Thursday, January 22, 2015

Budget revision off mark, not for the people



1:57PM Jan 22, 2015
By Ram Anand
COMMENT When Prime Minister Najib Abdul Razak took the stage two days ago to announce revisions to the 2015 federal budget, he addressed his speech to civil servants, dignitaries and also the Malaysian people at large.

Much has been said and debated about Najib's revision, which only cut about 2 percent of the initial federal budget in the face of plummeting crude oil prices and value of the ringgit, while trying to spur more small and medium enterprises (SMEs) activities and domestic consumption.

Najib, who is also the finance minister, outlined three key strategies to put the budget back in line with realistic goals for this calendar year, and within them, contained a host of cost-cutting measures picked from various programmes – from freezing the National Service to reducing grants to government-linked companies (GLCs), and so on.

He essentially cut down the government's operating expenditure, while maintaining the development expenditure, making no mention about increasing federal debts.

The announcement has been due for a long time, but it was not until Jan 19 when Najib told the nation that he would announce a budget revision the following day.

Oil prices had been plummeting since mid last year, and the ringgit was the weakest performing currency in Asia for 2014.

Najib had branded his revisions as being "proactive" in nature, which means the government was reacting to possible future consequence. The first words that he stressed in his speech were: "we are not in crisis".

The missing 1MDB brainchild

The question is, was our Prime Minister really reassuring Malaysians and addressing them through his speech? He went to extraordinary lengths to explain the state of the nation’s current accounts, our previous growth, and our Gross Domestic Product (GDP).

He also spent 45 minutes stressing that his administration is aware of all the concerns raised by the people.

Was he really responding to the people? There were still many other concerns that Najib had not even touched on, such as his brainchild 1Malaysia Development Berhad (1MDB).

Was he responding to dropping crude oil prices? If he was, his speech was definitely not as proactive as he puts it out to be.

The global crude oil prices has been taking a dive since mid-June last year, way before Najib even tabled his 2015 Budget in November 2014, on the assumption that global crude oil prices would average at US$100 per barrel in 2015.

Even when the budget was tabled, questions were already being asked of his government's decision to reduce fuel subsidies, even though global crude oil prices were actually decreasing.

Subsequently, in December last year, the prices plunged to the point where the government removed the subsidies completely and installed a float mechanism system to allow fuel prices to be determined by the market.

Aimed at the finance world

Despite assertions that “we are not in crisis”, Najib was probably prompted to react due to growing concerns from not only Malaysians, but also the investors, financial brokers, and most importantly, credit rating agencies such as Fitch.

And there were those who believe that was the case.

"If you look at the first half of the speech, it was obviously directed at the folks from the finance world, and also the credit rating agencies," DAP's Klang MP Charles Santiago, an economist by profession, told Malaysiakini.

"You see, he went to great lengths to explain about our current accounts, how we won't be in a deficit, and that the government is aware of the problems," Santiago (left) added.

But Fitch's statement that the budget revision highlighted structural weaknesses and that Malaysia may still face a downgrade means that Najib's attempts did not quite achieve the desired results.

"He thought it was sufficient to please the credit rating agencies without looking at other factors. That's why he kept talking about bringing down the deficit to 3.2 percent. He misread the whole mechanics of the situation," DAP's political education director Liew Chin Tong noted.

He said that absolving Malaysia of any accountability for the current situation and blaming it on the oil price drop alone does not cut it.

"Yes, globally, many countries had the same problem. Many currencies were devalued compared to US Dollars since late last year, but Malaysia had the worst performing currency in Asia in 2014.

"So, there must be reasons that are peculiar to Malaysia that caused us to be in this situation," Liew argued.

Over-reliance on commodities

Among those is the country's over-reliance on commodities as a structure of economy, making Malaysia highly dependent and susceptible to changing global landscapes.

"We rely too heavily on palm oil and petrol. We are an agricultural nation, but we never fully made use of agriculture as a form of economy for us," Liew (below) said further.

Najib also managed to see the lighter side of the crude oil price drop, saying that it would create more disposable income for the people and hence, domestic consumption can be spurred by strengthening the SME sector and also extending mega sale periods all over the nation.

But for a country where the household debt is bulging at its seams – 86.8 percent of the GDP, it is difficult to see how cheaper fuel prices would create enough disposable income for other domestic spending.

"It's all very superficial. Domestic consumption is only spurred by disposable income. He's not thinking ahead. It's very, very short term," Liew concludes, giving not more than two months, in order to be "kind", before the whole revision become irrelevant, prompting the government to return to the drawing board.

For Santiago, if the people were to spend less money, they are more inclined to keep it instead.

"If they can save the money, people will keep money in their houses instead of spending it in shopping malls," he said.

A ‘manager’ is in the house?

The whole revision, for Santiago, was an exercise to show a "manager" still exists in the country.

"There's like an impression now that we are ‘leaderless’. The revision was like showing to the whole world that the manager and the leader still exists. But cutting down that little (from the budget), he might as well have not done the revision at all," he said.

"For example, he asked SMEs to venture out further to the Asean Economic Community. These things don't happen overnight; they take time," he added.

The Malay Economic Action Council (MTEM), while welcoming the basic elements of the revision, noted how Najib made no mention about increasing income inequality in Malaysia.

"We are concerned that the government made no mention of any measure to combat inequality. In fact, there was not a single mention of any sign or step to combat the inequality in Malaysia," its CEO Nizam Mashar (left) said.

All Najib had to offer was that the government would continue focusing on programs for the bottom 40 percent in Malaysia in the economic tier. But how, he did not specify.

MTEM also indicated that the drop in our currency value must be "thoroughly examined", while saying that development funds should be used for projects that would benefit society, such as affordable housing, instead of focusing solely on mega projects.

MTEM warned of rising national debts.

Liew warned of import inflations that would translate into higher interest rates and eventually a burst in the property bubble.

The national debt last stood at 52.8 percent of the GDP, lingering close to the self-imposed debt ceiling of 55 percent.

Najib's revision seems to have done very little to allay long-term fears and neither did it seem to appease credit rating agencies and investors. Where does that leave Najib's economic direction now?
~ Malaysiakini

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