Najib’s roll of the dice – RM60 billion economic stimulus package (3)

How Did WE Get Here? An Alternative View

Najib in his speech to the House briefly reviewed recent economic developments. This review was selective and must be rebutted.

Contrary to his view, the danger signals were already there in mid 2008 when the budget for the current year was presented. However, the Government remained in a state of denial and continued to assert that Malaysia would not be affected by the global meltdown.

Ministers and the Governor of Bank Negara continued in parrot fashion to mouth the mantra of the economy attaining a growth rate of 3.5% in 2009 despite mounting evidence of declining industrial production, a fall in exports, lower commodity prices, sharp falls in FDI and growing evidence of capital flight.

On the global scene alarm was being expressed and country after country was taking measures. The two Finance Ministers remained sanguine and repeatedly provided the mainstream media with sound bites indicating that Malaysia was miraculously immune from global trends. They propounded the so-called theory of immunity via the notion of “decoupling”.

Despite these protestations, which rang hollow, the markets took due note and lowered the risk ratings. Yet, the euphoric expressions of growth continued to be mouthed relentlessly. Najib is thus stretching credibility by suggesting that it was only late in the 4th Quarter that there were “negative” developments.

The truth of the matter is that he as the Finance Minister was either asleep at the wheel or was engrossed in narrow politicking in the context of UMNO politics. The Second Finance Minister cut a sorry figure as he went about repeating like a broken record that the Malaysian economy would continue to grow; the Minister responsible for the EPU was neither heard nor seen; the Governor of Bank Negara was hamstrung and failed to move by adjusting interest rates or by allowing a true float of the ringgit.

There was a wide gap between pronouncements and actions. The economic management team took contradictory actions. The Budget for 2009 saw an increase of RM20 billion. The Budget was promoted as “stimulative”; a further stimulus was provided by way of a package in late 2008; Value Cap was given RM5 billion with the somewhat dubious goal of supporting the stock market, how this was to sustain growth or aid those affected by the slowdown continues to remain a mystery; further resources were provided via off budget handouts.

The point to note is that there was no overall plan to counter the effects of the globally induced shock to the economy. The key thrust of the spending measures was the channeling of funds to UMNO linked entities and the various warlords. There is little evidence that funding was provided to cushion the impact on the SMEs or the laid off workers linked with a weakening economy.

It is evident that management of the economy remained on auto-pilot while it hurtled towards a cliff. It is thus legitimate to ask if Najib as the economic czar has displayed a degree of competence to shepherd the economy through the treacherous waters that lie ahead.

In his speech, the DPM indicated that GDP growth rate of plus 0.1 percent was recorded in the 4th Quarter. With all due respect, it must be pointed out that the growth rate appears to be somewhat inconsistent with available indicators that have shown sharp declines. It is legitimate to ask the DPM to provide a full set of macro-economic accounts in the interest of transparency. In any event, GDP estimates are generally subject to margins of error. The probability that the economy shrunk in the 4th Quarter is high. It would thus be prudent to acknowledge that the Malaysian economy like other ASEAN and other middle income economies recorded negative growth and to base policies on a more realistic assessment.

Turning to the prospects for the current year, it should be noted that both the IMF and the World Bank have further revised their estimates of growth for the global economy – (World Bank has projected it shrinking by at least 1% this year, the IMF has stated that there will be a decline for the first time in 60 years.)

In the face of these new estimates, Najib’s growth estimates for Malaysia for the current year are “rosy”. Exports are likely to decline more sharply than projected by him. The FDI figures cited are wishful and are not likely to be attained given the state of global financial markets, the political instability in Malaysia, the weak fundamentals, the non-competitiveness of Malaysia. More so, Najib conveniently ignores the fact that there are sizable capital outflows from Malaysia. Were these factors taken into account, Malaysia is likely to experience a net negative capital flows.

Najib appears to lull the nation into a state of complacency. He cites FDI figures. These are not the true measure of such flows; they represent the so-called “approvals” by MITI. Many of these approvals do not mature into actual investments. Nor do these numbers take account of the capital flight that is taking place. Evidence of the size of such flight is provided by the Errors and Omissions figure in the Balance of Payments.

The DPM asserts that with the Stimulus Package in place, the economy will experience growth. He projects this in the order of +1 to -1 percent. This is somewhat of a pie in the sky view. MIER and other reputable analysts are forecasting that the economy is likely to shrink by between 3 and 5 percent. Datuk Najib continues to be indulging in unrealistic expectations that the turnaround will occur in the second half of the year. This is inconsistent with the consensus view that the US and other industrial economies unlikely to recover until the second half of 2010.

The DPM claimed that the sums included in the First Stimulus Package have been “channeled” implying that they have been spent. The truth of the matter is that they have yet to be spent. Given the notorious track record of shortfalls in spending (particularly on construction projects handled by F Class contractors) Najib is being very optimistic. The reality is that there are serious capacity constraints.

Secondly, spending on “projects” which are nothing but “pork” for UMNO chieftains do not directly aid those most affected by the recession. A large part of the resources are “leaked” abroad via migrant worker remittances and via imports of construction materials etc.

What is clear is that there is no evidence that the RM20 billion increase injected via the 2009 Budget and the further RM 7billion via the First Stimulus has not contributed to arresting the slowdown that began in the first half of 2008.

The lesson to be drawn, yet unlearnt, is that stimulus efforts need to be carefully targeted to counter specific economic weaknesses rather than via a general sprinkling of funds across the board. A further unlearnt lesson is that stimulus efforts must be accompanied by reform measures. The singular lack of a coherent and well designed reform package is very telling and indicative of intellectual bankruptcy.

These concerns are also applicable to parts of the Second Stimulus Package now unveiled.