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Tuesday, October 25, 2011

A fool’s paradise?

But how quickly times change. Within a week, even The Star was forced to concede that a number of economists thought the growth forecast of 5 per cent to 5.5 per cent for 2012 was somewhat optimistic, without which premise the entire fiscal deficit reduction claim would appear to be a pipe dream.

Kapil Sethi, The Malaysian Insider

Spot on! Screamed out page after page in The Starthe day after the Budget 2012 announcement by the prime minister. Barisan Nasional was at pains to paint it as a caring budget which emphasised its concern for the underprivileged through a number of cash handouts and maintenance of subsidies across the board.

But how quickly times change. Within a week, even The Starwas forced to concede that a number of economists thought the growth forecast of 5 per cent to 5.5 per cent for 2012 was somewhat optimistic, without which premise the entire fiscal deficit reduction claim would appear to be a pipe dream.

In less than another week, the Malaysian Institute of Economic Research (MIER) revised its growth forecast down to 5 per cent for 2012. The Monetary Authority of Singapore, in an even gloomier tone, said that it expected growth might be below its potential rate of 3 to 5 per cent next year. US unemployment feeding into a probable double-dip recession in its economy and the eurozone crisis has the whole world bracing for a year of desperate belt tightening.

Already, volatility in the investment, stock and currency markets has reached such a level that Bank Negara recently reported that foreign investors sold Malaysian equities to the tune of US$439.6 million (RM1.36 billion) in August and September alone. This was reflected in a drop in Malaysian foreign exchange reserves to the tune of US$5.3 billion at the end of September. The ringgit has also been continuously weakening against all major currencies in the same period.

At this juncture, it might be wise to ask why the Malaysian government’s blithely rosy forecast and expectations for 2012 are at such complete variance with the rest of the world, and what it may mean for the Malaysian consumer in the coming months.

In one word — politics. The raison d’être for politicians is to promise a better future to voters. In an election year especially there is undeniable pressure on the ruling coalition to deliver that elusive “feel-good” factor through all the instruments of state at its disposal to win re-election.

Having said that, the government and BN are distinct entities. While it is the job of a political coalition to influence voters positively, it should be the job of the government to take a more responsible stand when the future livelihood of its citizens is at stake.

A reasonably independent civil service is a prerequisite to reining in the natural propensity of all politicians to spend, spend, spend and leave the consequences to the distant future. When the bureaucracy is supine, the result is a budget like the one recently presented — a free-for-all spending plan with no acknowledgement of the economic realities and forecasts on the ground.

Due the perceived unpopularity of the proposed GST and an extremely narrow taxpayer base, simply put the plan to raise revenue seems to be one of cross your fingers and hope for the best. If the US goes into another recession and oil prices plummet, even the current revenue of the government will drop, let alone increase. Whereas on the expenditure side there is a plethora of proposals set to precipitously increase operating costs.

Malaysia’s household debt as a percentage of GDP is already the highest in Asia after Japan, and household debt service ratio (proportion of debt to disposable income) is close to 50 per cent. This makes the Malaysian consumer much more sensitive to external economic shocks like a possible global double-dip recession.

When global demand and national GDP drops, government borrowing will increase to cover the revenue-expenditure gap. Combined with growing inflation due to rising food prices, this will lead to a rise in interest rates on lending.

So for the average Malaysian, this could mean much higher monthly debt service obligations and grocery bills on the back of stagnant or reducing income. In a nutshell, there may be an extremely unpleasant year ahead for the consumer. A prudent plan for 2012 would include making yourself indispensable to the boss in order to protect your income, avoid any increase in borrowing by not buying the new car or house, and boosting savings/ reducing debt by shopping wisely.

So if a lot of this sounds familiar to you, it may be time to acknowledge that far from being “spot on!” the budget may be “far out” and it’s probably time to moderate rather than celebrate.

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