5 ways to save the Malaysian economy
Let’s not kid ourselves. A major economic crisis is looming with no sight at the end of tunnel as yet. The Government is not even prepared to acknowledge that there is a crisis, not to mention to deal with some basic macroeconomic understanding of what’s going on and what’s next.
The ringgit hit the 17-year low of RM4 to 1USD on 12th August 2015. Within slightly over a month, not only was the RM3.80/US$ psychological line breached, it’s now crossed the RM4/US$ line!
Thus far, the responses from the Government on the rapidly declining ringgit are that the weaker ringgit would be good for exports and tourism; and that the slide is triggered by global factors such as china’s renminbi’s unexpected devaluation.
For instance, newly minted Deputy Finance Minister Datuk Johari Abdul Ghani said that there is no need to press the panic button, while Tourism Minister Datuk Seri Nazri Aziz claimed that a weaker ringgit is good for the tourism trade. Higher Education Minister Datuk Idris Jusoh said a weaker ringgit would bring more international students to study in Malaysia. Such talk won’t get us very far.
How we got here
If we look at the long range perspective, since the 1997 Asian economic crisis, Malaysia has been heavily dependent on unskilled foreign labour with very little general improvement and upgrade in income, productivity, skills and technology.
Since the Gulf War in 2003 which triggered manifold increase in oil and commodity prices, Malaysia has been heavily depended on oil revenue to sustain the broader economy, as well as to sustain lavish government spending.
With the cheap credit that came with Quantitative Easing introduced by the US Federal Reserve in response to the 2008 Global Financial Crisis, the Malaysian economy has been heavily dependent on debt-fuelled consumption and property speculation.
The long-term dependence on cheap labour means that our export sectors are not as strong and robust as we thought. Significant portion of Malaysia’s economic outputs come from oil and gas and commodities, the prices of which are declining.
Worse still, unlike during the 1997 crisis, Malaysia and Asian economies can no longer export our way out of the crisis because the ultimate export destination, the US economy, is no longer doing so well.
Today, out of the four major engines of world economy – US, Europe, Japan and China – only the US economy is doing reasonably well but it is still a pale shadow of its strength during the 1997 Asian economic crisis. The so-called ‘emerging economies’ of Russia, Brazil and others have by now more or less ‘submerged’.
So, on the one hand, Malaysia has no one to export to apart from the United States. On the other hand, there is a currency war which saw Japan, Europe and now China competing to devalue their currencies with the intention of boosting exports. This is probably the most terrifying part of the impending crisis.
Ministers, stop talking nonsense
I hope that Government Ministers who claim that a weaker ringgit aids exports would stop talking nonsense. One just has to take a look at the latest Bank Negara report that shows Gross Exports declined by 3.7% in the Second Quarter 2015 (1Q2015: -2.5%) despite the ringgit depreciating throughout the period.
The other major challenge is adjusting to the “new normal” of post-Quantitative Easing scenarios. Oil prices collapsed soon after the Federal Reserve ended its QE programme in late 2014. Inflated asset prices throughout Asia between 2009 and 2014 as a consequence of QE would have to face difficult adjustments.
Malaysia’s very high household debt ratio and property speculation quagmire are likely to make adjustments more painful. The next shock to the Malaysian economy would come if the US Federal Reserve hikes its rates in September.
Exports are not going to improve too much in the short term (due to Malaysia’s limited export capacity, race to the bottom competitive devaluation of currencies and US’ limited appetite for imports) and the ringgit is likely to go south further (domestic political crisis, US rate hike, collapse of oil prices), but anyhow Malaysia still needs a way out.
Five ways to save the economy
I propose 5 ways to save Malaysia from the looming crisis:
1. Get Najib to quit as Prime Minister
Let’s admit that Datuk Seri Najib Razak is a problem. While there are other global factors contributing to the decline of our economy, Najib is the cause to the loss of confidence in the integrity of Malaysia’s institutions. As the “political dead man walking”, his continuation as Prime Minister is causing more harms to Malaysia’s economy.
2. Name a new and competent Finance Minister
Even if leaders of the ruling parties couldn’t get rid of Najib as Prime Minister as yet, for the sake of the Malaysian economy, a new and competent Finance Minister with clear understanding of macroeconomic factors should be appointed immediately.
It’s time to end the practice of Prime Minister holding the Finance portfolio concurrently. Najib has shown how disastrous such practice is. Two names come to mind as new Finance Minister. From among the current ministers, Datuk Seri Mustapha Mohamad is probably the best to steer the economy. From outside the system, perhaps Datuk Seri Nazir Razak would be a decent choice.
3. Set GST at zero rate
The global market is stuck in an unsustainable situation, i.e. depended on the US economy as the sole and final consumer destination. There will only be limited growth the export, if there is any. Malaysia needs to quickly arrest the economic slide by ensuring that there is sufficient domestic consumption at the bottom.
With the ringgit sliding rapidly, imported inflation is going to result in higher prices soon. One intervention to ensure that domestic consumption would not collapse is to abolish GST or at the least set it at Zero Rate for a period of a year before further review.
4. Halt big ticket crony projects
All big ticket crony-like mega projects should be halted and be subjected to a ‘foreign currency impact’ assessment. Many of the big-ticket projects like Malaysia-Singapore High Speed Rail and even the MRT are unnecessarily expensive, and actually unnecessary if cheaper and more effective options were considered.
The Government’s past responses to a crisis would be to inject more cash into the hands of the cronies for more construction projects. Government-driven construction projects usually hire mostly unskilled foreign labourers with very little spillovers to the wider economy. There are other ways to boost the economy.
5. Halt intake of unskilled foreign labour
One important way to push for massive structural change to the Malaysian economy is to reduce the number of unskilled foreign labour and to push for mechanisation and automation so that Malaysian workers are paid better with more skill component in their jobs. Hence Home Minister Datuk Seri Zahid Hamidi’s proposal to bring in 1.5 million Bangladeshi unskilled workers is foolish and against national interest.
Boosting income of the lower income group to boost domestic consumption when export will be limited would be an important strategy to survive the current crisis. Boosting income at the bottom level is so important because Malaysia’s household debt ratio is already very high and domestic consumption must be pushed without more debts being accumulated.
We are in uncharted waters. Malaysia needs competent political and economic leaders with integrity to sail through the tough times.