From The Nut Graph
By Deborah Loh

YES, we are staring at the gathering clouds of an economic crisis. Sure, economic fundamentals are strong, as government ministers keep saying, but that’s only half the picture.

The other half is the financial scenario, as economic and financial principles are two different things. The sub-prime crisis that began in the US and western countries is essentially a financial problem. But in an interdependent world, a financial crisis in one place could result in an economic crisis in another.

To illustrate, if US consumers buy fewer cars from say, Japan, Japan slows production and therefore imports less steel and rubber from say, Malaysia. Faced with low demand, Malaysian factories may be forced to downsize by cutting wages or workforce. That would be the worst-case scenario.

Which begs the question: how well is Malaysia positioned to face an “imported” crisis we had no hand in starting?

No new revenue

To a panel of experts at The Global Financial Crisis and Implications on Malaysia forum on 12 Nov 2008 at Universiti Malaya, Malaysia is taking a practical, albeit predictable, approach by spending its way out of a crisis.

It is typical of most governments to respond to a crisis by injecting funds to keep the wheels of market and business turning.

Yet, the experts at the Centre for Public Policy Studies-organised forum also wondered, where was the money going to come from?

Already, the government has revised the national deficit for 2009 to 4.8%, up from the originally projected 3.6%.

Malaysia has had a budget deficit for the last 11 years. With earnings from commodities like crude oil and palm oil falling, the question is whether there will be enough money to pump-prime the economy.

The RM7 billion package announced by Deputy Prime Minister and Finance Minister Datuk Seri Najib Razak on 4 Nov is not new money. It is sourced from the savings made from reducing fuel subsidies following the drop in oil prices.

But while low oil prices may mean lesser government subsidies, hence more money in the government’s coffers, it also means less revenue because Malaysia is a net oil-exporting country. Indeed, national oil company Petronas contributes over 40% to government coffers.

“There will be less revenue overall for the government next year from petroleum, palm oil and taxes as profitability drops. How will we continue pump-priming the economy with falling revenue?” said DAP economic adviser Teh Chi-Chang.

“The government may know the right thing to do, but do they have the means to do it?” added Datuk Dr R Thillainathan, who has sat on several high-level government advisory panels. These include the National Economic Consultative Council II (Mapen II), and the Anti-Recession Task Force during the 1980’s economic crisis.

The government plans to raise funds by monetising its assets, through tendering out federal land in the Klang Valley for redevelopment. But this might be too little to face the fuller impact of the oncoming crisis, and too late when the benefits are finally reaped.

“You won’t get a good price now if you tender out land in this climate. Also, it will take time before the development is finished and the returns can be enjoyed. Turning land assets into cash is also akin to spending money saved for future generations,” Teh argued.

The RM7bil package

It’s too late to look for alternative sources of new revenue if the crisis is to hit next year. As such, the next best thing is to ensure that whatever funds available are spent wisely. Money can also be saved by plugging leaks and fighting corruption among the “big fish”, panellists noted.

Which leads to concerns whether the RM7 billion package will reach the intended target groups. Some of the panellists worried that without transparency, corruption and leaks will result in the bulk of the package benefiting only a few.

Teh reckoned that the package’s most viable part is the RM3 billion that cumulatively will go towards reviving abandoned housing; and building more low- and medium-cost houses, minor public infrastructure projects like village roads, bridges and community halls, and public amenities like schools, hospitals and roads, including roads in rural Sabah and Sarawak.

These are projects that would benefit the rakyat directly, and provide economic activity for small contractors. But what about small and medium enterprises (SMEs) which comprise 95% of all Malaysian businesses and employ 54% of the workforce?

Despite RM200 million under the package going to micro-credit schemes for SMEs, Universiti Malaya Business and Accountancy Faculty adjunct professor Dr Sieh Lee Mei Ling worries that not all SMEs will benefit.

“We have close to one million SMEs in the country but according to government records, only some 7,000 are registered. Will aid reach those who are most needy?” said Dr Sieh, who is also advisor on services for the Malaysian Industrial Development Authority (Mida).

Datuk Syed Amin Aljeffri, president of the Kuala Lumpur Malay Chamber of Commerce, added that SMEs still face regulatory problems, such as difficulties in securing bank loans because government policy dictates other sectors as priority for banks.

Ultimately, the issue is how best to utilise limited funds. Citizens should press the government for accountability, says Universiti Kebangsaan Malaysia Institute of Ethnic Studies fellow Datuk Dr Denison Jayasooria.

“There must be more rigorous accountability through Parliament. It should be more than one hour for the question-and-answer session in the Dewan Rakyat. Select parliamentary committees should be formed to monitor the implementing ministries,” he said.

How deep a hole?

The statistics do show that Malaysia has good economic fundamentals: a low rate of non-performing loans, high foreign reserves of US$100.2 billion that can cover eight months of imports, low external debt, enough cash in the system, loan growth at 9.5%, and inflation projected at between 3% and 4% next year.

But the point for Thillainathan is, nobody knows just how deep a hole we are about to fall into. Even the affected countries in the west are unclear as to the period and depth of their economic downturn. The collapse of the auto industry in the US appears to be just beginning. And in Malaysia, the long-overdue West Coast highway project has been deferred for the second time.

“What if the recession is long and deep? If we try to spend our way out, for how long can we spend?” asked Thillainathan. He called on the government to work out “best-case and worst-case scenarios” for the economy against different levels of commodity prices.

Syed Amin also felt that the banking sector, still resilient for now, will eventually be affected as businesses face difficulties in repaying loans. Sieh of Mida cautioned that non-performing loans might increase.

Waiting it out: Press government for accountability in the RM7 billion package

Those most vulnerable to a downturn will be the lower and lower-middle income groups, said Denison. The first group includes those who hold jobs in the manufacturing sector with multi-national companies, or with export-oriented businesses like textiles or furniture-making. These sectors and MNCs could be severely affected by a slowdown.

The lower-middle income group would include young couples with children or new families, who are likely juggling housing and car loans with everyday expenses.

The panel’s best advice for the average Malaysian is to buckle up and hunker down to wait out the downturn, which could last for at least the next one to two years, according to experts.

“Spend, don’t stinge, but spend only on what’s necessary. And use this time to retrain yourself by learning new skills,” advised Sieh.

Denison noted that social problems caused by unemployment, including a higher crime rate, haven’t even been addressed yet.

So, the outlook is bleak, probably more so than we thought after the cheer generated by the government’s RM7 billion package. But the sooner we take stock of the realities ahead, the better our chances of surviving the months ahead.