Now you see it, now you don’t

08 March, 2014
As appeared in TheStar.com.my

ALTHOUGH not rip-roaring, the Malaysian economy is on an even keel.

Growth numbers have been consistent over a period of years now. Last year GDP growth was 4.7%. Although less than the 5.6% of the previous year, it was held up in the final two quarters, in line with the uptick in the global economy which has been showing encouraging signs. Even the normally under-stated International Monetary Fund (IMF) suggested: “Is the tide rising?”

For the first time since the dark days following the 2008 financial crisis, there are chinks of light and grounds for optimism. After about 3% last year, the global economy is forecast to grow by 3.7% in 2014, 3.9% in 2015. The US economy, Britain and even the EU are looking positive.

Although the Chinese economy seems to be flattening at around 7%, there is thus more than compensating external demand from the advanced countries for the Malaysian economy. It is expected that exports will be the main driver of growth this year, as domestic demand was last.

This is of course not mutually exclusive. There are massive projects under the Economic Transformation Programme (ETP) and the 10th Malaysia Plan that will continue to drive the economy: for example MRT 1, 2 and 3 which are valued at RM90bil if we included the LRT; projects such as the KL-Singapore high speed railway (RM30bil), East Coast Region railway (RM30bil), Tun Razak Exchange (RM20bil), Sungai Buluh RRI (RM10bil) and a few more.

Where government funding is involved, clearly the debt incurred has to be watched. At the moment, government debt is 53% of GDP although with quasi-government debt the figure is 60%, above the prudent ceiling of 55%. To repeat, prudent economic management means this has to be watched. We do not want to go the Greek way.

But look at the tables to see solid numbers which show the economy’s resilience and continued attractiveness. It has not been plain sailing. Sometimes it has been a struggle, after the 1997-98 financial crisis, after the Great Recession that followed the 2008 crisis. Tough world, but Malaysia stands firm.

FDI flows are increasing in all sectors, but particularly manufacturing and services as well as the mining sub-sectors. The surplus on the current account of the balance of payments has see-sawed. However it is widening again.

The reserve position is particularly strong – despite emerging market capital outflows. International reserves are sufficient to finance well over nine months of retained imports and are 3.4 times the short-term external debt.

And, Malaysia’s share of the vibrant global sukuk market has been about 70% since 2012 when the nominal value of amount placed was almost US$140bil.

Numbers, numbers, numbers, positive or not, what do I care if prices are rising.

Well, the short answer is you might very well be out of a job if those numbers become negative or show a downward trend. Investment will not take place. The ringgit will come under attack. Asset values will fall. Banks will get into trouble. Loans will have to be recalled.

It is therefore critical that the Government shows fiscal discipline, a true commitment to address the deficit that does not waver under pressure. Whatever else may be said about Prime Minister Datuk Seri Najib Tun Razak, he is actually the first to address the deficit for a very long time – and it already shows a positive outcome: 3.9% of GDP against targeted 4%.

It may seem a small number, but it is a giant leap for Malaysia. For the longest time, under at least two previous administrations before Najib, the Government has been talking about reducing subsidies which were a prime cause of the deficit – but did nothing about it to remain popular.

For the longest time previous administrations blew hot and cold about the GST while muttering the mantra on the need to widen the tax base beyond dependence on Petronas, on 1.7 million tax payers alone and on whatever corporate taxes collected whose rate is always under pressure in a competitive global economy.

Only now has something been done. The Government’s fiscal consolidation is viewed positively across the world. Malaysia’s A3 sovereign rating stands a chance of upgrade, which will be positive for bond markets (lower borrowing rates) and ensure a strong ringgit, even as other emerging market currencies are being bashed about.

Why does it matter? Because it means confidence, investment, growth, jobs.

What the Government has failed to do is to communicate effectively – there is a trade-off between some level of price increase and the long-term health of the economy to be gained, apart from the other fundamentals, from fiscal discipline and consolidation – a communication in simple language and one which is believed.

We can say we don’t want to become another Greece. We can say… look what happened to Indonesia in 1998. We can show what is hitting other emerging markets and why.

The big problem is there does not seem to be a clear communication plan (which must include one on the GST – Australia educated consumers for one year before the tax was introduced). And then there is the problem of credibility of the conventional media.

Whatever the good numbers, the people don’t want to believe them. They would rather believe everything they read in the social media. A credible conventional media is in the national interest. We cannot continue to have a media that is not believed. It hurts our country because people refuse to see the good as they believe none of the bad is ever aired. No balance, which is the reality of life, of the economy.

If I told a housewife coming out of the market with her heavy basket the inflation rate was 3.4%, she would pull out the largest cucumber (which has gone up in price by much more than that) and hit me on the head. So people have to be better informed about numbers, what they mean, what is general, what is specific. What they imply in terms of consumption patterns.

Most of all, why prices are increasing, what will happen if we sit on our hands and did nothing about the government deficit, and when all this bit of bother will result in bigger economic gains.