KUALA LUMPUR - Malaysia is bracing for an economic slowdown, as the government
gradually comes to grips with the fact that the country is not as isolated as
it hoped from the mounting financial turmoil in the United States and Europe.
Already dark clouds loom on the economic and financial horizons.
This week, Deputy Prime Minister Najib Razak, who is also finance minister,
said the government would review its 2009 economic growth forecast of 5.4%. He
said that budget deficit forecasts may also be reviewed after critics pointed
out that its previous budgetary assumptions, including revenue forecasts, no
longer held.
Najib, who is expected to succeed Abdullah Badawi as premier
by March next year, has consistently denied that the trade-geared country is on
the brink of a financial crisis or economic recession and "certainly we should
not talk ourselves into one". He said in no circumstances would state spending
be cut back.
Those assertions are raising questions about whether the government is in
denial about the country's economic and financial prospects. Along with Hong
Kong and Singapore, Malaysia is the region's third most trade-geared economies,
with exports representing around 120% of gross domestic product last year. In
recent years around 20% of total exports have been sent to the US, where
consumer demand is expected to fall off drastically in the quarters ahead.
The Malaysian Institute for Economic Research (MIER) predicts growth will slow
to 3.4% next year, while other economic analysts are already talking about the
possibility of a full-blown recession. The umbrella trade union body for public
sector employees has warned that up to 50,000 contractual civil service
employees could be retrenched by the end of the year and there are fears that
export-oriented multinational corporations could also shed jobs.
For its part, the government has said it will announce several measures on
November 4 to ensure that the country will not slide into a recession. The
trade-oriented economy has already taken a hit following the sharp drops in the
prices of crude oil and palm oil, which will adversely affect both export
revenues and the national budget. The price of crude palm oil price fell from a
high of nearly 4,500 ringgit (US$1,262) per ton in March to around 1,500
ringgit at present.
Meanwhile, the budget deficit for this year is expected to reach 4.8% of gross
domestic product (GDP) against a previously forecast 3.1%. And the Malaysian
stock exchange is now at its lowest point in four years, with 24 billion
ringgit in market capitalization lost on October 24 alone. A string of the
country's wealthiest tycoons have reportedly lost billions in the market value
of their equity holdings.
The opposition People's Alliance coalition, led by former finance minister
Anwar Ibrahim, last week came up with budget recommendations to keep the
economy afloat and stave off a crisis of confidence. The main thrusts were
ensuring the stability of financial markets, enhancing provisions for the
social safety net, maintaining domestic price stability and enhancing national
competitiveness.
The opposition expects an 11% drop in government revenue to about 157 billion
ringgit (US$44 billion), compared with the government's projection of 176
billion ringgit, due to declining volumes and prices of exports. Even that
lower projection may be understated as the Alliance's forecasts were based on a
global oil price of US$80 per barrel and crude palm oil price of 1,700 ringgit
per ton.
To manage the bulging deficit, it proposes to trim operational expenditure by
15.5% or 24 billion ringgit compared with the government's targeted spending,
which as scheduled represents a 20% rise from the previous year. Of the
proposed 24 billion ringgit budget cut, 10 billion ringgit in savings would
supposedly come from eliminating corruption and implementing open tenders for
government procurement.
At the same time, the opposition has proposed boosting spending in education,
public transportation, health and housing "as we believe they will contribute
quickly and with more multiplier effects towards strengthening the economy in
2009 and beyond".
Adds a Penang-based senior equity analyst: "What the country needs to do now is
to come up with a new budget and get rid of the unproductive mega-projects that
are a drain on the country's resources."
The government's recent proposal to inject 5 billion ringgit from a state
workers' pension fund into Valuecap, a stock market fund management firm
jointly owned by three statutory government owned agencies, has also come under
heavy fire and raised concerns about ham-fisted market interventions. The
injection "serves no logical purpose other than to prop-up some companies in
the stock market, resembling the same pattern of abuse of power and
misallocation of public funds which took place in the 1997 bailout scheme",
said the opposition alliance in a recent statement.
Meanwhile, central bank governor Zeti Akhtar Aziz recently said that Malaysia
faces a challenging period from a previous position of strength. She pointed to
a recent current account surplus of 15% of GDP as evidence of this strength and
predicted that even under the toughest of global economic circumstances that
the surplus would still be around 10%, The Edge business weekly recently
reported.
As recessionary fears roil the region, central banks have been forced to
intervene to stabilize depreciating domestic currencies. Foreign portfolio
investors have recently dumped ringgit-denominated assets and exited the
markets, forcing Bank Negara to play a more aggressive role in shoring up the
local currency. That's been reflected in a recent dip in foreign reserves,
which dropped from $126 billion at the end of June to $110 billion at the end
of September - still equivalent to a comfortable nine months cover of imports.
The faltering economy has also impacted on what were already heated internal
politics of the ruling United Malays National Organization (UMNO), which is
gearing up for party elections that will determine the second echelon of
leaders. The country's wealthiest tycoons and shareholders have taken a beating
as the share values of oil palm giants, state investment funds, and
government-linked firms plummets. Many of these individuals are known to have
strong connections with the UMNO leadership.
Najib has recently said that elements of the controversial New Economic Policy
(NEP), an affirmative action policy that largely favors ethnic Malays over
minority Chinese and Indians, would be gradually liberalized once he takes over
power. The liberalization would not burden Malay entrepreneurs and would be
based on fairness for all groups, he assured the UMNO faithful. Anwar and his
People's Alliance, on the other hand, have advocated replacing the NEP with a
new Malaysian Economic Agenda, which broadly would promote market policies
balanced with generous social policies.
There is a growing recognition even in UMNO that elements of the NEP, though it
initially uplifted significant segments of disadvantaged Malays and created a
new Malay middle class, have proven to be a stumbling block to the country's
overall economic well-being and these distortions will likely intensify amid an
economic downturn.
A vice-president of the Malaysian Chinese Association, a ruling coalition
partner has said that the 30% quota for bumiputera, or indigenous Malay, equity
ownership in all listed companies in Malaysia is an obstacle to creating a true
partnership between business people of various ethnic groups. Former premier
Mahathir, a strong advocate of the policy and whose son Mukhriz is one of the
leading contenders for the UMNO youth chief post, has disagreed, saying the
original target for bumiputera equity participation has still not been met.
As the economy falters and factionalism in the UMNO intensifies, expect
divisive issues of race and religion to be raised as UMNO bids to bolster its
position and stave off threats from Anwar's People's Alliance, which before the
global financial meltdown was already bidding to topple the government through
parliamentary defections.
Judging by Najib's remarks about liberalizing the NEP, the country must grapple
simultaneously with long-held and deeply entrenched race-based policies while
defending itself against global financial and economic turmoil. If the economy
and markets slide further and the government denies there is a problem, Anwar
and his opposition alliance can be expected to capitalize politically on the
displacement.
Anil Netto is a Penang-based writer.
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