Malaysia’s fiscal future and the general election


April 28, 2013

Malaysia’s fiscal future and the general election

Author: Liam Hanlon, Cascade Asia Advisors (04-23-13)

Malaysia’s 13th general election, scheduled for 5 May, is shaping up to be the tightest in the country’s near 60-year history.

Rows of political party flags hung across a road to woo voters for the upcoming general election in Pekan, 300km outside Kuala Lumpur, Malaysia, 21 April 2013. (Photo: AAP)

The ruling coalition, Barisan Nasional (BN), should slightly edge out the opposition, Pakatan Rakyat (PR), but will probably fail to reclaim the coveted two-thirds majority necessary to amend the constitution. Behind the divisive rhetoric of this unofficial campaign season, however, neither camp has formulated a viable, long-term solution to one of Malaysia’s most insidious problems: fiscal imprudence.

Malaysia’s struggles with public finances are nothing new. With the exception of a brief period in the mid-1990s, Malaysia has long maintained a fiscal deficit, and in 2012 its budget deficit was one of the region’s largest, at 4.5 per cent. It has also done little to reign in public debt, which at 53.7 per cent of GDP in 2012 sits right under the debt-ceiling threshold of 55 per cent of GDP.

Najib-money-300x175

Although Malaysia’s deficits aren’t inherently irresponsible, they do reflect a concerning trend of ‘hidden’ public debt. This includes contingent liabilities, such as government guarantees on debt and ‘off balance sheet’ borrowings, which have more than doubled since Najib Razak took office in 2009. This debt surge comes from government entities that fund massive transportation and infrastructure projects.

It is not inconceivable that these liabilities may eventually find their way onto the federal balance sheet. Additionally, the government’s revenue stream, which has remained unimpressively low, is too heavily reliant on the state oil company PETRONAS, responsible for almost 35 per cent of federal revenues.

Underpinning many of these structural issues is a proclivity for subsidies and cash handouts, particularly when an election is on the line. As BN recovered from the political shock of the 2008 election that saw PR erase its parliamentary majority, Najib unleashed budgets saturated with voter-friendly measures.

The 2013 budget provided bonuses to over 1.3 million civil servants, cash for low-income families, smart phone rebates and a cut in the income tax rate. These additions reflect the political reality that prudent fiscal management does not carry votes in Malaysia. Malaysians frequently lament the rising cost of living, making subsidies politically expedient for anyone running for office.

anwar-ibrahim12

Malaysia’s 13th general election is no different. PR’s leader, Anwar Ibrahim, and Najib are competing for the hearts and minds of Malaysia’s electorate, promising to deepen their pockets, shower them with gifts and reduce their taxes. Anwar unveiled his election manifesto 25 February, outlining an agenda replete with election sweeteners. He promised free secondary education, lower car prices, an increased minimum wage, and greater oil revenues for Sabah and Sarawak.

Najib revealed his electoral platform on 6 April, proffering his own brand of populist pledges. He promised to raise the annual cash handout for poor households from US$165 to almost US$400, build one million new affordable homes and similarly subsidise car prices. Najib also delayed the implementation of a goods and services tax (GST), which would expand the tax base and ease the government’s dependency on oil revenues. The electoral payoffs for these political ploys make it risky for any leader to advocate for long-term fiscal management.

However unpromising this election cycle has been, one policy prescription has emerged that could drastically alter Malaysia’s financial future. PR has advocated reforming the country’s longstanding quota system favouring Malays, opting instead for a system based on socioeconomic status. Eliminating racial preferences in public contracts could conceivably yield more efficient and useful government investments, and free up revenue for the high subsidies PR wants to dole out.

More importantly, this reform will reinvigorate Malaysia’s domestic competitiveness and empower truly disadvantaged segments of society. If implemented correctly, it would signal to the international investment community that business in Malaysia no longer runs on cronyism and race-based politics. Touting an improved investment environment could position Malaysia to better compete for much-needed foreign investment in the region, easing pressure on the government to drive investment.

To be fair, Najib has taken strides to roll back some of the archaic policies benefiting Malays. In 2009, he overturned a longstanding requirement for certain companies to sell at least 30 per cent of their shares to Malays. But the prime minister stopped short of addressing the bulk of preferential racial policies that infuriate ethnic Chinese and Indian Malaysians, particularly those in education and government contracts.

The United Malays National Organisation is still the most influential party component in BN, essentially guaranteeing that Malay interests will continue to guide the coalition’s policies. Regardless of Najib’s own ambitions, institutional impediments to achieving reform in this area may be too powerful to overcome.

Indeed, the policies of neither BN nor PR instil much confidence in the country’s medium-term fiscal future. Malaysia’s electoral politics fail to reward fiscal prudence and instead encourage shortsighted economic measures. But if the government cannot extract racial considerations from the economy, Malaysia risks falling deeper into financial mismanagement.

Liam Hanlon is a political analyst at Cascade Asia Advisors, a research and strategic advisory firm focused on Southeast Asia.

http://www.eastasiaforum.org/2013/04/22/malaysias-fiscal-future-and-the-general-election/

20 thoughts on “Malaysia’s fiscal future and the general election

  1. This is not an election issue for ordinary voters in our rural heartland. They do not pay taxes. If the cost of essentials increase, they know UMNO-BN will ease their burden via subsidies. Pakatan Rakyat is using this issue as part of their campaign tetapi malangnya rakyat jelata tidak faham isu ini. They are waiting for another BR1M if UMNO-BN wins.

    Janji ditetapi. Najib ialah perminpin yang prihatin terhadap rakyat and that works in our kampongs. When in the kampong play kampong politics, not high flown economics and finance. It make no difference to the poor if there is a recession since they live in a non-monetized sector of the economy. They grow their own food and catch fish. Elites in PR do not understand rural minds.
    ______________
    You are right, People1 and here is why:

    BERNAMA
    RAWANG (April 28, 2013): Datuk Seri Najib Abdul Razak said today the 1Malaysia People’s Aid (BR1M) would continue to be given because it was a focused programme which had a major impact on the people.

    The Prime Minister said BR1M reached the target group more than the bulk subsidy which he added also benefit the rich, foreign workers and law breakers such as smugglers. “There is much leakage (in bulk subsidy), but with BR1M the recipients can make use of the money to shop, buy infant milk, school bags and clothing.

    “This can indirectly help uplift the local economy such as the farmers’ markets, retail shops and so on,” he told reporters after meeting the residents of Kampung Sungai Terentang, here.
    Najib was commenting on the alleged belittling of the BR1M payment by the Opposition political parties.

    The federal government introduced in 2012 the BR1M annual payment of RM500 for every household with a total monthly income of up to RM3,000. This year, it also paid RM250 to single unmarried individuals with a monthly income of up to RM2,000.

    Najib said the government would continue to give the BR1M payment if it was given a fresh mandate in the 13th General Election come May 5. He said the programme might be improved as per the pledge made in the BN manifesto. The manifesto had pledged to raise the BR1M to RM1,000 next year.

    “We know that the programme benefits the people. So, the opposition is trying to turn it into a controversy.However, the people want the programme to be continued and the sum increased,” he said. – Bernama

  2. Fortunately, we discovered more oil. Whether oil revenues might rise remain to be seen; US with its shale oil and octopus fracking will overtake Saudi as No.1 net exporter and global demand is still CHINA so unlikely oil export price may fall. We are then reasonably safe.

    Fortunately we are net exporter of CPO but we cannot value add that as PRC and India might raise tax on non-crude. The replanting forest with Oil Palm not a bad idea as hard timber takes a long time to harvest and too competitive with others like Kalimantan and North Asean so the Oil Palm which can grow best in Malaysia and Indon makes good decisions as OP has shorter cycles. Trouble is the timber from converting forest to OP went elsewhere.

    We import rice despite having land to grow. Ok…that exchange with Thailand, PRC and India and others………Indon competes with us on this.

    Other that Crude oil and CPO, we have nothing much resources to exchange.

    Wanna raise high income jobs? then raise human capital first by education system to produce autonomous learner with independent assessment. All know that our univ assessment now is by affirmative action even in exam. Our matrix college top up students’ grade by affirmative action Malays who graduated from UM before the 70s are of different caliber than now. The industries know that but the affirmative. Then the people complaint Malay graduates cannot get jobs in private sector and have to turn to civil service. The trouble is we developed people not correctly and spoil them with affirmative action; not all but most. How these new graduates can enhance GDP when high value FDI of intellectual kinds avoid us?

  3. They calculated that Najib had already spent RM58 billion BEFORE NOMINATION DATE to buy the GE. By the time the GE is over, easily he will have committed a total of RM100b – just for a GE – that is BIGGER than the annual development budget – almost HALF of the total annual budget.. For the NEXT GE – what do they do? Commit RM200-300billion to win it? Can a country spent ALL ITS DEVELOPMENT BUDGET JUST FOR GE WORK?

    Its IMPOSSIBLE. We are ALREADY WELL ON THE WAY TO FISCAL TRAIN WRECK under UMNO/BN. The issue is can we get rid of it.

  4. Micro subsidies like stamps for food, petrol and books must stay. trouble is now mostly ebooks then we waste money chopping down trees for papers

    BRIM In a way is like micro finance without repayment.

  5. BN supporter, your macroeconomics sucks.

    Credit, no matter how micro must come from somewhere – unless it’s created ex-nihilo. In which case, Jibs is god. Subsidies on essentials are fine, but define what are the essentials. Food? Then get the proper ‘basket’ and not shift the posts. Housing? Then have a comprehensive plan instituted that cannot be tinkered with by the Politicians – which happens with DBKL or any other local authority. Agricultural reform? What reform, when they are transforming the forests into mono-crop circles and dams. Food sufficiency was never in UMNO’s interest – since they can get their cronies to rip all off.

    What’s disingenious about BR1M is that it is a Political ploy and vote buying gimmick, which is NOT sustainable in the long run. Like that oso cannot see. Wah liao.. Tell us what you know, what not what we already know..

  6. This is exactly what President Mugabe did when he wasf aced with a political crisis in the late 1990s. Pensions for War Veterans were more than doubled when total debt was well above the GDP. Subsidies like deficit financing are good for one to three years. After that if they become the norm it can only be sustained if GDP doubles every 15 years and population growth is restricted to couples just replacing themselves-A two child policy. Every year we are adding about 500,000 people to our population. You do the maths. Revenue from our Petroleum and agricultural exports are by and large finite but the demand for BRIM is going to infinite. Even those of us who do not qualify will find a way to become qualified to receive BRIM.

    Yes, we want people to be put First. That means quality education, quality health care and if and when we get to the end of the line there are jobs out there for us to be gainfully employed. In 1970 a clerk earned a take home pay of RM250.00 per month. In today’s terms that clerk should earn RM 2,500.00 a month. Which employer is willing to pay a newly appointed clerk? They do not want to pay or graduates that salary.

    We should move away from subsidies because when you subsidies RON 95 those of us who are well off also enjoy the subsidy. What we urgently need is a GST on luxury good. How do we do this at a time when many of these luxury goods like watches, cameras and sporting goods are imported duty free. I do not envy the people who are going to win on Sunday. They will own the economy and its problems and they must find a solution before the economy goes into a tail spin because of our off-budget spending.

  7. CL, clearly your grapes are sour without BRIM fertilizer.
    In 7 moons’ time you will know. BN wins, then what will you do?
    BN lose, BRIM continues. Its already status quo so your grapes still sour?

  8. BN Supporter, anyone with basic Economics 101 will tell you BR1M is not an economic plan / action that is productive. It is a handout for no productive results (except perhaps an X at the right place on the ballot paper)… it is not sustainable and if Najib ala Nottingham U Economics think BR1M is an economic marvel, then I better tell my younger kids to also start learning how to score well in the GMAT exams to achieve average above 3.75… coz they need that to get into a real good u overseas when they migrate off…

  9. Sour Grapes, blinko, er BN supporter?
    No i don’t take grapes. Some red wine perhaps. Good for the heart.
    What is with the 7 months? You expecting premature delivery without ejaculation? Doesn’t work. Basic biology.., no need economics.

  10. CLF
    BN Supporter is playing reverse psychology. If only he knew who he’s dealing with. He thinks we are all idiots.From his writings he’s as old as we are, maybe ate salt longer than we have. He is feeding us some tidbits here and there pertaining to the weaknesses of the BN policies but at the same time making some excuses why the problem exists but not how to fix the problem.
    His last few posting has revealed his past, his education and his links with BN/UMNO. Not a CT as his English is great and not talking nonsense but not addressing reality though especially the micro credit versus Beri Rasuah 1 Malaysia approach. He’s trying to make comparison that the BR1M is similar to Food Stamps in the US and trying to justify the program. He also goes all over the globe from the US Oil reserves to Crude Palm Oil and Timber versus Oil Palm.
    He’s just being entertaining and perhaps naughty in his choice of moniker.

  11. even people with the slightest sense would realize that cash handout is not a solution to solve the poverty problem, even countries like Hong Kong and Singapore, the cash handout to every citizen was done only once as they had surplus in their national accounts, but for Malaysia, the national debts are at the brink of surpassing our own GDP and our budget has been in deficits year after year, this type of cash handout will only spell disaster to our economy.
    i am shock with the way some of the people think about BR1M as a positive step,
    truly speechless!

  12. Thanks semper, for the heads up.
    This flur reminds me of a old MCA war-horse way past his prime. They don’t know when to give up the ghost. Otak dah kering..

    Remember an old pug looking MCA president who resigned and now has a hall named after him? He’s in the UK and a successful retired businessman with a coupla excellent restaurants. There were recent attempts to lure him to return, to galvanize the Chinapek. He refused. Why is that?

    Btw, how’s the horse meat (taint) scandal in your parts? I hope they’ve not been trying to pass off horse-meat for beef hereabouts after the collapse of condo-cows.

  13. BN supporter,
    as a umno-bn ……. you lack commonSENSE, thats not surprising. by just throwing in a couple of heavy words you think we will be fooled. words, probably due to your standard of education, that you don’t fully understand in an articulated manner. if you talk about monocultures you have to also consider the drawbacks of such development, don’t you think??
    you feel safe because umno-bn has found new oil sources and that you can finance the BR1M forever? if India finds a bigger oil source tomorrow and the oil price tumbles, what then? if nobody wants your palm oil anymore? my God what display of naivity!!!
    wake up and look at all the OIL RICH african countries whose people live in abjection and absolute poverty while the elites live in luxury??

    yes, rightly you say umno-bn will win and we can’t do anything about it!! then we are really screwed up.

  14. CL
    7 moons (bulan) not MONTHS; who is now the blinko.

    As for the rest of you thought leaders wannabees,
    Eat your heart out when wine turns vinegar. Don’t you know, the mass com strategy is let you fellas play with yourself knowing that you can’t see the hole before the finish line. By then, you fellas are left dry and he alone owns the orgasm.

    Apa ini cakap cakap reverse psychology.
    Ini la cruising speed, reserve energy for then final 10 days make the dash.

    Ini kali la; BN style !

  15. Semper Fi,
    Hence here goes my next question to BN supporter. BN supporter, are you Ellese? Hahahahaha. I prefer that hishamh far better than this fella. The fact that he/she or is it IT trying to tie Obama with Najib. Come on la! Watch Ministerial broadcast in Yes prime minister. “When the press secretary ask Jim Hacker, what you want to be? I wanna have all those qualities…..Man on the street, thinker etc etc etc……What’s the first ministerial broadcast all…..Jim Hacker,” well, it’s about me!”. Another great joke can be found in “The Big Brother, Yes Minister” when Robert Mackenzie ask Jim Hacker (Paul Edddington) about the Big brother machine…..All Jim Hacker can do is to beat around the bush…..Exactly what that ah jib gor is doing in al jazzeera……aiyoyo

  16. BN whatever,

    7 moons? Good grief! Is that why you’re ‘mooning’ hereabouts? In which case your sentence is as senseless as a door-nail or from someone prone to ‘Alien’ abduction by UFOs. Suggest you return from Saturn Shepard moons asap. You masochistic or what?

    Nah looes, ellese writes better English amd is a butch ‘lady’. No worries, our hide is thicker than his, and semper has velcroed his body armor. Watch yourself.., the Time is near.

  17. CLF,
    Well, what more can I say about Ah jib kor’s paranoia that may finally seal his fate. Oh how I love Yes prime minister series. Plus, I really prefer Jim Hacker to be PM rather than this clown

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