Money matters

The outlook is grim I must say.

Underscoring the seriousness of the US debt-payment horror is the fact that as of July this year, Apple Inc’s nett operating cash balance of USD 76.4b far outperformed the entire US as a nation. At the same time, the US, as a nation, had a nett operating cash balance of only USD73.7b. (source: BBC report).

The US government debt is projected by S&P to hit 11 trillion this year, which would be equivalent to 75% of its gross domestic product or all the wealth that the US economy would generate this year. S&P also estimated the debt would increase to $14 trillion by 2015 and top $20 trillion by 2021, which at that point would mean that it will be 85 per cent of GDP.

In a grim postulation, S&P says in a worst-case scenario, US government debt could outstrip all the wealth generated in the world’s largest economy by 2021. (source: here).

With those kind of numbers, it was not surprising at all that the US credit rating was downgraded a notch from AAA rating to AA+. (source: BBC report).

How do all these affect us?

Back home, the numbers aren’t all rosy as well.

As of last year, our national debt was down from RM236.18b in 2008 to RM233.92b. (source: the Star report). That sounds good as it is on a downward trend. However, an analysis of our foreign debts as compared coupled with our domestic borrowings as well as the percentage in the increase of our debts as compared to the increase in our GDP over several years paints a really worrying picture. See the analysis here.

The points are these:

1. While our foreign debts decreased from RM236.18b in 2008 to RM233.92b, our domestic debts increased from RM217b in 2006 to RM371b in 2010.
2. Between 2006 to June 2010, our gross domestic product grew at an average of 6.6% while the total debts grew at an average of 10.2%.
3. Total debts to GDP ratio therefore increased by 39% from 64% in 2006 to 73% in 2010.

What the above means is that we are borrowing faster than we are producing income.

According to the US Census Bureau, between the months of January to May this year, the US’ exports to Malaysia totals USD6.1b while our exports are worth USD10.5b. The US Department of State's website shows that he United States is Malaysia's third-largest trading partner and Malaysia is the eighteenth-largest trading partner of the United States with annual two-way trade amounting to $33b.

The United States is the largest foreign investor in Malaysia on a cumulative basis, and was the largest source of new foreign direct investment in Malaysia in 2010 with direct investment in the manufacturing sector in Malaysia as of year-end 2009 of $15.1 billion, with billions of dollars in additional investment in the oil and gas and financial services sectors of the economy.

Such is the importance of the US to Malaysia. It goes without saying that a US in financial bad shape would inevitably equal to a Malaysia in economic doldrums.

Meanwhile, Malaysia’s Economic Transformation Program (ETP), an ambitious project to convert the country into a fully developed nation by 2020 remains critically linked to foreign investment. The ETP requires annual foreign investment in the range of $11 billion to fund a quarter of the proposed projects. However, average annual investment since 1997 has only been $3.1 billion.

A March 2011 report by Bank of America Merrill Lynch ranked Malaysia the second least popular market after Colombia among global emerging market fund managers. Malaysia, thus, is in no position to project a picture of chaos and disruption to the investors from outside.

In addition, recent well known events, the details of which are all too familiar to many, if not all of us, do not endear Malaysia too well to foreign investors despite strenuous efforts by the government to attract them.

Yesterday, Goldman Sachs revised our GDP forecast for this year from 5.4% to 5% with a similar cut of 0.4% next year from 5.6%. (source: the Malaysian Insider report).

Considering the state of the US economy and its burgeoning debts, the US government might just increase interest rates in order to lessen public spending; impose higher import duties on certain goods; impose some strict import conditions as well as broaden its protectionism policy over some industries.

The increase in interest rates would restrict cash outflows as well as investment activities thereby resulting in decrease of consumer spending and imports by the US. This is bound to adversely affect our exports to the US. Standing at USD33b a year, a 10% decrease in our exports to the US would mean a snatch of USD3.3b from our liquidity. I wonder how many business would fold up and how many jobs will be lost in such situation.

Added to that the severely weakened US dollar as opposed to our Ringgit, things would not look too bright for our exporters as they lose competitiveness in terms of currency exchange. Perhaps we should take a serious re-look at our development policy and pay sufficient attention to the areas in which we are strong and not forgetting our traditional bread and butter, namely, the agricultural sector. Modern and thus efficient food production may be a good option as well.

The government must come up with a plan to counter the US meltdown – as well as the Europe meltdown which is fast forthcoming – as soon as possible. failure to do so would just exacerbate the current economics hiccups that we are facing.

Locally, living costs have been escalating lately as inflation rises. As of June this year, it was 3.5% although realistically, the people on the streets are feeling the pinch a lot more.

In order to alleviate the suffering of the people who are finding it tough to cope with the rising in the costs of living, the government yesterday announced a half-month bonus to the 1.3 million civil servants and a sum of RM500 to every pensioner.

The intention was good. Our Honourable Prime Minister was reportedly saying the bonus payment “can lighten the burden... for the upcoming Aidil Fitri celebration.”

I am happy for the civil servants. The total pay out is RM2b. However, in my humble opinion that pay out would do little, if not nothing, to solve the problem at hand, especially the problem of the rising costs of living.

Can we all imagine a total sum of RM2b being spent in the next 10 days or so? How does that help in terms of controlling spiralling prices and inflation? In fact, quite to the contrary, this 2b additional spending within such a short span of time would only serve as inflationary factor.

The bonus could have been given in the form of a saving instrument for example. The government could give out ASB certificates to the civil servants (as well as other debt instruments to non-Bumi civil servants) to the tune of their bonus entitlement thereby ensuring some savings for the civil servants as opposed to cash pay outs which will do nothing but to flare up inflations.

I could be wrong as I am not an economist. But I have been opposed to stop-gap measures for a long time.

To me, all problems, especially national problems, will have to be met with a holistic solution. Stop-gap measures look good for a while, until more and more gaps appear in the future and we would run out of plugs to plug those gaps.