NERP facing crisis of confidence when  in all the eight trading days since its publication, the KLSE CI had registered lowest levels not only in the year-long economic crisis, but even reached the lowest level in nine-and-a-half years


Speech
- Develoment Funds Amendment Bill 1998

by Lim Kit Siang  

(Dewan Rakyat, Tuesday): On Thursday, 23rd July 1998, Special Functions Minister,  Tun Daim Zainuddin, announced the the  National Economic Recovery Plan (NERP) prepared by the National Economic Action Council (NEAC).

The next day, Friday, 24th July 1998, I said that the NERP had  failed its first test in being unable to stimulate market confidence despite Daim’s upbeat release of the plan as seen in the the  Kuala Lumpur Stock Exchange (KLSE) Composite Index ( CI) registering the lowest level   throughout the year-long economic crisis at the end of trading the previous day.

At  the close of trading on 24th July 1998,  the KLSE Composite Index fell 1.54 per cent or 6.51 points as compared to the previous day, ending at 4.15.40 points.  The lowest the KLSE CI had fallen during the year-long economic crisis was 421.31 points on July 13, 421.91 points on July 22 and now 415.40 on July 23 - very much worse that the depth plumbed by KLSE CI on January 12, when it fell to 477.57 on January 12 - at around the time when the Prime Minister, Datuk Seri Dr. Mahathir Mohamad was talking about economic recovery between six to twelve months while the MCA President and Transport Minister, Datuk Seri Dr. Ling Liong Sik spoke of an economic recovery in three months, i.e. by April this year!

I had on that day posed the question whether the NEAC NERP could prevent the KLSE CI crashing through another psychological barrier to go below the 400-point level, considering the statements made by Daim last year when it was at the 800-point region that the KLSE CI was undervalued and advising Malaysians to go into the shares market to pick up bargains?

I had not expected my question to be answered in the following fifth trading day of the Kuala Lumpur stock market, when on July 29,   the KLSE CI ended at the unbelievable level of 385.97 points, the lowest in nine-and-a-half years.

The NERP is clearly facing a crisis of confidence when  in all the eight trading days since its publication, it had no stimulating effect on the markets whatsoever, where  the KLSE CI fell to the  lowest levels not only in the year-long economic crisis, but even reached the lowest level in nine-and-a-half years!

Yesterday, for instance, the KLSE  CI fell at one time to 385.53, which is even lower than the nine-and-half-year lowest  level registered on July 29, i.e. 385.97 points and when trading closed, the CI had fallen by 16.38  points to end at 386.27 points.

I do not think any plan for national economic recovery from a deep and prolonged economic crisis anywhere in the world has been received with such unfavourable market reactions, not only in the stock market but also in the money market, as the Malaysian ringgit continued to struggle in the band between 4.120 and 4.1650 against the US dollar during the end of trading in these eight days.

In the past eight days since the publication of NERP, the KLSE CI had lost  35.64 points from last Wednesday's 421.91 to 386.27 points yesterday, a major setback of the NERP to win the battle of confidence-restoration.

From the high of 1271 level in 25 February 1997, the KLSE composite index plunged to 385.97points on 29th July  1998, with a loss of about 886 points or nearly 70 per cent. At the high in 1997, the market capitalisation (comprising the main board and the second board) was RM917 billion but sank to  RM250.97 billion by 29th July  1998 - a devastating  loss of 72.6 per cent.

In fact, at market close on July 30, a total of 333 counters were trading below the RM1.00 level.

These 333 counters represented about 45.6 per cent of all counters listed on the main and second boards of the KLSE.

Of these counters, 74.17 per cent or 247 counters, are from the main board while second board accounted for the remaining 25.83 per cent or 86 counters.

Out of the 333 counters below the RM1.00 level, 121 counters (36.34 per cent) stayed below the 50 sen level.

The main board also dominated with 110 counters (90.91 per cent), while second board accounted for 11 counters (9.09 per cent).

A quick glance at the above figures revealed the pathetic state of the current market. The KLSE All Share EMAS Index broke the 100-mark on July 29 when it closed at 99.47 level. Yesterday, it again fell below the 100-mark to end at 99.70 points.

When releasing the NERP, Daim said the most urgent and critical need was to restore investor confidence in Malaysia’s macro-economic stability.

Such confidence cannot be restored by the release of a plan, entitled "Agenda for Action" with the six-prong strategy of:

This is because all these six prongs had been the very same economic strategy of the government  in the past year, and had been specifically declared and repeated by the Finance Minister, Datuk Seri Anwar Ibrahim, whether in his 1998 Budget presentation to Parliament on Oct. 17, or in his three Ministerial statements on new economic packages during the Parliamentary meetings of early December, March and recently on 13th July 1998.

How can their repetition by Daim restore market confidence when their repeated declaration by Anwar Ibrahim had failed to achieve that effect?

Daim rightly said that the most urgent and critical need was to restore confidence, which the government had dismally failed in the past 13 months.

Unfortunately, Daim and the NEAC have undermined confidence-restoration efforts by the contempt they have shown to Parliament and even the Finance Minister in  the way the NEAC NERP was released outside Parliament.

The proper place for Daim to present the NEAC NERP report was in Parliament, especially as Parliament was debating the 1998 Supplementary Supply Bill on the same day as its publication,  which should be the most important debate in Parliament on the national economic crisis in the past 13 months, even more important than the parliamentary debate on the 1998 budget in October-December 1997 as the Malaysian economy had worsened with no light at the end of the tunnel.

Can the government give a satisfactory explanation as to why the NERP was not tabled in Parliament for approval and adoption, when successivd Five-Year Plans and Outline Perspective Plans had been  presented in Parliament for debate and approval?

Even now, I have not received a copy of the NERP when the report was released about two weeks ago, not only to study it but to fully understand the context in which several major government bills have been introduced in the current  Parliamentary meeting directly arising from the  recommendations of the NERP, whether the 1998 supplementary budget, the Pengurusan Danaharta Nasional Bhd Bill  to establish the Asset Management Corporation (AMC) or the present bill, the Development Funds Amendment Bill 1998.

Is this the way to go about the "most urgent and critical need to restore investor confidence in Malaysia’s macro-economic stability"?
 
Daim should realise that the NEAC must not bypass or belittle Parliament by treating MPs, whether Barisan Nasional or Opposition with contempt as  this is counter-productive to the second prong of the NERP strategy to restore market confidence.

I am very surprised that apart from DAP MPs, no Barisan Nasional MP has protested that the NERP had not been tabled in Parliament and that after two weeks, MPs have not been given copies of the NERP - another  illustration that having the Dewan Rakyat packed with five-sixth of Barisan Nasional MPs is not necessarily a good thing for the country.

From the parliamentary debate on the 1998 Supplementary Supply Bill, it is clear that not only ordinary Malaysians and MPs generally know very little about the NEAC, even Ministers and Deputy Ministers are quite in the dark about the operations of the NEAC.

During the debate on 23rd July,  I had lamented the lack of accountability and transparency in the NEAC’s establishment and operations.

As an example, I said that although the NEAC had been established for more than six months, nobody knows the full membership  of the NEAC Executive Council.

When I asked whether any Minister or Deputy Minister in the House could stand up to enlighten Parliament as to the full constitution of the NEAC Executive Council, there was silence, until the Deputy Human Resources  Minister, Datuk Abdul Kadir bin Haji Sheikh Fadzir stood up to say that the composition of the NEAC Executive Council was generally known by the people as it had been repeatedly announced in the mass media.

I challenged this statement and asked Abdul Kadir to name the members of the NEAC Executive Council. He was unable to do so, claiming that he had forgotten about it, and that they comprised professional people.

I corrected him, pointing out that the professional people he referred to are serving on the NEAC working committees and not the NEAC Executive Council.

In the event, history was made in Parliament yesterday when the Opposition had to inform the government front-bench about the composition of the NEAC Executive Council.

I told Abdul Kadir as well as the Ministers, Deputy Ministers, Parliamentary Secretaries and the Barisan Nasional MPs that the NEAC  Executive Council comprised of five members, namely Prime Minister and the  Deputy Prime Minister as Chairman and Deputy Chairman respectively and Tun Daim Zainuddin as the executive director.  There are  two other  members appointed by the Prime Minister.  I told Parliament that the Chairman of the Institute of Strategic and International Studies (ISIS), Tan Sri Noordin Sopie is the fourth member of the NEAC Executive Council but nobody knows who is the fifth member!

I thank the Parliamentary Secretary to the Ministry of Finance, Datuk  Dr. Shafie Mohd. Salleh in his winding up on 27th July 1998 for disclosing the fifth member of the NEAC Executive Council, namely Encik Oh Siew Nam, a Bank Negara director, with the Economic Planning Unit Director, Tan Sri Ali Abdul Hassan as the NEAC Secretary.

I understand that the MCA President and Transport Minister, Datuk Seri Dr. Ling Liong Sik had wanted to the fifth member of the NEAC Executive Council, but other Cabinet Ministers who are also leaders of component parties of the Barisan Nasional, particularly the Gerakan President and Primary Industries Minister, Datuk Seri Dr. Lim Keng Yaik and the Works Minister and MIC President, Datuk Seri Samy Vellu, would feel very offended if  Liong Sik is included but they are left out.

I am glad that this matter of the fifth member of the NEAC Executive Council has finally been sorted out.

The NEAC through NERP had repeatedly stressed that as the economic crisis had been "prolonged by the weakening of confidence", steps should be taken to strengthen public and corporate governance and enhance transparency and accountability, with "more frequent release of economic data to allow analyses and to increase transparency".

It pointed out that in the United Kingdom, the minutes of the Bank of England board meetings are released to the public, while the US Treasury releases economic data at a regular and timely manner.

I fully support this proposal by the NEAC in the NERP. Unfortunately, the NEAC has not been able to act on its own recommendations, whether on the composition of its various committess (as MPs only know six months later who is the fifth member of the NEAC Executive Council), or in connection with the NERP which has not been distributed to MPs, or about its operations.  In the spirit of greater accountability and transparency, is the NEAC prepared to make public all reports and studies it had commissioned through its various working committees?

In this connection, why is the  government so slow in releasing data on the second quarterly performance of the Malaysian economy.

Other countries have already reported on the second quarterly performance of their economies from April to June. Singapore for instance, on 28th July 1998, announced that its  economy grew just 3.8 per cent in the first six months and seems headed for a recession in the current second half.

Singapore's growth momentum has slowed significantly, with all sectors -- apart from construction -- affected by the downturn.

Given the government's projection of 0.5 to 1.5 per cent growth for the full year, the H1 figure means the economy could contract 0.7 to 2.6 per cent in the July-to-December period.

During the first quarter, the Malaysian economy contracted by 1.8 per cent and Malaysians are eager to know the gravity of the GDP contraction in the second quarter of the year.

I call on the Deputy Prime Minister and Finance Minister, Datuk Seri Anwar Ibrahim to be forthcoming with all the economic data and statistics in order to restore confidence, as the NERP had warned that the Malaysian GDP could contract more than the projected -1% to -2% if there is "continuing lack of confidence".

The economic prospects for 1998 in a scenario of projected -1% to -2% GDP contraction is already very grim and bleak.  Would the data from the economy Second Quarter’s performance be supportive of the government’s projections of -1% to -2% GDP contraction or reinforce the more pessimistic forecasts of economists and analysts that Malaysia’s GDP contraction for this year could be as serious as -4% to -5%?

This Developjment Funds Amendment Bill is to enable the Government to provide grants and loans to and to invest in the AMC or anybody corporate controlled by the Government of Malaysia if the grants, loans or investments are for the purpose of supporting or maintaining the continuous development of the banking and financial system of Malaysia or any part of Malaysia, or for any related purposes.
 
The present economic crisis has raised concerns on the vulnerability of Malaysia’s financial sector. The Government has taken several measures to  strengthen and instil confidence in Malaysia’s financial sector such as Government guarantee of  deposits, and mergers and consolidation in the financial sector.

Despite these measures, which includes the creation of the AMC, even the NERP has admitted that "there is general uncertainty over the soundness of the banking system".

The AMC will have direct implications on the management of Non-Performing Loans (NPLs) and the rehabilitation of viable  businesses. NERP’s conservative estimate of the total NPL in the banking system is around RM74  billion (or 15.7 per cent NPL) at the end of 1998, and rising to RM100 billion (19.7 per cent NPL) by end 1999, if nothing is done to address the problem.

The AMC will buy a portion of the non-performing assets away from banks. While relieving the banks of the problems of managing non-performing assets and injecting cash into the banking system, the banks will still have to make provisions for writing-off the shortfall in loan value arising from  the sale. This will hit their profit and loss statement and balance  sheet. The banks’ portfolio of NPLs may be reduced, but their  capital adequacy ratios will still be eroded and, therefore, require recapitalisation.

The first question that comes to mind is where the government is going to find the money for the NERP’s RM60 billion proposals to kick-start the economy, including RM25 billion for AMC and RM16 billion for the recapitalisation of banks.

The NERP suffered its most serious setback when the government had to shelve plans for an international roadshow aimed at raising US$2 billion (RM8.4 billion) from bonds. The separate overseas trips by the Deputy Prime Minister and Finance Minister, Datuk Seri Anwar Ibrahim and the Special Functions Minister, Tun Daim Zainuddin, were postponed following a sovereign
ratings cut by credit-rating agencies Moody's and Standard & Poor's.

The cancellation of the international roadshow to raise bonds from international financial institutions was one primary cause for  the Kuala Lumpur stock market’s depression after the release of the NERP,  as it  created  market worries over the government's ability to lead the country out of its first recession in 13 years.

Let me say that the DAP is prepared to give full support to the NERP if an in-depth study shows that it is a plan which could finally restore confidence among the people and investors and  chart the country’s economic recovery in the shortest possible time.

This is why Malaysians need more information about the NERP, as for instance, where the funds for the AMC, the recapitalisation of banks and other ventures involving massive expenditures are to be found.

The government should realise that confused signals and inconsistency on macro-economic policy is highly inimical to confidence-restoration.  The NERP, for instance, proposed that the government should issue RM20 billion worth of long-term bonds to the Employees Provident Fund, Petronas and the Insurance Companies, but last Thursday, the Finance Minister said  that the government is not expecting EPF to take up part of the proposed RM20 billion bonds to help speed up economic recovery

While  I welcome Anwar’s statement, I would call on the Special Functions Minister, Tun Daim Zainuddin to publicly endorse this position, especially as this is contrary to the NERP recommendation.

Both Anwar and Daim should be sensitive to the worries and concerns of the nine million EPF contributors about the safety and security of the RM160 billion EPF funds, which increases monthly by RM1.2 billion.

At a time when the country is faced with a crisis of liquidity of funds,  the cash-rich EPF with its vast funds  will be an attractive target to those who are looking for sources of funding to bail out troubled companies with political connections.

If EPF is now not required to subscribe to part of the RM20 billion government bonds to help speed up the economic recovery  - I had earlier estimated that EPF may be required to put up as much as RM10 billion - then where is the money for the RM20 billion  bonds going to come from? Is it all going to come from Petronas and Insurance Companies?

Petronas chairman, Tan Sri Azizan Zainul Abidin had said the national oil corporation was prepared to subscribe to part of the RM20 billion bond issue recommended by NERP to help put the economy back on track.

Petronas has reserves of about RM30 billion and it must be accountable to Parliament as to how it is managing the Petronas reserves to the best long-term interests of the nation and people and what are the safeguards to ensure the reserves are never  used for any bail-out operations.

In amending  the Development Funds Act to enable to Government to provide grants and loans to AMC, the question of the accountability and transparency of such grants and loans become an important question which has not been satisfactorily addressed.

Furthermore, this Bill also empowers the Government to provide grants and loans not only to AMC, but also "any other body corporate controlled by the Government of Malaysia if the grants, loans or investments are for the purpose of supporting or maintaining the continuous development of the banking and financial system of Malaysia or any part of Malaysia or for any related purposes", which tantamounts to giving the government a blank cheque to form other AMC-type of corporations to bail out banks and financial institutions without having to come back to Parliament for accountability.

This will burn out to be a great disaster if the grants, loans or investments given out under this Amendment  to the other "body corporate" are greater than to AMC - for it would immediately raise the problem of parliamentary accountability.  What safeguards are there to ensure that such abuses of power and public funds cannot take place at all under the Amendment Bill?

(4/8/98)


*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong