Published March 2, 2009

MALAYSIA INSIGHT

It's time for govt to take targeted fiscal measures

Cash-rich agencies can take up govt debt

By S JAYASANKARAN
KL CORRESPONDENT

	Email this article
	Print article
	Feedback

AFTER all the denial, the what-me-worry statements, it's clear that Malaysia has entered into a recessionary phase.

Growth in real gross domestic product (GDP) was O.1 per cent in 2008's last quarter, the worst showing since 2001. The good news - if anyone can call it that - was that Malaysia outperformed other open economies like Hong Kong, Thailand, Taiwan and Singapore, all of which slid emphatically into recession. But it's cold comfort.

Three key sectors did the country in - mining, construction and manufacturing, the last of which slid massively by over 8 per cent. No wonder exports fell 13 per cent in the last quarter.

The services sector held up grudgingly (5.6 per cent compared to over 7 per cent the previous period) and domestic demand - long a crucial driver of the economy - finally showed signs of faltering (up 5 per cent from 8 plus previously).

All the talk about the government fiercely stimulating the economy proved to be that, just talk. Investment actually dropped 10 per cent year-on-year, suggesting that many of the government projects supposedly in the pipeline remain stuck there.

Malaysia is between a rock and a hard place because there are precious few bullets to fire. In addition, there is a significant lag period between fiscal policy articulation and its outcomes so Malaysians should brace themselves for a spring of ominous discontent.

It is one reason why we could never understand Deputy Prime Minister Najib Razak's blase, almost nonchalant, scheduling of his mini-budget three months after his original announcement of intent. It is only to be tabled on March 10.

Bank Negara governor Zeti Akhtar Aziz has fired the first shots, consecutively slashing the overnight policy rate to, now, 2 per cent. That's 150 basis points cut since November, placing rates at their lowest since the 1980s. Reinforcing the notion that governor Zeti is no slouch, the central bank has also cut the bank's statutory reserve requirement - the money banks have to place with the central bank - by another 300 basis points, thus freeing up RM16 billion (S$6.7 billion) banks can now lend out.

How low can she go? Well, some economists suggest that she cut it further to 1.25 per cent by the end of the first quarter but that is uncharted territory. Even so, her hands are pretty much tied as there is little more monetary policy can do.

It's time for a fiscal policy response and one that is both targeted and, especially, timely - we refer to the decline in investment figures. It also has to be meaningful which means anything like the originally envisaged RM7-10 billion would be nothing more than namby-pamby. It should be closer to RM20-RM25 billion - and maybe even more - and the idea has to be to save jobs and keep spending ticking over.

Until the world economy comes back, Malaysia is basically on its own. So we should stop wringing our hands about international credit agencies and begin using our savings which are considerable. Almost every country is running a budget deficit so we are in good company.

There are a number of cash-rich agencies out there which can take up government debt including the Employees Provident Fund, Bank Negara, Permodalan Nasional Berhad, etc.

So long as the government borrows from within, it would be non-inflationary and would not put any extra pressure on the ringgit.

The history of the world economy has always moved in boom and bust cycles. This, however, is a spectacular bust because the entire world is involved.

All Malaysia can do is to go with the flow and hope that this, too, will pass. But the least the government can do is mitigate the damage.