Published February 23, 2009

Stimulus measures may not be enough

Fall in exports too big to be filled by domestic demand

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(KUALA LUMPUR) 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.

Political distraction: With a change of leadership looming, the focus of the second stimulus package expected next month is likely to be on preserving jobs in industries that compete on low labour costs rather than restructuring the economy

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 per cent of gross domestic product (GDP), Malaysia has lagged, spending just US$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, an influential think-tank.

The government has not signalled how big the second package will be, saying only it will be larger than the first, but analysts predict it will be worth around RM 7 billion to RM10 billion (S$2.9-4.2 billion).

'It is a drop in the bucket, less than 2 per cent of GDP which pales in comparison with what Singapore is talking about,' Mr Ariff said.

In Malaysia, where exports are equivalent to 100 per cent of GDP, sales overseas slumped by 14.9 per cent year-on-year in December. Electronics, which account for close on 40 per cent of total exports, fell to just RM17 billion, down from a peak of RM24.78 billion in September.

While Malaysia unveiled a timid US$2 billion package in November worth just over one per cent of GDP to boost the economy, Singapore spent US$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 per cent of GDP and it was in surplus to the tune of 9.5 per cent 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 per cent of GDP in 2007 and likely overshot its planned 3.1 per cent budget deficit target for 2008 with 4.8 per cent 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 overdependent on oil revenues which account for 40 per cent of budget revenue.

Although Malaysia has locked in revenues from high oil prices for the 2009 budget, the drop in crude prices to less than US$35 a barrel from over US$148 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 US$2 billion already pledged to revive the economy, 70 per cent is still sitting with ministries saddled down with bureaucracy rather than being spent, according to 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, said.

There are also concerns that political changes are influencing the announcement of the second fiscal package.

Deputy Prime Minister Najib Razak will take over the country's top job but not until after polls in the United Malays National Organisation, the main coalition party, in late March.

Although Mr Najib will stand unopposed there are big battles for the deputy presidency of Umno which could distract the government from implementing the budget boost. -- Reuters