THE recently announced RM28 billion stimulus package for the economy, including RM20 billion for the stock market, will work in the very short term to boost confidence. It’s a quick fix and does not address the deteriorating economic fundamentals.
The RM20 billion for ValueCap, a government equity investment agency, to pick up undervalued stocks is a relatively small sum compared to the total market capitalisation of Bursa Malaysia. It will provide short-term support but will have little multiplier effect on the economy. Furthermore, the question is also whether we have enough financial muscle to outlast the current negative sentiment.
History, and more recently, China, have shown that almost always, interventionist policies cannot fight market forces and win.
The reality is, while the Malaysian economy is still growing, albeit at a slower pace, the worst may yet to come. There are more downside risks to growth.
This is because the economy has yet to face the full impact of the headwinds coming from both the domestic and external fronts.
Domestically, the key challenges, apart from politics, come from the rising cost of living, as a result of the implementation of the Goods and Services Tax (GST) in April this year and weakening ringgit. Like it or not, many items in the grocery basket of the average Malaysian are imported products. The continued slide in the ringgit, coupled with higher prices as a result of GST, will take its toil on consumer spending.
A view is that the growth in private consumption, which has been identified as a key growth driver for the Malaysian economy, will show a steeper decline from the second half of 2015 onwards.
Already, private consumption growth has fallen from 8.9% in 1Q2015 to 6.4% in 2Q2015. This is the lowest level in four years. Gross fixed investment is also down, from 7.9% in 1Q to just 0.5% in 2Q.
Slower growth and lower corporate earnings could hurt government tax revenue, which in turn will constrain fiscal options further.
Externally, the global economy is slowing, led by China, where growth forecasts for the next couple of years have been trimmed to below 7%. For example, the Asian Development Bank has projected that China will grow at 6.8% in 2016 compared with 7% this year. Barclays Research is less optimistic, opining that growth in the first half of 2015, based on alternate activity indicators, could be below 6%. Bear in mind that China is one of the largest importers of commodities in the world.
Commodity prices have been on a downtrend for some time now. World trade has been sluggish, growing at an average of just 3% a year since the 2008 global financial crisis, compared with 6% from 1983 to 2008. In fact, world trade hardly grew in the first half of 2015, and the forecast of the whole year is around 1%.
This is not good news for Malaysia, which, by and large, is still an export-dependent economy. In particular, commodity exports still make up a sizeable portion of its export revenue.
Going forward, economic indicators will likely show a weakening set of numbers.
The last thing the economy needs is political uncertainty and issues such as those surrounding 1MDB have contributed to the erosion in investor confidence in ringgit assets such as equities and bonds.
The economy grew 4.9% in 2Q2015, down from 5.6% in 1Q. Full-year growth is projected at around 4.8%, but some economists are warning of possible downward revisions.
Confidence in the global economy and financial markets is fragile, and there some views that what is happening in China may well be the start of the next financial crisis.
To put it in a nutshell, it will be one tough ride for the Malaysian economy this year and the next.
Bank Negara Malaysia Governor Tan Sri Dr Zeti Ahktar Aziz said last week Malaysians will have to make adjustments to cope with the current economic conditions.
This means consuming less imported goods, forgoing holidays overseas and studying in local universities and colleges rather than going abroad.
This is all good if adjustments are for the short term to ride out the downturn, with the assumption that appropriate and effective measures are taken to address the problems.
If we take a big picture view, the RM28 billion stimulus package will, at best, provide temporary relief but will not restore confidence in the long term. What the economy needs is a game changer.
This means the creation of new sources of growth, raising productivity, improving the quality of the workforce by improving the education system and last but not least, ensuring a rich talent pipeline.
It must be said that all these measures are contained in the Economic Transformation Programme, but implementation of the hardcore reforms has been slow. Indeed, the ETP was seen as a game changer for the Malaysian economy but it has not been the case at the halfway point.
For now, the focus is on the 2016 Budget, which will be tabled in Parliament on Oct 23. It is a critical one for the economy given the fact that 2016 may well be more turbulent than 2015.
Anna Taing is managing editor of digitalEdge Weekly
This article first appeared in Opinion, digitaledge Weekly, on September 21 - 27, 2015.