Is the economy in crisis now?

By P Gunasegaram
Malaysiakini
Jan 22, 2015

QUESTION TIME Granted we have lots of problems in the country and tonnes of wastage. We overpay for contracts, we have a strategic investment fund which has gone amok and is investing willy nilly with borrowed money, we have a looming disaster in the form of RM30 billion at risk in a private finance initiative gone wrong and we have loads of patronage.

Does this necessarily mean that the economy is in crisis if we put all this together with a weakening ringgit and oil prices which have fallen off a cliff? Does this mean this year will be a disaster and one of gloom and doom for Malaysia?

It is tough to do but this is when we need to be rational about things and assess economic conditions with a cool head, separating this to some extent from the sad state of politics in the country which leads to a whole host of economic concerns.

Let’s just take a couple of the most serious concerns and examine them in some detail to see what gives. First, the weakening ringgit which was at its lowest levels in six years. But why was it low six years ago – early 2009 to be precise?

Yes, it was when the world financial crisis (WFC), caused by the subprime mortgage issue in the United States was raging. It was biting hard at that time after it surfaced in 2008. And what were the pundits predicting, especially those who had huge funds at their disposal to make their predictions come true, at that time?

Yes, a weak ringgit (to be fair not just the ringgit but currencies of other countries as well which had open markets) because the funds were going to repatriate money back to the US where it will be needed. And also because these countries will have problems with their exports to the US whose purchasing power will fall.

Also, you have a strange situation of the US dollar strengthening against currencies of those countries whose economies were in much better shape than the US. Is that sustainable? No. Is the analysis smart? No. Was that done for a trade then? Highly likely because that was a smart if crooked way to influence markets and if you did it first, you can make a lot of money.

As it turned out the US undertook the biggest exercise of printing money in history through quantitative easing 1 and 2 by buying government bonds from investors and injecting money into the system, driving interest rates down next to nothing.

The excess funds flew out of the US finding a home in countries like Malaysia where stock market returns were better and interest rates were higher. And yes, you guessed it, Malaysia’s currency appreciated against the US dollar to levels not seen since the Asian financial crisis (AFC) of 1997/98. And so did the currencies of many other countries.

Now, it seems, because of falling oil prices, Malaysia’s budget deficit as a proportion of GDP (gross domestic product – sum of goods and services produced) is likely to increase – by all of 0.2 percentage points to 3.2 percent from, a projected 3.0 percent last year, as the prime minister pointed out two days ago.

Poor outlook for the ringgit

These and slowing growth are the main reasons for the outlook for the ringgit to be poor this year, along with the stoppage of money-printing by the US. Such arguments have resulted in a weak ringgit (also other currencies as well but the ringgit has weakened more than most), the weakest seen in six years. And continued capital outflows are supposed to result in persistent weak demand for ringgit. But will that situation prevail?

According to the government, as announced by the PM, given a new forecast price of US$55 per barrel for oil (instead of US$100 previously), the revenue shortfall will increase by RM5.5 billion to RM13.8 billion. To compensate for this, the government has proposed to cut operating expenditure by RM5.5 billion.

But let’s look at what the oil price fall will do. First, it increases the disposable income available to the public which helps to boost the demand in the economy by increasing consumer spending. The government estimates disposable income to increase RM7.5 billion.

Second lower oil prices and a depreciating ringgit reduces costs of producers and makes them more competitive in international markets, which does help to push growth up. While as a net exporter of oil and gas, Malaysia can expect export proceeds to decrease because of the oil price fall, this is mitigated by other factors.

On balance, the impact on the Malaysian economy is minimal. Growth will come down to about 4.5 percent to 5.5 percent from 5-6 percent, which is still pretty respectable by world standards. Government finances will suffer slightly but not by a lot.

By any reckoning of what one means by a crisis, and using as yardsticks the 2008-9 WFC and the 1997-8 AFC, Malaysia is quite far from an economic crisis as are most countries in the region, despite being a net exporter of oil and gas.

So why is the ringgit weakening? I reckon it is the same reason why it weakened in 2009 – a trade, perhaps a few trades, basically. When it becomes obvious that Bank Negara Malaysia, with foreign exchange reserves approaching RM500 billion, is quite willing and able to deal with massive capital outflows, it should move back up again as speculative selling of the ringgit diminishes.

My conclusion – despite all the bad things happening in the country – the wastage of public funds, 1Malaysia Development Bhd, Pembinaan PFI Sdn Bhd, poor decision making and a whole host of other things – the economy is not in crisis now although it could be lot better if these things were properly handled.

That does not mean that we can continue with all those bad practices which we have accumulated over the decades. If we continue with them and add on to them instead of turning against them, it will be inevitable that we will have not just an economic crisis but a national crisis of epic proportions not long from now!

Let’s turn back from this path of doom quickly before it’s too late.

P GUNASEGARAM is founding editor of business news portal KiniBiz.