World stocks tumble to 5-year low, dollar jumps
> Global stocks fall to five-year low
> Europe down 4 %, Japan 9.6 %
> Dollar at two-year high against major currencies
LONDON (Oct 24, 2008): Global stocks tumbled to a new five-year low on Friday and demand for the relative safety of government bonds and low-yielding currencies soared as economic decline and corporate damage continued to grip investors.
MSCI’s all-country world index was down 2.8 % after earlier hitting a level not seen since August 2003. The dollar hit a two-year high against major currencies.
European shares were down around 4 % and Japan’s Nikkei average plunged 9.6 %. Emerging markets were hit hard again, with MSCI’s index for the asset class down 4.9 %.
The emerging market stock index has now lost close to 14 % this week and has wiped out all its massive gains from the last four years.
“Nobody is willing to take risks under the current circumstances, and risk aversion will only accelerate,” said Mitsuru Sahara, senior manager of foreign exchange sales for Bank of Tokyo-Mitsubishi UFJ in Tokyo.
The financial crisis has now spread far beyond the banking sector, with electronics maker Sony Corp and U.S. online retailer Amazon.com Inc cutting their forecasts in the face of weakening consumer demand.
South Korea led the decline on Friday with shares falling 11 %, leading to a brokerage industry group asking its members to stop selling shares to save the country from more losses.
In Europe, the FTSEurofirst 300 index was down 4.1 % having earlier hit its lowest level since mid-2003.
Hammered banks led the decline, with HSBC down 8.3 %, Santander off 6.5 % and UBS shedding 2.7 %. The European banks sector dropped 5.4 %.
“Just when we thought it was safe to get back in the water the markets remind us how choppy they can be,” said Felix Riley at ChoiceOdds.
“For every silver lining there is a cloud right now and the fear of more systemic failure in the global economic machine haunts every person wishing to go long.”;
Earlier, Japan’s Nikkei slid 9.6 % or 811.90 points to 7,649.08, a 5-1/2 year closing low. The benchmark lost 12 % in the week and has fallen 50 % so far this year.
DOLLAR, YEN SOAR
The dollar hit two year highs versus a basket of currencies and the euro and sterling hit a five-year low, reflecting heavy dollar repatriation.
The euro was at $1.2644, just above the low. Sterling hit a 5-year trough at $1.5834 and was later at $1.5863.
“Its extreme risk aversion and deleveraging of risky assets … and we are seeing safe-haven flows into dollar and yen,” said Lee Hardman, currency economist at BTM-UFJ.
The dollar hit a 13 year low of 94.79 against the Japanese yen and was later at 95.07 yen. Euro zone government bonds were higher. Two-year bond yields were 7 basis points lower at 2.694 % and 10-year yields lost 6 basis points to 3.725 %. — Reuters
Economy risks recession next year: MIER
Oct 16, 08 2:06pm
A leading Malaysian think-tank today slashed its 2009 economic growth forecast for the country to 3.4 percent and said there was a risk of recession if the US economy tumbles.
The influential Malaysian Institute of Economic Research (MIER) said the economy was expected to expand by 5.3 percent in 2008 after a strong first half but that it would deteriorate in the new year.
It cut its 2009 forecast from 5.0 percent to 3.4 percent, in contrast to the government which in its 2009 budget unveiled in August predicted 5.4 percent growth next year. The economy grew by 6.3 percent in 2007.
In the first half of the year the Malaysian economy did well but we don’t think this will be the case for the rest of the year given the flagging global economy,” MIER executive director Mohamed Ariff told a press conference.
malaysia stock exchange market klse 141008 02″If the US economy goes into some kind of recession in… the first quarter or second quarter (of 2009) we think somewhere in the middle, second or third quarter, we may experience (technical recession),” he said.
“There is a 40 percent chance that Malaysia will register technical recession in 2009, meaning two quarters of negative growth and a 30 percent chance it could be a real recession lasting more than two quarters.”
However, Ariff said he did not expect a recession to be as severe as the 1997-98 regional financial crisis when the economy contracted sharply.
“This recession is going to be milder but I think (it’s) going to last longer,” he said.
Political uncertainty may compound problem
Ariff said there could be a revision in official interest rates but it would not happen just yet. The central bank is expected to keep interest rates at 3.50 percent until the year-end.
Malaysia’s inflation jumped to a 27-year high of 8.5 percent in August, driven by the escalating cost of food and fuel.
Ariff said that on the bright side, Malaysian banks were fundamentally strong and this would help keep the economy on the right footing, although there could be further risk as the crisis unfolds.
“All banks are adequately capitalised and the NPL (non-performing loans) problem actually for now is a non-issue because it is less than 3.0 percent of total bad loans, which is considered very low by any standards,” he said.
“But come next year there is a chance that the NPL problem may get worse if the real property sector and the construction sector caves in.”
Ariff said the political uncertainty that has paralysed the stock market and investment in recent months may compound Malaysia’s economic problems.
Prime Minister Abdullah Ahmad Badawi has been forced to announce he will quit next year after dismal results in March general elections that handed the opposition unprecedented gains including a third of parliamentary seats.
Bursa Malaysia shed another 29.86 points, or 3.1 percent, to close at 920.02 today.
China slowdown: after years of boom, powerhouse sends world a warning
• Growth dips below 10% for first time in three years
• Beijing tries to encourage homegrown consumers
- The Guardian,
- Tuesday October 21 2008
China has fuelled fears over a global recession by warning that the financial crisis is damaging its economic growth.
Data released yesterday showed that China‘s gross domestic product expanded by 9% in the third quarter of 2008, down from 10.1% for the second quarter. Although this is still extremely healthy compared with other major economies, it is less than the figure expected by experts – and the first time the country’s GDP growth has dipped below 10% in almost three years.
China’s government blamed lower growth on the world economic slowdown, which means less demand for Chinese exports. “The growth rate of the world economy has slowed down noticeably. There are more uncertain and volatile factors in the international economic climate,” said Li Xiaochao of China’s National Bureau of Statistics. “All these factors have started to release their negative impact on China’s economy.”
After years of boom, China’s GDP growth has now slowed for the last five consecutive quarters. The country is a huge consumer of raw materials, and last week the global mining giant Rio Tinto caused share prices in the sector to slump by warning that demand from China was slowing. Analysts believe that GDP growth will slow further in the fourth quarter, as the impact of the financial crisis bites.
Huainan Zhao, a banking expert at the Cass Business School, in London, said: “The problem is that China’s economic growth is slowing down when it is most needed. But I am afraid that the world will have to live with a slowing Chinese economy. The IMF forecasted that the Chinese GDP will decline from 12% last year to about 9.6% this year.” One of the most worrying aspects for the Chinese leadership is that net exports contributed only 1.2 percentage points to the country’s total GDP growth over the last nine months, down from 2.4 percentage points over the same period of 2007.
China’s toymaking industry is under particular pressure, following a series of safety scares relating to manufacturing processes last year. Last week more than 6,000 employees lost their jobs when Smart Union, a major toy manufacturer in Dongguan, closed. It blamed a fall in demand from the US.
Since President Hu Jintao took charge in 2004 with a mission to correct the imbalances that have accumulated throughout China’s economy since the market reform process began in 1978, senior leaders have talked about boosting domestic consumption by raising incomes and improving social services, but growth has remained thoroughly export-led.
Already forced to yield to international pressure to revalue its currency and make its goods more expensive overseas, China is now facing a significant slump in demand as the recession hits its markets in Europe and America. A back-up plan has become more urgent than ever.
Last week, China’s senior Communist party leaders approved plans to strengthen the rural economy and improve the incomes of farmers, hoping that making citizens better off will create a new market for the millions of computers and household appliances now being shipped abroad. For now, the measures appear to be too little, too late.
Stock markets across Asia recorded gains overnight – after a week of volatility – as traders welcomed a $130bn (£74bn) bail-out of South Korea’s banking sector. The government in Seoul announced it would support its banks with $30bn of fresh liquidity and loan guarantees totalling $100bn.
The move came just days after ratings agency Standard & Poor’s put the country’s five biggest banks on a ratings watch. S&P warned that they could struggle to repay foreign loans, as the South Korean currency, the won, has fallen by a third against other currencies since January.
Before the data’s release, government leaders met to map out a strategy for countering the slowdown. Newspapers carried reports of planned measures to spur lending and stabilise the country’s volatile financial markets. Share prices, for example, are still down nearly 70% from the peak they hit a year ago.
In China, Li Xiaochao said that a range of measures – including export tax relief – will be introduced in the next few months to ease the pain.
A rescue plan for the real estate sector is also in the works. The Beijing leadership has also vowed to spend more on welfare and construction, such as rebuilding the areas devastated by the earthquake in Sichuan province in May.
Widely reckoned to have been the biggest loser in the stock market rout of the past few months. The London-based boss of the world’s largest steelmaker, ArcelorMittal, has seen around £20bn slashed from the value of his personal fortune, after falling steel prices triggered a slump in the company’s share price.
The property tycoon was left an estimated £800m out of pocket after
demands for the recall of loans from the Icelandic bank Kaupthing forced the sale of major stakes in the supermarkets group J Sainsbury and Mitchells & Butlers, Britain’s largest pub operator.
The legendary investor has seen his fortune dwindle by between $12bn and $50bn (up to £29bn) in the past year. He has made a number of astute investments, including building up large stakes in American Express and Coca-Cola, but his shareholdings have not been immune to the market downturn.
US Treasury pumps money into banking system
WASHINGTON, (Oct 14, 2008) : Top US financial officials on Tuesday said they were injecting $250 billion into the battered US banking system, moving swiftly on the heels of similar European action to try to boost investor confidence.
At a press conference before U.S. markets opened, Treasury Secretary Henry Paulson said the government is buying nonvoting preferred shares in nine U.S. banks as it tries to beat back a credit crisis that threatens to swamp the economy.
Paulson, appearing with Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp Chairman Sheila Bair, said the measures were distasteful to him but necessary due to a spreading lack of confidence in financial markets.
“Today’s actions are not what we wanted to do but today’s actions are what we must do to restore confidence in our financial system,” Paulson said, adding the government was acting with “unprecedented speed” to try to “get our economy back on an even keel.”
Stock prices leaped higher for a second straight day, with investors clearly heartened that policymakers were pulling out all stops worldwide to get credit that is the lifeblood of global commerce flowing again.
Paulson said nine banks were participating initially in the capital-injection program. Treasury refused to name them and said it was up to individual banks to say they were joining, though the names of several banks that are to receive capital already have been widely reported.
Among the banks widely reported to be participating are Bank of America Corp BAC.N, Wells Fargo WFC.N, Citigroup C.N, JPMorgan Chase & Co JPM.N, Goldman Sachs GS.N, Morgan Stanley MS.N and Bank of New York Mellon Corp BK.N.
Bernanke expressed confidence the latest bid to pump money into banks to try to persuade them to resume normal lending will work but cautioned it won’t bring instant relief to a severely stressed U.S. economy.
“I am not suggesting the way forward will be easy,” Bernanke said. Bair said the overwhelming majority of U.S. banks remained safe and sound but they were beset by a loss of confidence that policymakers were determined to counter.
“All of us are prepared to do whatever it takes to fix whatever problems arise and to work with Wall Street and Main Street to unclog the financial system,” Bair said.
The $250 billion to be invested in U.S. banks — effectively a partial nationalization of the U.S. banking system — will come from a $700-billion financial bailout program originally approved by Congress to buy bad assets that were poisoning bank balance sheets.
It was a major alteration of Treasury’s original plan for freeing credit markets, which relied more heavily on standard free-market principles, and Paulson made clear that he was turning to it only because he felt forced to do so.
“Government owning a stake in any private U.S. company is objectionable to most Americans, me included, but the alternative of leaving businesses and consumers without access to financing is totally unacceptable,” Paulson said.- Reuters
G7 urged to take joint action to avoid collapse of financial system
Darling calls for united action to achieve stability after failure of country-by-country rescue plans
- Friday October 10 2008 18.39 BST
A crisis meeting of finance ministers and central bank governors from the west’s seven leading economies is considering joint action to bail out banks amid fears that a fresh wave of panic had pushed the global financial system to the brink of collapse.
Chancellor Alistair Darling was urging his G7 colleagues to adopt Britain’s blueprint of using taxpayers’ money to buy stakes in tottering banks and warned the time for talking was over.
With shares, oil and sterling all plunging at the end of a dramatic week, Darling said: “Governments must act. They must demonstrate to the world that they are prepared to act together to do whatever it takes to stabilise the situation.”
The G7, which is meeting in Washington, was galvanised into action today by a nerve-shredding month on the financial markets, which they believe has taken the global financial system to the brink of a catastrophic collapse.
The FTSE closed down 8.9% today, slipping below the 4,000 mark for the first time in five years. It fell 381.74 points, to 3,932.06, a 21% fall over the week, wiping £250bn off the value of Britain’s companies – the City’s worst week since the crash of 1987. Across Europe, every major market saw at least a fifth wiped off its value during the week.
In New York, the Dow Jones industrial average plummeted by more than 700 points at the opening bell and then gyrated wildly in frenetic trading. It had already lost more than 40% of its value since its peak last year.
Shares of embattled UK banks Royal Bank of Scotland and HBOS were among the hardest hit, with RBS falling 25% and HBOS 19%. It emerged that the government may be forced to take a stake of up to 50% in RBS after its market capitalisation was reduced to £12bn tonight.
With little sign that country-by-country plans to prop up failing banks have helped to kick-start stalled lending, the G7 believes immediate action is vital to avoid the paralysis in credit markets triggering a slump. The past four weeks have seen the biggest cut in forecasts for global growth in living memory, and the International Monetary Fund has warned that the world economy is “on the cusp” of recession.
Darling said the annual meeting of the IMF and the G7 talks presented policymakers with “a real challenge”. He added: “if international cooperation is to mean anything, it means governments have to move on from simply agreeing a general approach and doing something to resolve the problems we are facing today. This is a period of severe turbulence. We haven’t seen anything like this for generations.”
The chancellor hinted the government would exact a price from those bank chiefs deemed responsible for creating the crisis in the UK. Asked what the taxpayer could expect in return for bailing out the banks, Darling said: “They won’t accept people taking large risks that have had hugely damaging effects, not just on individual institutions, but on the wider economic system. Agreements will be negotiated.”
Also in Washington, the Bank of England governor, Mervyn King, said: “Central banks will work together as we demonstrated this week to ensure sufficient short-term liquidity is provided to stabilise banking systems. But it is also vital that governments work together to ensure their banking systems are recapitalised to enable them to lend to finance spending in the real economy.”
So violent was the sell-off that several countries, including Russia and Indonesia, were forced to suspend their stock markets during the week to stave off financial collapse.
The Italian prime minister, Silvio Berlusconi, mooted the idea that stock markets throughout the world could be closed for up to a fortnight while governments work out a plan to restore calm and confidence to the financial system.
Foreign exchange markets were also hit by the mood of panic. Sterling slumped at one point to $1.68, a five-year low against the dollar.
Meanwhile, the prime minister, Gordon Brown, dispatched a team of Treasury officials and lawyers to Reykjavik in a bid to reclaim some of the £1bn of deposits from British savers and organisations under threat from the collapse of Icelandic banks.
“This is the responsibility of the Icelandic authorities. They have got to take responsibility for this situation,” said Brown. The intensification of the crisis has forced the US government to reconsider whether the $700bn plan to buy Wall Street’s “toxic waste” will now be enough to halt the most severe stockmarket crash since 1929. US officials are working on their own version of Britain’s bailout. There were reports that the treasury secretary, Hank Paulson, was considering guaranteeing all US bank deposits.
More details of the UK Treasury’s plan were unveiled today, with the recognition that wholesale nationalisation of Britain’s banking system is the only alternative if it fails.
The government will buy shares in the banks that choose to participate in the plan at market prices and place them in an arms-length fund. When the immediate crisis is over, the Treasury hopes to offload the shares to investors.
As share prices on Wall Street plunged for an eighth straight day, traders blamed an increasingly familiar cocktail of panic selling, liquidations by struggling hedge funds, computer-driven trading programs and speculative short selling. The so-called “fear index” of market volatility, Vix, shot up by 10% to an all-time high.
President George Bush appeared in the White House rose garden in an attempt to reassure American voters and investors.
“We are a prosperous nation with immense resources and a wide range of tools at our disposal,” he said. “Fellow citizens, we can solve this crisis. And we will.”
Banking shares fell amid anxiety over the shape of the bail-out plans evolving on both sides of the Atlantic, with experts anxious to see the extent to which governments would come to the industry’s aid.
America’s biggest carmaker, General Motors, felt obliged to issue a statement saying it was not considering filing for bankruptcy despite facing “unprecedented challenges” in the financial markets and the weakening economy.
One of America’s largest managers of usually ultra-safe money market funds, Reserve Management, said it was liquidating 15 funds. These funds are usually viewed as almost as risk-free as bank accounts but have dabbled catastrophically in the frozen debt markets.
The IMF managing director, Dominique Strauss-Kahn, has made clear that he believes recapitalisation of the banking system, along British lines, must be part of any international solution.
From the blog:
Reconstructing a more accurate view of reality
September 27, 2008
Of the many articles I’ve read about the financial crisis, the following ten have been the most informative. Read them all, and I think you will have a very solid understanding of what is going on.
1) The Financialization of America A broad overview of how 1) insanely profitable Wall St. became in the past two decades and 2) this profitability was due to implicit government subsidization of risk. This includes the “too big to fail policy” and the “Greenspan put”.
2) The Global Pool of Money [MP3] – An hour long podcast from NPR about the selling of subprime mortgages. Hear the story of hustlers, smooth talking sales guys, fast cars, and big money. It’s like something out of a movie.
3) Triple-A Failure: The Ratings Game by Roger Lowenstein of the NYTimes. You may ask, who was buying these securities that were so obviously shoddy? Government regulations mandated that certain investors – mutual funds, insurance companies, pension funds – could only buy bonds rated as investment grade by one of the three official rating agencies – Fitch, Moody’s or S&P. But these rating agencies were for-profit companies that earned more money by giving banks higher ratings. This conflict of interest resulted in systematically underestimating risk.
4) How regulation breeds complex financial products and Why Lax Regulation Did Not Cause the Crisis by Mindles Dreck. The author works in the investment banking industry. He relates how the industry had actually seen a dramatic increase in regulation as a result of Enron and the Patriot Act. But the effect of regulation was not to make finance less risky, but rather regulations encouraged the creation of more complex financial products that outsmarted the regulators and gamed the system.
5) Fannie Mae’s Golden Goose – A Lesson in Moral Hazard – The author, Bill Burnham, has worked as a Wall St analyst, venture capitalist and hedge fund manager. In the mid-90’s he consulted with Fannie Mae for a year. He tells the story of how Fannie Mae abused its implicit government backing to make very risky loans at low interest rates.
6) Commodity Hysteria – An Overview by Nick Szabo, a former programmer, now a law school academic. He explains how the simultaneous rise in price of dozens of diverse commodities is best explained by rising inflation expectations due to the financial crisis. As inflation increases, more people buy ETF’s and commodity index funds. Additionally, producers have no incentive to pump more oil, as oil in the ground is worth more than a dollars in the pocket.
7) Record Central Bank Financing Continues by Brad Setser, an academic economist. Setser notes that foreign central banks are buying up massive amounts of American debt. Foreign countries have deemed the U.S. government too big to fail: “Sometimes I think the US should drop the façade of auctioning off Treasuries and just negotiate private placements with the People’s Bank of China and the Saudi Monetary Agency.”
8) How Stocks are like Baseball Cards by Mark Cuban. Mark Cuban is famous for selling Broadcast.com for billions during the dot com bubble. He explains how the decline of dividends has turned stocks into purely speculative collectibles, rather than ownership shares that earn the investor money.
9) How the Fed lowered the reserve ratio and caused a decade of inflation and asset booms – In 1995 the Federal reserve created special exemptions allowing banks to keep 0% reserves in many cases. This lead to an explosion of the broad money supply, and successive bubbles in the stock market and housing market.
10) Maturity transformation considered harmful: an unauthorized biography of the bank crisis by Mencius Moldbug, a semi-retired software engineer who’s spent the past two years studying history and economics full-time. He traces the roots of the financial crisis to a fundamental flaw in our banking system that has been around for 300 years. He proposes a solution to fix things up and prevent these crises from ever happening again.
PARTI KEADILAN RAKYAT MALAYSIA
2009 NATIONAL BUDGET AND ECONOMIC POLICY BRIEF
Parti KeADILan Rakyat (KeADILan) recognizes that for millions of Malaysian citizens the economic climate has become a troublesome one. Malaysians today face ongoing reduction in their purchasing power, job insecurities, increased fuel prices, low wages, and a high gap between the rich and poor. KeADILan believes that Malaysia can no longer afford to stand on the sidelines and allow the BN government to pursue a ‘too-little-too-late approach’ to addressing these issues. That is why, on this day, KeADILan is pushing forward one more step its positions on the Malaysian Economic Agenda, to relieve the burden on Malaysians struggling with record high inflation levels and dwindling economic prospects. Whereas the current government has failed to adequately assess or address these issues, KeADILan will pursue the policies critical to reasserting Malaysia’s quality of life, economic strength and competitiveness in the global economy.
The KeADILan proposals on the budget and response to the current BN government’s Malaysia Budget 2009 are based on a new model of socio-economic development drawing on an analysis of some of the best performing economies in the world. This specifically includes understanding the successes of Taiwan, Korea and Ireland, and integrating the best practices of these economies with the enormous potential of Malaysia’s natural and human resources as well as the positive aspects of Malaysia’s past development plans.
When KeADILan model is implemented, the gap between Malaysia and other developed countries in terms of economic performance and living standards must be narrowed, instead of growing as it has under the current government. KeADILan’s policies will spur a rapidly growing economy that can effectively compete at the regional and global level as well as open up numerous opportunities for all Malaysians and for all scales of business at the individual and sector level. KeADILan’s educational and human development reforms will bring about an improved educational system and knowledge based economy and enable Malaysia’s domestic businesses to meet the global challenge with a locally sourced and higher skilled labor force.
KeADILan’s policy changes target attracting increased foreign and domestic investment and improving labour skills and productivity in the private and public sectors. Underlying this, and in contrast to Malaysia’s recent trends, KeADILan is unwavering in its focus on the systemic foundations to ensure Malaysia’s success: fairness, transparency, accountability and good governance.
The key features of the KeADILan Model include:
- Faster pace of economic liberalization
- Extensive investment in quality education
- Higher rate of investment in public-oriented infrastructure
- Integration with more developed ASEAN and East Asian countries
- Stronger role for the private sector
- Merit and need driven policies with a stronger safety net for poor
- Higher standards of governance and accountability
In the near future, Pakatan Rakyat will publish and promote in greater detail the entire policy regime of its Malaysian Economic Agenda.
2.0 Response to Barisan Nasional (BN) Malysia 2009 National Budget:
2.1 BN Government’s Misrepresentation of the Current Situation –
The BN government’s budget has been described in mainstream BN controlled government papers as a budget with ‘something for everyone.’ KeADILan acknowledges that on the surface that seems to be the case, but much of it is illusory. Furthermore, this economic plan will clearly not produce the concrete results that BN has been promising Malaysians. Unfortunately, it follows the trend of previous years which resulted in gross examples of mismanagement, inefficiency and missed opportunities to take Malaysia and its people forward. Since this BN government came to power, they have repeatedly emphasized to Malaysians that their economy is becoming more resilient, that people are more prosperous, that standards of living have gone up, that the country has become more competitive, and that everyone has benefited equally from the country’s growth. Yet, KeADILan believes that many citizens are aware that the reality of Malaysian achievement compared with other countries, particularly in the context of the country’s enormous potential in human and natural resources, is far from the BN government’s rosy rhetoric. KeADILan believes that this was clearly demonstrated at the ballot box both in March and again in August of this year.
The realities of the current BN government’s mismanagement have been:
- Worsening socio-economic disparities
- Rising income inequalities
- Spiraling costs of living
- Growing urban and rural poverty undetected or underestimated by the Government’s unrealistic poverty line
- Endemic corruption
- Falling competitiveness and sluggish growth
- Rising cost of doing business
The above shortcomings do not touch on the key non-economic factors of quality of life, namely civil liberties, judicial independence, media freedom, race relations, religious tolerance, national unity, crime and security. While not addressed in this brief, these are all key issues whose resolution the current government has either mismanaged or manipulated for the sake of certain individuals to secure narrow interests against that of the greater public good.
2.2 Deteriorating Public Finances and Economic Sluggishness –
As the current government has neither been open nor honest about Malaysia’s current economic state and financial position, KeADILan has outlined below several indicators which raise grave concerns amount financial and economic mismanagement under BN rule:
- Operational expenditure in the 2009 National Budget has increased to RM154.2 billion, from RM128.8 billion in 2008, an alarming increase of almost 20%. This is close to a 100% increase or doubling from the RM80.5 billion in operating expenditure from 2004 when Abdullah Badawi first became Prime Minister. Of even greater concern is that the current operating budget is nearly a 200% increase from that in 2000.
2. Malaysia is suffering from sluggish domestic investment, despite not being short of domestic capital. Private fixed capital formation averaged less than half of total fixed capital formation. In addition, since the current government first entered office, Malaysian investment abroad (outward FDI) has risen dramatically: from less than 50% of inward FDI in 2004, to approximately equal to inward FDI in 2006, to now actually exceeding inward foreign investment. This is entirely uncharacteristic of any growing economy in the world, and raises grave concerns with KeADILan about the policies driving Malaysian capital flight.
3. The economy grew 6.3 percent in the three months ended June from a year earlier, down from a 7.1 percent gain in the first quarter. Economic growth is forecast to ease to 5.7 percent this year and 5.4 percent in 2009, the weakest pace since 2005. The figures suggest potentially a growth of just 4% for Q4 2008. The government’s proposed budget will be unable to do the heavy lifting required of it in 2009. KeADILan is concerned about the government’s irresponsible reliance on a global upturn in 2009 that could directly impact Malaysia’s economy and growth.
4. Inflation was at a 27-year high of 7.7 percent in June as a result of the government’s mismanagement of the petrol subsidy issue. There are signs that it is worsening. For July’s inflation rate Bank Negara’s Monthly Statistical Bulletin (Table VI.13), gives a figure of 8.5% incease in the CPI, with food rising 11.2%, non-food rising 7.2%, transport rising 22.7%l, and consumer non-durables rising 15.4%. While KeADILan acknowledges that higher transport and food prices are working their way through the economy, the government continues to appear oblivious to this fact.
5. The fiscal deficit has risen from 3.2% in 2007 to 4.8% of GDP this year
6. The KL composite index is down from 1,374 points to 1,163 year to year
7. The KL market capitalization lost over RM200B, or almost 1/5th of its value, within one year.
8. The ringgit’s value has weakened against the major currencies. Against the US dollar, the RM recently completed its biggest monthly loss since the end of a peg against the dollar in 2005
9. Recently, Malaysia’s credit rating outlook was downgraded by Standard & Poor’s to the fourth lowest investment grade, indicative of government mismanagement and excesses that are putting credit ratings and currency at risk.
10. Short-term (less than one year) federal debt, the bulk of it domestic has ballooned from RM21 billion at end Mar 2004 to RM51 billion at end Jun 2008, and total federal government debt has gone from RM192 billion at end Mar 2004 to RM285 billion at end Jun 2008. This is a cause for concern of worsening fiscal health.
2.3 Government Budget Initiatives are ‘Too Little, Too Late” –
The 2009 National Budget presented by the current government last week clearly appears to collect piecemeal proposals to allocate what have been described as ‘little goodies’ across all quarters – the poor, the middle class, the rich, the corporate sector, and civil servants. The plan lacks concerted vision, and is again indicative of the government’s failure to provide sound economic direction in a challenging global and domestic environment.
This analysis, however, does not focus on the small handouts and various fiscal ‘goodies’ which are fairly transparent in their purpose and overall ineffectuality. Instead, this brief is focused on analysing the substantive thrusts and programs, and assessing whether they can meet short term needs, while recognizing their medium and long term consequences.
2.3.1 Suspicious Public Transport Measures
The various initiatives finally focusing $35billion on public transportation are ostensibly to address the needs of Malaysia’s urban population, especially in Klang Valley and KL as well as Penang. But characteristic of this budget it is simply too little and too late.
This will not resolve the public transport woes of the country, not even for urban commuters. Given the current systemic flaws and the past track record of BN, building new infrastructure without good governance, proper execution and maintenance has resulted in large portions of funds going to waste, bribery and other leakages with the public transport issue largely left unresolved.
KeADILan has two specific concerns on this issue: First, the proposed Public Land Transportation Commission is a central federal body in the PM’s Department, although these projects are almost entirely local or regional issues. Until and unless power over public transport planning and design is devolved to state and local authorities, the problem cannot be properly solved. Second, based on previous examples, there is a strong possibility of misguided centralized planning attempts and award of tenders and contracts to insider and favored companies such as Scombi which may lead to allegations of nepotism. To forestall this, KeADILan emphasises the need for open competitive tenders, with special consideration given to genuine multi-racial partnerships in those tenders. In addition, KeADILan has additional policy proposals for more productive public transportation initiatives it would pursue.
2.3.2 Failure to Strengthen the Safety Net
KeADILan has for many years consistently criticized the meager safety net provided to Malaysia’s poorest and most vulnerable citizens. While the current government has finally taken heed to these concerns and deemed it advisable to raise the cut off point for welfare assistance and the increase in pensions for the lower levels, it is again ‘too little, too late.’ Besides being adjustments needed several years earlier, the proposed increases only appear to be intended to raise beneficiaries above the PLI (Poverty Line Income) established in 2004, and as published in the 9MP (Ch 16), adjusted by a mere 10%.
Of grave concern, and indicative or irresponsible policy, is that the beneficiaries of this initiative will still be below the nominal Poverty Line Income’s for Peninsula Malaysia, Sarawak and Sabah. Going by the overall CPI for the 3 regions, the adjustment from 2004 to 2008 should be closer to 120% than the 10% proposal. (As of mid-year 2008, CPI for PM was 113.4 [2005=100 ]. Seeing that the 60+% of the PLI is the food PLI, the actual adjustment should have been higher since the food weight in the CPI is around 31%). (See “Note on Safety Net for the Poor, KeADILan 2009 Budget & Econ Policy Brief” for more details on this proposal)
KeADILan has also been clear about its concerned regarding the importance of targeting Malaysia’s most vulnerable segments exposed to escalating inflation. The government has not only ignored this problem but by its flip-flopping over the fuel price increases has been the main culprit in the galloping inflation which has hit Malaysia and inevitably has most affected Malaysia’s poor.
2.3.3 Meaningless Corporate Sector Initiatives
While the 2009 National Budget has been touted in the mainstream government press as a “business friendly budget”( Star, 30 Aug.), experts have already contradicted that notion. This can be seen in the two page coverage of responses by leading tax experts (from Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG) acting on behalf of the country’s top businesses and corporate clients. Their verdict was that this is a budget that whilst not penalizing business is going to do practically nothing to encourage business. The plan has not substantive initiatives to encourage business big or small, and no compelling proposals to improve Malaysia’s competitiveness in the context of the global economic slowdown.
It is not only the tax experts and business consultants that have lost faith in the government’s business policies. Clear evidence can be found in the government’s own data. From table 8.2, Investment in Approved Projects by Industry, it is seen that there has been a significant reduction in investment of almost all industries this year – most significantly in textiles and textile products; paper, printing and publication; and petroleum products; and electric and electronic products. KeADILan is concerned that if this trend were allowed to continue, domestic and foreign investment would continue to avoid Malaysia due to the BN government’s continuing failure to develop attractive and meaningful policies, within the context of structural reform, reducing of business costs and to improvements in government response and operating efficiency. Without a clear investment and business oriented strategy, BN’s lack of planning would have serious implications for overall economic growth and private-sector employment.
2.3.4 Exaggerated Claims and Unsubstantiated Targets, Food Sector
KeADILan is concerned that the BN government is exaggerating claims and misrepresenting statistics to create a ‘rosy’ picture of its achievements and the economic progress achieved under its administration. One example comes from the food production and padi sector, to which KeADILan attaches great importance. Firstly BN 2009 National Budget refers to laying the foundations for achieving 86% self-sufficiency in rice by 2010, from 73% in 2008, through a variety of interventions. This implies an increase in domestic production of 18 % in 2 years, or a compound annual rate of increase of over 8% per year in the two years left. This is an implausible and unachievable target given that since 1980 to the present, despite billions spent on new irrigation system intensification, research, extension services, and allocations to agencies and padi based IADPs, Malaysia has not been able to achieve an annual rate of increase in national padi output even approaching 1%. The reality is that domestic rice production nationally has been flat.
KeADILan proposes greater research invested to understand why some farmers are able to get yields of around 10 tonnes per hectare, amongst the highest in the world especially in the tropics, and transmit that knowledge and technique to all farmers. This does not require huge expenditure, nor an obsession with large-scale farming and the subsidies the government provides such large-scale farms. Instead it will benefit smaller, lower income farmers, almost all of whom are Malay. KeADILan also proposes further investment to research improvement of hill rice yields in Sarawak and Sabah, as it is possible to obtain up to 5 tonnes per hectare. This not only will improve food security, but also incomes ; it is also sustaining a form of agriculture that is often the most environmentally friendly for the terrain in question.
2.3.5 Opening the Door to Wider Corruption and Abuse
KeADILan’s concerns do not stop with misleading targets. The concerns are with the BN’s historical practices of spending large sums of scarce public funds on a problem – without proper concern for prudent and responsible spending and a strong commitment to high execution standards and results that merit the expenditure. This has been clear across all the major sectors of government spending. In agriculture and padi we see that what is not specified in the 2009 National Budget document, but included in the lump sum allocations are a number of handout programs which are likely to have the following outcomes:
· Special yield enhancing inputs to be given free, whose efficacy in terms of yield increase is questioned by many parties, but which will enrich suppliers. Hence the scramble now for many UMNO and BN companies to get their products on the favoured list.
· Farm machinery handouts, again immediately benefiting a small group
· Various production incentives in cash but in practice subject to significant abuse in implementation. For example: the yield increase bonus.
These KeADILan concerns extend equally to many other sectors. For example, in Sarawak, there is a 20% allowance for Sarawak tenders, on top of the 10% allowance for bumiputera, i.e., a total of 30% allowance for those individuals and companies that can claim Sarawak bumiputera status. If the RM3 billion allocated to Sarawak for infrastructure is subject to this, it means that, RM1 billion will immediately have been siphoned into pockets of such companies as CMS and individuals directly associated with key BN political leaders and their families.
In conclusion, the current BN government’s 2009 Budget Proposals reflect on the large and small scale the same ineffectiveness and mismanagement that is undermining the basic resilience of the Malaysian economy. KeADILan endorses a plan of constructive stewardship of the economy and of aggressive realization of policy to restore business and consumer confidence in the years ahead.
3.0 Key KEADILAN Policy Initiatives:
The policy initiatives that comprise KeADILan’s Malaysian Economic Agenda, cover the full spectrum of social, political and economic development for Malaysia. The following are examples of specific policies which KeADILan will put forth with specific impact on Malaysian economic growth.
3.1 STIMULATING INVESTMENT
Increasing both domestic and foreign investment, the key drivers for Malaysia’s productive growth, is a primary focus of KeADILan’s policy proposals. Despite strong fundamentals in Malaysia that would be expected to lead to domestic investment and FDI – such as high domestic savings, high private consumption, and high domestic demand – yet FDI has underperformed for the region and even more domestic capital is flowing out of the country than investment is flowing in. KeADILan believes there are fundamental regulatory and business environment factors which must be addressed to truly reach Malaysia’s goals of global competitiveness within the next decade and to make any significant changes to this situation.
First, KeADILan recommends a shift away from the historic equity restrictions for approved investments, and that the FIC should be retasked to monitor the national distribution of equity under present policy. The foreign share of the national economy has reduced significantly since the NEP (and its consequent policies) and the FIC was introduced. The equity restrictions imposed by FIC are now seen as a barrier to investment while not materially assisting the growth of disadvantaged groups. For example, corporate transactions through mergers and acquisitions when they fall under the Guidelines of the FIC on Take-Overs and Mergers, have to restructure their ownership structure to comply with the NEP (now the NVP). Moving away from equity limitations at the enterprise level will stimulate investment (and FDI) while FIC can act as a facilitator and monitor for participation of disadvantaged groups in macro economic context using incentives to encourage participation rather than restrictive legislation.
Second, KeADILan proposes that tariffs and other entry barriers need to be eliminated in order to negotiate trade agreements with other ASEAN countries, Japan, the EU and others. To sustain the competitive advantage against especially India, China and Singapore, Malaysia will need to upgrade the educational system to educate and attract high skilled labour in focus sectors, such as engineers, biochemists, industrialized farmers, etc.
3.2 PRODUCTIVE BUSINESS INCENTIVES
KeADILan believes that reduction in taxes and other levies to the business sector, in the proper environment, will result in increased investment and consequently job growth. Additionally, KeADILan’s proposals are to focus on key sectors to maximize impact of tax-rebates on industries strategic to Malaysian growth and development. After opportunities to lower the overall business tax burdens, KeADILan would then offer more sector- and productivity-driven incentives to increase investment in critical areas and companies. Examples of these policies are:
- Tax rebates for those who export to a certain level (similar to Chinese initiative)
- Tax rebates or even direct subsidy to fuel efficient and labor intensive operations to help provide incentives for companies to migrate to more fuel efficient production methods and keeping people on the payroll.
3.3 REFORMING THE PUBLIC TENDER SYSTEM
One of the core pillars of the KeADILan economic agenda is that all government contracts must be tendered in an open, competitive and transparent manner. Towards this end, the following policies will be implemented by KeADILan as quickly as possible:
1. All qualified companies shall be provided with equal opportunities to secure Government supply contracts and projects.
2. To prevent destabilizing disruption to the current system, this policy shall be implemented on a gradual basis, commencing with projects or supply contracts sized above RM10 million for 2009.
3. In view of the challenges brought by globalization and to honor our international commitments to free trade, all tenders shall be made competitive, open and transparent by 2015.
KeADILan projects that on the conservative assumption a 10% savings is achieved via the new tendering system, it will generate an absolute savings in excess of RM5 billion per annum as well as bring about quality improvements that are of a large magnitude.
3.4 DOWNWARD ADJUSTMENT OF THE FUEL PRICE
KeADILan proposes to review the downward adjustment of fuel price so as to reduce growth constraint pressure brought about by the government’s mismanaged and excessive fuel price hike other inflationary factors in the economy. The downward adjustment will mean lower fuel costs for businesses which will enable them to expand production. Further growth will also come about as a result of the increase in disposable income of the average Malaysian arising from reduced energy related prices. The impact of the oil price adjustment will also result in a stimulation of consumer spending and help moderate the current slowdown in consumer credit growth.
With our proposed downward adjustment of the fuel price, our aim is to reduce inflation to less than 5 percent
3.5 STRATEGIC PUBLIC TRANSPORT INITIATIVES
KeADILan considers public transportation infrastructure a priority for investment, but also formajor systemic reform. KeADILan will improve the quality of the nation’s transportation infrastructure by optimizing the development expenditure for the sector. Key attention will be given to the 3 highly congested urban centres – the Klang Valley, Penang Island and Johor Bahru. A blueprint for a “Klang Valley Circle” rail network will also be developed to improve inter-suburban connectivity, by-passing the congested Kuala Lumpur city centre.
KeADILan also supports a policy to strengthen and link up the public transportation network nationwide in a manner that revisits Malaysia’s “old” cities such as Ipoh, Seremban, Melaka, and Alor Star and links them with fast rail service. KeADILan projects that just Singapore’s population of 3 million tourists, with income 4 to 5 times that of Malaysia, would be introduce to innumerable new tourism spending opportunities if from Singapore they can take a train to Melaka in 45 minutes or Ipoh in 1.5 hours. This inflow of high income individuals would have marked impact on local economies and foreign reservesIn addition, the interconnectivity of these cities will foster greater trade and information flows with affect domestic consumption and investment. Finally, improved rail transport opens the path to future re-developments of these older cities in the medium term with less infrastructure costs as compared to current investment in new city-creating mega projects. KeADILan believes Malaysians must think of the public transportation network of the future in terms of the flow of people, investment and business — not simple mega-projects for funds to be siphoned off from the economy.
3.6 CURBING PUBLIC EXPENDTURE ON MEGA-PROJECTS
Historically, the BN government has a notorious track record for wasteful and extravagant mega projects that cannot justify close scrutiny. In addition to the aborted RM1.13 billion crooked scenic bridge, a RM9 billion undersea cable-tracking project has also been proposed and there is now a proposal for a RM15.2 billion high speed broadband (HSBB) project to wire up 2.2 million so-called high economic impact premises.
Not many details have been released about the HSBB project since the plan was initially made known by Deputy Prime Minister Datuk Seri Najib Tun Razak last September. If this latest example of a mega project is approved, the expenditure will cost the public approximately RM 7,000 to wire each premise – a totally unjustifiable sum.
To prevent the likelihood of financially irresponsible mega projects burdening the public, KeADILan proposes for the current budget year and the remainder of the 9th Malaysia Plan period to undertake a rigorous priority review of all proposed mega projects costing RM1B upwards and to assess their socio-economic viability, affordability and intended impact on national development. This review will be conducted as transparently as possible and will include the use of independent and credible professional bodies and individuals.
The strict adherence to higher standards of fiscal prudence by the KeADILan government – beginning initially with mega projects and to be extended to all new projects – will prevent public funds from being wasted or hijacked by political cronies of the BN. It will also enable the savings to be channeled towards programmes bringing higher returns for the public, including those aimed at helping the low and middle income earners.
3.7 REFORMING THE CURRENT SYSTEM OF AWARD of AP’s
KeADILan proposes as a part of our new source of revenue as well as to negate the rent-seeking culture, the approved permits (APs) currently issued for free by the Ministry of International Trade & Industry to a select pool of “businessman” shall be auctioned to the highest bidders. Based on an estimated 70,000 APs issued per annum and a conservative RM25,000 market price, the auction will provide an additional RM1.75 billion to the government coffers.
3.8 MEDIUM TERM PROPOSALS
KeADILan’s medium term proposals are focused on the policies that KeADILan believes must be changed as well as on the new policies that need to be put in place in order to raise the Malaysian economy to a higher level and to realize the full potential of Malaysia’s diverse human resources and geographical regions. These proposals are also based on the removal or liberalization of archaic or self defeating entry barriers that stand in the way of ensuring sustainability and improving growth in the various sectors to benefit all Malaysians. Finally, they are based on taking the country’s economy forward in meeting the unprecedented challenge from other regional and global players and in coping with the more uncertain and rapidly changing external economic environment.