Fitch sends us into the ditch?

Excessive spending and lack of financial prudence may further dampen Malaysian economy.

COMMENT

The international ratings agency Fitch Ratings in their recent evaluation of the Malaysian economy has downgraded Malaysia from ‘stable’ to ‘negative’; main reason being the worrying factor pertaining to its weak management of public finances.

Fitch Ratings’ statement said that “Malaysia’s public finances are its key rating weakness”.

This sets alarm bells ringing on the fear that Malaysia will be more exposed to economic shocks in the future if no immediate concrete steps are taken to correct its current position and methods of managing public finances.

Prolonged excess spending above income since 1998, has resulted an increase in deficit and further pushed up government debts.

In 2011 the budget deficit was 3.8% of the Gross Domestic Product (GDP) but in 2012 this has increased to 4.7% as the government merely gave lip service towards reducing this said deficit.

Thus, it would not be a surprise if the deficit exceeds 5% this year in view of the massive spending incurred by the government in its run-up to the 13th general election. The increase in budget deficit can cause more financial turmoil.

National debt rising

In 2011 the national debt was 51.6% of the GDP and last year it was 53.3%. Will it be more than 55% this year?

The situation is worsened by the fact that the government needs to employ expansionary fiscal policy to combat the downward economic cycle that is currently being experienced globally.

Massive outflow of funds via the servicing of public and corporate debts, payment of dividends to foreign companies, illicit funds outflow, slower growth of exports, the lessening of trade surplus, slightly lower growth of the economy (4.5% to 5%) has caused the value of the ringgit to slide downward causing inflationary pressure to go up.

According to Bank Negara, in the first quarter of 2013 the national debt stands at RM508.9 billion. Actually this figure of RM508.9 billion does not tell the whole story. The true picture has to add the debts on the balance sheet with those which are off the balance sheet.

In the first quarter of 2013, the government-guaranteed debts off-balance sheet amounted to RM147.7 billion. This means that in total the national debt amounts to RM656.6 billion.

Fitch Ratings highlighted that the government-guaranteed debts have increased from 9% of the GDP in year 2008 to 15% of the GDP in year 2012. Our national debt should thus be more than 65% of the GDP by now which is way above the ceiling of 55% set by Parliament. Therefore the figure of 53.3% furnished by the government is a bad joke.

As we have already surpassed the threshold of 55%, we are now at danger level and that is the reason why Fitch Ratings said: “Malaysia’s public finances are its key rating weakness”. The government must thus take steps to rectify the situation.

A prudent budget not GST

The utmost important thing to do in the coming 2014 budget schedule to be presented on Oct 25 is to remove unwarranted items and immediately halt the ‘white elephant’ projects. The practice of off-budget spending (off-balance sheet expenditure) must be stopped at once.

Prudent spending via implementation of open tender in awarding government projects must be practiced as the next step.

Open tender should also be practiced when the government sells its shares in the government-linked companies (GLCs) so that there is transparency in totality.

Open tender can save billions of taxpayers’ money as it prevents wastages and leakages. Furthermore it also increases the efficiency in project management and reduces risk of late completion and cost overruns.

This will reduce the deficits and assist in achieving a balanced budget. Thus every ringgit will be worth its value.

Also the government’s administrative expenditure is rather high with 1.4 million civil servants for a population of 28 million; and thus there should not be anymore increase in the intake of civil servants.

In comparison to UK, USA and Japan, we have far more civil servants though they have a higher population.

Pro-Barisan Nasional (BN) finance analysts are pushing for the goods and services tax (GST) to be implemented in order to increase the government’s income. They argue that those who consume more will be taxed more. Nevertheless this is only a surface view.

In reality, those who earn less will be taxed more as their purchases will swallow up a larger percentage/portion of their income. GST is therefore definitely a regressive tax.

For example, a bottle of XYZ mineral water costs RM1. A low-wage earner who earns RM800 a month will only have RM799 left after buying this product whereas a man who earns RM3,000 per month will still have RM2, 999 left after the same purchase. Thus, the poor man is also taxed while under the current system, he is exempted.

There is also a factor of inflation. Prices are increasing but purchasing power is down. It’s high time the government be more prudent with its spending trends before implementing GST.

And as an ending reminder, where is the reduction in car prices as promised by the BN government during the GE13 campaign.

Selena Tay is a DAP member and a FMT columnist.