Posted on by Kit

Our strong and weak economic fundamentals

Yesterday, the repetition by the Prime Minister, Datuk Seri Abdullah Ahmad Badawi that Malaysia will not be hit by the global financial meltdown is most disturbing as Malaysia has both strong and weak economic fundamentals.

Malaysia’s past economic performance was in part linked to high rates of domestic savings and FDI flows. Capital was readily available – it was directed by the state, not necessarily into the most productive sectors.

Paul Krugman, the much-acclaimed economist now awarded the 2008 Nobel Prize for Economics, in his analysis about the Malaysian economy had drawn attention to this issue and questioned the capacity of the country to remain competitive.

It is indeed remarkable that no heed was paid this feature in government policies. Both in the Mahathir and Abdullah eras the essential economic policies remained unchanged — directed investments into large projects with low returns; a less than transparent and accountable use of national resources thus contributing to the growing level of corruption and abuse.

The exploitation of oil and gas resources in an unaccountable manner led markets to recognize the unsustainable nature of the Malaysian development pattern. Malaysia has in this regard adopted some of the first possible features of the Latin American economic development path. It would appear that no account is being taken of the changed circumstances.

The Second Finance Minister must take responsibility for much of the preparation of the gravely-flawed 2009 budget. It is indeed most troubling that despite the catastrophic developments in the global economic scene in recent weeks, he continues to mouth statements that Malaysia’s economic fundamentals remain strong; that Malaysian growth rates will be only marginally lower in the year ahead; inward FDI flows remain high; foreign exchange levels are sufficient to finance 9 months of imports and thus Malaysia will not feel the full impact of the ongoing crisis.

These and similar statements have also been articulated by the Prime Minister and the Deputy Prime Minister. These statements are greeted with a degree of disbelief by investors, the markets and rating agencies as they do not deal with the fundamental weaknesses associated with high inflation, a unsustainable budget deficit, outflows of capital and a mountain of contingent liabilities made up of guarantees that have been signed as part of the various toll and other concessions.

This is a serious state of denial and Ministers appear to operate under the assumption that markets and the private sector will accept Ministerial pontifications as the true elaboration of the current economic scene. Further, they assume that upbeat and fanciful statements are sufficient to lull markets. If anything these statements have the opposite effect.

It is patently clear to all and sundry that Malaysia is a small economy, open and therefore vulnerable to developments in the global economy. It is not insulated or protected; it is dependent on inflows of FDI; its growth and prosperity are linked to exports of commodities and manufactures; demand and price developments in the global markets have a direct impact on output growth, employment and prosperity.

Given these circumstances, the current global crisis will inevitably impact on the flows of FDI, the demand for its exports ( both manufactures and commodities), a deterioration in export prices. These externally generated impulses will inevitably be transmitted into the domestic economy and result in lower growth, a worsened labor market and a decline in consumption.

In brief, Malaysia faces a severe and bleak economic outlook.

The danger to the economy is even greater when account is taken of the already poor economic fundamentals represented by:

• The highest rate of inflation experienced (8.5%) over the past quarter century;

• An unsustainable fiscal deficit projected at 4.8% this year and 3.6 next year ;

• Billions of dollars of hidden contingent liabilities — akin to IOUs written to GLCs, crony corporations; an unendingly flow of subsidies to private entities that believe in the notion that profits can be privatized while losses are to be nationalized.

• An interest policy that has been irresponsible and largely favored to help over-leveraged “friends” of the BN and to keep Government borrowing costs low;

• A manipulated and less than transparent exchange rate policy that has contributed to imported inflation;

• The policy of “no bid” award of tenders and projects to BN connected companies and contractors that has contributed to increased project costs

• The loss of competitiveness through corruption and poor governance.

• Credit rating agencies had lowered Malaysia’s ratings

This list is not exhaustive but indicative of how the economic fundamentals have deteriorated in the recent past.

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(Speech on the 2009 Budget in Parliament on 14.10.08)

33 Replies to “Our strong and weak economic fundamentals”

  1. Malaysia is a fantastically rich nation; with an abundance of natural resources and few natural disasters.
    Even the population mix is good as we can tap business from India, China and Indonesia.
    But we have wasted a lot of human talents and God has given us a different handicap – we have a government of CRONIES!

  3. Datuk Seri Abdullah Ahmad Badawi’s repetition that Malaysia will not be hit by global financial meltdown……..
    ====================================================

    Abdullah dared to make the above statement because he will not be in charge of the economy come March 2009. Whether the country goes bankrupt or not in five months time, that is not Abdullah’s concern anymore!

  4. The coming economic hard times in Malaysia is going to be bad, very bad unless actions are taken today to address them. As everyone knows, there is a time lag between policy intervention and actual results.

    Consumer demand is already badly hit in America and Europe. Singapore is already in recession. Germany already has one quarter of negative growth. Why do you think commodity prices (e.g oil, palm oil, rubber, etc.) are dropping lately? It is because there is a sharp slowdown in demand for these commodities. Car companies are already closing down factories or extending shut down periods now and for the upcoming Christmas period and laying off workers. Already, they are next in line for handouts.

    http://www.dw-world.de/dw/article/0,,3707267,00.html?maca=en-tagesschau_englisch-335-rdf-mp

    As mentioned in the blog key indicators to watch are FDI, export volume and prices which I expect to decline dramatically as demand plummets in the rest of the world. Another indicator would be the exchange rate where I expect the Ringgit would be slowly loosing its value (also an indication of vote of no confidence in M’sia). This will be evident in the coming months. Why would one want to invest in new capacity in the face of dwindling demand? Also, where are consumers going to get the money to spend if one is out of work? We should look very closely at unemployment rates in the gib economies. The rates are already rising in the U.S.

    To counter this, sound economic policy needs to be put in place to encourage more local consumption and demand. At the same time, political reforms to be initiated against corruption and monopolistic structrures need to be eliminated (e.g. non-competitive bidding, AP’s, etc) that acts as tax to doing business.

    This is not a time for playing politics. It is time to put up or shut up. If PR has the numbers, then it should go ahead and form the govt. NOW. If not, then be a responsible opposition and concentrate on helping the country prepare for the coming economic slowdown (or recession) to minimize the impact and come out stronger.

    Believe me, this is a real bad one and it is just a matter of time before it hits the shores of M’sia as the big economies contract. I have not seen such a bad one in my whole lifetime. Perhaps this is because I am not based currently in M’sia, but in one of the interesting countries where the crisis is being played out. The last bad one was in the early 1980’s and this one is going to be worse in my view.

  5. I can’t comprehend why the most prudent bank negara gabernor can make such a silly mistake by approving the take over of BII during this critical worldwide liquidity crisis. In addition, Malaysia banks are licensed loan sharks with such low saving/deposit accounts rate but charging us with high morgage/loan interest rate. With too little interest rate, we are coerced to invest in risky investments and end up burn so badly at stock market. apart from that, the mushrooming of the so-called unlicensed investment companies who promise higher return is resistable with so many innocent victims.

  6. Najis is more well known than Paklah with many grandiose & burning money projects such as space project, highly controversial national service, etc. Nation’s wealth will deteriorate under his govern. We need a prudent leaders such as Zeti Aziz not ‘tua chai tua lau’.

  7. How can Malaysia be immune from the effect of global recession when countries like Singapore, Japan and Korea have already conceded that they are sliding into recession. Don’t tell me M’sia has better fundamentals compared to these countries!

  8. Simply put, the government is still in a state of denial as to the effects on our country’s economy due to the global financial meltdown! We must be brave and ready to take stock of ourselves and face the challenges ahead of us!

  9. Left brainers are more intelligent. Trouble is Malaysia lacks left brainers to bring in more money. Malaysia does not need too many right brainers or central brainers. Left brainers do not care about positions because whatever position it is, it will still be able to do what it is supposed to do. Left brainers will be purposelly left out because the right brainers could not stand the idea of not being in power. Whoever thinks that Malaysia is not affected by the world’s economic situation must be living in some sweet dream.

  10. The global financial firestorm is hitting the USA Europe, Japan and everywhere else . USA and Europe are lowering their borrowing cost and putting in place trillions of dollars to recapitalise their financial institutions to prevent a total meltdown. We are in the middle of the worst crisis of confidence ever and it is not just about economic fundamentals which is no match for the former .

    Consequently our exports of manufactured goods are going down, commodities prices of crude oil and CPO are down sharply due to lower demand overseas. Our cost of living has gone skyhigh reducing private consumption leading to private businesses not reinvesting due to reduced demand or worst folding up. FDI are not coming our way , capital outflows are getting bigger than inflows and our currency is getting weaker. Jobs are getting hard to find and redundancies is going to get worse. We are going to see these horrible effects in 1Q2009.

    Yet the present day govt is not taking proactive steps to protect the country but issued nonsensical statements like “Trade with other Asian countries will offset slowing exports to US”. As if Asia is not going to be affected by the global financial firestorm. We would be lucky to see a 3 percent growth next year.

  11. The GOONS have not recovered from the TKO they received in the GE 12!
    They think the country and themselves are invinsible!
    Still sleeping and shriking responsibilities for the sake of their own pockets!

  14. Malaysia economy was in dire state now, business is harder and harder. how can we say we are now in better position when world credit meltdown affected almost every countries in the world but Malaysia exception, Malaysia the best country never affected our commodities sale to outterspace alien to used.
    hello FM your budget 2009 sweeties budget can impliment or no?
    where the money come from?
    commodities definately will sliding downward trend either crude oil, palm oil or electronic component due to slower world demand.
    Maybe the Bee N government will export our goods to outterspace.

  15. I don’t understand how Malaysia can produce great minds but never seem to fully utilize them… The crisis is scarily well-rounded in which the ripple effect into all industries is guaranteed. Our budget can’t be used to sustain us through this crisis. We need to strengthen the core financial sector fast. This will definitely be the starting point of the crisis. Immediately peg the ringgit. By controlling our currency, we eliminate the forex issue. Secondly, secure labor-intensive industries in order to slow down potential unemployment. This can be done by temporarily lowering taxes for these industries. The govt should limit spending but not stop spending. Stop spending and companies will have no business and fold. Channel budget set aside for military spending into core industries such as production and services. Next, assure investors that their investments are safe and work hand-in-hand to ensure they remain.

  16. To the world of UMNOputras the world economic problems will not affect them because they have already presented a generous Budget that will definitely benefit them to continue finance their extravagance.

    While the rest of Malaysia are suffering they can still blissfully go on expensive jaunt overseas, go shopping, customisze the best restaurants, etc.

  18. Textile shop keepers in KL city centre told me recently that they often would not have a single customer walking in to look around for one whole day. For most days, they will be seeing the same few faces. And they are buying a great deal less than before. In the past, business used to be extra brisk before raya and other festive periods but not now – in fact not in the last few years. Kacang and snack sellers told me the same story. So too did sellers of musical instruments. Even street vendors (of cheap and often fake goods) are not spared.

    And these are stories I heard before the financial market crisis hit home in US and Europe. Three months down the road or maybe sooner, when the effects of that crisis cross the oceans and hit our shores those stories would have to be re-phrased and re-told.

    Of course umnoputras are well shielded. They have their profits and profitability well guaranteed. And more than that. They have their losses fully underwritten. And more still. They actually do not need capital to venture into big time business. A letter of award and some big names in their pockets to throw are all they need to get financing. So they can still continue with their big time ventures and still dare to dream big.

    The government must not treat the position of umnoputras as our economic barometer which I suspect they could have. Otherwise remarks like our fundamentals are still strong will never find their way outside of our DPM’s oral cavity. He may spit them out if his cavity gets too full but that is another thing altogether and is definitely different from letting them flow out from the tip of tongue.

  19. I think it is not that they dont want to bother about the financial crisis or economy meltdown which will effect our nation economy, it is because the present government dont know how and hence doubtfully to have the ability to handle the crisis.

  20. I must say, Sdr Lim, has got the priorities of issue quite right although he has not point out the most critical aspect of the problem.

    For example, its true the biggest problem with impending slow growth is really income but inflation. In particular lack-of-jobs inflation. Our country cannot live without low growth at this stage because of the need to restructure our economy to a labor force that is uncompetitive in the first place. Either we will see high graduate unemployment become very severe OR we will have an illegal immigrant problem that will be out of control. We need a high growth to pay for retraining of what was originall uncompetitive labour in the first place. But with inflation, this will be impossible.

    The fiscal deficit will likely go up next year and it means they will raise taxes probably GST.

    The contingent liabilities is quite real given the slow growth. You can kiss all the corridor projects goodbye except maybe for Iskandar which can be revived if they fully embrace Singapore via real transport and people connectivity (but Dr. M may have something against that so don’t hold your breath).

  22. He thinks he is talking to the iliterate. Making sweeping statements without facts is both irresponsible and dangerous. M’sia is not an island! We are affected by global economic conditions. Judging by the irresponsible attitude of our leader, I am afraid the rot is much worst than it actually is and the bubble will burst sooner than expected.

  24. Reduce in petrol price.

    If fuel price remain at US80 or below, the govt better reduce its petrol price by RM1.70.

    Here is the calculation.
    Based on US$80 ($78 as of today 15Oct08)
    $80 X3.25 exchange rate = RM260 divide by 159 ( 1 barrel/159 litres) =RM1.635.

    RM1.635 +0.32 (production+delivery+ agent cost) =RM1.955
    Deduct 0.32 (govt subsidy) = RM1.635

    We expect nothing more than RM1.80

  25. It looks to me the ministers and the government they are supposed to lead treat the budget more like a spending plan- A free for all ( Umno members only) spending extraganza. They just spend to the very last cent. After all nobody had been held accountable for any abuse or mismanagement. So what if the auditors report of misuse or mismangement. Whatever happens, financial crisis or meltdown, would not affect them. They are so well insulated with lots of money- your money, my money and whatever they can grab, they would never feel the hardship others face. To them many things come free and there are many ways to get things they want without having to pay for. First off all they are already getting their “gaji buta”. For that they are rewarded a life time pension. These are nothing compared with other “side” income. All these I believe are not declared and therefore free of income tax. For people who only receive and don’t contribute would never like to discuss further on Budget 2009. They would not know what to discuss as most of them do not enough as they never do their homework. How to secure themselves positions in Umno is certainly more important than serving the nation and attending to national issues. That’s the best way to get rich fast and almost zero risk.
    So what financial crisis you are talking about? What Budget ?

  27. Kit – some typos…

    /// Paul Krugeman, the much acclaimed economist now awarded the 2008 Nobel Prize for Economics,///

    Paul Krugman, an e-conomist has no “e” in his name.

    /// Malaysia has in this regard adopted some of the first possible features of the Latin American economic development path. //

    Should it be “worst” possible features instead of “first”?

  28. As I have said before,the last time it happened in 1998 the losses were in billions and East Asia nations were knocked down like 10 pins.Now the losses are in trillions and it’s affecting not only the West but all over the globe.Japan is now technically in the deep;our next door neighbor, S’pore is also in recession.Are we so good that we can never sink!
    Dont 4ever be in denial mode.He has only 5 months left in office.Do the right thing.Let the people be forewarned:a financial tsunami is coming our way!

  29. recession fear shakes stocks down across world as Dow plunges more than 700 points— losing much of their 936-point advance from Monday — and all the major indexes fell at least 7%.
    The Dow fell 733.08, or 7.87%, to 8,577.91. The Dow’s massive decline Wednesday marks its 20th triple-digit move in 23 sessions.
    Light, sweet crude fell $4.09 to settle at $74.54 per barrel on the New York Mercantile Exchange.

    In Asian trading, Hong Kong’s Hang Seng Index lost nearly 5% after rising more than 13% the previous two days. Markets in Australia, South Korea, China, India and Singapore also sank. Japan’s Nikkei 225 index, however, ended up 1.1% after soaring 14% in the previous session.

    In Europe, Britain’s FTSE 100 fell 7.08%, Germany’s DAX index fell 6.49%, and France’s CAC-40 fell 6.82%.

    Contributing: Matt Krantz

    but our ministers said we will no in affected we are allien in the globe

  31. we love this country please don’t run this country in amok style, the poor Rakyat will be suffering if thing no hander porperly, this credit meltdown will be here to stay alease for the coming 1-2 years,so we hope our law maker should well prepare for the worse to come.

  33. I am conducting a research for my thesis as part of the requirement for my Bachelor of Economics (Human Resource Economics). The title of this thesis is “Unemployment Among Graduates”.

    In my research, the respondents will include graduates who are not working yet, 3 months after their convocation.

    Currently, I faced a severe problem. I can’t get any respondent who are not working yet, 3 months after their convocation.

    Either you are employed or still searching for a job, please enter the following link to filling up the questionnaire

    http://www.scribd.com/people/view/2814575-chiewlanchin

    If i can’t get respondent, my supervisor will fail my thesis and i can’t convo on year 2009..

    wuwuwu.. i want to get respondent…i want to convo

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