The Sea of Debt

Speech (5)
- Budget 2000
Lim Kit Siang

(Dewan Rakyat, Monday): An issue of the utmost concern is the rising tide of red ink represented by the country’s debt levels.  The foreign debt of the country is estimated at RM161.3 billion, or  57.4 per cent of the country's Gross National Product (GNP).  Of this RM161 billion, the private sector was  responsible for RM59.8 billion. The rest RM 72.5  billion was the debt of the public sector, meaning the Federal Government, public corporations and state agencies.

This latter figure is an understatement if account is taken of the contingent liabilities of the government arising from hidden guarantees that have  been extended. It is interesting that the Second Minister earlier in the year stated that the Government would not be borrowing from the World Bank. In another U-turn he was reported in Washington DC earlier last month  as saying that Malaysia would indeed seek further sizable loans. We again we see policy confusion and incompetence.

Debt servicing  in 1998 accounted for  15.5% of the operating expenditure; in 1999 it will amount to 18.5% and  stay at that level in the year ahead.

A country's external debt is the shared burden of a country's citizenry; however, it is the Federal Government debt -- foreign and domestic -- that can truly be said to be the collective debt of each of us and we pay for the servicing of it from revenue, which means the taxes, fees, duties, etc. that each citizen pays. And the cost of servicing it and of repayment takes away from other potential uses.  What this translates into is a very simple fact: there is that much less available for social services and meeting the needs of the poor.

These levels of debt are clearly unsustainable. The budget now presented fails to address this issue. The budget for the coming year is only  targeted at creating a "feel good" factor for the purposes of aiding an electoral victory for the Barisan. It fails to address the critical longer-term problems faced by the country. Structural reforms, which are urgently needed, are ignored.  The country will be called upon in future  to pay a heavy price for such flawed policies.

The  latest set of numbers pertaining to foreign exchange reserves released by Bank Negara raises questions about the wisdom of government policies. For months on end we have been told how strong our reserves were, and how rapidly they were rising. The world was also lectured about how selective capital controls were providing Malaysia with the means to strengthen the economy and restore growth.

I had previously cautioned this House that reserves growth could be  illusionary and an indicator that the country was not challenging larger trade surpluses into productive activity. Many analysts had forecast  that with the partial lifting of controls on Sept 1, that there would be an  exodus of foreign funds. Officials uttered soothing statements that there would be no massive exodus. Some even touted inflows of funds.

In his budget speech, Daim decried these prophets of doom. This is what he said:

"In regard to capital control measures, critics estimated that a large outflow of funds would occur on 1 September 1999. As it turned out, net funds that left the country on that day only amounted to 327.9 million US dollars.

"This is small compared with the 10 billion US dollars that was estimated earlier by our critics. It is clear that despite all the dire predictions, the large outflow did not occur after all."

The picture, however, does not look that rosy from the latest figures released by Bank Negara, reporting  that its gold, foreign exchange and other reserves fell to RM113.95 billion  on October 15, down from RM 119.28 billion at the end of September. It was the largest two-week drop since the Asian financial crisis erupted in mid-1997. In U.S. dollar terms, reserves fell to US$29.99 billion on October 15 from US$31.39 billion on September 30 - a fall of US1.4 billion in two weeks. Reserves were at their lowest level since May 31 when they stood at  US$29.78 billion.

Ministerial statements have made light of these trends, attributing the fall to "loan repayments". This House is entitled to a fuller explanation. We want to know whether the  decline in the reserves reflected the continued outflow of foreign investment since Malaysia lifted a restriction on the repatriation of foreign principal on September 1. The outflow has been encouraged by generally weak regional stock markets.

The US$1.4 billion drop in reserves over the first half of October came despite a seven per cent rise in the Kuala Lumpur Stock Exchange Composite Index between September 30 and October 15. There is strong evidence to indicate that foreign investors have been pulling money out of Malaysia since July, when net portfolio inflows since mid-February peaked at RM4.7 billion (US$1.2 billion). As of September 29, there was a net outflow of  RM1.3 billion ringgit, indicating that between July and September, US$1.6 billion in foreign portfolio investment left the country. The central bank's figures would indicate that up to another US$1.4 billion left the country in the first half of October.

These outflows were bigger than expected, and it shows that foreign institutions are currently not looking at putting their money in Malaysia.  Some analysts  have predicted even larger outflows in the months ahead.

These  trends represent how capital controls have adverse longer-term effects and harm the economic prospects over the medium run.

I call upon the Finance Minister to tell this House what reserves policies is he pursuing? What advice has he sought from the hated IMF?

I would also like him to assure  this House that he will not indulge in more foreign borrowings at penal rates in order to merely pad the reserves to contribute to the "feel good" factor? It is imperative for the Finance Minister to adopt a policy of  candor as his silence on these issues will be read negatively by the markets.

As I said during the debate on the 1999 Budget last October, the DAP is not opposed to the capital control measures as extraordinary times may require extraordinary measures. The question is the timing and efficacy of the capital control measures which has remained a matter of controversy.

 The general consensus of independent and non-partisan economists and analysts inside and outside the country is that  capital controls had almost no impact either in benefiting or  damaging Malaysia's economy because they were  imposed when they no longer mattered as by  mid-1998, Asia had fallen as far as it was going to economically and the problem task was "no longer breaking the fall, but managing recovery".

This is why the Barisan Alternative (BA), in its policy statement of 9th September, called for the phasing out of the capital controls. The BA  Policy Statement said:

The Barisan Alternative expressed the following concern about capital controls:

The Barisan Alternative Policy Statement concluded:

The Finance Minister should reconsider  the capital control measures and take steps to phase them out. The problem with such controls is that imposing them may be easier than lifting them - and given the uncertainties of the latter part of this year, and especially next year, this would be the best time to begin.

In his budget speech, the Finance Minister said the Barisan Nasional Government is a responsible Government and has never misled the people.  But Daim was caught red-handed in trying to mislead the people with regard to the so-called abolition of television licences from 1 April 1999, showing that the Barisan Nasional government  does not qualify as a responsible government.

Daim also proclaimed that statistics do not lie. I do not dispute that. However, statistics are and can be used to support lies. The budget he presented to this House is clear proof of what I am stating. Changing basis of comparisons, selective use of numbers, convenient omission of facts and figures are familiar devices that the Barisan National government  has used in the past. This budget is no exception.

The Finance Minister touted figures of growth by the various sectors of the economy in real terms or constant prices. However, the Minister made no mention of how aggregate demand and its components performed during the year. The Economic Report in Statistical Table 2.1 curiously provides percentage shares for the components of aggregate demand but does not show either absolute numbers or the growth rates. By not showing these numbers, the Minister is concealing information. So much for transparency.

The text of the report in discussion of demand aggregates however is most revealing and shows how anemic growth is. It shows that GDP growth in 1999 was largely driven by public sector consumption expenditures, which grew by 16.7 percent. This was also accompanied by public investment outlays which grew by 9.9%.

The private sector saw a decline in investment of 21.5% on the heels of the decline of 25% in 1998. This is further confirmed by the fact that investment applications fell by 21 % in the first eight months of 1999 – with both domestic and foreign investors holding off. Approvals by MIDA fell by over 40%.  What these numbers indicate is that the investment pipeline is almost dry and real investment in the year ahead will continue to be weak. These trends show that the pump-priming efforts of the government have failed to provide the stimulus to investment by the private sector.

These figures rebut the claims by the government that capital controls have worked. The evidence is clear. They have contributed at best marginally to growth in the past year but have done long term damage. Although the relaxation of some capital controls have led to  a few foreign investment advisers to restore Malaysian shares to their emerging-market indexes, there was bad news yesterday when Morgan Stanley Capital International Inc (MSCI) announced in Geneva that  it had delayed Malaysia's reinclusion into its index to May 31, 2000 from February as announced earlier.

Although the reason for the three-month delay is to  avoid adverse market uncertainty over possible leap-year computer glitches, as  liquidity in global equity markets might be disrupted by uncertainty over whether certain computer systems would recognise the leap year date, the MSCI statement still referred to "certain issues" about the process of financial liberalisation which remained open and that "the investment procedures for foreign investors remain difficult in Malaysia".

The delay in reincluding Malaysia into the indices is expected to disappoint the country's stock market which had risen for most of last week partly on speculation that MSCI would readmit it sooner than February.  This disappointment is going to be doubly hard on the stock market, after the disappointment of the 2000 Budget to lift the stock market - as Kuala Lumpur Stock Exchange Composite Index ended lower at the end of trading last Friday, down by 7.33 points to settle at 742.87, unimpressed by the 2000 Budget.

Fund managers expect the  MSCI announcement to adversely  affect the market performance in the short-term with  foreign funds staying on the sidelines and probably waiting until the second half of next year before renewing their interest in the Malaysian markets.

This should be another  reminder of the downside effects of the capital control measures and why the DAP and Barisan Alternative want them to be  phased out.

I was talking about the anemic growth of the Malaysian economy.  Allow me to quote Dato Kadir Jasin, an acknowledged and recognized supporter of the Barisan Nasional  whom Anwar Ibrahim described as "proxy" of Datuk Seri Dr. Mahathir in Real Mild Sdn. Bhd in controlling the New Straits Times media empire, who had this to say in his New Sunday Times column yesterday:

That sums it all. The recovery is neither robust nor sustainable without massive government spending. We in the Barisan Alternative  do not disagree with the notion of pump-priming, provided it is characterized by targeted policies that revive private sector activity through the  creation of confidence.

DAP agrees that an expansionary deficit budget is necessary to stimulate economic recovery, but the country is not laying the basis for robust and sustainable economic recovery and growth  if  huge deficits budgetted go towards the funding of mega-projects and  the bail-out of crony companies.

There  are no signs that the government is prepared to undertake far-reaching economic and financial reforms and this is why the 2000 Budget is not so much  the People’s Budget as the  Barisan Nasional Fishing Budget.

The "feel good" budget will give a temporary boost to the economy but it hold dangers down the road. The downside of this "feel good" budget is that there is little pressure, especially on corporate Malaysia, to change. There are few incentives for companies to merge or hive off operations.

Banks are being pushed to lend more rather than to restructure some of the imprudent loans they have made in the past. Nor is there any viable way to control the quality of future lending.  All this spells danger. By creating artificial  euphoria and postponing the day of reckoning for corporate restructuring, the price will inevitably be higher. A year or two from now, this may well be unavoidable.

A related danger is that posed by Malaysia's undervalued pegged exchange rate. The ringgit has the crudest of pegs, with neither the discipline of a currency board nor a band to allow some flexibility. The boost given by the 2000 budget may result in some capital inflows, including the return of past flight capital which  would lead straight to monetary expansion -- just as in pre-crisis Thailand.

This  would lead to the reemergence of an asset bubble, not to sustained economic recovery. I urge the Finance Minister to avoid these outcomes by immediately taking steps to launch meaningful corporate debt restructuring, mergers and asset sales, and removing the currency peg and adopting a managed float of the currency. Now is the time to do so – not at a point in time when the external surplus is smaller and the level of reserves down.

But at the core  the  Finance Minister  wants cheap credit for corporations. He's not thinking of sustainable economic growth. Just as before, a lot of the credit will end up in the stock market or in property speculation rather than productive investment to raise industrial and export capacity.

Warning has been raised that although Malaysia's credit boom could go on through 2000, they are "just another financial-credit bubble" which could burst in  a couple of years when Malaysia would have to pay with "low economic growth, diving financial markets and political confusion".

It is clear that the contradictory policies of capital controls, despite the several u-turns, will cast their shadow in a negative manner for the foreseeable future. It is also clear that without policy consistency, clearly absent at the present point in time, investors – both domestic and foreign – are unlikely to put their money in this country. The Finance Minister must face these facts and not mislead the nation.

The Prime Minister may croon the Frank Sinatra tune "My Way" to claim victory in battling the worst recession the country has seen.  His Way may  not do  the country much good for the long term. Indeed, it is appropriate to remind him of the other words of that  tune which have another meaning that appears to  have escaped him  - "The final curtain draws… And the end is near…". Indeed those lyrics might aptly describe the circumstances confronting the Barisan National  that has done so much damage by pursuing shorted-sighted policies at great cost to the long-term interests of the people and  nation.


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