Monday, October 27, 2008

Flat With the Nose Dipped

Chinks in the Malaysian economic armour?

We have had nearly thirty "good" years since 1980 spending the "oil" money and pretending to the great. The real chink is that the "oil" money is gone, and populist policy of subsidising food and fuel is being removed - in the midst of probably one of the greatest economic turmoils of the century. So much for timing. This implicates the whole generation of politicians who went along with the merry-go-round.

Financially, we took the hit in the 1997-1998 financial crisis, from which we have not recovered. Indeed, danger looms still in the financial industry which has been quite happy to lend to consumers to buy stocks, cars and houses and a good time. But I think that the downside is limited, given that the industry has been recapitalised. I do not mean that the financial industry will not take a hit again - it is likely to, but not to the magnitude as in 1997-98 or what we see in the US and the rest of the developed world which has been relying on financial services for a living.

Malaysia will also feel a similar effect from the credit crunch. The way the local stock market is mimicking the world markets being that the local economy has no real fundamentals on its own. It has similarly been floating on inflated real estate and the general "consumer'led" recovery of old. With the scare, property prices will deflate to its real value - which could be easily halved in some areas - and this will also remove the excuse for banks to lend without thinking.

Even if interest rates are not raised or credit rules tightened, banks may not be inclined to lend.

Without loan growth, the economy will easily be flat with the tip of its nose down - before it nosedives.

The real chink is in its loss of momentum - from an irrelevant economic structure.

The relevant structure is to refocus the economy on competing in the world market - not the generation of billionaires through mega projects.

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