Published January 29, 2009

KL may unveil another stimulus package in Feb

It could lead to a downgrade in the country's sovereign debt rating

By S JAYASANKARAN
IN KUALA LUMPUR

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THE Malaysian government is tipped to unveil a second economic stimulus package of RM7 billion-RM10 billion (S$2.92 billion-S$4.17 billion) next month.

Deputy Prime Minister Najib Razak, who will become premier in March, said last week another package is inevitable as the downturn is turning out to be more serious than first thought.

Officially, Kuala Lumpur is still saying the economy will grow 3.5 per cent in real terms in 2009. But most private economists predict growth of zero to 2 per cent.

Their pessimism is grounded in reality. Exports have plunged in the past two months, industrial production has come off and the prices of Malaysia's two main exports - oil and gas, and palm oil - have fallen off a cliff.

Unemployment is expected to rise, with almost half of the country's biggest Chinese companies planning to retrench, according to a poll by the Malaysian Chinese Chamber of Commerce.

The downside to a second new government spending package could be a downgrade in Malaysia's sovereign debt rating, as the budget deficit could climb to 6-7 per cent of gross domestic product (GDP), from an estimated 4.8 per cent.

But this is unlikely to faze government planners. Economists say that given the scale of the downturn, almost every country will run a budget deficit.

Kuala Lumpur has so far announced one stimulus package, cut interest rates twice in two months - the overnight policy rate is now 2.5 per cent, down 75 basis points - and reduced banks' statutory reserve requirements so they have more to lend.

The central bank has also allocated RM2 billion to be borrowed by small and medium enterprises. Simultaneously, the intake of migrant workers has been frozen and measures will be taken to reduce the number already in the country.

Last week, Mr Najib invited Malaysians to write to his website - http://www. 1malaysia.com.my/ - with suggestions on how to tackle the crisis. The invitation drew more than 135 responses, with suggestions ranging from tax and tariff cuts to greater spending on renewable energy projects.

Some could well be taken up. Analysts reckon the government is likely to cut taxes and charges - especially for electricity - and target critical industry sectors for spending.

But almost every analyst agrees that the speed of implementation and the target sectors are crucial. The implementation of projects under the Ninth Malaysia Plan has been abysmal. For example, the Pahang-Selangor water transfer project and the second link to Penang have not got off the ground, after years on the drawing board.

Some analysts are worried that Kuala Lumpur will continue to dole out 'political' projects to keep peace within the ruling United Malays National Organisation (Umno) which Mr Najib will lead in March.

'If they are still going to give out contracts to the so-called Class F contractors, it will do nothing for the economy,' said one economist. 'The Finance Ministry should keep its focus.'

Class F contractors are mostly small ethnic Malay businessmen, generally unskilled and almost universally Umno members.