meant to lure Malaysians back home, but had not addressed the underlying reasons on why they had left the country.

NONE Woo ( right ) stressed that, in order to conduct real reforms, leaders of the present government could not be beholden to the previous office holders.

"For example, in China, Mao Zedong's appointed successor Hua Guofeng could not institute reforms because he was picked by his predecessor and was beholden to him, but when Deng Xiaoping deposed him, he had the legitimacy to turn against the old policies and introduce new policies," he said.

Since then, reforms in China had accelerated as the old generation died out and the new generation instituted further reforms, Woo added.

While admitting that certain countries had gone through quick and rapid reforms - such as Russia under Mikhail Gorbachev - had fallen, he dismissed the possibility that a 'shock reform' in Malaysia would lead to a collapse.

Woo pointed out that countries like Vietnam and Laos had also instituted overnight reforms, and have seen an amazing growth since then, up until the Asian financial crisis.

He noted that the key point for the success of reforms would not be dependent on the speed of reform, but rather on the initial state of the country.

"China, Vietnam and Laos were overwhelmingly based on agriculture, so when the market was opened, industrialisation took place - people in the agricultural sector moved into the industrial sector.

"But in Eastern Europe, (they collapsed) because they were already industrialised - and agriculture was only a small part. Most people were already in heavy industries, and for the light industries to grow, they had to be at the expense of the former.

"Given our condition, I am confident that there will be no collapse, as our initial state does not require a reorientation of the economy," Woo added.