Moody’s has given us a good mood… but is it sustainable?

– Ramon Navaratnam
The Malaysian Insider
November 21, 2013

After the earlier cautious Fitch Rating Report on Malaysia’s sovereign credit outlook, the Moody’s Investors Service’s upgrading of our credit outlook from “stable to positive”, uplifts our mood on our country’s economic prospects.

Yes Moody’s has given us a good mood on our economic prospects. But unfortunately the question lingers as to whether this feel good mood, about our sovereign credit and economic outlook, can be sustained and for how long?

The upgrading had been due to the positive and bold promises made in Budget 2014 Speech by Dato Seri Najib Tun Razak. His speech has obviously made an impact on Moody’s.

The Budget gave the welcome assurances that the fiscal deficits and the debt ratio would be better managed and reduced, to achieve more sustainable fiscal and financial strength and economic prospects.

We have to take note however that Moody’s based their “positive outlook” for Malaysia, on our continued good performance, relative to our “peers”. We can include our neighbours like the Asean countries, and even Korea, Taiwan and Hong Kong.

Many of these countries have better records in economic management. Hence, we have to be vigilant all the time and take corrective measures not only within our economy, but also in comparison to the better economic performance of our peers. We have to also be increasingly competitive and meritocratic.

Here again we must ask ourselves whether we will be introducing adequate structural reforms that will not only raise revenues like the proposed new General Services Tax in 2015, but whether the government will be more assertive in constraining our huge and rising expenditures. Will the new expenditure supplementary budgets that will inevitability be introduced next year, increase the low budget estimated deficits?

The Economic Transfer Programme have helped to increase Private Investment; but this is slowing down. Government or public investment has its limitations due to budget and debt constraints. So what will motivate sustained growth and better income distribution for the Malaysian economy?

To move forward more steadily and purposefully, and to be more convincing to ourselves and the rating agencies, we will need more structural reforms in our economic management such as to:

1. Raise the transparency in our non-financial public sector on indebtedness and to reduce contingency liabilities.

2. Reduce our recourse to the use of “off Budget institutions” to show less budget expenditures.

3. Dampen high household debts.

4. Curtail the rising costs of houses, through less protective Bumi policies.

5. Drastic measures to cut corruption and the wastage of public funds, as indicated in the sound Auditor General’s reports.

More importantly, we have to seriously reconsider the adoption of the basic reforms that were proposed in the New Economic Model. These fundamental reforms are the kind of issues that Moody’s could have politely described as “politically and administratively challenging”, since they go to the heart of fiscal discipline and sustainable socio-economic development.

Whether and how we can achieve our reduced budget deficit and debt targets will be carefully monitored by Moody’s and other international rating agencies in the months ahead!

For instance, they will keep close track of our tendering procedures for mega contracts and projects, to see if we are getting full value and viable returns for our expanding expenditures from our limited hard-earned income. In short, they will watch our quality of governance.

An example of poor governance and bad financial management is shown in the current controversy around the raising of assessment rates proposed by the Kuala Lumpur City Hall. Rate payers and tax payers want to know why they have to be further burdened, without being consulted adequately on new taxes. They have become more sophisticated and ask what they are getting in return for higher rates and taxes?

Have the federal government and local council services improved that much to justify new taxes? Are local councils they sufficiently accountable? Should local elections be reintroduced to check on lack of accountability and poor governance and bureaucratic and political indifference?

Conclusion

Finally, although our mood and sense of well-being may be improved with Moody’s upgrade of our credit outlook, we have to be realistic and continue with our pursuit of good governance and fiscal discipline.

We cannot afford to drop our guard and become complacent! Our budget promises and performance will be careful scrutinised at home and abroad. Thus, we have to strengthen and sustain our reformative process for better governance with greater priority. – November 21, 2013.

* Ramon Navaratnam is the chairman for the Asli Center of Public Policy Studies.