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Will the stimulus package work, at what price and for how long? These are raging questions that need urgent redress especially by policy makers that in turn must be communicated to all as to ‘shore up confidence’, arguably true as stressed by the second FM.
Dr Dzulkefly Ahmad (drdzul.wordpress.com )
After the winding up by the second Finance Minister on the budget debate at the committee level in the Dewan Rakyat today (Tuesday, 11 November), I felt compelled to write my 2-cents worth of thought on our economy. It’s only wise that I do it soonest after writing “Missing numbers in stimulus package” (Malaysiakini.com).
For a start, the news about China’s stimulus package of US$586 billion or RM2.1trillion not capable of counteracting the effect of the US-led slowdown and that the euphoric rally observed in the Asian bursas could only last for a day, i.e. on Monday, are indeed very frightening. The RM5billions injection to shore-up ‘undervalued stocks’ by Value-Cap, as instructed by the FM, flies in your face and how much quicker, you thought, will it dissipate.
Yes we have had for sometime now, a strong current account surplus, a trade surplus and a strong foreign reserve to support our currency. But despite of all these the ringgit has fallen to a level that does not match its arguably strong fundamentals. There is a lot more in finance that we simply fail to understand. It has weakened by 7.3% against the US dollar and is down 13.3% from its peak of RM3.1320 on April 23. It was quoted at RM3.560 versus the greenback on Friday, 14 November. All this happens when the greenback is being severely battered.
Some are even anticipating that it may trade at RM3.6 by yearend against the US dollar and lower still in the following year. Portfolio investment leaving the Asian bursa and making a beeline for the US State Treasury bills may not augur well with us too.
Many financial strategists in credible research houses are now saying that ringgit performance is, more importantly determined by decreasing international reserves, large fiscal deficit, falling commodity prices and the contagious or boomerang effect of global economics.
Frankly, many analysts do not see our numbers improving. On the contrary, it may continue to fall unabated. We witnessed our foreign reserves shrinking from US$116 in August to US$109.6 billions in September and very recently US$107.6 on October 15. With falling commodity prices in crude oil and crude palm oil well below 50% of their projected price in the PM’s budget, we are anticipating a huge reduction in our revenue projection, hence an increasing deficit surely beyond the government’s adjusted number of 4.8% in the new Finance Minister’s budget.
To make matter worse, the economic slowdown will see demands for our commodities dwindling as the global economy slows down and recession-deflation setting in. Similarly demands for our manufactured goods will equally be reduced as our trading partners reduce their spending. Our trade surplus and current account surplus will subsequently shrink.
Manufacturers will start to lay off workers as to cut cost. Already they are. The numbers laid off are distressing not the least are those retrenched across the causeway. All these will definitely have a knock-on effect on our macroeconomic parameters of unemployment and slowing growth which would adversely affect our currency and sovereign rating. Downgrading of our sovereign rating from A to A- aggravates our cost of borrowing and competitiveness.
Our NPLs may be as low as 2.5% (net) of our GDP as at end of August but that may soon reverse. During the financial crisis of 1998, NPLs were at 13.6% (net). More alarmingly our household debt to GDP ratio has hiked to 66.7% as at end of 2007, while it was only at 44.4% during the financial crisis. It could be a lot worse right now. Under inflationary pressures due to our own misdoings of hiking the fuel prices in June this year, the price hike in everyday goods and services coupled with lower disposable income, situation could drastically deteriorate.
Will the stimulus package work, at what price and for how long? These are raging questions that need urgent redress especially by policy makers that in turn must be communicated to all as to ‘shore up confidence’, arguably true as stressed by the second FM. We have to ‘leverage’ (bad word now) on both our fiscal and monetary policies to get our economy going on an expansionary or anti-cyclical approach. But could we? How fast?
Firstly, on the RM7 billions. Where is it coming from? Rightly from the saving of fuel subsidy as allocated in the budget of RM21 billions. With the reduction in fuel price at the pumps, the government expected a saving of RM 7 billions. Hence no external injection, simply coming from expected savings?
But that’s not very realistic, because you could only spend what you have. But it looks like you don’t have it. Besides, Najib only conceded losing RM8 billions in term of revenue, while PR’s budget expected RM18 billions to say the least.
Will they be doing the obvious of outright borrowing, from again our national saving EPF etc, or raising bonds? If it’s true, say so and make it clear. Will they be creative to unlock some real assets of the government in term of securitizing and monetizing lands or buildings etc. But please stop cannibalizing on our national savings like the EPF, KAWP etc.
It must be made clear that nobody is in to score political points in facing this crisis. The entire ship is sinking. We could wait till we get to the shore. But the issues that need addressing are, will the stimulus package work? At what quantum – will RM7 billions be sufficient? In which critical areas would injection be made as to effect the greatest ‘multiplier effect’? Surely not in the Capital or share market! How do we encourage consumer spending? Giving them higher disposable income by reducing their EPF saving will certainly ‘shortchanged’ them later. It may not be wise after all. Are the incentives sufficient to boost private sector investment?
How long are we to do this? Will we witness an immediate recovery over the range of 12-18 months or a V-shaped recovery as economists put it? Or a U-shaped one, over 2-3 years or L-shaped crisis like one experienced by Japan for a long time?
And for as long as the details of the proposed spending have not been presented to the parliament, it may be pertinent for the government to peep at the PR’s strategy of facing the crisis.
Having settled for the strategic issues, the next is to iron-out of ‘how to make it happen’. Admittedly it is quite consoling to see that the BN government has finally heeded the critiques by many, to have open-tender system in place, especially for mega-projects and all. Enough of the multi-billions RM that was rampaged in various leakages and hemorrhages in awarding lop-sided privatisation projects, military procurements, mergers and acquisition etc, in a long list of downright ineptness and irresponsibility to say it politely.
But the proof is in the doing. Enough of lip-service and mantras- however religiously sermonized. The ‘ineptness’ of the BN’s financial and economic leadership have to end. Otherwise, the rakyat and voters would have to effect change earlier then the next GE. But currently every wannabe is engulfed in party’s election. That will certainly take precedence until March 2009.
The Economy Sir, Please!
Over to you, fellow Malaysians!
Dr Dzulkefly Ahmad is the Director of PAS research Centre and MP for Kuala Selangor.
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