Who will benefit from RM20 billion pumped into economy?

Consumers are tightening their belts in the face of a shrinking ringgit resulting in higher prices for most goods and services. Putrajaya has announced special measures to boost the economy but economists ask if funds are misdirected. – The Malaysian Insider file pic, September 21, 2015. Malaysians will continue to feel the pinch of higher prices for household goods and food even as Putrajaya rolls out special measures to cushion the impact of a weak ringgit and turbulent global economy on the country.

Economists The Malaysian Insider spoke to were also sceptical of the positive effects of these measures for manufacturers, who are facing higher costs as a weak ringgit makes their imported raw materials and equipment more expensive.

Despite the fact that the stock market responded positively to these special measures, some also questioned the wisdom of reactivating ValueCap, a government investor whose role is to support undervalued stocks.

Just like increasing Kedai Rakyat 1Malaysia (KR1M) outlets, such a move could lead to government intervention to prop up non-competitive companies while preventing legitimate smaller firms from growing, said the economists.

There was also the question of credibility, said Institut Rakyat’s Yin Shao Loong.

“These proposals are coming from the man responsible for Malaysia’s biggest financial scandal, 1Malaysia Development Berhad (1MDB) that remains unresolved to this day and continues to be a burden on the economy.”

Boosting value   

Prime Minister Datuk Seri Najib Razak announced the special measures on September 14. The next day, the local stock market charted one of its biggest single-day gains as the business community responded to these measures, especially restarting ValueCap with RM20 billion.

Independent economist Azrul Azwar Ahmad Tajuddin said ValueCap could bolster investor confidence and woo more foreigners back into the local stock market.

“Apart from bolstering market and investor confidence in general, resilient asset prices in the capital market, especially equities, could also provide a positive spark for consumer sentiment,” Azrul told The Malaysian Insider.

Although economists from the Penang Institute agreed with this assessment, they said such government intervention in the market was risky if the RM20 billion was misdirected.

“There is a risk that inefficiently run companies are artificially propped up by the government, thus preventing new entrants from setting up which is a natural process required in rejuvenating businesses,” said a statement from the institute’s top economic experts, Dr Lim Kim-Hwa, who heads the economics unit, senior executive officer Tim Niklas Schoepp, and senior analysts Dr Lim Chee Han and Ong Wooi Leng.

Worse, said Yin, was the prospect of ValueCap bailing out non-performing companies with crony links. 

Cash strapped   

Another main target of the special measures was helping companies and consumers deal with higher prices from imports because of a weak ringgit.

These included import duty exemptions on a variety of products and increasing low-price stores such as KR1M, Kedai Kain 1Malaysia and Kedai Buku 1Malaysia.

These outlets allowed low- to middle-income groups to get goods and services at affordable prices, said Azrul, but questions remained about their quality and whether they actually curbed inflation.

The fact was few Malaysians used them and not many of their goods go towards calculating the inflation rate via the consumer price index, he said.

“(KR1M) is targeted at the lower-income segment of society. (They) might not address the pressure of higher cost of living faced by many middle-income groups,” said the Penang Institute.

“Besides, with KR1M, the government has become a retailer of goods, in direct competition with other private sector retailers.”

Azrul also said import duty exceptions should be specific to only export-oriented industries which were hurt by the ringgit slide, such as producers of electrical and electronics
products, and rubber gloves.

Yin of Institute Rakyat said the government also needed to deal with how the goods and services tax (GST) has created cash flow problems for small and medium companies that were already battered by pricier imported materials.

“At the moment, GST is disproportionately punishing the SME sector which lacks the revenue to sustain GST compliance and payments. The government should respond to calls for a moratorium and review on the GST.”

Who does the money really help?

Although a weaker ringgit would be a tourism boon, the Penang Institute economists were critical of how Putrajaya was spending money to help the sector by focusing on mega-projects, such as the Desaru Coast Destination Resort in Johor.

The funds for the project could be better spread throughout other popular tourist destinations, such as in Sabah and Penang, it said.

“Spreading the funding to more tourist attractions throughout the country will increase the breadth and depth of Malaysia’s attractiveness, thus catering to more tourists.”

Benefits from mega-projects, said Azrul, took longer to be realised and would not raise tourism revenue in the short or medium term.

“Scarce resources could better be used to promote and strengthen Malaysia’s appeal as the destination for health tourism, eco-tourism, agro tourism, edu-tourism, shopping and MICE activities.”

Pouring so much attention and funds into one project when the aim was to help the economy as a whole was also suspicious, said Yin.

“(I) would like to know why Desaru of all locales has been singled out for preferential investment? Who stands to profit from this? This creates the worrying impression that a national economic recovery plan is being diluted with service to vested interests.”

- TMI