THE 2015 Budget Revision last week and the circumstances surrounding it provide much food for thought for all Malaysians. One cluster of questions arises from Prime Minister Datuk Seri Najib Razak’s announcement of the Budget Revision at a special televised session from the Putrajaya International Convention Centre instead of in Parliament.
As critics have pointed out, this poses a question about the role of parliamentary oversight in budgetary matters. If the national budget needs to be passed in Parliament for it to have legal effect, should not a revision of that budget also require the same for it to be valid?
Secondly, circumventing parliamentary review of the budget opens the door to unaccountable allocations of public funds, obstructs scrutiny of public spending decisions and deflects national attention from structural and systemic problems affecting the economy that may need to be given top priority.
In short, the 2015 Budget Revision is problematic from the regulatory perspective and in terms of government accountability to the people, both in the immediate and long-term management of the economy.
Perhaps it is not surprising that these issues have gained a sudden urgency.
As many analysts have noted, the overdependence of the Malaysian economy on commodities is just one of a number of structural weaknesses threatening to drag down the country’s sovereign rating. While the sharp drop in oil revenue is the immediate crisis that warrants an adjustment of the government’s budgetary allocations for the year, it merely emphasises the growing concerns over the sustainability of Malaysia’s economic performance.
Indeed, there is ample warning that the Malaysian economy may be heading for a perfect storm if the country does not take decisive action to address numerous glaring structural weaknesses.
Among them is its operating expenditure. If the government continues to allow its operating expenditure — now some 80% of the budget — to balloon at the expense of its development expenditure, it is crystal clear that the country’s future growth prospects will be rather dim. No rocket science in this.
The rest of the risk factors are equally plain to the eye. For the record, they include the low income levels of a huge majority of the population, excessive dependence on low-skilled foreign labour, a major deficit in human capital development, the poor quality of education, endemic corruption, a serious illicit outflow of funds, deteriorating race relations and dysfunctional political and governance processes.
Hence, it is also not surprising that Najib’s 2015 Budget Revision failed to convince the markets that it was the correct prescription for the country’s economic malaise, as evidenced by the continuing slide in the value of the ringgit against the US dollar, and the lack of buying interest on Bursa Malaysia.
What is the value in revising the budget deficit from 3% to 3.2% based on a projected crude oil price of US$55 per barrel, when the price has dropped to US$40 levels and is expected to stay low for some three years? If anything, it only reveals the policy paralysis of the administration.
Above all, the perils highlighted by Najib’s attempt to maintain the status quo with the 2015 Budget Revision underlines the paramount importance of changing the country’s economic game for the sake of its future prosperity.
To anchor the Malaysian economy to financial prudence — the first prerequisite before any policy directions are even considered — is for the country’s political culture to be cured of its addiction to easy money.
This habit manifests itself most obviously in the overdependence on extractive industries, a penchant for massive infrastructure projects, rent-seeking and similar schemes that fund the political apparatus.
It will require tremendous motivation to cut the umbilical cord that connects business with politics. Such determination may arise when the public becomes disenchanted with the quality of governance in a country and there is apparently no end to financial and other scandals at the cost of the public’s welfare.
That awareness often results when a majority of the people discovers that a chosen elite are privy to a privileged life, while the rest eke out a meagre living hamstrung by marginal working skills, unaffordable social goods, a lack of opportunity and are generally constrained by poor life outcomes.
This scenario may not appear imminent now, but it is not unimaginable that events on the horizon may conspire to push the country into a harsh economic environment. A slew of cautionary reports is beginning to warn investors about Malaysia’s sovereign risks.
To illustrate, following the Budget revision, Fitch maintained a “negative” outlook on Malaysia’s chances of defaulting on its bonds in the long term. This means the country’s credit rating is, more likely than not, to be downgraded in the next 12 to 18 months.
Further, Fitch red-flagged the government’s failure to meet its fiscal targets, underlining the vulnerability of Malaysia’s economy and credit profile to sharp movements in commodity prices, which will impact its external accounts.
The emergence of both fiscal and current account deficits will remain a rating sensitivity for Malaysia, according to Fitch. “Such a scenario would risk greater volatility in capital flows to a degree that could become disruptive for the economy,” the report says. Malaysia’s rising contingent sovereign liabilities also are likely to remain a credit weakness.
To prevent the country from sliding into the doldrums, now is the time to excise the economic profligacy that is compromising the country’s future resilience.
Deliverance will not come from merely asserting that we are not in crisis.
R B Bhattacharjee is associate editor at The Edge
This article first appeared in Forum, The Edge Malaysia Weekly, on January 26 - February 1, 2015.