Four factors for incorporation in post-Iraq war economic stimulus package

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Four measures which the post-Iraq war multi-billion ringgit economic stimulus package should adopt to prevent the Malaysian economy drifting to disaster

Media Statement
by Lim Kit Siang

(Petaling Jaya, Wednesday): When the Budget for 2003 was presented in Parliament in September 2002, the Prime Minister, Datuk Seri Dr. Mahathir Mohamad, despite the global uncertainties and the sharp drop in FDI flows to Malaysia, chose to forecast that the Malaysian economy would grow between 6 and 6.5 percent in the year ahead, which was questioned and criticised by economists and analysts.

By adamantly sticking to the unrealistic forecast, the Government sent the wrong signals to the markets and further damaged its credibility for competence.

I had warned against such unrealistic forecasts at the time and called upon the Government to move away from a state of denial to accept that the global economy faced a precarious outlook and that Malaysia was not an isolated oasis that could ignore the gathering storm.

In the six months since the budget was presented, the global economy has suffered further setbacks and the prospects for growth in the next three quarters have been sharply lowered. The US-led war of aggression against Iraq has raised the level of uncertainty. The IMF has lowered its forecasts and its Managing Director warned that the world economy was likely to face a recession. And he is not alone. Alan Greenspan, the Chairman of the US Federal Reserve Board has also expressed concerns. The war, coupled with the reckless fiscal policies being pursued by the Bush Administration, has created circumstances that are alarming from the viewpoint of global economic prospects. The markets have recognized the dangers. The major bourses are in retreat.

Bank Negara however has chosen to ignore the global uncertainties. In its 2002 Annual Report released last week, it assumed fairly robust growth when it postulated that "global economic growth is expected to expand modestly by 3.1% in 2003 (2002: 3%), while world trade is expected to increase by 3.5 - 4.5% in 2003. Growth in the major industrial countries as a group is estimated at 1.8% (2002: 1.6%)"

Based on these rosiest of assessments, Bank Negara has in an ostrich-like stance persisted with the fiction that Malaysian economic prospects remain bright. The latest Bank Negara Report said:

"Based on the assumption of a modest world economic growth, some pick-up in the global electronics industry, firm commodity prices and further expansion in intra-regional trade, real GDP growth in Malaysia has the potential to be sustained in the region of 4.5% in 2003. Growth would be mainly domestic driven, supported by a modest growth in external demand. While the public sector would remain supportive of growth, private sector demand is expected to assume a more significant role in driving economic expansion in 2003. The improved domestic fundamentals would provide support for the sustained strong consumption and continued recovery in private investment. More encouraging is that after two consecutive years of negative growth, private investment is expected to turn around to increase by 8.1% in 2003, supported by domestic capacity expansion and a steady inflow of foreign direct investment."

The optimism reflected in the Report stands in sharp contrast to the reality of the circumstances the nation faces. This is vividly illustrated by the fact that more than 40,000 people lost their jobs in 2001-02 in the electronics industry. Restructuring of industries in Shah Alam and other industrial sites led to the loss of some 100,000 people between November 2001 and last month.

Realized FDI inflows as opposed to "approvals" are at the lowest levels in over a decade. Lack of foreign investment is hurting the Multimedia Super Corridor (MSC), which is on the road to being an IT ghost town. The recent self-inflicted wound in the Palm Court Incident has further damaged prospects. The war of words with our near neighbors is affecting tourism earnings. Domestic investment is stagnating for reasons unconnected with the global scene. The Islamic state issue has had a damaging impact on the investment climate; so too the uncertainties linked with the internal machinations within the Barisan Nasional.

Prices of almost all items have increased by an average two percent as of last Thursday, which is not considered bad, but the maximum increase was in communication, transportation and in industrial products. To arrest price increases in export-oriented products, Malaysia announced a cut in natural-gas prices by 50 percent, which followed a recent 2 percent increase in petroleum prices.

As part of measures to kick-start the economy, interest rates have been slashed in part to encourage people to buy locally-made cars to save the ailing automotive industry and low-interest loans for housing.
Civil servants were given interest-free housing and car loans from banks to keep the economy afloat. There is a growing fear that non-performing loans are likely to increase sharply as the economy slows down.

Since the 1997 crisis, the Government has relied on pump priming as a key instrument of policy to sustain growth. The government has been mistaken in its use of pump priming as a viable policy instrument. It is an appropriate instrument in countering cyclical movements but not a long-term tool for addressing structural imbalances.
The Malaysian economy has deep structural problems linked with the bubble created in the 1990s. It has over-invested in infrastructure with low rates of return and has persisted with the policy. Even more telling is the loss of competitiveness as evidenced by the inability to attract FDI, which provided the impetus for export led growth.
The current strategy of the Government of domestic-led private sector driven growth,"with the Government providing a positive enabling environment for private sector activities and initiatives." is headed for failure. It is a strategy dependent on the rapid growth of Small & Medium sized Enterprises. But these are hardly in a position to act as an engine of growth. The Bank Negara report makes reference to the role and status of SMEs in the following terms:

"The survey findings showed that in general, the potential ability of SMEs in Malaysia to compete and contribute effectively to the economy was affected by their relatively small scale, low efficiency levels and insufficient comparative advantage. Other pertinent issues affecting the viability of the SMEs including access to advisory services and access to financing were also highlighted in the report. The main findings of the survey are: -

SMEs are largely involved in the trading, manufacturing and services sector.

88% of SMEs are family-owned businesses with 72% operating as private limited companies. Foreign ownership in SMEs is small with participation in less than 15% of SMEs, while 26% of SMEs surveyed are Bumiputera-owned enterprises.

The SMEs are generally very small with 77% having total assets of less than RM5 million and 74% having less than 50 employees.

The SMEs were generally affected by the 2001 economic slowdown. 29% of SMEs surveyed were insolvent while 33% were breaking-even or making losses. 70% of the respondents generated sales of less than RM10 million with 50% reporting sales of less than RM6 million, while only 8% of SMEs export their products.

62% of the respondents indicated that they did not have difficulty in obtaining financing. 47% financed their business operations through borrowings from banking institutions, 32% through self-financing while 11% were financed through borrowings from other sources.

Generally, the survey showed that SMEs had low investment in technology and computer utilisation. 45% of the SMEs are still labour-intensive and 48% have low computer usage.

This then is the reality. Overcoming these hurdles will demand much more focused and sustained measures well beyond those articulated in the 2003 Budget. SMEs are not the saviours. The greatest challenge is to channel finance to SMEs. That is unlikely so long as the Government is obsessively focused on bail-outs of crony corporations, mega projects, re-nationalization of failed privatized entities and other ill-onceived schemes such as Valuecap. If the largest proportion of national savings are thus channelled, little remains to strengthen SMEs.

The 2003 budget projected a deficit of 3.9 percent of GDP, lower than the revised figure of 4.7 percent in 2002. This is the sixth fifth year in succession that the Federal budget will record a deficit. There can be no denying that budget deficits on this scale are unsustainable in the long run and can only be harmful to the long-term health of the economy.

However, it is salient that in 2002 Net external borrowing is now estimated at RM 11.95 billion as against what was stated in the budget at RM9.79 billion. The Report gives no estimates of borrowings in the current year. Hidden in these arcane numbers is a devastating revelation - that the government had borrowed heavily for bailouts; that it short-changed local lenders (largely depositors in banks and EPF contributors) who were compelled to lend at low rates so that the government could bailout its cronies. The structure of the Federal Government's domestic debt is equally revealing. Of the total domestic debt, 56 percent was owed to the EPF and another 19 percent to banks and insurance companies. Thus, in the final analysis, over the years ordinary Malaysians have loaned the Federal government as much as RM 90 billion to squander in the name of "development".

The absence of transparency and accountability in the investment decisions of the EPF Board assume a new meaning when the declining dividends paid out to contributors are in part at least due to the low interest rates paid by the Federal Government for its borrowings from the EPF.

The nation faces difficult choices and these times which demand difficult decisions. The key challenge is: how it can regain competitiveness and return to sustainable growth.

To meet the immediate task of cushioning the impact of the global slow down , a number of policy initiatives are needed. These should be viewed from the over-riding need to sustain demand and protect employment.

Pump priming is a palliative and is delusional. It cannot be a basis for sustainable growth in the long term. Massive pump priming over the past years has led to resources being channeled to mega projects and the building of white elephants. We are likely to see "more of the same" in announcements that are pending. No attention has been paid to issues of the quality of investment and its direction. Most investment has been channeled to projects that have low economic returns, are capital intensive and have led to the creation of bubbles.

What the nation needs, however, is more investment in schools, expansion of tertiary education, and in R&D. Given these considerations, the development budget should be carefully reviewed and reoriented. Hopes for a sustained contribution from the SMEs to boost private investment, are unlikely to materialize unless radical policy changes are introduced. SME growth will only come about if it is supported by R&D and injection of capital. So long as the government hijacks investment resources to support bail outs, undertake reverse privatization and build more white elephants, the SMEs are unlikely to have the capital to expand.

Fiscal and monetary policies, however sound, are inadequate to create the environment to sustain growth in a difficult world environment. What is most critical are changes to restore credibility and to improve the overall business climate.

There are four factors which the post-Iraq war multi-billion ringgit economic stimulus package, which is expected to be announced any time after more than two months in preparation, must take into account to prevent the Malaysian economy drifting to disaster, viz:

corruption has reached levels that it sharply affects the viability of doing business. The odor of corruption can no longer be masked.

In the aftermath of Sept 11, the issue of stability in the region has become of concern to foreign investors. Toning down the rhetoric of Malaysia being an Islamic state is essential to restoring investor confidence. Better still, withdraw the unconstitutional "929 Declaration" that Malaysia is an Islamic state.

The megalomania for mega-projects is seen as a negative factor in long-term assessments of the economic prospects of Malaysia.

Efforts at corporate restructuring are seen for what they are - out- and-out bailouts of cronies. Financing of these bailouts through the use of public resources managed by Khazanah, EFP, or Petronas do not sit well with markets. Even bond issues are nothing more than the use of private savings to aid a few chosen tycoons. The time has come to put in place policies that are driven by the national interest rather than private crony interests. Greater transparency in investment decisions by EPF and other bodies is urgently needed if markets are to be persuaded that investments are solidly based on fundamentals and not politically-motivated calculations.

Malaysia faces challenges it has not faced before. It does not have the luxury of following failed policies, or policies that have a short term focus. The hard choices that have to be made can no longer be avoided or postponed. The long term prosperity and well being of the nation demand that the real issues be confronted frontally. Any new stimulus package that ignores the pressing issues is likely to have far reaching long term consequences.

(2/4/2003)

* Lim Kit Siang, DAP National Chairman