Yesterday, the repetition by the Prime Minister, Datuk Seri Abdullah Ahmad Badawi that Malaysia will not be hit by the global financial meltdown is most disturbing as Malaysia has both strong and weak economic fundamentals.
Malaysia’s past economic performance was in part linked to high rates of domestic savings and FDI flows. Capital was readily available – it was directed by the state, not necessarily into the most productive sectors.
Paul Krugman, the much-acclaimed economist now awarded the 2008 Nobel Prize for Economics, in his analysis about the Malaysian economy had drawn attention to this issue and questioned the capacity of the country to remain competitive.
It is indeed remarkable that no heed was paid this feature in government policies. Both in the Mahathir and Abdullah eras the essential economic policies remained unchanged — directed investments into large projects with low returns; a less than transparent and accountable use of national resources thus contributing to the growing level of corruption and abuse.
The exploitation of oil and gas resources in an unaccountable manner led markets to recognize the unsustainable nature of the Malaysian development pattern. Malaysia has in this regard adopted some of the first possible features of the Latin American economic development path. It would appear that no account is being taken of the changed circumstances.
The Second Finance Minister must take responsibility for much of the preparation of the gravely-flawed 2009 budget. It is indeed most troubling that despite the catastrophic developments in the global economic scene in recent weeks, he continues to mouth statements that Malaysia’s economic fundamentals remain strong; that Malaysian growth rates will be only marginally lower in the year ahead; inward FDI flows remain high; foreign exchange levels are sufficient to finance 9 months of imports and thus Malaysia will not feel the full impact of the ongoing crisis.
These and similar statements have also been articulated by the Prime Minister and the Deputy Prime Minister. These statements are greeted with a degree of disbelief by investors, the markets and rating agencies as they do not deal with the fundamental weaknesses associated with high inflation, a unsustainable budget deficit, outflows of capital and a mountain of contingent liabilities made up of guarantees that have been signed as part of the various toll and other concessions.
This is a serious state of denial and Ministers appear to operate under the assumption that markets and the private sector will accept Ministerial pontifications as the true elaboration of the current economic scene. Further, they assume that upbeat and fanciful statements are sufficient to lull markets. If anything these statements have the opposite effect.
It is patently clear to all and sundry that Malaysia is a small economy, open and therefore vulnerable to developments in the global economy. It is not insulated or protected; it is dependent on inflows of FDI; its growth and prosperity are linked to exports of commodities and manufactures; demand and price developments in the global markets have a direct impact on output growth, employment and prosperity.
Given these circumstances, the current global crisis will inevitably impact on the flows of FDI, the demand for its exports ( both manufactures and commodities), a deterioration in export prices. These externally generated impulses will inevitably be transmitted into the domestic economy and result in lower growth, a worsened labor market and a decline in consumption.
In brief, Malaysia faces a severe and bleak economic outlook.
The danger to the economy is even greater when account is taken of the already poor economic fundamentals represented by:
• The highest rate of inflation experienced (8.5%) over the past quarter century;
• An unsustainable fiscal deficit projected at 4.8% this year and 3.6 next year ;
• Billions of dollars of hidden contingent liabilities — akin to IOUs written to GLCs, crony corporations; an unendingly flow of subsidies to private entities that believe in the notion that profits can be privatized while losses are to be nationalized.
• An interest policy that has been irresponsible and largely favored to help over-leveraged “friends” of the BN and to keep Government borrowing costs low;
• A manipulated and less than transparent exchange rate policy that has contributed to imported inflation;
• The policy of “no bid” award of tenders and projects to BN connected companies and contractors that has contributed to increased project costs
• The loss of competitiveness through corruption and poor governance.
• Credit rating agencies had lowered Malaysia’s ratings
This list is not exhaustive but indicative of how the economic fundamentals have deteriorated in the recent past.
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(Speech on the 2009 Budget in Parliament on 14.10.08)