Strengthening of fiscal policy?

Malaysia’s sovereign risk profile compares poorly to rating peers on the fiscal side. Accelerated by the drop in oil price and weakening ringgit. Being an oil exporting country, it has to absorb a large terms-of-trade shock and face greater fiscal and external vulnerabilities.

Further hike in OPR is expected in 2H2015, probably after the implementation of goods and services tax (GST) in April. Statistically speaking, housing credit has remained pretty stagnant over the last few years, whereas personal loan and vehicle loan are on the rise. I think such unhealthy situation like this wont warrant the central bank to further increase the interest rate this year. Furthermore with the recent implementation of GST, which would normally gives a profound impact to the economy especially within its few months of implementation.

The increase in government’s development expenditure (as announced in the budget 2015) is expected to boost GDP in 2015 due to development expenditure has a higher multiplier impact on the economy relative to government’s operating expenditure.

One thing for sure, 2015 aint going to be a good year for the economy. Say on the currency front, there are analysts who predict that the ringgit might go down to 3.80/dollar level by year end. That is quite a scary possibility. Last week we could see there had been a slight increase for ringgit, 3.62/dollar, but that was expected due to the issuance of the dual tranche $1.5bil sukuk wakalah. By next week the rate could go back down again, we shall see.

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Malaysia Market Reform – How to Get out of Fiscal Debt Situation

Poland and Slovakia among many other countries currently are dubbed as high income nations, where these countries have made significant economic reforms after being stagnant in the early years. South Korea for instance, has amazing economic growth within a short period of time, where it was once a devastating nation due to the Korean war and had managed to transform to becoming one of the wealthiest nation in the world.  

Challenges for Malaysia, are of short term and long term, where the next general election is in 2018, and until then there are key areas that the current government administration is tasked to do.  In this case few economic matters are of concern, which are reducing the government debt, implementation of GST, strengthening of ringgit and reducing the debt-GDP ratio. Now there are two things that are also of concern in my opinion, in terms of our corruption and competitiveness indexes. We are still far from achieving corruption-free state and our competitiveness index is at the unsatisfactory level (24^th out of 148 countries).

A reform can simply be defined as a major policy change. In economical sense, this could mean a positive improvement to the society, such as in reducing the country’s fiscal deficit. A successful reform could also mean by spreading the burden of the adjustment of government expenditures and revenues across income classes and income sources.

 Some suggested economic reforms:

– Enhancing the role of private sector in the society and limiting government’s involvement in infrastructure projects, which in turns would lessen the contingent liabilities for the government.

-To increase government’s revenue (to achieve >25% of GDP) via more efficient tax collection system and to move away from oil and gas revenues stream.

– Eliminating price controls, deregulating capital markets and lowering trade barriers. As for capital market point of view, to limit foreign holdings in the stock market, to limit GLC participation by way of encouraging the GLCs to sell down their ownership in stocks as well as to ease companies participation in the ACE market and also their movement from ACE market to Main market of Bursa Malaysia.

– Limiting the subsidies and handouts. Though BR1M is a measure of targeted form of subsidy, it is still bearing the characteristics of featherbedding, which discourages and limits self development in the society.

– Allowing media freedom

-Encourage self reliance in food production, which means promoting and supporting the agriculture industry.

All these economic reforms in transforming the country’s political economy should start from the grass roots level, and that includes individual, household and the society at large. Educating the rakyat on the necessities of reforms and difficult government decision such as subsidy rationalisation should be a priority. Any policy reform is indeed painful at the beginning, which largely due to people receptive of changes, thus it is important for the government to disseminate the right information.