Crisis? Not yet, but not too far — Chang Lih Kang

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JANUARY 26 — Having read the Prime Minister’s special address on the current economic developments, I am appalled by the absence of both honesty and seriousness in addressing the plight of our economy. Datuk Seri Najib Razak merely laid down some vague strategies, which turned out to be wishy-washy.

I am not attempting to paint a bleak picture of our economy. In fact, the foundation of our economy is relatively healthy as compared to many other countries. However, the Prime Minister should stop being economical with the truth and honestly admit that there are some serious problems in our economy, which need to be addressed urgently.

Loss of revenue

When he presented the 2015 Budget in October 2014, Najib projected the crude oil price to be at the level of US$100 to US$105 (RM320 to RM336) per barrel. Unfortunately, about a month after the budget was tabled, the Brent crude oil price plummeted to US$70 to US$75 per barrel.

Petronas President and Group CEO Tan Sri Shamsul Azhar Abbas urged the government to “tighten its belt”, as the firm is facing a risk of shrinking profit. The state oil firm contributed to about 40 per cent of the country’s coffer. He warned that payment to government could be 37 per cent (approximately RM25 billion) lower from previous year to about RM43 billion in 2015 if oil stays around US$75 a barrel.

If the government were losing RM25 billion when the crude oil price is at US$75 per barrel, what would be the revenue loss when it has plunged to US$50? What if the crude oil price does not rebound in 2015 as predicted by some economics pundits? What if it continues to plummet?

The amount of our revenue loss could be astronomical, and we have not taken the low prices of other commodities into account yet.

Unfortunately, the budget revision does not address the issue surgically. Setting a new projection of crude oil price at US$55 per barrel is certainly too rash and imprudent. Hoping the crude oil price will not plunge further in the future might turn out to be mere wishful thinking. It could be worse. In fact, one of the key crude oil producers, Iran, hinted that prices could hit US$25 per barrel without supportive OPEC action. The government is facing the chill wind of a crisis, rather than deceiving its rakyat with overly optimistic projection, it should be more realistic and risk-sensitive.

Insignificant cut

Besides a realistic projection, another way to address the issue of revenue loss is to cut government expenditure. However, the so-called “expenditure rationalisation” does not reflect any bit of seriousness and political will of the government. There are only four areas that will contribute to the expenditure cut, namely by optimising outlays on supplies and services, deferring the Program Latihan Khidmat Negara (PLKN), review transfers and grants to statutory bodies, and reschedule the purchase of non-critical assets. Nevertheless, these efforts will only result in savings of RM5.5 billion.

Cutting a meagre 2 per cent from an expenditure of RM273.9 billion could hardly translate into any significant effect. Ironically, the hefty RM19.1 billion allocations to the Prime Minister’s Department remain untouched. In addition, no suggestion on any multi-billion worth mega project, for instance the KL118 (Menara Warisan Merdeka), Bukit Bintang City Centre, or the Tun Razak Exchange (TRX), was to be deferred or scrapped in the budget revision.

I could not help but to ask, how serious is the government in cutting expenditure?

Alarming current account performance

According to the statistics department, our current account surplus has declined by almost 30 per cent between the first and third quarter of last year. The Prime Minister also mentioned that the country’s current account surplus is estimated to decline from 5.5 per cent of gross national income (GNI) to around 2 to 3 per cent, if the crude oil price stays at US$55 per barrel.

The Prime Minister was trying to appease the rakyat by indicating low oil prices will give more disposable income to the people and thus, boost private consumption by RM3 billion. Theoretically, he is right. However, there are two factors that Najib should pay heed to. 

Firstly, increase in private consumption usually indicates decline in national savings.

Secondly, we should not ignore the impact of the GST, which the government is steadfast to implement in April this year. The GST will reduce the disposable income of the rakyat and cause both private consumption and the national savings to shift downward.

The current account is the difference between national savings and domestic investment; decrease in national savings would deteriorate the country’s current account. Our current account has been suffering from the plunging prices of crude oil and other commodities; decline in national savings is as good as rubbing salt in the wound.

Another way to assess the current account is the trade balance. Owing to the strong performance of commodity exports, Malaysia has been running on the current account surplus since the Asian Financial Crisis. In the era of slowing economy in the United States and Europe, the rise of China in becoming the biggest trade partner of Malaysia had helped to ease the pressure on Malaysia’s trade balance.

Risk of twin deficits

However, a sluggish world economy is looming. In June 2014, the World Bank predicted the global economy would grow 3.4 per cent this year. Two weeks ago, the World Bank revised its prediction and cut the projection to 3 per cent. Similarly, the International Monetary Fund (IMF) has also cut its forecast for world economy from 3.8 per cent (projected in October 2014) to 3.5 per cent. It is the steepest cut to its own global growth forecast since 2012.

Besides, a slowdown in China economy is also expected, and it means China would diminish its imports (including goods from Malaysia). The slowdown of both global and China economy will affect our exports significantly. In fact, we are already experiencing the slump in our trade balance. Our country’s trade surplus has slowed down from RM8.23 billion in October 2013 to a pathetic RM1.18 billion in October 2014.

The budget revision craftily mentioned that strong exports of manufactured goods (due to recovery of the US economy) would cushion the shortfall in commodity receipts. But it did not inform us that the imports due to the recovery of US economy, could only compensate the diminishing imports from China and other countries, not so much the shortfall in oil and gas earnings.

If we are unduly complacent, our current account could turn into deficit and the country will be bogged down in the quagmire of twin deficits.

Twin deficits refer to a scenario where a country has both fiscal and current account deficit. Having twin deficits is not all bad; the views of economists are quite diverse, but it does matter a lot for a country like Malaysia.

Our country has been running on budget deficits for the past 16 years. The value of our currency depreciated drastically in the past two months. Our foreign exchange reserves have fallen 14 per cent to lowest since 2011. If we are dragged into twin deficits at this juncture, it could trigger mass capital outflow due to confidence loss. Foreign investors who are holding our bonds would run for the exit. That would give a deadly blow to our already weakened currency.

So, are we in a crisis? Not yet, but not too far.

* Chang Lih Kang is State Assemblyman of Teja, Perak.

** This is the personal opinion of the writer or organisation and does not necessarily represent the views of Malay Mail Online

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