Business

Saturday February 28, 2009

Budgeting for crisis

By JAGDEV SINGH SIDHU


THE amount of money being spent to resuscitate waning global economies is mind boggling. Hundreds of billions of dollars are being forced-fed to banks to recapitalise them and get them to lend again.

Apart from that, governments are blowing their budgets wide apart to pump prime their economies either through huge infrastructure projects or to get spending up and running.

The concerted global effort is to overcome a global recession that has been caused by years of over-exuberance that first manifested itself in the US housing sector’s subprime debt.

Given the magnitude of questionable and bad debt, the repair effort is enormous, and if there were to be a parallel in history, it is almost like the post-World War II Marshall Plan, where a total of US$13bil was spent to rebuild war-torn Europe.

And the current stimuli, some argue, are already having an effect, positive or otherwise.

Shipping charges have bounced off their lows and so has the price of iron ore.

While that may be largely owing to anticipation of rising demand from China and other countries that have zeroed in on infrastructure to boost growth, one wonders if speculation too is rearing its ugly head to take advantage of potential demand.

Big money is being spent by the US, China and Europe to boost growth and it is no different in Malaysia where news of the second stimulus package has hogged the limelight since it was announced that the “mini budget” will be tabled in parliament on March 10.

There has been much debate on the size and content of the package but the general consensus is that it would be much larger than the first RM7bil package.

“Other than the budget size, an equally important consideration will be the coverage and the structure,” says Standard Chartered Bank economist Alvin Liew.

“As Malaysia has no control over external demand, we expect the measures to be geared towards supporting domestic demand and minimising job losses. We can also expect more infrastructure spending.”

An open economy like Malaysia is especially susceptible to a deceleration in external demand and the drop off in exports has been startling.

In the final quarter of last year, exports, on a year-on-year basis, fell by 2.6% in October, 4.9% in November and 14.9% in December.

The US$586bil and US$789bil spent by China and the US to give their economy a spark should help exports but one wonders by how much?

In the meantime, there is still much to do with the domestic economy and the Government will focus on infrastructure and human resources.

The Government is an old hand when it comes to using infrastructure to boost the economy but the second approach, of addressing human capital, might be something new.

“The recent Jobs Credit measure proposed by the Singapore government in its FY2009 Budget, could also be implemented by Malaysia to lower the wage bill of companies and help slow the expected increase in retrenchments for Malaysians,” says Liew.

“And with the existing Employees Provident Fund infrastructure, it will be relatively easy and cost-effective for the Government to administer this scheme.”

Liew also sees the possibility of the Government giving partial or full tax holiday to individuals to support private spending which is a key growth driver for the economy.

“In the past downturns, the Government was rather successful in its stimulus measures to bring the economy out of recession, so we could still see a repeat this time, although admittedly the current global crisis is unprecedented at least in recent history and may mean that Malaysia may take longer to recover (compared to, say, 2001),” he says.

Rating Agency Malaysia Bhd chief economist Dr Yeah Kim Leng sees a parallel in the stimulus plan between the current situation and 2001 when Malaysia’s economy was dragged down by a slumping global electronic trade.

“That was offset by a stimulus package that looked at consumers and housing,” he points out.

When it comes to the size of the deficit, the general consensus is that the second package has to be large. The former deputy governor of Bank Negara Tan Sri Dr Lin See Yan expects to see a mini budget of up to RM50bil.

Others predict it will be less but the message that needs to be sent is this – a lot of money will be spent to keep the economy afloat.

“Malaysia’s external position is still sound. Although its foreign exchange reserve position has declined in recent months, it still has very strong reserves level (compared to 1997/98) and it is also running a sizeable current account surplus,” says Liew.

Yeah, however, warns that there is a danger if the Government has a stimulus plan that is too large.

“If we overdo it, the danger will be on the fiscal deficit and the other thing is whether we have the capacity to spend it in the first half of this year,” he says.

Apart from spending the money quickly, another worry is whether the money will be spent properly and most effectively. There is also consensus that structural reforms must be accompanied or incorporated in the stimulus package.

“The Government should always engage in reforms that will enhance the business environment of Malaysia and attract foreign investors. It is no longer investors from the West but also within Asia,” says Liew.

Yeah, too, concurs that Malaysia must make reforms to keep in line with other countries that are taking steps to make themselves more competitive.

“We, too, should take the opportunity to tackle the more difficult structural issues such as our reliance on foreign workers and the government’s dependence on oil revenue,” he says.

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