Published March 12, 2009

Mixed reactions to RM60b second stimulus

Lack of measures to cut cost of doing business was a big disappointment

By S JAYASANKARAN
IN KUALA LUMPUR

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ANALYSTS held mixed views yesterday about Malaysia's RM60 billion (S$24.9 billion) second stimulus package with the most bearish veering towards full blown recession this year (minus 5 per cent) while others cautiously agreed with Kuala Lumpur's forecast (between one and -1 per cent).

Browsing but not buying: The announcement marked a new sobriety among Malaysia's planners in finally acknowledging the seriousness of the economic crisis

It's not that they disagreed with the plan. Indeed, most thought it would work except that almost everyone had reservations about its implementation, or its lack thereof.

'The key reason is timing,' wrote CLSA's Loong Chee Wei in a March 10 report. 'The November package of RM7 billion will only be fully implemented by June. If this is anything to go by, our expectation of a 5 per cent contraction this year is almost a foregone conclusion.'

Mathew Hildebrandt of JPMorgan forecasts tepid growth but does not disagree with Mr Loong's reservations. 'The added fiscal spending should provide a boost to growth,' he wrote in his report. 'However, the pace of the deterioration in growth has been intense and there are always implementation risks in getting large amounts of funds out the door quickly. Thus, we are only modestly raising our GDP forecast to 0.3 per cent.'

The comments are reaction to one of Malaysia's biggest stimulus packages in recent history. On Tuesday, Deputy Prime Minister Najib Razak announced a RM60 billion shot in the arm that will blow the country's budget deficit out to 7.6 per cent of GDP.

The announcement also marked a new sobriety among Malaysia's planners in finally acknowledging the seriousness of the economic crisis - for months, they had stubbornly stuck to their initial predictions of 3.5 per cent growth for 2009. That analysts' remained divided over Malaysia's ability to escape recession only underscored the horror.

The main disappointments for analysts and, indeed, the general public were the absence of measures that would have cut the costs of doing business in Malaysia. There were, for example, no dramatic gestures like income or corporate tax cuts or reductions to the employer's mandatory contribution towards the Employees Provident Fund. Neither were there any direct 'handouts' to the body public.

Instead, what emerged was a pattern of 'spend and guarantee' measures that indicated that Kuala Lumpur was bracing itself for the long haul, a recovery that it thought was not going to be V-shaped but more U-shaped. For one thing, Mr Najib said that the stimulus would cover two years and, given the glacial pace of implementation, many of the projects might start in late 2009 and early next year.

The package, which amounted to 8-9 per cent of GDP, comprised: RM15 billion fiscal spending; RM25 billion guaranteed funds; RM10 billion through projects through Khazanah Holdings; RM7 billion private finance initiatives (PFI), and RM3 billion in tax initiatives.

The RM15 billion spending package is likely to be channelled to small infrastructure projects - refurbishment, maintenance, new rural roads, etc - including RM2 billion for the construction of a new low cost carrier terminal at the international airport.

But the real gravy could be in the PFI projects which, in addition to the RM7 billion in announced initiatives, will also include RM15 billion from the RM25 billion that the government will undertake to help the private sector raise funding for infrastructure projects that will have to be built through concession agreements with the government.

Chris Oh of JPMorgan thinks that the projects could include some long delayed ones like the upgrading of the Kuala Lumpur urban transport system, the Pahang Selangor water transfer scheme and the Penang monorail and outer ring road.

Analysts also anticipate greater liberalisation of the New Economic Policy, a three-decade old affirmative action policy designed to economically uplift Malaysia's Malay majority but which critics charge has outlived its usefulness because of its distortive effects on the economy.

Mr Najib hinted that it would be eased especially in the liberalisation of the services sector going forward but stopped short of specifics. Most analysts think that will come later, after the March elections of the dominant United Malays National Organisation. Any rollback of the NEP has to be done by a leader sure of his strength in Umno and Mr Najib only takes over on March 28.