It’s the Economy, Mr. Najib, so don’t blink


August 31, 2015

It’s the Economy, Mr. Najib, so don’t blink

by Martin Khor@www.thestar.com.my

FT Najib

TODAY(August 31) marks the completion of 58 years of Merdeka. On the economy, there is much to be proud of, with nearly six decades of generally good growth. One key reason is that the national economy has become well diversified. At Independence, Malaya was dependent on exporting just rubber and tin.

Through the years, more commodities including palm oil and petroleum were introduced and the raw materials were processed and manufactured, for example, into rubber gloves and furniture.

The manufacturing sector also diversified to include electronics. Construction has boomed and has high potential. There have been mistakes, too, along the way. Policies could have been better designed and implemented. And growth, though quite well-distributed, could have been more inclusive.

There are many regions and communities still left out of development. This Merdeka, we should resolve that those living at the bottom of the pyramid should receive the most attention and resources.

There is no reason why, 58 years after Merdeka, Malaysia cannot cater to the needs and interests of the poor and vulnerable. Despite the achievements, the economy is now facing what could be its greatest test. We are already inside the start of an economic crisis, and it will get worse before it gets better.

The fall in prices of petroleum and palm oil has rightly been blamed. Our economy is still reliant on commodities and thus affected by the booms and busts of the global commodity cycle, which turned downwards in the past couple of years. Even more important, Malaysia has also become dependent on another boom-bust cycle – that of global finance, the rapid inflows and outflows of funds.

This cycle is even more volatile and dangerous than the commodity cycle. Volatile because the flows can be huge and can change suddenly, and dangerous because the change can damage many parts of the system. There is a large body of literature on the dangers of global financial flows, when trillions of dollars of short-term funds go hunting for investment venues and modes in search of higher yield.

These funds choose Malaysia and other emerging economies to place many billions of dollars. When fundamentals or perceptions change, the funds move out.

Allowing the free flow of speculative funds is not a good idea. When too much comes in, effects include stock market and property price bubbles and currency appreciation.

And when the investors exit, there are other bad effects, as is now becoming evident. Foreign funds in the stock and bond markets are leaving the country. The ringgit has fallen more than 20% since a year ago, with expectations of further falls prompting further outflows. Local capital flight is also taking place.

Since the trade surplus has declined, it cannot fully offset the outflow of funds. Thus the overall balance of payments is now negative and this is reflected in the falls in the foreign reserves from US$132 bil (or RM424 bil at the exchange rate then) on August 29, 2014 to US$94.5bil (or RM356bil) on August 14, 2015.

Unless the investor mood reverses, there is potential ground for higher foreign outflows. The relevant foreign funds are in four categories: equities, bonds and deposits (denominated in ringgit) and loans to Malaysia denominated in foreign currency. Foreign investors have around RM300-400bil in the stock market. This year up to 31 July, they pulled out RM11.7bil from the stock market, according to MIDF Research. Foreign funds invested in bonds denominated in ringgit are high and falling fast. Foreigners own RM206.8bil of government and corporate bonds at end-July, down from RM226bil at end-2014 and RM257bil in July 2014, according to government data.

They also own deposits in Malaysian institutions of RM91bil as at end-March. Thus, there are RM600-700bil of foreign funds in the country as equities, bonds and deposits. If a sizable amount moves out, this would further drain the foreign reserves which stood at RM356bil on Aug 14.

On top of this, the public and private sectors also had RM399bil of external debt (of which RM157bil is short-term) denominated in foreign currencies as at end-March 2015, according to Bank Negara.

The country has thus become dependent on foreign funds and lenders to maintain their assets in and loans to Malaysia. The foreign reserves are still quite high, but has been declining and subject to future stress if outflows continue.

It is timely that an economic task force has been set up by the Prime Minister and it should examine all facets of the emerging crisis.

Should the country re-establish a currency peg? If this is done, there should also be controls on capital outflows, otherwise the fixing of the currency may not prevent and may instead cause further large capital outflows. The 1998-2000 policy measures that overcame the crisis were successful because they were done in combination: a fixed exchange system; control over certain types of capital outflows; and reflationary monetary and fiscal policies. One without the others would not have worked.

The committee should also consider whether it was wise to have recently liberalised the financial system so much, to now have such free inflows and outflows of funds. Excessive fund inflows and debts could have been limited in the first place, as done in some other countries. Local institutions should also not have been encouraged or allowed to invest so much abroad; now it is not easy to get them to reverse the flow.

The policies have resulted in high dependence on foreign funds, and the economy being susceptible to the stress of capital outflows. We shouldn’t welcome or attract all the funds that want to enter to do so, and then later bewail the fact that these same funds now want to exit when the economy cannot afford them to do so.

In any case, it is important to give priority to reviving the economy, which is now clearly under stress and already inside a crisis.

 

11 thoughts on “It’s the Economy, Mr. Najib, so don’t blink

  1. When dealing with Foreign Investments you can restrict inflow of funds but you cannot restrict outflow of funds. I thought this was the most important lesson that we learnt from the Asian Financial Crisis.

  2. Quote:- “it is important to give priority to reviving the economy, which is now clearly under stress and already inside a crisis”

    It is important to give priority to remain as PM, which is now clearly under stress and already inside a crisis.

  3. The 1MDB mess will need to be cleaned up sooner or later.

    Be prepared for “austerity”, folks.

    Lessons from the Latin American Debt Crisis of the 1980s :

    Debt is an acute problem for many countries of Africa. But, because of the magnitudes of debt involved, it has had its most visible impact in some middle-income countries – particularly in Latin America. The debt crisis remains a threat to international financial stability, but its main impact so far has been on the process of development, both in its economic and ecological aspects. Of the total world debt of around $950 billion in 1985, roughly 30 per cent was owed by four countries: Argentina, Brazil, Mexico, and Venezuela. Their debts constitute roughly two-thirds of the outstanding loans of banks to developing countries./12

    21. In the 1970s, Latin America’s economic growth was facilitated by external borrowing. Commercial banks were happy to lend to growing countries rich in natural resources. Then major changes in international conditions made the debt unsustainable. A global recession restricted export markets, and tight monetary policies forced up global interest rates to levels far exceeding any in living memory. Bankers, alarmed by deteriorating creditworthiness, stopped lending. A flight of indigenous capital from developing countries compounded the problem.

    22. The ensuing crisis forced governments into austerity policies to cut back imports. As a result, Latin American imports fell by 40 per cent in real terms over three years./13 The consequent economic contraction reduced per capita gross domestic product by an average of B per cent in the eight main Latin American countries./14 Much of the burden was carried by the poor, as real wages fell and unemployment rose. Growing poverty and deteriorating environmental conditions are clearly visible in every major Latin American country.

    23. Further, the lack of new credit and the continuing burden of debt service forced these countries to service their debts by running trade surpluses. The net transfers from seven major Latin American countries to creditors rose to almost $39 billion in 1984, and in that year 35 per cent of export earnings went to pay interest on overseas debt./15 This massive drain represents 5 to 6 per cent of the region’s GDP, around a third of the internal savings, and nearly 40 per cent of export earnings. It has been achieved by adjustment policies that impose severe and regressively skewed cuts in wages, social services, investment, consumption, and employment, both public and private, further aggravating social inequity and widespread poverty. Pressures on the environment and resources have increased sharply in the search for new and expanded exports and replacements for imports, together with the deterioration and overexploitation of the environment brought about by the swelling number of the urban and rural poor in desperate struggle for survival. A substantial part of Latin America’s rapid growth in exports are raw materials, food, and resource-based manufactures.

    The impact of the present crisis on Latin America has been compared, in its depth and extension, with the Great Depression of 1929-32. The crisis has made it clear that, although the need to protect the environment against the traditional problems of deterioration and depletion continues to be a valid objective, policy-makers responsible for environmental management ought to avoid negative attitudes in the face of the need for economic reactivation and growth.
    The expansion, conservation, maintenance, and protection of the environment can make an essential contribution to the improvement of the standard of living, to employment, and to productivity.

    Osvaldo Sunkel
    Coordinator, Joint ECLAC/UNEP Development and Environment Unit
    WCED Public Hearing
    Sao Paulo, 28-29 Oct 1985

    24. So Latin American natural resources ate being used not for development or to raise living standards, but to meet the financial requirements of industrialized country creditors. This approach to the debt problem raises questions of economic, political, and environmental sustainability. To require relatively poor countries to simultaneously curb their living standards, accept growing poverty, and export growing amounts of scarce resources to maintain external creditworthiness reflects priorities few democratically elected governments are likely to be able to tolerate for long. The present situation is not consistent with sustainable development. This conflict is aggravated by the economic policies of some major industrial countries, which have depressed and destabilized the international economy. In order to bring about socially and environmentally sustainable development it is indispensable, among other elements, for industrial countries to resume internationally expansionary policies of growth, trade, and investment. The Commission noted that, in these circumstances, some debtor countries have felt forced to suspend or limit the outflow of funds.

  4. Wayne, excuse me for being pedantic.

    It is important to give priority to reviving the PM, which is now clearly under stress and already inside many crises and dying a slow death. Resurrection.

  5. The,

    You are excused.

    Quote:- “It is important to give priority to reviving the PM…”

    Bersih 4 has revived Najib, unfrotunately. He feels more confident and cocky than ever. If Bersih 4 can’t bring him down, nothing else will.

    I bet he slept well on Sunday night, which accounts for his cheerfulness on Monday Merdeka morning.

    As I said before, what doesn’t kill you make you stronger.

    Now it’s up to Altantuya.

  6. Hi Wayne

    The 1PM has access to Special Branch and military intelligence reports.
    So he and UMNO Baru know the real situation on the ground and I’m sure he and his inner circle are really worried.

    The claim of so-called lack of support for Bersih 4 amongst certain segments of the population is part of the propaganda war for the hearts and minds of the people.

    After the vote of no confidence (which would be bombarded with tons of $$$), the next GE will require mountains and mountains of cash. So
    the cash accumulation would continue, and hand-in-hand with gerrymandering etc. We are indeed resembling the Philippines of Marcos more and more. Under Marcos, the economy was “stimulated” with loads of cash and vote buying at every election. And look what resulted to the economy of the Philippines under Marcos and his kleptocratic and crony rule.

  7. Phua Kai Lit,

    Yes, as I said before, we just have to wait for the cash to run out.

    Malay sentiments?

    Before the sacking of Muyhiddin, I was very sure he wouldn’t dare do it, and I bet Muyhiddin and Mahathir thought the same. The sacking came and went and not a whimper of significant general protest from the UMNO grassroots was heard, let alone any boisterous ground swell which perhaps Muyhiddin or Mahathir was naively expecting. Hence the last-ditch hijacking of Bersih 4 by the latter, and the noticeable absence of the former who now knows he is more lonely than Mahathir.

    Just as it takes a thief to catch a thief, it also takes a thief to shut up another thief.

    Mahathir’s ambivalent, (perhaps even insulting), stance vis-a-vis Bersih 4 actually back-fired. Served him right. I think he actually lose the moral high ground and exposed the self-interest element of his campaign against Najib.

    Najib does not need the Special Branch or military intelligence to tell him that the majority of the Malays, especially within UMNO, would support any Malay leader who is in a position to provide the gravy and the more corrupt the leader the more the gravy, isn’t it?

    CASH IS KING, FOREVER AND EVER

  8. Pingback: The Effects Of The Economy On Us…. | Anna's World

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