Malaysia should cut spending, reassess fuel subsidy, energy policies
KUALA LUMPUR, Oct 20 - While Malaysia will likely escape a recession this year, next year is harder to call.
Although one of the stronger economies in the region, it is a major trading economy and will not be immune to the knock-on effects of a deepening global turmoil.
Following the Asian financial crisis a decade ago, the rebuilding of financial systems and stricter governance have strengthened its banking framework and put the country in a relatively stronger position to fend off the contagion effects.
Unlike many nations whose financial systems have been bled nearly dry by sub-prime loans and toxic mortgage-related debt, local banks have negligible exposure to both sub-prime related securities and affected financial institutions of other countries.
The central bank last week sought to give assurance that the financial system is secure when it confirmed that more than 90 per cent of the total assets of the banks and insurance companies are ringgit-denominated assets.
It also pointed out that the banks are more than adequately capitalised, have ample liquidity - complaints about a credit squeeze are not obvious - and the level of non-performing loans have dropped to 2.5 per cent.
It also joined a number of central banks in guaranteeing all deposits - at least until end 2010.
Foreign reserves are still high at US$110 billion as at end September although off a mid-year peak of US$126 billion. The savings rate is robust, and the current account surplus is estimated to have hit over RM100 billion this year. Although commodity prices have plunged by more than half from record peaks reached earlier this year, the commodities are still valuable resources.
Because the problems are originated externally, Malaysia should keep its head down and brace itself for the headwinds. The use of monetary and fiscal tools would be limited given prevailing low interest rates and a fairly big budget deficit, which after extra spending was allocated to counter inflation, is expected to rise to nearly 5 per cent of gross domestic product this year.
But can the government reduce its spending? A record RM208 billion allocation was set aside for next year's budget - the budget is now 3 times bigger than a decade ago - and the current Ninth Malaysia Plan saw an extra RM20 billion allocated towards coping with building material, food and transport price increases.
With oil now at about half of its US$147-a-barrel peak, other than using the additional allocations to further strengthen the social safety net when the economy ticks at a lower pace, spending ought to be reduced to keep the deficit in check.
Petronas's revenue last year accounted for a hefty 44 per cent of the federal income. Because of a one-year lag, the oil income will still be substantial given the oil price average of around US$115 last year.
But the unhealthy dependency on Petronas will be felt in 2010 when its revenue slips dramatically. Which is why as gratifying as the recent fuel price reductions have been at the pump - in line with lower global oil prices - the government should rethink its fuel subsidy policy and use this as an opportunity to gradually reduce the subsidy so that it can be channelled to far more productive areas of the economy.
In the current crisis, a bigger problem could be emerging. Energy players last week warned that imbalance and unsustainable subsidies in the power sector have led to glaring 'structural issues' which are a threat to energy supply security.
A national energy policy is desperately needed to address the possibility of supply shortages which, according to state investment agency Khazanah Nasional, could occur as early as 2010. Petronas has repeatedly warned that its oil and gas reserves are dwindling at a rapid pace, in part due to cheap prices.
Unaddressed, that time bomb can be expected to hit the economy harder - and the worst part is that it will be self-inflicted. - Business Times Singapore
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It's unavoidable that private industry will react by reducing their risk and exposure. However I am rather skeptical with the BN-UMNO lead government to do like wise. Recent ill spending like the Eurocopter purchase and multiple mega project such as Johor Iskandar will certainly create big dent on our reserve.
Furthermore the increase in public administrative expenses to touch the 200 million mark. Base from our experience more money put into the system, more money will be gone, especially into the pocket of our political leaders.
My wish list if the government is sincere to help us citizen, both employee and business owners;-
1. Reduce Toll Rate in Klang valley by 50%
2. Reduce taxes on cars
3. Control BLR increased, especially car purchase & housing loan
4. Control Banks on their abuse of Credit card rates
5. Reduce corporate tax to 11%
6. Remove house purchase taxes
7. Increased income tax deduction for insurance, education saving
8. Provide more micro-funding for small business set-up
9. Improve the transport system with integrated LRT, Buses and Train services
10. Create new legistration to remove public servant that are not performing or found guilty (corruption and abuse of power)
11. Remove racial driven policies such as government agents and bumiputra equity ownership
12. Put in place a fair and unbias judicial system
13. Improve the police efficiency by introducing an independent commision
14. Remove illegal workers in Malaysia
15. Open up all university places for all citizen, it should not be just for bumiputra. Also put in place a more racial balance lecturer in public university.
Yes. The top 15 list is what the country need right now. It quite easy to implement the above if our political leaders has the political will. Otherwise, doom days is ahead of us.
Cheers
daniel