We are facing critical times if not a crisis yet
Bank Negara Governor Tan Sri Zeti Akhtar Aziz did well to give an uncharacteristic press conference on our economic performance based on the Fourth Quarter economic data in 2014.
She gave the press conference to “address the misconceptions surrounding the impact of the fall in oil prices and the significance of the oil and gas industries to the Malaysian economy”.
She agreed that we are definitely adversely affected by the drop in oil prices, but that we could have had economic growth of 2-3%, if we had not diversified our economy. But it raises the question as to whether we have we diversified and done enough to face the challenges of these critical times?
Idris Jala also told the The Economist that he seeks to correct the “big misconception” that Malaysia will suffer the brunt of the oil price slide because we are a major oil exporter, since we are not a major oil exporter.
Actually, Malaysians generally refer to our oil and gas earnings together and recognise the major impact of this industry on our growth prospects. After all, Idris Jala carefully points out, the “oil gas and energy” sector constitutes 17% of the gross domestic product. That is a very large chunk of our economy and it will have a major impact on our economy, if the oil and gas prices remain low and even slide further. So we must appreciate the deep concern of Malaysians over the low oil and gas prices. We cannot afford to play down the problems and our serious concerns about our future.
When we claim credit for diversifying our economy, we also ask how successful economic diversification has really been? The residual “other industries” constitute 30% of our GDP. Education, and health make up only 1% of the GDP. The rest of the sectors like tourism, electronics , agriculture, and financial services constitute only 5 – 7 % of the GDP each. Could we not have done better over 58 years of Merdeka, to diversify much more and into much greater value added productivity?
Yes, we may not be in crisis now, but I dare say that we are facing critical times ahead. The major world economies are generally slowly recovering or are still struggling to recover. Malaysia has done better at a 6% growth registered for last year. But how long can this higher growth last, in this sluggish world economy?
What are the danger signals ahead?
1. Inflation is reported at 2.8% in the fourth quarter. This will rise when the GST is introduced soon! In any case, do Malaysians believe that our inflation rate is only 2.8%? My Mee Mamak has already got smaller and less tasty! There is a long standing credibility problem with our public perceptions of cost of living.
2. The Malaysian Ringgit, according to Bank Negara has declined about 12% against the US Dollar between September last year to February 10th this year. Will the ringgit continue to weaken with the soft market sentiments and low confidence? There have been large non-resident Portfolio Capital Outflows amounting to US 18.6 billion since last September. Will this trend continue and dampen the ringgit further and cause more imported inflation? There may not have been “no dislocation to the underlying economic activities”, but there were no adverse effects on business confidence and medium to long term investment potential?
3. Malaysia`s international reserves were about RM385 billion at the end of January this year. It was sufficient to finance an impressive 7.9 months of retained imports. But if our balance of payments current account declines, due to lower export earnings and higher Import payments, these high reserves can easily fall. This is possible because of weaker external demand for our exports and higher costs of imports due to the weak ringgit.
The ringgit can be under attack, if we do not make structural changes in the economy, like following more closely the New Economic Model and phasing away faster, from the New Economic Policies and many of its non–competitive and protective practices. We have to be more realistic under globalisation or just withdraw from it and face the isolation.
4. Short term external debt is high at RM359 billion, especially when more than half of it is denominated in foreign currency. The foreign debt can rise if the ringgit falls further. Our international reserves can only support 1.1 times the short term external debt. This is not a strong safety margin and does not generate confidence, especially to foreign investors. We cannot afford to be cavalier about the dangers we face.
5. Our household debt expansion may have slowed down to 9.9% in 2014 compared to a large growth of 15% in 2010, but the total household debt is still unacceptably high and the banking system can be exposed to more risks .
Is there no crisis ahead?
We are now running the risk of looking at and emphasising short term economic growth, and losing sight of the medium to longer term critical challenges issues facing us.
We tend to talk of “no crisis now”, but how long can we honestly say so?
The critical issues facing us include not only economic concerns, but racial and religious and unfair policies and practices that can combine to cause social unrest and instability. If we do not firmly address the rising polarisation problems, with greater urgency, the growing economic problems of Inflation, the weakening ringgit, low productivity and slow income growth could consolidate and present us all with a real crisis , sooner than later.
Idris asks for fair and reasonable comments on his remarks to The Economist. He confidently urges “local companies to be innovative, creative and competitive”. Yes sir, but do all our national policies and practices encourage local companies to achieve their full potential or do many big companies they feel constrained and denied development opportunities? Can they really innovate? In fact the big brain drain and the considerable capital outflows, do not show much confidence in our economic prospects! So how to compete sir? We have to be more pragmatic.
Finally, we cannot wait for a crisis to happen. We have to act now to prevent a crisis, because we already know we are facing critical times and major challenges ahead. We have to be prepared, but are we preparing enough for the hard times. We just cannot console ourselves by saying – “no crisis”but I ask will it come and are we preparing for it . Then let the people know please?
That will generate more public confidence.
We must transform faster. This means that we must be moderate in all our policies, in managing our Economy, Race and Religion relations and in fighting corruption , cronyism and public wastage, much more effectively and with greater priority and less complacency.
In this Chinese New Year of the Goat, we will have to be more resolute and nimble, to climb over our critical challenges ahead.
May Malaysia succeed and all Malaysians enjoy A Happy Chinese New Year, with national unity, resilience, progress and prosperity.
Article published in Free Malaysia Today and The Malaysian Insider.