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Malaysia primes the economic
pump
By
Chee Yoke Heong
KUALA LUMPUR - As Malaysia gets
set to implement a series of economic stimulus measures,
voices of concern point to the sluggish world economy
that threatens to derail the newly announced package.
The much-awaited plan aims to generate economic
activities by mobilizing domestic sources of growth,
boosting consumption and stimulating investments to help
mitigate the impact of the severe acute respiratory
syndrome (SARS) outbreak, the Iraq war and lethargic
world economic conditions.
Though the Iraq war
has had minimal impact on Malaysia, the ongoing effects
of SARS have proved to be more disruptive, especially to
the services-related sectors, which helps to explain why
the transport, hotels, restaurants, entertainment,
recreation, retail, and food and beverage segments are
to be among the biggest beneficiaries of the stimulus
plant apart from small and medium-sized enterprises
(SMEs), the housing and property sector, rural and
agricultural folks, foreign direct investment (FDI) and
overall consumers.
The SARS-hit sectors received
a major boost with incentives going to tour, travel and
restaurant businesses. Apart from a RM1billion (US$263
million) Special Relief Guarantee Facility to assist
operators in the tourism industry, the government is
also offering discounts in electricity bills for hotel
owners and road tax for taxis and exemption from service
tax in the case of hotels and restaurants.
The
total cost of the plan comes up to RM8.1 billion,
according to Prime Minister Mahathir Mohamad, comprising
an allocation of RM7.3 billion, of which RM1.7 billion
will come from the government budget, RM2 billion from
Bank Negara (the central bank), while development
financial institutions will provide RM3.6 billion which
will be raised through the issue of bonds. In addition,
the government is to shoulder an additional cost of
RM800 million in the form of incentives and tax
exemptions.
The targeted growth forecast for the
gross domestic product (GDP) for this year is retained
at the 4.5 percent announced in March, with the first
signs of the impact of the plan to be felt in three
months, according to official statements.
Though
the focus of the plan is mainly domestic-driven -
improving domestic consumption and encouraging
investment - its success nonetheless hinges on the
performance of the global economy, particularly the US
economy and the US dollar, which are both currently
sluggish.
A fund manager said that while the
measures tackle domestic problems well, they are
insufficient to handle any external shocks. As long as
the global economy remains in the doldrums, it is hard
for a small trading nation such as Malaysia to recover.
According to Saifuddin Morat, an economist at
Mayban Securities, the declining US dollar against major
currencies means that the United States will be
importing less, affecting countries that depend on
exports to that country such as Japan, Germany,
Singapore, the Philippines and South Korea. And since
many of these countries, including the United States
itself, are also Malaysia's main export markets, the
Malaysian economy is likely to be hit should the US
dollar continue to weaken.
But there might be a
silver lining in the gloomy outlook. With the US economy
projected to recover in the second half of the year,
Malaysia could see growth picking up in the latter part
of the year, says chief economist Lee Heng Guie of CIMB
Securities. In the meantime, he hopes consumption will
increase in the near term, as he believes it is a matter
of confidence, which should improve as the SARS scare
tapers off and more countries are off the travel-warning
list, such as Hong Kong and parts of China.
Though international developments are beyond the
control of most countries, domestic affairs are what
each government is able to affect to a larger extend,
and this is what the stimulus plan is most concerned
about. Like a mini-budget announcement, the unveiling of
the package is meant to do just that - increase local
consumption, boost Malaysia's competitiveness and try to
balance growth, especially between domestic and foreign.
Lee welcomed the measure relating to foreign
investment as a move that is transparent and
investment-friendly. Under the plan, the Foreign
Investment Committee guidelines would be further relaxed
to provide greater flexibility on foreign equity
participation. By lowering the ceiling on properties
that foreigners can purchase, foreigners are also
encouraged to help boost the housing and property
sector, which is suffering an overhang of late.
Saifuddin hopes that Malaysia could also benefit
from a spillover from the weak US dollar and attract
more foreign investors. Economies such as Malaysia and
Hong Kong whose currencies are fixed to the US dollar
stand to gain from a weaker greenback, while investments
in other Asian countries whose currencies are higher
against the US dollar would be more expensive than those
in Malaysia or Hong Kong.
While the move to open
the market to FDI is good as international competition
is stiff, the fund manager worries that a weak dollar
will impact negatively on the stock market, which still
depends on overall economic factors such as the global
macroeconomic outlook, foreign-exchange policy and
country competitiveness. Investors would shy away from
investing in local equity knowing that the Malaysian
currency is depreciating vis-a-vis other regional
currencies, he says.
One major incentive aimed
at boosting domestic spending is the reduction in the
employees' contribution to the Employees' Provident Fund
(EPF) from 11 percent to 9 percent for a year whose
efficacy is viewed with doubt by some economists.
According to Azrul Azwar, economist at MIDF Sisma, a
similar move in 2001 had little success in boosting
consumer spending after most contributors opted for an
11 percent contribution instead of taking up the option
of a 9 percent contribution.
"It remains to be
seen whether this EPF contribution cut will be made
mandatory or optional, just like in 2001. We don't
expect any significant impact on household expenditure
on average due to its negligible boost to disposable
income," he said.
On the other hand, the
half-month bonus for some 1 million civil servants will
certainly enhance consumers' disposable income, with
bigger possible multiplier effects on the economy, he
added.
Lee of CIMB Securities maintained that
the EPF reduction, bonus payout and the 50-basis-point
cut in Bank Negara's intervention rate, which should
make loans cheaper, are of minimal short-term effect,
adding only 3 percentage points to the consumption side
of the equation. The 50-basis-point slash in the
intervention rate to 4.5 percent, the lowest since its
introduction in September 1998, was not a major surprise
since bond prices have factored in the possibility, says
MIDF Sisma.
The brought-forward private
placement of a new 10-year benchmark Malaysian
Government Securities maturing in February 2013 a day
before the unveiling of the economic package was in fact
a strong indicator for such an eventuality. As a result,
the ceiling Base Lending Rate, to which quite a number
of business borrowings and mortgage rates are pegged,
will have to drop accordingly with immediate effect.
To minimize consequent downward adjustments to
fixed deposit rates, being a major source of income for
most pensioners and associations/charities, Bank Negara
will ensure that interbank rates are more or less
maintained at current levels via its liquidity
operations. As a rate cut generally works through the
economy with lag effects of six to nine months, this
preemptive monetary easing is first of all needed to
give a nudge to investor and consumer confidence.
In fact, this long-overdue monetary action was
all the more crucial given the onset of a
disinflationary trend observed since March, according
Azrul of MIDF Sisma.
There were also other
expectations that were not fulfilled, such as the
proposal by the business community for a corporate tax
cut, which some analysts believe could be proposed in
the next budget or when the fiscal deficit comes down a
little.
A chief executive of an investment fund
said a lot more was expected especially with regard to
addressing the competitiveness of certain sectors such
as automotive prior to AFTA (ASEAN Free Trade Area).
The international rating agency Standard and
Poor's has reacted positively to the stimulus plan. Upon
the announcement of the measures, it reaffirmed
Malaysia's foreign-currency credit ratings of BBB+ with
a stable outlook.
"In theory, it is a good
mixture of a package, incorporating fiscal, monetary and
the supply side," said Saifuddin.
The challenge,
according to the Mayban economist, Lee and others, is
for the government to put into place and effectively
implement these measures to achieve the objectives that
it has set out for itself.
"The implementation
of the measures is crucial and that means the ability to
improve public delivery of the system, which the people
are generally very skeptical about," said Lee.
And that is a challenge the government must take
upon itself: to win the trust and confidence of the
people and of the foreigners it hopes to attract to help
Malaysia gain a strong footing in the economic sphere.
The fact that the government took the effort to
consult a wide range of groups in the business community
as well as foreign investors in formulating and
developing this comprehensive set of measures is an
indication of its seriousness in addressing the
challenges and in meeting most of the needs of the
groups it met, and that bodes well for the plan.
However, all eyes will be on the world economy,
the performance of which will determine the course of
the Malaysian economy and the fate of the newly minted
plans.
(Copyright 2003 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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