Tuesday, February 24, 2009

Malaysia Stimulus Seen Too Little, Too Late

Malaysia's attempts to boost its faltering economy will likely fail as the drag of falling demand for its main exports of electronics, commodities and oil is too large for any domestic expansion programme to offset.

The government is to introduce a second spending package in March but with a change of leadership looming, the focus is likely to be on preserving jobs in industries that compete on low labour costs rather than restructuring the economy.

While many countries in Asia have acted decisively to staunch the decline in economic activity, unveiling economic stimulus of up to 12 percent of gross domestic product (GDP), Malaysia has lagged, spending just $2 billion in its first economic boost.

"I do not think we should expect much out of this (second) package," said Mohamed Ariff, executive director of the Malaysian Institute of Economic Research (MIER), an influential think-tank. The government has not signaled how big the second package will be, saying only it will be larger than the first, but analysts predict it will be worth around 7 billion-10 billion ringgit ($1.92 billion-$2.74 billion).

"It is a drop in the bucket, less than 2 percent of GDP (gross domestic product) which pales in comparison with what Singapore is talking about," Ariff said. Asia's economies were initially thought to have escaped from the contagion caused by the U.S. financial crisis but the slump in global demand has caused exports to fall off a cliff.

In Malaysia where exports are equivalent to 100 percent of GDP, sales overseas slumped by 14.9 percent year-on-year in December. Electronics, which account for close on 40 percent of total exports, fell to just 17 billion ringgit, down from a peak of 24.78 billion ringgit in September. While Malaysia, a country of 27 million people unveiled a timid $2 billion package in November worth just over 1 percent of GDP, to boost the economy, neighbouring Singapore by contrast raided its trove of savings accumulated during the boom since 1998 and spent $13.7 billion to boost domestic demand.

That it can do so reflects the fact that it saved through the good years. In 2007, Singapore ran a budget surplus 12.2 percent of GDP and it was in surplus to the tune of 9.5 percent of GDP in 2008, according to estimates from Deutsche Bank.

Malaysia by contrast spent its way through the boom years for exports, commodities and crude oil and racked up a deficit of 3.3 percent of GDP in 2007 and likely overshot its planned 3.1 percent budget deficit target for 2008 with 4.8 percent of GDP.

That means that its credit rating may be in danger if it boosts spending by too much. Fitch Ratings cut Malaysia's A-plus local currency outlook to negative in February and warned that the government was over dependent on oil revenues which account for 40 percent of budget revenue, according to the agency. Although Malaysia has locked in revenues from high oil prices for the 2009 budget, the drop in crude prices to less than $35 a barrel from over $148 at their peak will make the 2010 budget harder to draw up.


As well as being late to apply the spending stimulus needed to rescue Malaysia from what could be its first recession in eight years, the money has not been spent fast enough. Of the $2 billion already pledged to revive the economy, 70 percent is still sitting with ministries saddled down with bureaucracy rather than being spent, according to government ministers and industry.

"The second stimulus has to cut through present weaknesses in delivery systems, it has to cut through the usual procedural delays, and it all has to happen by June if we are hope for a cushion," Razali Ibrahim, a lawmaker from the National Front ruling coalition, told Reuters.

There are also concerns that political changes are influencing the announcement of the second fiscal package. Deputy Prime Minister Najib Razak, who is also the finance minister, will take over the country's top job but not until after polls in the United Malays National Organisation (UMNO), the main coalition party, in late March.

Although Najib will stand unopposed there are big battles for the deputy presidency of UMNO which could distract the government from implementing the needed budget boost.

Najib will then need to win a key parliamentary by-election in April. So far, Najib has taken charge of and lost two by-election campaigns, one of which saw opposition leader Anwar Ibrahim return to parliament for the first time in 10 years after a bar on holding office following the expiry of a jail term. Najib is seen a more decisive leader than Prime Minister Abdullah Ahmad Badawi and skilfully engineered the takeover of an opposition controlled state this month.

But he is less popular among the electorate than the incumbent which means he will likely focus on populist policies, such as job saving, in the second stimulus rather than on the fundamental issue of pushing the economy into higher-valued products and services. "The worst of the economic slowdown will only hit ordinary Malaysians well after Najib has taken over as prime minister, so he has no choice but to prepare now to mitigate the possible political impact that will arise," said political analyst Shamsul Amri Baharuddin.

Article From Reuters


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