The more cynical of us would come to understand that economic policy is essentially economics mitigated by a large dose of politics. And in a crucial elections year (which have to be called by April 2013, against a resurgent opposition), the Malaysian government has increasingly dipped into the national coffers to offer a ‘people-friendly’ budget – in essence, dealing out cash and subsidies as political sweeteners.
In an expected move, the federal government has run a deficit budget again (for the 15th consecutive year), chalking up a total federal debt of some half a trillion Ringgit, standing at 53.7% of GDP. The expected budget deficit of 4.5% ranks third in Asia, behind only Japan and India – both economies which have seen better days.
Against an increasingly uncertain global economic climate, such a high level of debt naturally raises some concern. Countries have gone bust almost overnight, and key trade partners are experiencing weak growth, if at all. Bearing in mind that Malaysia is an export-dependent trading nation, can the Malaysian government continue to service its debts and deliver on its promises to rein in government spending, or is it just a bust away from fiscal disaster?
Perhaps it would be fairer to consider what the government spends its expansionary budgets on. Significantly, four-fifths of this year’s budget is allocated towards operational expenditure, while only RM49.7 billion is channeled towards developmental expenditure. In essence, while the government spends a huge budget, it is not spending so much for the future, as much as meeting present commitments. The multiplier effects and capacity-building is thus small despite a large expansionary budget being tabled.
Besides the continuous spending on expansionary budgets (the government has run deficits for the past 15 years, since the 1997 Asian Financial Crisis), the government’s revenue stream is also some cause for concern – around 45% of this comes from Petronas, the national oil and gas giant. Oil and gas prices are still high, but will it remain so, given that the world economy will probably remain weak for the foreseeable future?
There is an insidious addiction and overreliance to petroleum revenues, which has been likened by critics to leaning more and more heavily on a crutch that is getting shorter and shorter – oil and gas reserves, after all, are finite.
Besides the addiction to petroleum revenues, Malaysia is also addicted to subsidies – these, covering everything from fuel to sugar, make up a significant portion of the huge operational expenditures. Quite simply, there has been no political will to reduce the subsidy bill, as well as broaden the government’s revenue base by implementing an unpopular but deeply needed Goods and Services Tax. Similarly, efforts to restructure and reform the economy to promote greater competitiveness and efficiency, as well as to plug leakages from corruption, have been half-hearted and lacklustre.
There is an increasingly pressing need for the government to be decisive in implementing deep cuts and structural reforms, that while painful now, will save the country from traumatic pain further on especially as dark clouds drift over the economic horizon. These are essentially politically unpalatable but economically necessary measures that hopefully will be carried out by the government after the elections.
There indeed have been murmurs of a possible credit downgrade by Fitch and Standard & Poor if the government does not exercise fiscal discipline and stop trading economic prudence for short-term political expediency. As of now, chilling comparisons have been made between Malaysia and its more debt-laden A- peers, notably Italy.
Among the weak Southern European economies, Malaysia’s problems also bear a resemblance to Greece’s, with a bloated and relatively inefficient public sector, and its corresponding wages and pensions to be paid out. Spain’s propensity for mega-projects that become white elephants is also shared by Malaysia’s ruling classes.
Having run a decade and a half of deficits budgets, the government clearly has not saved while the going is good, even as oil prices soared to new heights during that period. This lack of fiscal discipline could come back to haunt the government in these uncertain days.
As conventional investing wisdom goes, when everybody is greedy, be fearful; when everybody is fearful, be greedy. The Malaysian economy, which can only be described as ‘gravity-defying’, as the Financial Times have, is not a cause for jubilation but rather concern. The relatively weak fundamentals in a state-dominated economy, dulled competitiveness and uncertain global economic outlook are not reflected in the present 5.2% growth rates, leading to the unpalatable question that has to be asked – is this a Potemkin economy, propped up by state spending, and is this sustainable?
As of now, there is still confidence that the Malaysian economy will continue to grow and the debt, which is held mostly domestically, will be serviced. However, in an increasingly volatile global economic climate with huge financial flows, where even advanced economies are just one crisis away from disaster, perhaps it is wiser to err on the side of caution.