The 2013 Budget: Najib's Last Hurrah? (2)
Taken as a whole, Malaysia appears to have accumulated debt rapidly even as it loses competitiveness and is thus precariously placed. The Budget Speech made no reference to these issues despite the urgency and importance of these facts to the economic health of the country.
A full and transparent accounting is imperative to permit the development of strategies to avoid a debt crisis of the type affecting many of the countries, large and small, in the EUROZONE.
Current Economic Developments and Prospects
The preliminary estimates of growth cited in the Prime Minister's Budget Speech for the first half of 2012 are somewhat exaggerated and contradicted by recent economic indicators. Inflation has been under estimated and thus there is an illusion of a high rate of GDP growth in the first half of the year. What growth occurred can be largely attributed to expanded exports of oil and gas and an expansionary fiscal policy adopted in the Budget for 2012.
There are recent indications of a slowdown in exports resulting partly from weaknesses in global commodity markets; industrial output has also shown weaknesses. Growth in the second half of the year is likely to fall short of growth in the first half. Thus, the projected rate of growth of between 4.5 and 5.0 percent for the current year as a whole is unlikely to be achieved. A lower growth rate has implications for revenues; lower tax receipts will mean a higher deficit further compounded by rising public expenditures. Thus, the overall deficit for 2012 is almost certainly going to exceed the projected figure of 4.5 percent cited by the Prime Minister.
The claim that there was "robust private sector investment" is not supported. If anything, private sector players e.g. IPPs such as YTL, Genting Power etc., have divested. The claims regarding FDI are audacious indeed when account is taken of the fact that the numbers cited are based on APPROVALS rather than actual flows. Moreover, no account has been taken of the large OUTFLOWS, both legal and illicit.
The outward flow of capital poses a legitimate question: Why are domestic entrepreneurs rushing to buy real estate and other assets in the UK, the USA and elsewhere? These purchases are indicative of the poor investment climate brought about by an incompetent and corrupt regime. It is also provides an indication of the fact that the various incentives offered in previous Budgets have failed to induce the private sector to invest and provide the necessary investment response.
These trends are indicative of a ringing failure of policies. The so-called reform agenda, with its alphabet soup initiatives, has failed to move the economy forward to meeting the goals of achieving advanced economy status by 2020. It is becoming increasingly clear that the Malaysian economy is mired and stuck and will remain caught in a middle income trap until and unless bold measures are taken to implement true reforms.
The growth in market capitalization cited by the Prime Minister needs to be judged more realistically. Almost a third of the capitalization can be attributed to the GLCs. Market values have been raised by incestuous dealings and by the inflow of "hot" short term capital flows and reflect a return to the conditions that preceded the 1997/8 Financial Crisis that had a devastating impact on the economy. Earnings reported by the listed companies do not justify the euphoria and gloating about the size of the capitalization. Indeed, the observed growth in capitalization needs to be taken as a cautionary signal indicative of an emerging bubble.
Citation of per capita income growth from RM 25,000 in 2009 to RM 31,000 in 2012 needs to be taken with a grain of salt. The numbers cited are in current price terms and ignore inflation. Neither did the Prime Minister make mention of the worsening income disparities. Household incomes have largely stagnated and Malaysia continues to be caught in a low wage trap.
Turning to the economic prospects for the year ahead, the Prime Minister dealt with the matter in a single paragraph:
"In 2013, based on the prospects of an improved global economy, the Malaysian economy is forecast to expand strongly between 4.5% and 5.5 percent. For the first time, the nation's nominal Gross Domestic Product (GDP) is expected to exceed RM1 trillion. The higher growth is supported by private investment and consumption at 13.3% and 5.7%, respectively. The construction sector is expected to increase 11.2% followed by the services sector at 5.6%."
It is indeed remarkable that the Budget has been built on such grossly over optimistic set of assumptions both about the global and domestic economies. The Prime Minister's assertion that 2013 will see an improved global economy is most audacious indeed and at variance with the carefully considered assessments offered by virtually every financial expert or international institution. His assumption is an irresponsible and wholly unrealistic one.
By taking this tack, the Budget fails to take account of the bleak prospects for the global economy which will inevitably impact on Malaysia. The stark reality for the global economy is that the prospects for growth in the US economy are weak; the EURO zone according to moist observers is likely to stagnate; the UK economy is in a double dip recession; so too Japan; the two recent engines of growth in the world economy-- China and India - are unlikely to recover with robust growth restored. Thus, the external environment for Malaysia is not favorable as virtually every single market for Malaysian products will be either shrinking or stagnating.
Given its integration with the rest of the world, it is widely acknowledged that the Malaysian economy is vulnerable to any prolonged downturn in the global economy or a sharp escalation in global financial stress. A fall in exports and a worsening of the terms of trade would spill over into domestic demand. Financial spillovers could include a reversal of short term foreign capital. The Prime Minister has chosen to ignore these downside risks that Malaysia faces.
Christine Lagarde, Managing Director, International Monetary Fund in a speech on Sept 24th indicated that the IMF's updated forecasts for the global economy will be released in Tokyo in a couple of weeks. In her speech, providing a pre-view, she forewarned and focused on the broad direction of the global economy.
She noted: "The global economy is still fraught with uncertainty, still far from where it needs to be....." She went on to add and pointed to the increasing divergence of economic fortunes in the Eurozone; a tepid recovery in the United States; the slowdown in emerging markets; great concern in low-income countries about rising food prices and volatile commodity prices; growing frustrations across the Middle East.
Her remarks are of particular relevance to the Malaysian situation given its extensive exposure to the global economy. She noted that the major emerging markets are slowing. She urged that the need for focus should be on countering vulnerabilities - albeit domestic or external. This is a call the Prime Minister has ignored wholly.
The Prime Minister's reference to buoyant domestic investment and consumption to support a GDP growth of between 4.5 and 5.5 per cent in 2013, rates exceeding the optimistic projected outcome for 2012, do not tie in with the facts on the ground. His assumptions are based on a hope and a prayer and are designed to lull the nation into a false sense of security even as he pursues a desperate fight to retain power.
The huge fiscal transfers to households, represented by the so called goodies, cannot be expected to support consumption. The existing high indebtedness of households would limit increases in consumption spending. Consumption would also be curtailed by the impact on confidence by the general economic outlook by lower disposable incomes in commodity intensive sectors such as palm oil and sectors linked to the manufacturing supply chain, including small and medium enterprises (SMEs).
The Prime Minister's Budget is a huge gamble driven by short-term political and electoral considerations. He has ignored the realities of the circumstances and chosen to go forward with a fiscal package that does not address the serious challenges confronting the country. It is nothing but a desperate roll of the dice.
The policy course he has charted incorporates continued large spending resulting in a persistent and unsustainable budget deficit that has been a feature of the government's economic policy for well over a decade. No new initiatives were offered to get Malaysia out of the vicious circle. It is rather telling that the Speech contained nothing substantive about needed policy reforms or a course correctioin. It focused largely on the giveaways he proposes and a political tirade against those who offer an alternative vision.
The nation needs to take particular note of the following statement in his Speech.
"Apart from the transition from bulk subsidies to targeted subsidies, a review of Malaysia's taxation system will be continued to ensure the taxation system better reflects the household's financial position. The transition from income based taxation system to a more comprehensive and fair taxation system will eventually benefit the rakyat".
This statement is most ominous as it lays out the intention to reduce subsidies and at the same time to introduce a GST after the General Election. This is an indication of what the Prime Minister has in store. Thus, returning him to power guarantees a double whammy of new tax burdens and a scaling back or even an elimination of consumer subsidies that benefit low and middle income groups.
It is indeed cynical of the Prime Minister to incorporate far reaching strategic policy intentions and mention these only in passing. It would appear that the Prime Minister intends to satisfy the markets in meeting deficit targets by riding on the backs of ordinary citizens.
He shows no inclination to address the pressing fiscal issues by taking a balanced approach that looks at both the revenue and expenditure dimensions. Prudent fiscal management demands that equal attention needs to be paid to both the revenue and expenditure sides of the fiscal equation. He appears to be oblivious of the needs to take a balanced approach.
It is clear that there is ample scope to check the bloated and run away expenditure. The size of the public sector has as a result of all kinds of initiatives taken by the Government under its so-called Economic Transformation Program grown rapidly.
This outturn contradicts the Prime Minister's statement that the era of "government knows best is over". Indeed, the public sector is projected to expand by a further 13.3 per cent in 2012 to account for 25.2 per cent of GDP (up from 23.3 per cent in 2011), meaning that the government will play an even larger role in the economy, rather than scale back its footprint and allow the private sector to assume a lead role in moving the economy forward.
Any rationalization of the fiscal structure of the nation must begin by improving the productivity of the public sector; the adoption of competitive bidding processes in the purchase of goods and services and construction works are needed to lead to not only greater efficiency and lower costs but also to reduce the obscene levels of corruption. It is also time to review the nation's defense policies. There is no justification for expending billions of ringgit in acquiring over-priced submarines that do not submerge, planes that do not fly and patrol boats that can hardly float.
The time has come for true accountability and transparency in public spending. It time for the Government to disengage from activities that are best left to the private sector. It is time for the monopolistic GLCs to be delinked and to play on an even field with small and medium sized businesses permitted to grow and prosper. Malaysia needs to go through a new round of true privatization to restore vigor to the economy. The public sector, now accounting for almost a quarter of the economy, should be targeted to represent no more than 20 percent of the entire economy.
In this context it is important to note that following the Annual Consultations, the IMF concluded that high and stable growth would require sustained structural reforms anchored around medium-term fiscal consolidation. The IMF also made the following additional recommendation:
"Efforts should concentrate on increasing fiscal space to allow room for countercyclical fiscal policies, putting federal government debt on a declining trajectory, and removing distortions in the tax and subsidy system. Broadening the tax base through the proposed goods and services tax would help reduce reliance on pro-cyclical oil?related revenues. Resource allocation would be improved by the streamlining of subsidies and wasteful tax incentives, and replacing them with targeted assistance to the needy."
The Prime Minister has ignored these important policy recommendation and stuck to policies that have failed.
The Budget for 2013 is grossly irresponsible as it fails to respond to the dangerous challenges the nation's economy faces at a time when the global economy is in turmoil.
This Budget is irrelevant to the needs of the country. When bold leadership with a clear vision is demanded, the nation has been presented with a package that fails to offer realistic solutions to the problems that have accumulated after decades of poor governance.
The Budget statement is narrowly designed with a single goal: winning the upcoming General Election at whatever cost. And the cost is high both in terms of the billions of ringgit being dished out and the long term damage being inflicted on the economy by inaction and the adoption of irresponsible policy measures.
This current Budget is essentially dead on arrival. The Prime Minister would be well served under these circumstances to withdraw this Budget and seek an interim allocation to allow the Government to operate in the early months of 2013.
The most responsible and appropriate approach would be to allow for the introduction and adoption of a Budget following the General Election. A Budget introduced, post GE 13 by the winning coalition, would enjoy greater credibility, have the mandate of the people and allow for a level field for the Election to be fought out.
That would represent a victory for democracy and provide proof that the power was not being bought by a discredited incumbent regime whose mandate has all but run out. The adoption of an interim Budget would thus mark a milestone in the maturing of governance.
The Prime Minister must take account of the fact that this Budget will not stand and will inevitably be overturned in the post-election.
A Pakatan administration will introduce a responsible Budget that reflects reality and boldly takes on the need for fiscal consolidation and other reforms that put the country on a new trajectory leading to sustainable growth providing equitable distribution of the fruits of development.
In the event the BN coalition is returned to power with a fresh mandate, it too will almost certainly be compelled into presenting a new Budget. The compulsion will arise from the fact that there will be a demand from market forces and the rating agencies for a policy package that fully addresses the serious challenges facing the economy. It will not be able to resist change, unless it wishes to face a collapse of confidence and the onset of a major economic crisis.