Getting out of the hole that we dug

What are our options as our government fails us?

COMMENT

Populist measures promised and undertaken by Najib Tun Razak to ‘buy’ electoral support had served only to fuel inflation and to benefit Barisan Nasional at the polls more that it benefits the underprivileged and deserving recipient.

The ‘economic reforms’ signaled by the BN government since the May 2013 elections are disappointing. They are merely measures to recoup the billions spent in the run up to the last general election rather than a demonstration of strong, stable, smart and responsible leadership required to boost the economy.

In truth the root-cause of this government’s problem is its own spending.

Malaysia is now facing an era of sustained lower growth and lower living standards. Weaker economic activities, lower external demand, tighter credit conditions and the necessary fiscal consolidation that will weaken domestic markets have all meant that Malaysia’s growth outlook in 2014 and 2015 are not encouraging.

Efforts are not being made to raise non-oil tax revenues and the implementation of the Goods and Services Tax (GST) seems to be the only way that the federal government finances can remain sustainable.

This government must innovate, control inflation and remain politically strong to do this.

Failure in political leadership will doom prosperity for our nation. And the results of the last two general elections indicate a federal government that is at best in crisis, at worse in abject failure due to corruption and its own incompetence.

The challenge that now faces our country requires new thinking amongst our political leaders. They have to implement and innovate economic reforms that will encourage domestic demand and open up our country globally to increase exports.

There must be innovative tax and industrial reforms and modernization that will allow our country to become a strong middle economic power globally.

But instead our government concerns itself with issues that can distract them for the challenges they must now face.

One of this is the future of our national car. Proton is beset by systemic and structural problems – problems that cannot be overcome by government intervention.

Our domestic markets cannot sustain Proton. Thailand and Indonesia have cheaper labour and lower standards for working condition.

Proton lacks the high-end branding to compete globally against established car manufacturers in a global market with minimum import barriers.

Our government must recognize these issues. What matters are viable industries that will be relevant for our future and not those that had once been relevant in the past.

The government cannot continue to subsidize Proton.

The worrying debt

Our public debt is massive but manageable, but only for as long as our government uses the money raised from debt issuance to manage the economy so that it has the ability to produce goods and services. Then our economy will be able to sustain itself.

What is worrying is the level of private/household debts.

Consumer debt is debt of consumers used to fund consumption rather than investment. It includes debts incurred for the purchase of goods that are consumable and/or do not appreciate in value.

Bank Negara’s 2010 Annual Report tells us that Malaysian’s household debt at the end of 2010 was RM581 billion, or 76% of Gross Domestic Product (GDP).

This high level of household debt can only be managed if there is income growth, high levels of savings and favourable employment opportunities.

It does not take an Ungku Aziz for us to know that the following are true of the Malaysian economy today:

• There is no income growth.

• Saving levels? We are all dipping into our savings to put food on the table and pay our rent. Our debt ratio in 2010 is 47.8% – households are using half of their disposable income to pay off their debts and this figure is rising!

• Employment opportunities? If our Prime Minister is in danger of losing his job what does that portend for us mere mortals?

And so what of the future?

This rising household debt restricts government monetary policies. If the government increases interest rates it would mean that the average householder debt serving capability is further affected.

We also know that growth in personal consumption driven by debt (as it is now in Malaysia) rather than by income growth cannot be sustained.

The two major items of household debts are housing and car loans. The price of houses has continued to rise every year while the government misguided national car policy of encouraging car ownership at the expense of good public transport does not help matters.

Our government lacks the political will to implement what is required to make things right.

What then are our options even as our government fails us? How do we dig ourselves out of a hole we ourselves have dug?

CT Ali is a reformist who believes in Pakatan Rakyat’s ideologies. He is a FMT columnist.