Business

Saturday November 14, 2009

When it’s hard to know the right timing

By CECILIA KOK


It’s a million-dollar question as to when to unwind the massive stimulus measures injected into the global economy.

THE principles of applying stimulus packages to treat an ailing economy are somewhat similar to a doctor prescribing antibiotics to his patient.

Medical experts tell us that patients who have started taking antibiotics would have to finish the course of their prescription even though they may seem to have recovered from their ailments.

Prime Minister Datuk Seri Najib Tun Razak early this month said the prospects for the country’s economy chalking up positive growth in the third quarter after a contraction of 3.9% in the second quarter had brightened.

This is to ensure that their immune system is strengthened and their health totally restored.

Otherwise, there could still be some bacterial residue in their bodies that could cause the same symptom to emerge again.

On the other hand, they are not supposed to take the medicine more than the prescribed dose, as that would increase their chances of developing other form of health problems.

Doesn’t that sound somewhat like the kind of dilemma that global policymakers are facing nowadays as they gauge how and when to reverse the massive stimulus packages that they have unleashed into the economy before they “overdose” the system and cause other complications to arise?

As it stands, the global economic crisis is seen to have gradually subsided. Led by Asian countries, especially China, most economies in the world have started showing signs of recovery since the second quarter of the year.

These include major industrialised countries such as Japan, Germany and France.

The global economic rebound is due mainly to the extraordinary stimulus packages that policymakers have implemented over the past one year.

But the truth is, unlike prescribed medicine whereby a patient knows when to stop taking the drugs, exit strategies for the type of medication applied on the economy are hard to design and execute.

Withdrawing the stimulus measures too soon could risk a reversal of the nascent recovery process and push the economy back into recession.

But retaining those measures for a prolonged period could risk sowing seeds of future crises such as the formation of new asset bubbles and runaway inflation.

A case in point: the prolonged low interest rate policy adopted by the US government in the early 2000s to revive its economy, which was then affected by the dot.com burst and Sept 11 terrorist attack, was one of the factors that had set the stage for the subprime crisis to happen in the mid-2000s.

The US subprime crisis later mutated into last year’s full-blown global economic crisis.

Inflation, at this juncture, remains a subdued risk.

At the recent Asia-Pacific Economic Cooperation (APEC) forum in Singapore, participating ministers ruled out the possibility of tightening their accommodative policies over the short term and pledged to stick to their economic stimulus measures until their economies achieved a “sustainable recovery”.

The same stance was taken by finance ministers of the Group of 20 (G-20) countries who met in Scotland early this month.

Most policymakers seem to concur that the current recovery cannot be sustained without the governments’ stimulus measures.

The APEC ministers, for instance, say the worst may be over, but the global economic crisis has not.

Take China. Despite growing signs that its economy has strengthened, its Premier Wen Jiabao confirms that the government would not withdraw its massive fiscal stimulus measure that’s worth four trillion yuan and its loose monetary policies.

The World Bank and the International Monetary Fund (IMF) expect that with the stimulus measures in place, the Chinese economy would grow by more than 8% this year.

As for the strong possibility of asset bubbles forming, the Chinese central bank has already implemented specific measures such as the tightening of mortgage requirements and raising of banks’ capital reserve requirement to rein in the risk.

Other Asian countries facing the same risk, such as Singapore, Hong Kong and South Korea, have also taken pre-emptive measures to deal with the asset bubbles.

Although, based on the recent G-20 and APEC forum, it is clear that most policymakers are not removing their massive fiscal and monetary stimulus measures just yet (except for Norway and Australia that have started raising their interest rates since last month), they have started discussing plans to implement their exit strategies.

Take the APEC ministers. While they reckon the need to reduce and stabilise government debt at low and prudent level, they say it is also important to ensure that the strategies to unwind their economic stimulus plans take into account the different stages in the recovery of its member economies and the type of policy measures to be phased out.

Five economists polled by StarBizWeek laud policymakers’ decision to maintain their expansionary policies, agreeing that the time to withdraw those stimulus measures is not here yet, otherwise it is the economic recovery that will show “withdrawal syndrome”.

As a matter of fact, some of them even feel slightly disappointed with the recent Budget announcement for Malaysia.

One of them says, “It looks more like a contractionary move to me. Could it be that it is still too early for fiscal consolidation?”

Under the Budget 2010, the Malaysian Government’s plan is to reduce the country’s budget deficit from the estimated 7.4% of GDP this year to 5.4% of GDP next year.

As part of the measures, the Government will be slashing its operating expenditure by a drastic 13.7%.

Total development expenditure allocated for the 10th Malaysia Plan (10MP) has also been capped at RM180bil, which is 21.7% lower than the amount under the 9MP.

The target is to reduce the budget deficit to less than 4% of GDP by 2015.

But with the country’s benchmark interest rates kept at its low level of 2% and the acceleration of the government spending under the RM67bil fiscal stimulus package, Prime Minister Datuk Seri Najib Tun Razak early this month said the prospects for the country’s economy chalking up positive growth in the third quarter after a contraction of 3.9% in the second quarter had brightened.

Global equity markets are following closely policymakers’ decision on exit strategies. And they seem to favour the continuation of those extraordinary stimulus measures.

The markets respond positively each time policymakers make their commitment to continue with their stimulus measures, and vice versa when there are suggestions that policymakers intend to wind down those measures.

Even by withdrawing some short-term emergency measures, confidence in the world economy will be affected.

For instance, the Bloomberg Professional Global Confidence Index in November fell to 60.3 from 61.7 last month, the highest level in the series that began two years ago, after several central banks indicated plans to withdraw some emergency measures; hence, raising concern about the strength of the global economic recovery.

The survey followed steps by several central banks such as the Federal Reserve, which planned to scale down the buying of mortgage-backed debt by the first quarter, and the European Central Bank, which planned to end some of its long-term financing auctions next month.

Their intention was to market distortions that could spur bubbles in assets, but it came amid rising job losses in the United States and Europe.

With so many contrasting factors coming into play, it’s really a challenge to implement the right strategy to exit from the massive stimulus measures that policymakers have pumped into the system. Timing is of essence, and it should not be rushed, the IMF says.

And ultimately, it is the coordination of exit policies that’s important to improve the outcomes for all countries, it adds.

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