Beware populist policies and rash pronouncements

Malaysia’s equities and ringgit value will plunge if our credit ratings deteriorate due to the absence of viable concrete replacement plans for populist policies.

COMMENT

Tey Tsun Hang

It is understandable that with the electoral mandate, the new government feels constrained by its 10 Promises in 100 Days economic populism, and is rather anxious to fulfil them within 100 days.

But, its economic populism platform is self-imposed, as are the constraints of the 100 Days. Malaysians voted neither for immediate economic gratification nor populist policies.

The majority of Malaysians voted for responsible governance and democratic accountability.

It is not excusable for the new government to drive itself into a whirl by simply executing promises with sensationalising statements of economic populism, and a frenzied media tell-all and dramatic exposés, without much thought for the need to calm financial markets, and stabilise Malaysia’s economic outlook.

Leave the election sloganeering where it was. Malaysia’s finances do not belong in the category of third-world banana republic. Malaysia is not bankrupt. Even with a RM1 trillion federal government debt, it is 65% of GDP. It is still manageable.

Last year, Fitch Ratings affirmed Malaysia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at “A minus” with a Stable Outlook. Before GE14, Moody’s Investors Service raised Malaysia’s gross domestic product (GDP) growth forecast for 2018 to 5.4%; Moody’s credit rating for Malaysia was set at A3 with a stable outlook.

Measures such as reintroducing fuel subsidies, zero-rating GST, removing tolls (and paying off concessionaires) and other measures to tamp down rising living costs are popular and well-received.

But, plugging the gaps, without concrete countermeasures, through the much-touted removing of wastage and leakage, is easier said than done.

On May 16, a week after GE14, Malaysia announced that the 6% GST would be zero-rated from June 1, and indicated it would reintroduce the sales and services tax (SST) that was in place before the introduction of GST in 2015. The trouble is, the legal structure for replacement, the reintroduction of the old SST, will require a Parliament sitting, and a bill, and a proper time lapse for reintroduction.

Only later did the Council of Eminent Persons chairperson Daim Zainuddin say that the amount of tax collected via GST was about RM44 billion. If the old SST is re-imposed, then the tax collected is RM30 billion, which effectively gives a shortfall of RM14 billion.

In the meantime, there is a gap of at least several months for revenue collections. In 2017, GST revenue was RM44.3 billion (US$11.2 billion), or 3.3% of GDP. Beyond 2018, the reintroduction of the SST will create a revenue shortfall of 1.7% of GDP if the GST remains at zero.

It is unsurprising that Malaysia’s plan to remove the GST would be credit negative as it would increase the government’s reliance on oil-related revenue, as well as narrow the tax base which would strain fiscal strength.

There is no excuse for such a rash move, without a replacement mechanism firmly in place.

On May 17, Zeti Akhtar Aziz gave an impromptu interview, indicating that toll collection might be abolished with an announcement this week. Toll concessionaires have considerable capital market investments. It is unclear if the concessionaires are to be compensated, and if so, its fiscal impact. It does not seem to come to pass yet.

Again, there seems to be no proper fiscal impact assessment, and no proper thinking into a countermeasure. This is an irresponsible statement, without regard for the financial consequences and the stability of Malaysia’s economic outlook.

Exposing the 1MDB scam is exciting, but it does not calm the financial markets without at the same time announcing how the Ministry of Finance will be able to find the resources to plug the gaps, and its viable measures to stop the bleeding.

On May 23, the minister for education announced that fresh graduates drawing a salary of below RM4,000 could delay repayment of their National Higher Education Fund Corporation (PTPTN) loans without offering details, nor its fiscal impact assessment.

Worse, the deputy prime minister also announced on May 23, RM50 government funding every month for housewives’ contributions to the Employees Provident Fund (EPF). There were no details, nor a fiscal impact assessment.

Najib Razak’s “Cash is King” was driven by a simplistic assumption: Why should a population not vote for a populist leader who promises to improve their lives immediately with cash handouts?

It did not work. The majority of Malaysians voted against kleptocracy and crippling debt, irresponsible politics and racist rhetoric. The majority of Malaysians voted in responsible governance and democratic accountability. The majority of Malaysians did not vote for immediate economic gratification – that is why Najib’s “Cash is King” lost.

With national debt now more than RM1 trillion, such fiscal measures will widen Malaysia’s fiscal deficit, and will be credit-negative to Malaysia.

Before implementing any of the manifesto policies that are deficit-widening and credit-negative, it will be prudent to look at their fiscal impact. For every measure that is deficit-widening, there should be a countermeasure to fill the gap, and to be announced at the same time, with the implementation programme properly laid down.

Malaysia’s equities and ringgit value will plunge if our credit ratings deteriorate due to the absence of viable concrete replacement plans for the substantial hole created by GST and highway abolition, and fuel subsidies, and the whole host of policies of economic populism.

This multi-directional, sensationalising, uncoordinated announce-as-you-go is unhelpful.

Amidst the euphoria, do not rush into economic populism; it will not help you with state finances. Only with stable state finances, will you be able to do better in the next five years, than the corrupt, inefficient and wasteful regime of Najib’s.

Tey Tsun Hang is an FMT reader.