Wednesday, October 7, 2015

Malaysia: State of Economy

1. The economy is undergoing one of the sharpest adjustments in recent world economic history, after having gone through the glory times of the US quantitative easing of money printing. The rise and collapse of the asset markets - stocks and properties - is what we are seeing as the current business cycle. During the downturn, the sellout in the stock market and the subsequent outflow of funds depresses the local currency. How far down the adjustments will go is left to be seen.

2. As we have seen in Japan, if the adjustments are small and managed, then the adjustments will take a long time. In Japan, three decades and counting. Property prices have gone up to levels which the average young person in the job market could not even dream of owning a simple housing. This will create an entirely new generation of youngsters who have to cope with a high cost of living. At the same time, the property developers continue to milk their land bank by developing real estate based on inflated expectations. They can do so because they are already cash rich in their projects in the last three decades. Rents will remain high or properties vacant, and the only available market is the foreign market. In the world today, there is a class of the super rich who have the privilege of buying prime properties in any major city in the world. In the world today, there is also a class of the super poor who cannot afford to subsist even when they work very hard everyday. Those who cannot work are of course suffering the greatest miseries of human life especially in cities.

3. But do we dare to do major adjustments and how can we do it? The only balancing act is between the cost of living and wages. Ordinary people find it hard to live even when they are working hard. It means that wages are insufficient and therefore should be raised by an amount which is deemed sufficient, maybe 40%. If this happens, employers will say they cannot afford that as business is now bad. The other adjustment is to say that, given the current wages, the cost of living should come down. The cost of living is not just food, but importantly transport and housing. In the modern world, the cost of telecommunications and utilities now feature prominently.

4. The greatest spanner in the works today is the current great currency depreciation of 20%. This raises the prices of all imported stuff. This squeezes the livelihood of ordinary people into a pulp. As a result, overall demand for imported stuff drops. This squeezes even further the ability to own properties. This means that for those who are already invested in a property or properties, they may already be defaulting if they cannot find good tenants.

5. The greatest dilemma for banks today is how to deal with the aftermath of their reckless lending frenzy. The bad consumer debts and the non-performing loans in shares and real estate. Do they forgive these bad debts and move on? Who pays for the debts ultimately? The answer is simple - savers and depositors.

6. In such a depressed economic environment, the role of the government is to revive investor confidence. This good and generic statement is often mistaken to mean that we must sell our country cheap to foreigners. The most important thing for the government to do is to revive the investor confidence of Malaysians. This is of prime importance. It is really unbecoming of irresponsible politicians, just for the sake of rhetoric and showing courage, to deride businesses of all kinds in all occasions. We have the ministry of domestic food prices accuse businesses of profiteering by not reducing food prices when the price of petroleum drops a sen. We have the customs now going around witch hunting legitimate businesses for that gangster money called GST to the point, as I have heard, of outright harassment simply because every business in town is assumed to have always been evading customs duties and taxes and now GST. The response of many old businesses is to close down shop because it is simply too bothersome. The customs people are new in this game of the GST collection and in order to show results they use fear. In a word, the imposition of the GST will worse the business climate of this country and we should see a great economic slowdown and a rise in poverty as the government gleefully go about solving its deficit problem. Really, the best way to cut government deficit is to stop spending money you don't have on silly projects proposed by half-past-six management consultants.

7. I believe the political issues are mere political issues and should be isolated from economic issues. If there is any connection, I would say that the economics have a greater influence on the politics than the politics have on economics. Of course, in this country of ours, the politics have driven the economics for so long that it is assumed to be the only and correct for human beings to live. I believe we have been living under a dark cloud and that dark cloud will be passing even if reluctantly. That doesn't mean that the current shenanigans are acceptable. They are not, and they are silly. But in the end, it is going to be the economics that is going to influence people how they are going to vote.

8. How do we put the economy back together again? Confidence in ourselves. Start working with each other for the greater good. Politicians should stop making social comments and start straightening their policies and implement projects and programme. Give more money to the department of statistics so that they can get a more accurate picture of the social and economic profile of the country and the states. DOS has been so grossly underfunded and findings are approximated from sparse surveys and we get an unchanging picture of a blurred reality. Make the utilities more competitive through watchdogs and remove their monopolistic elements. Hopefully, basic facilities can be affordable and efficient and hence improve the overall competitiveness of the living and economic environment. Keep finance a separate and independent function. Charge finance with the role of ensuring the financial health of the nation. Remind the central bank of its role of preserving the value of the currency in a proactive manner. (Eg. ban inflows of short-term capital for the stock market.) Stop spending on silly projects - the LRT is the recent one, totally underplanned and hastily put together. Stop imposing silly policies - the GST is the recent one, totally uncalled for, with stupid arguments.

I better stop here.


walla said...

This one was about 11 months ago:

Has anything changed since then? So what's the expectation things will change a year henceforth after the present one which basically carries the same messages?

The issue today is still the same issue before. Politically motivated misalignment of national growth resources until even such a simple thing as augmenting the DOS is left undone for too many years.

After all, without more meaningful data which smart economist can crunch more information with greater confidence so that projects get picked better so that professionals don't have to be called in to solve the mess left behind and then blamed for it?

As with many other countries, we have two challenges but we seem persistent in shooting ourselves in both feet. One, the challenge of closing income disparity. And two, the challenge of creating income growth.

In chasing after the first one which has been skewed for political mileage, we lose sight of the second one of wealth creation which is the only thing that can make the closing of income disparity over time an achievable central national goal so that without national support for wealth creation regardless of race, people will just go and do whatever they can with whatever they have in the shortest possible time - investors will buy shares and properties, bankers will issue loans to investors, and ordinary folks will punt along because they know their take-home pay will not see them or their families through the long and uncertain years ahead.

Against that background, everything has converged today. The weakening currency has made inputs more costly to make more competitive outputs so that value-adding is hit, yet local prices have gone up with the new tax and that makes local trades unsustainable for that matter households get pushed to the brink even when all are equalized by the same currency. Meanwhile federal revenue that runs big ticket keynesian projects is perilously close to zilch on the one hand because of the weakened oil and gas industry and on the other hand because it has been blown on duplicitous dummy investments. And then to hide all this nonsense, deflections are raked by stirring racial sentiments in the hope of holding onto race-based political power by controlling all federal institutions including enforcement so that the result is enforced double-standards which is injustice which is what has caved in the national brand.

And if citizens themselves don't believe in the national brand anymore, where would local investments come from if there is even any left in the aftermath of this economic crisis? And without locals leading the way to re-invest in this country, who would believe international funders will come again when they are not even sure any official statement made can be trusted ever? They might as well park their funds in the latest international sensation and last frontier, the OBOR silk road which will crescent Northeast Asia, Central Asia and Southeast Asia.

As for us? Just clinically documenting the final writhing of our own puny economic worm. You can't imagine how bad it is in the small towns and rural belts throughout the land.

Anonymous said...

Toll rates will increase from 50 - 100% on the 15th/Oct/2015............How are the normal working people going to survive is just beyond me............. As usual, the explanation,"it's in the agreement"........yet that very agreement is "protected" under OSA...........

nangka said...

I am not sure why you are so polite. Call a spade a spade. Politicians (a small group) are running the country, the economy, the judiciary, the police and the military. Essentially, in this country, the same group of politicians are running and controlling the executives, legislature and judiciary. Now, if they are trustworthy, smart and without skeletons in the cupboard, then, the country can still be well run. Now, if they are not, any number of policies, sound or otherwise, will not help turn the country around.. And this my friend, is the state of the nation. As this group continue to cover up their past sins, the cover up gets bigger and bigger, and more and more ridiculous, to a point where we are likely to slide down the path of Zimbabwe. Malaysian Ringgit may soon be equivalent to the Zimbabwean Dollar - soon to be demonetised and no longer a legal tender.