MALAYSIA: SUBSIDIES AND BANKRUPTCY?

(This article appeared in The Malaysian Reserve and The Malay Mail yesterday and today respectively)

1. It was reported that subsidy cuts will be implemented from this month. The objective was to avoid bankruptcy due to accumulative debt caused by the subsidies. If not implemented immediately, the dooms day was predicted in 2019. If implemented now, a saving of RM103 billion within 5 years (2015) was forecasted.

2. The proposed cuts cover petrol, food items (sugar, flour and cooking oil), gas, toll rates, health care and education.

3. The intention is undoubtedly noble. Nobody wants the country goes to the drain. Therefore the subsidy schemes, currently stood at RM74 billion, should be revisited as they are largely expropriated by the undeserving rich people and big businesses. But the schemes ought to be continued for the deserving bottom 40% whose monthly household incomes are below RM2,129 .

4. But did Dato’ Seri Idris Jala prudently choose the right word ‘bankruptcy’ and harshly put all the blame on subsidies? Does the mounting debt can only be tackled by cutting the subsidies? Did he give the government a comprehensive landscape and, hence, the right signal?

5. The sacred duty of any responsible government is to provide a better standard of living for its rakyat on a sustainable time frame. It should be achieved through prudent management of the economy. And ‘prudent’ does not necessarily means a balanced budget ALL the time.

6. The strengths (or weaknesses) of the government in managing the country’s economy are measured by a few (basket of) indicators such as fiscal deficit, magnitude of debt, external debt service ratio and saving-investment gap.

7. The worst managed economy in the world is the US with debilitating budget, trade and balance of payments deficits. In the case of Malaysia, apart from a short period in the mid-1990s, the government has always run a fiscal deficit but nowhere close to that of the US. In fact, the government has managed to tame the fiscal deficit to 5.6% (as a percentage of GDP) in 2010, down from 7.4% in 2009.

8. At 5.6%, it is about half of that of UK’s and Spain’s and much lower than what Malaysia used to experience. In early 1980s, our fiscal deficit used to be at around 14%. And at the current rate the Prime Minister is driving the economy (10.1% growth in first quarter), this year’s GNP could be significantly above the target of RM499,690 million. Hence, the deficit in percentage terms would be reduced further.

9. Regarding the national debt that Idris was referring to, one has to look at its magnitude as well. It is normally measured as a percentage of GNP. In 2009, Malaysia’s debt was 34.7%; less than one fifth of what Japan is facing (192%) and less than one third of Singapore (118%). Belgium and Italy used to experience about 180%.

10. Our country highest national debt ratio was in mid 1980s, at around 70%. What must be commended is that over the past few years, the Treasury has managed to pay almost all our foreign borrowings. This positive situation gives the government ample space to focus on tackling domestic borrowings which stood at RM321.5 billion in 2009; the lion share was government securities which constitute 71%. It is important to note that domestic borrowings have negligible risk of impacting our foreign reserves. As at 14 May 2010 2010, it was RM314.2 billion and it can finance 8.3 months of retained imports.

11. Borrowing is one part of the equation; ability to pay is the other part. The later is normally measured in terms of external debt service ratio. In 2009, our debt service ratio stood at 6.5%; admittedly higher than the 2.6% recorded in the previous year.

12. Nevertheless, there is no reason to panic since our exports have shown a significant rebound of 31% during the first quarter this year. If the trend continues as forecasted, the percentage will definitely move south.

13. Additionally, by convention, the threshold is 20%; hence, we are much below that psychological line. Our worst case scenario was in 1986, when we had to service the debt at 18.9%.

14. Lastly let us look at the investment-saving gap. In 2009, our surplus was RM91.8 billion or 13.5% of GNP. It was higher than Germany’s 10% saving rate, the biggest economy in the Euro Zone.

15. Admittedly, it was lower than 2008 (18.1%). However, the surplus provided ample liquidity to finance domestic economic activities.

16. In terms of gross national savings, it was still at a comfortable level of 31.3%, albeit, 6.6 percentage point below the 2008 level. However, due to potentially strong economic recovery, it is projected that the savings will rebound to around 35% this year.

17. The above basket of economic indicators showed that Malaysia’s economic structure is much stronger than it was in the 1980s and is comparatively better than some of those countries. Combined with its prudent and accommodative fiscal and monetary policies, the risk of being bankrupt is quite remote.

18. Such a possibility is further reduced when the government broadens its tax base through the introduction of GST and aggressively implementing high valued added economic paradigm. The resultant outcomes would be more taxable income and a wider taxable base.

19. Idris should also realise that our GDP can improve, and hence government revenue will rise, if corruption is effectively reduced. Leakages and evaporation will stop.

20. Additionally, a study showed that an increase of one point in the Corruption Perception Index (CPI) will attract FDI which is equivalent to 0.5% of the GDP and pushed up the average income by 4%. Indeed the rakyat will benefit since the government is seen to be committed to fight corruption. The government revenue will increase accordingly.

21. Going back to subsidies cuts, before they are implemented, Idris should be reminded that the major economic factor contributed to the Alliance’s big loss in 1969 was high unemployment rate (more than 8%). The main contributing economic factor to the 2008 political tsunami was inflation (5.4%).

22. Therefore, I believe the withdrawal plan would be judiciously implemented; less it may cost a government. Idris may win the battle (cut subsidies) but will lose the war (general election).

23. From the violent reaction, I suspect Idris will be more tactful and politically sensitive in future.

24. He should have 100% confidence in the current government that it won’t allow the country to go bankrupt. It has an excellent track record in effectively and efficiently managing it for the last 53 years.

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  1. #1 by watever on June 3, 2010 - 4:54 pm

    Thank you Dato’ for the article.

  2. #2 by sam on June 4, 2010 - 4:04 pm

    I agree with Datuk that the KPI Minister should look at it holistically across the board rather than jumping the gun and made me lose my sleep!

    Thanks Datuk!

  3. #3 by Tedong on June 7, 2010 - 2:14 pm

    Thanks and appreciate your article Datuk. It was give all rakyat nerves when read statement from Dato Ideris and PM shall look the really impact our economic with a few angles. Rakyat especially Melayu they still want Subsidies since they had implement long time a go for daily survival i.e. fuel, food, gas, toll etc. I can’t imagine if all that subsidies to cuts … Rakyat will penalize current government in PRU13!!! … Are UMNO ready???

    • #4 by darahtuah on June 7, 2010 - 5:35 pm

      Dear Tedong,

      The answer is found in para 3, 5 and 22 above.

      My suspicion is that those who really want the subsidies to be retained are the rich and the big businesses. And on per capita basis, the Chinese benefitted most from the subsidies, not the Malays as many tend to believe.

      So who is having the subsidy mentality?

      T/kasih.

      • #5 by Tedong on June 9, 2010 - 9:22 pm

        Salam Datuk,

        Yes, Chinese got every thing!!!. How if GLC take over the majority subsidiaries?
        I’m not the right person to give the opinion, but I believe they can give hard pressure to ******* as the rich and big business

  4. #6 by Shamsul Yunos on June 7, 2010 - 2:50 pm

    JOKE OF THE DAY: Haris Ibrahim thinks Pakatan can produce a fair and balanced newspaper….

    Read all about it HERE

  5. #7 by sputjam on June 8, 2010 - 3:36 pm

    The subsidy should be abolished and the poor should be given direct monetary assistance. That is the only way to prevent abuse and wastage.
    Today, in south east asia, because we bow down to the poor, we are now the only country where two stoke motorcycles are tolerated while Indonesia and thailand, have abolished it due to pollution.
    Money spent on subsidising refined petroleum products, could have been invested on improving public transportation and subsidising its operations, like what is done in many parts of the world. In Paris, a RM200/month(Euro 40) is all you need to travel on any bus or MRT for one month. The price for a car is less than half that in Malaysia but refined petroleum products are taxed 200% and cars that pollute have to pay more in terms of carbon emmission and road tax.
    Artificial pricing for consumer products creates opportunities for smugglers. How else can you explain a 400% rise in the sale of diesel/petrol at border areas in Malaysia in 2007/2008. And due to this, marketing executives in oil companies were paid bonuses, including those in Petronas, up to 6 months.
    And today, we have shortages of sugar in the shops.Sometimes, smuggling includes those in the customs department, who approve re-export of controlled goods through our ports.

    diesel subsidies given to our fishermen only made them stay home and sell their alloted diesel instead of fishing.
    Cows given to kampung people ended up in kenduris, instead of being bred and creating model farmers.
    Marine engines given to fishermen will eventualy ended up sold after they could not find the money to repair it due to lack of maintenance.

    The main reason why many Malaysian are feeling poor is due to the drastic decline in the value of the ringgit, especially against the USD and S$ after 1997, and the amount of assets that we lost as the stock exchange, which at that time was the second highest in market capitalisation in asia, collapsed.

    As for the statement made by idris jala, he rightly mentioned that our national debt is growing at the rate of 15% a year. That means, the country is spending beyond its ability pay. After a while, we may reach our credit limit (he predicted 2019), and the hedge fund prowling around in singapore will then smell blood and tear us to pieces, like what happened in 1997.

    Today, the most powerful forces that mould the economic movement in this world, are the guys who control the financial system. hence, even if there is no demand for crude oil, these people may decide to spike the prices for nothing more than profit. A law that prohibits hedge funds and speculators from indulging in commodities and forex, will be in the right direction.

    If the subsidies are continued, then this government is only delaying the inevitable collapse of the nation. Subsidies that promotes wastage and smuggling should be listed as a form of corruption. And the govenrment that promotes it, does not deserve to lead the nation.

  6. #8 by CommonerNinetyNine on June 11, 2010 - 12:43 pm

    it may be unfair to say rich and undeserving people when it comes to subsidies.

    two types of rich people, legal and illegal business owner and workers. for those legals, they pay tax, and very high tax.

    for many people, non-rich, they don’t pay tax because income not reach the taxable range. they get goodies indirectly because some other people pay tax.

    the rich play a part indirectly in community development and the non-rich play a part in a stable community.

    it is an ideology, in its simplest form means win-win, everybody get what they want.

    so, rich or non-rich, getting subsidies should not be an issues.

    it is the obligation for the government to manage the country well and in one and only form to directly relate to every citizen, not just few groups of citizen, is to deliver subsidies.

    a country is not a company, where a country’s government has obligations to its citizen, and a company’s management has no obligations to its employees.

    when a company’s management has cash flow problems, they will cut the obstacles, and as we can see usually, layoffs. the company need not care about whether its employees have family to take care of or any personal reasons because the company interests are above all.

    can a government treat its citizen as a company treat its employee? isn’t it a government is selected in the first place because of its citizen needs?

    when a government can’t see their responsibility to its citizen, what else can be expected from it?

    of course when a government is working honestly and has tried all it can to manage the country but still fail because of uncontrollable circumstances, i believe its citizen will be more willing to do what they can to take part in saving the country.

    but don’t expect anything from the citizen when its government spend money like their own money, run the government like their family business and think they own the country.

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