Since the global economic train wreck of 2007-2008, the world economy has been treated to large doses of cheap money (monetary easing), and more government spending (fiscal stimulus). Unfortunately, the side-effects of this medicine have distorted many areas of the economy, resulting in problems such as:
- US cheap money have artificially fueled stock market booms in Indonesia, Philippines and other countries. Now these artificial booms are collapsing like a house of cards because the US is ending of this cheap money in an event called “QE3 tapering”.
- Near zero interest rates in US have also made it easy for governments and big companies to borrow money cheaply. This will also change with QE3 tapering about to end, probably in 2014. Suddenly costs of borrowing will increase. Already we are seeing companies in Asia planning to issue new bonds just to repay the expected higher financing costs.
- China’s extensive spending in 2008-2010 has resulted in a lot of wasted investments. For example, many new empty townships and roads leading nowhere have been built.
These problems have also affected Malaysia. The government has resorted to borrowing more and pumping this money into the economy in order to boost GDP growth. You can see that Malaysian government debt increased dramatically to over 50% of GDP in this chart from 2010 onwards:
Unfortunately, in a world where borrowing money is becoming more expensive and slowing Malaysian growth (growth is forecast to drop from 5.6% in 2012 to approximately 4.5-5% in 2013), the situation has become untenable for Malaysia. Fitch’s recent ratings downgrade warning to Malaysia is a reflection of this.
The Malaysian government is in a dilemma. It has run out of easy solutions. The free spending days are over. It has become hard for the government to make difficult choices when the opposition will pounce on any move that makes life more difficult for the people.
1. Subsidy Reduction
Reduction of petrol subsidies has already begun. However estimates that this will reduce the deficit by only about 3-4% means that further measures need to be taken.
2. Reprioritising Government Projects
The government has already voiced a plan to slowdown high-profile construction and oil&gas projects, putting priority on only those projects with a high multiplier affect on growth such as the new MRT system, and slowing others down. This is good, but more can be done as discussed in (3) onwards.
3. Civil Service Reduction?
Malaysia has one of the most bloated civil services in the world (source OECD):
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Reducing the civil service in a time when the economy is contracting will cause unemployment problems. This has been worsened by the fact that the retirement age was recently increased from 55 to 60. And even halting new recruitment into the civil service could cause unrest, although I feel this last step is probably necessary.
Implementation of GST (goods and services tax), probably in the range of 4-6%. The government has been promising to implement this, and then has deferred it several times. This will be an unpopular measure, and the opposition will probably use this as a stick to beat the government with.
Promoting export industries more through incentives and ringgit devaluation. Malaysia has a long history of exporting themselves out of trouble during times of economic turbulence in the 80’s and 90’s. This is probably one of the more palatable options as the government can then blame foreigners for devaluing the ringgit.
6. Government Privatizations and Cost-cutting Measures
Many government projects are extremely expensive relative to other countries. There are also rumours of hidden tolls and royalties accruing to various parties. This is an area where the opposition believes much progress can be made in terms of cost-cutting. Whether our current government is able to stomach this measure is doubtful, but I remain hopeful.
Have some holdings in a currency that can withstand any future devaluation (e.g. USD), or buy stocks in export-oriented companies with stable growth prospects – avoid companies with large debts payable in USD. Many banks offer interest bearing deposits in foreign currencies, or allow you to invest in foreign stock markets in a multi-currency account.