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Malaysia wakes up to crisis
Asia Times - March 15, 2009
Anil Netto, Penang – A big new economic stimulus package unveiled by Malaysia's Finance Minister and Deputy Prime Minister Najib Razak is being viewed as belated official recognition that the country is being hard hit by the global economic and financial turbulence, with worse to come.
The Malaysian economy grew by just 0.5% last quarter and many economic analysts have predicted a technical or real recession later this year. The government has revised its own forecast for 2009 down to between negative 1% and positive 1% growth in gross domestic product (GDP).
As one of Asia's most trade-oriented economies, with exports accounting for around 125% of GDP in recent years, the collapse in external demand is taking a growing toll. Swiss investment bank Credit Suisse said in a recent report that "[Malaysia's] downside risks are the highest in Asia, after Hong Kong and Singapore, especially given the big drop in commodity prices."
On March 10, Najib announced a new 60 billion ringgit (US$16 billion) stimulus package, the second such package the government has announced since November. The allotment exceeded the expectations of many analysts, who predicted it would be closer to 30 billion ringgit. Even so, the market reaction to the new package has so far been mixed.
The actual cash infusion of the latest measures is higher than the previous package, which entailed mostly quasi-fiscal measures, such as loan guarantees, and expenditure-side measures. The 60 billion ringgit was broken down into a 15 billion ringgit fiscal injection, 25 billion ringgit in guarantee funds and other assistance for industry, 10 billion ringgit for equity investments and 3 billion ringgit in tax initiatives.
Moreover, the 15 billion ringgit fiscal injection is scheduled to be spread over two years: 10 billion ringgit for 2009 and 5 billion ringgit for 2010. Together with the 7 billion ringgit in the first stimulus package announced in November, along with tax breaks of around 3 billion ringgit, the actual fiscal element for 2009 is likely to come close to 20 billion ringgit. This is expected to push up the fiscal deficit to 7.6% of GDP, from 4.8% earlier.
Much of the equities element is expected to be injected via Khazanah, the Finance Ministry's investment arm. Some analysts say that given the investment arm's market capitalization of 643 billion ringgit on the day the new package was announced, the relatively small 10 billion ringgit equity stimulus is puzzling as it is likely to have little impact on the market, particularly if the idea was to shore up prices and restore confidence.
As for the credit guarantee funds, one analyst wondered if companies were really finding it difficult to raise loans or working capital. "Or is it the case that, rather than looking to expand, companies are seeking to shelter themselves from the storm?" in which case, he said, providing such funds would be of little help. "Should we not be engaging these companies to see how it is we can help them protect themselves in this climate, while maintaining their current level of employment wherever possible?"
The amounts aimed at the north Borneo states of Sarawak and Sabah were large relative to the size of their economies. Roads and schools in these states definitely need improvement and much of the effectiveness of the stimulus will depend on how these funds are actually channeled.
These two states are strongholds of the ruling coalition, which opposition leader Anwar Ibrahim and his People's Alliance are eyeing in an effort to secure federal power at the next general election. Sarawak state level elections are also due to be held soon.
The economic stimulus announcement was made just a couple of weeks before Najib is scheduled to take over the premiership from Abdullah Badawi, under a transition scheme put forward following the ruling coalition's setback at last year's general election. But there is still heated speculation about whether the handover will materialize.
The stimulus package announcement comes not a moment too soon – many said it was overdue because of the small size of the first package. Some analysts believe that the government was behind the curve in assessing the severity of the downturn with the global economy likely to shrink for the first time since World War II.
As late as this January, the government was still predicting GDP growth of 3.5% for this year. Analysts have also pointed to the snail's pace at which the first stimulus package of 7 billion ringgit, announced in November, has been disbursed and spent. "That 92.9% of the first stimulus package has been handed out [to ministries and government agencies] is gratifying," said commentator Tan Siok Choo in local daily newspaper The Sun. "The problem is, only 1 billion ringgit has been spent."
A recent government Statistics Department survey of manufacturing industries reported a drop of 32,000 factory jobs in the last quarter of 2008. With the collapse in global trade, more jobs have been lost since. The electronics and electrical sector, which contributes 35%-40% of total exports, has been hit especially hard. Exports for the sector in January plunged by 35% from a year earlier.
"This stimulus package is not too late," insisted Najib. "We took this decision after a study following the announcement of the International Monetary Fund [IMF] which brought down the gross domestic product projection from 2.2% to 0.5%." At around the same time that Najib presented his stimulus package, the IMF was revising its own global projection to below 0% this year, or what it characterized as "the worst [economic] performance in most of our lifetimes".
When queried in parliament over whether the government's initial delay in coming to terms with the crisis was to avoid public panic, Najib admitted, "If we were to give too much of a negative picture in the early stage, consumers will not spend and domestic investors will not invest." Much will depend on the execution, implementation and transparency in the dispensation of the stimulus funds. If these are channeled via crony companies without transparency, as has happened in the past, or if there is unjustifiable subcontracting with hefty profit margins, then the effectiveness of the package could be undermined and the trickle-down and multiplier effect reduced.
Opposition politicians are already calling on the government to set up a website to monitor how the funds are channeled and distributed, similar to the one set up by US President Barack Obama's administration. Najib responded that announcements would be made occasionally about the implementations and he did not rule out setting up a website. "But I can guarantee you that the government is transparent and responsible about this. Don't worry."
As industrial production plunges in line with the global fall in export demand, Malaysia desperately needs to take stock of how it can restructure the economy to harness its strengths, while reducing its dependency on exports produced on the back of low wages. Najib has also indicated a larger future role for the services sector in the country's growth mix, which he aims to increase to 70% of GDP from 46%. Without a concrete plan to manage the transition, he will have his work cut out for him.
[Anil Netto is a Penang-based writer.]
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