The government’s New Economic Model structural reform agenda is aimed at raising average annual growth to 6% until year 2015. While implementation of the agenda would be positive for Malaysia’s economic fundamentals, even the talk of reform has already provoked considerable political opposition.
When first introduced, the NEM was supposed to be Malaysia’s new selling point to local and foreign investors and the country’s passport to a better future. It now appears to be aborted before birth. Or at best, it appears to be a newly arrived baby in the critically ill ward, and needing an incubator and special attention if it is to survive at all.
Chief amongst its enemies has been Perkasa and Dr Mahathir Mohamad. From them emerged harsh talk about Malays losing power in the country and of Umno allowing the situation of Malay dominance to be so badly eroded that the community is facing a bleak and hopeless future.
While Perkasa may claim a big membership of 200,000 – even if unsubstantiated or exaggerated – the results of a survey released in April by pollster Merdeka Center nonetheless did show that the right-wing group has been gaining popularity. The centre found that nearly 70 percent of Malay voters in the peninsula agreed with Perkasa’s demands for the government not to dismantle quotas and economic protection for the Malays.
Describing the list of demands sent to Najib Razak before the prime minister presented the 10th Malaysia Plan in Parliament, Perkasa economic bureau chief Dr Zubir Harun said, “We (Malays) would, of course, require assistance from the government.” Asked by reporters about any consequences should the government not consider Perkasa’s memorandum, Zubir replied that there would be “political implications”.
What form the ‘implications’ might take would boil down to the numbers game. “Malaysia comprises 55 percent Malays and 12 percent of other Bumiputeras, which total 67 percent Bumiputeras. Therefore, the nation’s wealth must be 67 percent for Bumiputeras but we get 30 percent only,” Perkasa president Ibrahim Ali decried at his movement’s inaugural congress in March – an event that was graced by ex-premier Mahathir.
It is the latter who has taken centre stage and had the spotlight shone on his continued manipulation of the Malay sense of insecurity. While Dr Mahathir’s scaremongering has been the grist for many a debate mill, his views on FDI is of equal public interest.
Now cautioning that Malaysia “should be more selective with FDI”, Dr Mahathir seems to have changed his tune from his past grand visions of ‘Look East’ development. He says presently: “Certainly we should not encourage foreign developers to develop high cost projects which are not within reach of local buyers. Rather Government should help local investors to develop these specialised areas by building needed infrastructure.”
He advocates “supporting local industries to grow big”, and cites Japanese and Korean world class businesses “with their own brand names” as examples of success.
Dr Mahathir’s selective amnesia appears rather convenient when one recalls how his expensive state-backed Proton project failed to make a dent in branding overseas, not to mention at home where it would have surely failed a long time ago were it not for crippling taxes levied on imported cars and injection of massive amounts of taxpayers’ money to buoy Proton.
Dr Mahathir’s continued efforts at whipping up fear amongst Malays has now been taken up by some other Umno leaders, including former party secretary-general Sabbaruddin Chik who was reported by Malay daily Berita Harian recently as saying that all the hard-fought privileges accrued by the Malays over the years would soon be lost if they are to be “disunited”.
The anti-Chinese agitators are missing the forest for the trees since they fail to ask what would be the point of having 99.9 percent political power if the economic cake has crumbled. Getting a guaranteed share of a small equity or property market cake is what the warlords may insist upon but at what cost to young Malays when the jobs that come with local and foreign investment disappear.
And if investor sentiment is the gauge of how well Ibrahim Ali – who avows he is proud to be a “jaguh kampung” – and Dr Mahathir and their friends have done, then they all should pat themselves on the back for doing a great job of scaring the business community, and not only just the Malay community.
Capital continues to flows out
According to a recent report, Malaysia’s capital account is now showing eight consecutive quarters of outflows. The capital account is an account that tracks the movement of funds for investments and loans into and out of a country.
Not only is money and funds moving out of Malaysia, so far this year, according to Emerging Portfolio Fund Research data, Bursa Malaysia has received just two percent of total equity inflows into the emerging markets of Asia – yes, two percent.
Unlike in other countries, where fund managers and strategists have been buoyed by recent sentiment and momentum, there are few catalysts to tempt investors into buying Malaysian stocks or to encourage new investment flows from abroad.
According to Fitch, one of the world’s leading rating agencies, in a statement issued on July 8:
“The deterioration in Malaysia’s public finances that motivated the local-currency rating downgrade in 2009 looks unlikely to be unwound soon. The authorities’ structural reform agenda has the potential to improve Malaysia’s growth prospects, but the government’s ability to overcome political obstacles to reform is not assured and it will take concrete progress to exert upward pressure on the ratings.”
Fitch projects Malaysia’s federal government debt to reach 54.4% of GDP by end-2010, up from 41.4% at end-2008 and well above the ‘A’ median of 40%.
The federal deficit hit 7.6% of GDP in 2009 on the agency’s measure and is projected to narrow only moderately to 6% in 2010.
Meanwhile, structural weaknesses in Malaysia’s public finances continue to weigh on the ratings. The country’s fiscal revenue base remains relatively weak, with federal revenues at 22.7% of GDP in 2009, against a 10-year average for the ‘A’ range of 34%.
Higher energy revenue reliance
Furthermore, fiscal dependence on the energy sector is high and rising, threatening higher revenue volatility in the medium-term. Energy-derived revenues were 41% of total fiscal revenues in 2009, up from 20% in 2003.
Should oil and gas revenues decline drastically, then the introduction of a goods and services tax (GST) to strengthen the revenue base may well be sooner rather than later.
An early warning of this has already been given by Petronas which revealed last week of a 23.2 percent plunge in net profit for the fiscal year ended March 31 due to weak demand and low oil and gas prices. Revenue fell 18 percent to RM216.4 billion due to a contraction in product prices and lower sales volume.
Should the collapse in global consumer spending and falling industrial output continue, the nation will be in deep trouble.
What are the alternatives?
The country’s best bet to attract investor interest and reduce the deficit appears to be the old standby of privatizations and special concessions to entice investors.
Some observers have argued that accelerating the privatization of GLCs can bring about a virtuous cycle of a reduced budget deficit; a re-rating of the country’s local-currency debt; and a chance of taking a bigger share of the short and long-term foreign capital heading Asia’s way.
Najib has recently been dropping discreet hints on the sales of holdings in Petronas Gas, Malaysia Airports and Sime Darby. However there is every indication that he will have to fight every inch of the way against Perkasa and its allies – the deeply entrenched warlords in Umno and the Malay bureaucracy.
When the prime minister warned local Johor leaders not to be emotional or parochial about Singaporeans investing in the state especially in the region of Iskandar Malaysia, he was not being proactive or referring to a hypothetical situation. He was finally reacting to statements by Dr Mahathir, Perkasa and the Bumiputera Economic Congress on the need to maintain the NEP status quo and to ensure Malay dominance.
Finally, it is the height of political stupidity to call for a Chinese Perkasa to meet the irrational and racist challenge of the Malay Perkasa. Whoever made that demand or issued a statement to that effect clearly needs to go back to study Political Ethics 101 which is that you do not fight darkness with equal darkness but with light and reason.