Malaysian Economy, Where Will It Go From Here (Part 2)

Getting priorities Right by Wan Saiful Wan Jan (The Star)

“The Government has suddenly realised that we are in a bad fiscal situation. This news is not very new, actually.

Back in 2010, the alarm had been raised that Malaysia could face bankruptcy by 2019 if we continue giving handouts and subsidies the way we have been doing for decades.

With the benefit of hindsight, perhaps it would be right to say that the Government should have acted as soon as the warning was issued. Unfortunately with the 13th general election, politics took precedence over leadership.

And now, several months after GE13, the Government looks set to make some difficult decisions. The Goods and Services Tax (GST) will come into effect soon. And various subsidies will be reduced.

Let us get one thing clear. The Government is not increasing prices.

Instead, the Government is reducing subsidies and removing price controls that have been keeping prices artificially low for many years.

Prices should have actually gone up gradually over the years. But government intervention has kept them lower than what they should be, such that when the subsidies and controls are removed, the increase is drastic.

Many people are complaining about the rising cost of living. Rightly so. The cost of living is indeed increasing.

But some of the complaints are rather misdirected because they call for the Government to continue subsidising and controlling prices. This is the wrong demand.

Further subsidies and price controls will only keep us living in a false world, one in which the actual cost of living is masked by interventions by politicians, whichever side of the political divide they may be on. And the reality is, the interventions are unsustainable anyway.

The fact is, subsidies, handouts and price controls should be removed. The market must be allowed to function efficiently with minimal distortionary interventions. Therefore the Government’s decision to stop them, is, in principle, praiseworthy.

I say “in principle” because there is another factor that must be taken into consideration. That is the issue of prioritisation.

Malaysia’s fiscal management is in a sorry state. Every day we hear reports about how our money is wasted on travels, projects that are not needed, corruption and leakages.

Plus so much wastage has been identified in the Auditor-General’s Report again and again every year.

If the Government wants to save money, they should prioritise reducing the wastage and leakages.

They should also prioritise removing subsidies given to big businesses and concessionaries, and recovering money given under questionable situations.

Actions that affect common people should come last on the list.

Unfortunately it is still not clear what is being done to prevent problems already identified by the Auditor-General.

There is no news about how the Government plans to stop subsidising corporate entities and concessionaries. Nobody knows if the billions lost to questionable projects and contractors will ever be recovered.

Let me stress again that I completely agree subsidies and handouts must be removed. They have distorted our economy for such a long time, and they are bad for our future economic growth.

But the way these steps are being implemented today makes it impossible to argue for subsidy removal. The Government has prioritised the wrong first steps.

Let me suggest some more steps that can help save money without hurting the public.

Our Government spends billions every year in public procurement. Ideas studied this topic in 2013, and we have released a policy paper on it recently. We calculated that simply by improving the processes of public procurement, we could save up to RM2.3bil in public procurement alone.

If we add the amount of money spent by the Public Private Partnership Unit (Unit Kerjasama Awam Swasta) under the Prime Minister’s Department, the potential saving could be much more. But the unit operates in a protected environment and not much is known about how they evaluate contract proposals.

We need more transparency around Ukas.

Nevertheless, I am glad that Datuk Paul Low, Minister in the Prime Minister’s Department, has managed to persuade various agencies to improve their processes and employ competitive tendering instead of direct negotiation. This is a brilliant first step.

Another step to save money is by reducing the size of the civil service. Why exactly do we need to have such a bloated civil service anyway?

Now is a good time to start issuing redundancy notices to as many civil servants as possible.

Perhaps they can start with under-performing officers. They should be sacked, not merely transferred to another unit.

An example of government leadership is being shown by another country that is also facing fiscal challenges after decades of government splurging – the United Kingdom.

The UK government has committed to cutting administrative staff at their ministry of education by 40%, and another 23,000 administrative posts in their health services. That is concrete action.

If we see concrete actions with the right priorities, the Government will face less resistance.”

Some highlights of the articles:

1. Our fiscal situation is bad. It is not new. It has been plaguing the country since many years ago, up to a point the World Bank estimated that at the rate we were going we would probably be bankrupt by 2019. Many Malaysians are ignorant to that fact that we were desperate for fiscal remedies.
2. Learn about fiscal policies in Investopedia, though some economists shun Keynesian ideas but the gist is there.
3. Goods and Services Tax is a form of consumption tax which its introduction would aid the country in reducing fiscal deficit. So welcome, GST.
4. Subsidies, price controls and cash handouts would never ever work in the long run.
5. Malaysians have been living in a false world where food price is (generally) cheap, non existent price increase (when price hikes normally happened during festivities). Thus when the government had to normalise the price by lifting the price controls, then all hell breaks loose. Just how is it to make you people understand that price increase is inevitable?? You can’t expect the price of 1kg of flour to remain constant at RM2 (for example) forever. That’s just not gonna happen.
6. It seems that we have too many whiners who don’t (refuse to) understand the necessity of the government’s actions.
7. Nevertheless spending cut should be a top priority. We have too many civil servants for such a small country (for God knows what reasons). There has been no profound action taken so far in handling corruption and leakages in government spending. UK govt as quoted in the article has successfully cut down their civil servants even up to 40%. That showed how committed the country is in curbing their challenges.

Till then, godspeed Malaysia.

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Malaysian Economy, Where Will It Go From Here? (Part 1)

Our index this year

It’s nearing end of 2013..lots of things happening in Malaysia, particularly on the side of our economy this year. We finally had the 13th general election in early May after waiting for almost 18 months for it. Again Barisan Nasional coalition won with majority albeit losing 7 parliamentary seats.

Market moved in a positive direction where we could see 5% gain in KLCI in the 3-4 weeks after the election. But then came tapering of quantitative easing announcement which has halted the rally. We could see spike in bond yields by 80-100 bps and also weakness in emerging market currencies, including Ringgit, where it has lost 10% of its value from end May to end August.

See the spike after the election?

 

Our bank has issued the first bond in the market after election and it was oversubscribed by 9 times times. Yes, our market was hungry. Prior to election everyone was cautious and sentiments were difficult to gauge, therefore it kinda hamper the excitement. Turned out everyone was hungry for new issuance, especially coming from an AAA rated issuer.

You happy, index?

Then along came Fitch with its rating downgrade. The rating agency has put Malaysia under negative watch (from stable) in July due to slow pace of fiscal reforms and rising government debt. As at end 2012, government debt has risen to 53.3% of GDP, whereas our revenue (mostly from petroleum) remains low at 24.7% of GDP. As expected, the first measure taken by the government was cutting down the oil subsidies. For which I believe, wherein other people blame the government for the sudden reduce in subsidy, was a necessary move in order to reduce fiscal deficit.

Well, a little input on sovereign ratings; it consist risk assessments assigned by the credit rating agencies to the obligations of central government. In other words it is the assessment of the likelihood that a borrower will default on its obligations. The ratings directly affecting fund raising activities, as it determines how expensive the cost of fundings will be. Lower rating assigned would indicate that it is more difficult for companies to raise foreign currency funds and it would be expensive for the country to borrow money from abroad. Plus, lower rating would dampen investment flow into our equity and bond market.

Anyway…the implementation of GST (as announced in 2014 budget in October) and the lowering of subsidies are not enough of measures to address fiscal deficit. The nation needs real structural reforms, say by way of tackling corruption and reducing leakages. Even after announcing the implementation of GST, Fitch still maintain its negative outlook, probably until they’re seeing our track record of budget management.