Malaysia’s ostrich economics

By Anil Netto

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.
– Asia Times Online

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Thai Baht more value than Malaysian Ringgit

I can’t imagine why Thai Baht is more value than Malaysian Ringgit.

The evidences:

Wednesday, October 22, 2008

10 Thai Baht = 1.03936 Malaysian Ringgit

10 Malaysian Ringgit (MYR) = 96.21286 Thai Baht (THB)

Interbank rate +/- 0%

This means:

You buy 10 Thai Baht : 1.03936 Malaysian Ringgit
You sell 10 Thai Baht : 1.01932 Malaysian Ringgit
You buy 10 Malaysian Ringgit : 96.21286 Thai Baht
You sell 10 Malaysian Ringgit : 98.10421 Thai Baht

Malaysians!! We must remember that during the Asian Financial Crisis 1997, Thailand was more badly effected compare to us. Today, our Ringgit is lower than Baht. We must not be proud.
Ringgit is 53% undervalued – conducted using Big Mac theory.
We must wake up,,,save the Ringgit in your wallets from further devaluation.

Big Mac Index

Big Mac Index

Let’s take a look back to pre-independence 1957.
Malaya, Singapore, Australia and New Zealand had a similar currency value among themselves.

Today, Singapore, Australia, New Zealand and later join by Brunei still share the currency value +/- 10% among themselves.

Again, I cannot imagine why Ringgit is very far below Sing dollar, Australian dollar and New Zealand dollar today. We must not be proud.

Maybe in future although this sound a bit ridiculous, Malaysians will be trading in Sing dollar instead of the Ringgit.
Similarly to Cambodians who prefer to trade in US dollar than to their own currency.

Malaysia may be hit by recession

(The Straits Times) A PRIVATE Malaysian think tank on Thursday cut its 2009 economic growth forecast for the country to 3.4 per cent and warned of a possible recession if the US economy deteriorates.
The influential Malaysian Institute of Economic Research predicted the economy would expand 5.3 per cent this year after a strong performance in the first six months.

But it expected growth to slide to 3.4 per cent in 2009, down from its earlier forecast of 5 per cent, due to the knock-on effects of a flagging global economy. This was sharply lower than the government’s forecast of 5.4 per cent.

Executive Director Mohamad Ariff warned that growth in 2009 may slump further if the US, one of Malaysia’s top trading partners, goes into recession.

‘There is a 40 per cent chance that Malaysia will enter technical recession in 2009, meaning two quarters of negative growth and a 30 per cent chance it could be a real recession lasting more than two quarters depending on what happens in the US,’ he said.

The institute said the global credit crisis showed no signs of abating despite concerted interest rate cuts and massive liquidity injection by governments and central banks worldwide.

It said consumer and business confidence in Malaysia has dipped and warned conditions would worsen if the credit squeeze dries up funds for investment and household spending.

Mr Ariff said there are heightened concerns that the current global economic slump could drag on until the end of 2010 or 2011.

Given the economic pressure and declining oil prices, he warned Malaysia’s budget deficit may exceed 5 per cent of gross domestic product this year and more than 4 per cent in 2009.

The government raised development spending in Aug which it said will push the fiscal deficit to 4.8 per cent of GDP this year and 3.6 per cent in 2009, from 3.2 per cent in 2007.

Finance Minister Najib Razak earlier this week said Malaysia can still grow 5 per cent this year but the government may need to revise its 2009 forecast. He has said he would announce a ‘stabilisation plan’ on Monday to prop up the economy.

Mr Najib, who is also deputy premier, is expected to take over from Prime Minister Abdullah Ahmad Badawi in March.

The quicker-than-expected transition follows the ruling coalition’s poor election results in March and is aimed at thwarting opposition leader Anwar Ibrahim’s threat to oust the government through parliamentary defections. — AP