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Monday, January 5, 2015

Gloomy outlook across the Causeway: From Singapore looking at MALAYSIA

By early December, many signs were already pointing to a bleak 2015 for the Malaysian economy. If anything, the major floods in its east coast around Christmas which triggered the evacuation of nearly a quarter million people only exacerbated matters. About RM550 million (S$207.4 million) has been set aside for flood relief, but the true cost of the worst floods in decades will be known only in the coming months.
Already, oil prices, now at under US$60 a barrel, present clear challenges to the oil-exporter - especially since the 2015 Budget was premised on oil costing US$100 to US$105. This has prompted questions of why the Budget hasn't been revised, and how Putrajaya will cope if oil prices stay depressed in the long term. Although national earnings are now more diversified, petroleum income still contributes about 30 per cent of total revenue.
Some economists expect the impact will not be insignificant, and that key targets will be affected; for instance, GDP growth is expected to come in at below 5 per cent for 2015, against the official 5 to 6 per cent forecast.
Trimming the fiscal deficit to 3 per cent of GDP from a forecast 3.5 per cent for 2014 might also be a stretch. Should the deficit swell further, a sovereign ratings downgrade could be in store - especially if a twin deficit occurs, with the current account turning negative on falling commodity prices and the outflow of funds - which in turn has ramifications for the indebted government and corporations. Whether these views are overly alarmist because the economy and financial systems are flexible and robust enough to adapt, as more optimistic analysts contend, consumers and businesses are treading more cautiously.
Lower oil prices have not led to a corresponding knock-on effect on goods and services; most consumers struggle with the rising cost of living and poor purchasing power, worsened by the ringgit's 11 per cent depreciation against the US dollar in the past four to five months.
Things could get bleaker: foreigners hold some 30 per cent of Malaysian bonds and 46 per cent of Malaysian Government Securities; a major exit will further damage the ringgit, even if local institutions undertake a mop-up of some bonds.
There is also trepidation over a new 6 per cent Goods & Services tax (GST) in April, with consumers fearing lighter pockets. More flexible spending might not be an option because Malaysia's household debt remains the highest in Asia, at some 86 per cent of GDP, and concentrated in the lower- to middle-income segments.
Tax experts and companies are also girding for the anticipated chaos. Many companies are unprepared; until a few months ago, many were hoping for a U-turn on the implementation of the tax.
And then there is the long list of GST-excluded goods and services - reportedly running to half a telephone book thick, versus a page for Singapore's list of exclusions - which is bound to add to the confusion.
Companies' earnings could come under pressure as higher inflation takes its toll on domestic demand and consumption.
Many corporations say the minimum wage, weaker ringgit, higher borrowing costs and utility rates are crippling business. Even so, it bears stating that Malaysia's wage-to-GDP ratio is only a third, compared to about half for economies such as Australia and Sweden, where businesses share more of their profits with their employees.
The large inequality gap needs to be narrowed more quickly if social inequalities and tensions are to be reduced, economists say.
Putrajaya moved in December to scrap the costly and inequitable fuel subsidies, capitalising on lower oil prices and moving to a managed-float system to determine oil prices. However, its continued promotion of lower prices as its way of allowing the people "to benefit" could backfire when prices reverse. The true test of its political will emerge then. It is worth noting that senior officials have provided conflicting accounts of what Putrajaya will do if prices rise, so it is unclear whether there will be a backtracking on terminating fuel subsidies.
The government will also be tested on its fiscal rectitude. On track with fiscal consolidation targets before oil prices tanked, how it copes now that plans have gone awry remains to be seen.
The government has run a budget deficit for the past 17 consecutive years and when global oil prices broke new records, bringing in windfalls. After nearly two decades of increasing Budget spending, Putrajaya seems incapable of tightening the national purse strings. Institute for Democracy & Economic Affairs chief executive Wan Saiful Wan Jan suggested slashing the bloated bureaucracy. Referring to the 1.4 million-strong civil service, one of the biggest globally and rife with overlaps in roles and functions, he said: "I suggest getting rid of two or three ministries."
One agency which came under fierce attack last year was national strategic development agency 1MDB, which has run up some RM42 billion in debts in five years, though its added value to the economy remains hazy. It has total assets of about RM50 billion, but its capacity to service its loans in a deteriorating environment has set corporate tongues wagging about potential defaults and their consequences for the economy and for Prime Minister Najib Razak, whose baby it is.
Also the finance minister, Mr Najib will be hoping that external events do not further delay the proposed flotation of 1MDB's energy unit, Edra Global Energy Bhd; this initial public offering will raise a reported US$3 billion to help pare debts.
Two other corporate developments to watch are the emergence of the newly constituted Malaysia Airlines (MAS) in mid-2015 and the proposed merger between CIMB, RHB and MBSB to form one of the world's largest Islamic banking groups.
Unless oil prices rebound, the Kuala Lumpur Stock Exchange is expected to turn in a diffident performance in 2015, after ending 2014 as Asia's worst performer. The benchmark KLCI retreated 5.7 per cent as its resurgent regional counterparts in the Philippines, Indonesia and Thailand boasted gains of at least a fifth.
icapital chief executive Tan Teng Boo, noting the confluence of external and internal factors, said he has little doubt 2015 will be a grim year for the economy and market.
His only question is "How bad?" - Asiaone

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