A perfect storm?
Published by The Edge in its year-end double issue in December 2014.
1. What are your key concerns for Malaysia in 2015?
I would answer this question with a more targeted one, which is, Is the Malaysian economy headed for a perfect storm in 2015?
Broadly, Asian economies are grappling with the impact of the end of Quantitative Easing, which has shaped them since 2009. In layman terms, when the US Fed “printed money” over the last five years, Asian currencies appreciated against the US dollar. Coupled with near-zero interest rate, “hot money” went into buying Asian bonds, gold, silver, oil, commodities, and properties in Asia. In a nutshell, the end of QE and the gradual rise of interest rate in the US will naturally mean the deflation of Asian currencies, bonds, gold, silver, oil, commodities, and, of course, properties in Asian cities.
But it is now clear that Malaysia could turn out to be the worst hit among Asian economies. Our past excesses are catching up with us:
o The Malaysian government and its government-linked corporations are heavily indebted. Government debt to GDP increased from 41.24% in 2009 to 54.8% in 2014; no one has been able to ascertain exactly how much the GLCs are owing and which portions are guaranteed by the Government;
o The Government is heavily dependent on oil-related revenue (over the last decade, averagely at least 30 percent of government revenues come from oil), budgeting with the assumption that oil would average at USD 110 in 2014 and USD 105 per barrel in 2015;
o Household debts increased from 60.4% to GDP in 2008 to 86.8% to GDP at the end of 2013;
o The number of registered vehicles increased from 13 million in 2008 to 23 million in 2013, mostly purchased on loans, with long repayment period;
o The stock of mortgage debts held by households increased from 26% to GDP in April 2008 to 35% to GDP in April 2014;
Both the Government and the households are borrowing up to the neck, so to speak, constraining the financial capability of the Government to respond in the event of a crisis. Likewise, households will be seriously harmed even if we are hit just by a mild recession. Disposable income is already low and further depleted by subsidy cuts and potentially by imported inflation due to a weak ringgit as well as by the introduction of GST. Domestic demand is weak.
In the last five years, the leading growth sectors of construction, properties and infrastructure projects were mostly debt-fuelled, while commodities, especially palm oil, as well as oil and gas were driven by high global prices. Prices are now much lower.
There has been very little productivity gain as the economy essentially relies on unskilled foreign labour.
In short, the combined impact of the end of QE and domestic excesses could trigger a perfect storm not seen since the 1997/1998 crisis.
2. With lower oil prices, continued global economic uncertainties and high government /corporate debt around the world, many say 2015 isn’t looking too good for Malaysia. Do you share this view? Are there any silver linings? Are there any areas in particular about the state of our nation that concerns you?
The end of QE and the potential crisis scenario should force Malaysian policy makers and the public to reorient the economy from debt-fuelled growth to one that is more sustainable and based on productivity gains.
If the US economy continues to grow, the export-oriented manufacturing sector may still have a chance to help the Malaysian economy to export our way out of trouble. As the rest of the world, including Japan, are on competitive currency devaluation, Malaysia may just not have any such advantage at all. And whether the US can do well and for how long will remain a big question.
The Government must rid itself of excesses, and instead focus on providing better public transport, public housing, and public health to cushion the potential fallout and social cost, and boosting domestic demand by moving the lower and middle-income group away from spending on houses, private cars, and private healthcare.
3. Is Malaysia losing its competitiveness? Are we doing enough and moving fast enough to put ourselves ahead?
It has now become a cliché that Malaysia should never compete purely on cheaper currency and cheaper labour costs. However, there is no political will to move away from our dependence on unskilled foreign labour.
With 1.5 to 2 million of mostly skilled Malaysians working overseas and, according to Human Resources Minister Richard Riot, 6.7 million unskilled foreign workers working in our economy, obviously we know that something is very wrong. Further, Malaysia has the lowest female labour participation rate in the region, mainly because of the endlessly available unskilled foreign labour which preempts investments that can get women into the workforce.
Ending our reliance on cheap foreign labour and helping industries to move up the skills, automation and technological ladder are the important things the Government must do immediately to move Malaysia ahead.
4. If you could make one realistic change to Malaysia right now, what would it be?
For something immediate in 2015, I would propose a ban on all Government agencies from employing unskilled foreign labour, either directly or indirectly through contractors. When the Government and its agencies at all levels are forced to hire only Malaysians, they will at least have to improve payment for jobs at the bottom level such as garbage collection and cleaning work, and hopefully this will trigger a virtuous cycle that is less labour-dependent, leading to higher wages, better skills and technology, as well as productivity gains.
5. Your motto for 2015?
Whatever that worked during what I call “the QE era” of 2009 and 2014 won’t work in 2015 and beyond. A fresh, new approach is needed immediately.
6. Is there anything that you reckon Malaysians should be thinking about more?
Politics and the economy are inseparable, especially in Malaysia. Less politics of race and religion, and more on what people need to put food on their table. Without major rethinking of our politics, the economy will not go anywhere either. Change is needed at the very core of society – the political structure needs to change.