How strong are Malaysia’s economic fundamentals?
Published on: Monday, October 26, 2015
By: John Lo
Text Size:
Wahid’s contention that there should be no concern on Malaysia’s economic fundamentals and JP Morgan “should not equate Malaysia with Indonesia” on 3 broad points.
[a] The Malaysian economy is more diversified, especially away from commodities.
[b] The Malaysian financial institutions are better managed and have sufficient financial resources to withstand current bleak economic scenario.
[c] Malaysia has a robust financial system and financial market. To a great extent, I can agree with him. But what worries me is Wahid’s repeated comparison of Malaysia’s current economic fundamentals to the 1977 financial crisis during which Tun M took the drastic step of pegging the Ringgit to US$ at 3.80 to stem the attack on our currency. 1977 is history.
The biggest question Malaysians must ask is: Can these better economic fundamentals in 2015 equip our country to face the numerous challenges confronting us now and in the near future. In all humility, I need to stress that Malaysia is facing a different set of external and domestic issues nowadays. Samples of these problems are:
[a] Number 1 is 1MDB to which closure is still elusive. It is already impacting our economic fundamentals in more ways than one. It may worsen if the political leadership fails to put away 1MDB in a satisfactory manner.
[b] Now political, racial and religious divisions are daily occurrence. It was not in 1977.
[c] Tun M, for better or worse, was in complete control. Therefore, it is not wise for him to keep asking Malaysians to take comfort basing on 1977 experience. Cambridge dictionary defines “fundamental” as “forming the base, from which everything else “develops”. This definition clearly points to the future, not the past. It is also pretty clear from this definition that Federal Minister Wahid has a very narrow interpretation of what constitutes good “economic fundamentals”.
Comprehensively, it should encompass all aspects of national life which have and can affect the economy of a country, like foreign reserves, fiscal and monetary policies, direction of budget, quality of political leadership, general economic policies, human capacity, degree of inclusiveness in terms of race and religion, implementation of economic policies like NEP, abilities to transform and restructure the economy with a strong mission of innovation. I will, again with humility, look into some of them hereunder. But first, let me touch on Indonesia vs Malaysia first.
Indonesia vs Malaysia: For the sake of objectivity, we must look at our own country’s economic position vs other comparative countries in the past. Malaysia was considered an Asian Tiger together with the likes of Singapore and South Korea. Taiwan was way behind us.
All these 3 countries, without oil and natural resources, have progressed into the 1st world. We are struck in the middle income trap with real dangers of slipping back if politicial leaders fail to take firm, decisive remedial actions.
We used to crack jokes about Indonesia and her endemic corruption. With Jokowi as President and his no-nonsense crackdown on corruption, Indonesia is being seen in better light. No need to comment on Malaysia in this respect as we already all know about it. Had Malaysia performed like South Korea, Taiwan and Singapore, JP Morgan would not dare to equate Malaysia with Indonesia. We should be in 1st world by now. For us to be equated with Indonesia by JP Morgan and Wahid having to defend our country is not flattering.
Strength [or weakness] of Ringgit: The rating agency Fitch has stated that it might downgrade Malaysia’s rating. Federal Minister said on 20 March, 8 August and 1 September 2015 that the rapidly weakening Ringgit was not reflective of the strength of the Malaysian economy. The Ringgit has since declined further to almost 4.5 to US$. Currencies of countries with sound economic fundamentals [in the real sense] like Singapore, have depreciated a lot less than ours. As Federal Minister in charge of economic planning, the best way is for Wahid to tell Malaysians the true reasons for the Ringgit’s decline and give us assurance that policies are in place to stop the downtrend.
Malaysians cannot take comfort at some statements by a couple of Federal Ministers that a weak Ringgit is good for us and other countries’ currencies have also depreciated. Or that the weak RM does not reflect our economic fundamentals. Wahid should recognise that the strength [or weakness] of Ringgit, to a large extent, is reflective on the [good or poor] quality of economic fundamentals.
Why is ours together with Indonesian Rupiah, have declined the most? I must point out that no country in the world that has “strong economic fundamentals” and has weak currencies at the same time. The contrary is also true; countries with the weak currencies have poor economic fundamentals. Make no mistake – Strong currency is synonymous with strong economic fundamentals, sound economic [especially monetary and fiscal] policies and management.
Fiscal and Monetary Policies: In recent years, PM Najib has committed to reduce deficit which he has done so quite well. Can he continue is another matter as sources of revenue from oil and commodities have all but dried up. Manufacturing, even with Ringgit so much down, will not perform all that well. This is because other countries, especially China, have also depreciated their currencies. More worrying is Malaysia’s lack of ability to produce up-market products, relying too much on “run of the mill” stuff. BNM, under world renowned and respected Governor Zeti, has run very sound monetary policies for many years.
This has been our economic bedrock. Danger on the horizon is the level of foreign reserve – at under US$100 billion – Malaysia’s arsenal to defend the Ringgit is like a water pistol.
Good Political Leadership Quality/Checks and Balances/Independence of Institutions: All well managed and 1st world countries have, by and large, these hallmarks. Malaysia has not been known for these qualities. A further reduction of quality in these three key factors will pull Malaysia down. Infighting between institutions like BNM and the AG Chambers is most unhealthy and will lead to worse things.
The Federal Government has already accepted the existence of “trust deficit”. Politicians in government and from opposition are to blame. They are overzealous to score politicial points at the expense of ordinary Malaysians. This is obvious in the print and internet media for the last 12 months – so little attention and energy have been devoted to the improvement of life for ordinary Malaysians. In fact, they don’t seem to exist to them most of the time. These same politicians lack virtues of gentleman, will never admit any wrongdoings no matter how obvious.
Adding insults to injury, they have the audacity to produce ridiculous excuses expecting ordinary Malaysians to swallow them wholesale. They like to throw checks and balances out of the window. Most saddening to see is the general decline in many of our institutions, often by political machinations. These undesirable developments have a huge bearing on our economic fundamentals. I hope the top political leadership in government and opposition will not comprise national interest in these aspects of national life.
Political Trend: Most damaging to long economic fundamentals is the use of racial and religious bigotries to garner political support by politicians. No country, especially in the era of intense global competition, can hope to enjoy decent economic growth if its population is divided by intense racial and religious barriers and sensitivities. The political leadership is paying lip service to harmony and has done precious little on the ground. Lucky for Malaysia that ordinary Malaysians of all races have so far behaved far more maturely and rationally than politicians. If this is not the case, what is left of our economic fundamentals would have disappeared into thin air.
Malaysian General Economic Trend: For years, Malaysia has been living lavishly on an “extractive” economic model, like revenue from oil, handing out APs to selected parties who have become very rich without much effort, favouring the chosen few with “fat” concessions in IPPs, highways, stable food imports and so on. End result, a big chunk of the Malaysian economy is uncompetitive, including many GLCs. There are just too many rich Malaysians leeching on this “extractive” economic model.
They have a great sense of “entitlement” meaning they feel they have the birth rights to all these goodies without working for them. The question is “who owes them” an easy and lavish living? I was hoping the NEM [New Economic Model] and Transformation of PM Najib would stop this “suck out” but apparently, nothing much has materialised so far. This sort of unhealthy economic trend must stop soonest possible as it will adversely affect and further damage our economic fundamentals. Can anyone tell me when was the last time any political leader talked about productivity, competition and better lives for Malaysians?
Global Economic Trend: Let’s be honest about it. Malaysia’s long term economic fundamentals are not looking too good right now. They may get worse because the Global Economic Trend is working against us.
[a] US is more than likely to raise interest rate by the end of this or latest 1st Q of 2016. If Malaysia cannot put the act together, US rate increase will further exacerbate capital flight and weaken Ringgit still more. Any Chinese depreciation of her currency will add to our headache.
[b] Our biggest trading partner, China will continue to experience its economic slowdown. Our revenue from commodities will continue to diminish.
[c] Malaysia has been lackadaisical in developing human capacity, competitive spirit [due to over reliance on extractive economic model] and innovative robustness. Other neighbouring countries like Indonesia, Vietnam and even Philippines are catching up.
[d] Oil price is expected to stay at low level for a long time due to over production and reluctance of producing countries to reduce output.
[e] Many countries are taking these “bad times” as opportunities to undertake economic restructuring and will emerge stronger eventually. Malaysia’s lack of determination in this respect will weaken our economic fundamentals in comparison with them in the near future.
Strong Economic Fundamentals make up a composition of factors, many of which are actually non-economic in nature. The most important ingredient to strong economic fundamentals is political leadership. Political leadership with qualities of honesty, credibility, strong desire in nation building. This is best illustrated in countries that have little or zero natural resources and having gained 1st world status.
On the contrary, many countries endowed with rich natural resources have remained 3rd world because of poor political leadership. Political leaders depending on racial and religious differences among the citizens for political survival and lopsided economic policies favouring cronies cannot build strong long term economic fundamentals.
ADVERTISEMENT
