Glossing over the ugly economic truth

Experts have warned that the Malaysian capital flight – which even exceeded the outflows recorded during the 1998 Asian financial crisis – was due to discordant government policies and negative political strategies that have pushed the country to the brink.

Wong Choon Mei, Harakah Daily   

Economists brushed aside rosy comments by Prime Minister Najib Razak that economic growth in the fourth quarter of last year had exceeded expectations, saying they were more worried about the massive amount of reverse foreign direct investments and the consequent loss of job creations.

Already, Malaysia has seen the third-biggest drop in foreign exchange reserves of any emerging market country in 2009. Scared by the global financial crisis and uncertain politics after the 2008 election, both foreign and local investors withdrew US$35 billion between Q2 2008 and Q2 2009.

“Bank Negara has been trying to hush the banks and put the blame on short-term portfolio funds,” a senior economist at a bank-backed research house told Harakahdaily on the condition of anonymity.

“But what really caused the huge pullout was reverse FDI, which are Malaysians taking out their money to invest in other countries because they view these places as offering better stability and economic returns.

Hiding the truth

Nevertheless, Malaysian authorities including Najib – who is also the finance minister – are expected to gloss over these fears as well as worries there could be a double-dip in the global economy in latter half of 2010.

Experts have warned that the Malaysian capital flight – which even exceeded the outflows recorded during the 1998 Asian financial crisis – was due to discordant government policies and negative political strategies that have pushed the country to the brink.

They pointed out that the record-high fiscal deficit chalked in 2009 as a result of Najib’s RM67 billion-budget meant that the authorities now had little room to maneuver in the event of any new and unforeseen dips.

The deficit hit a 20-year high of 7.4 percent of gross domestic product last year. Efforts to rein it in may be impossible without undertaking painful spending and subsidy reforms that will surely raise a public hue and cry.

Therefore, experts believe fiscal discipline may be beyond Najib, who is not only trying to stave off Opposition Leader Anwar Ibrahim and his Pakatan Rakyat coalition but also an internal power struggle within his own Umno party.

“The Malaysian authorities have also tried to downplay the facts by pointing out that the country will benefit when investors repatriate their profits. But the big question mark is, will they? If the political climate in Malaysia worsens and it becomes another Myanmar, why would anyone bring their money back?” the economist said.

“Another disastrous impact of the reverse FDI that they have tried to put the lid on is the loss of jobs creation. When you invest long-term in a country, you create jobs and opportunities that lift livelihood. When Malaysians don’t have the confidence to invest in their own country, it not speaks poorly of the ruling authorities but spell gloom for the future of the economy.”

Political mileage

Meanwhile, Najib is expected to ride as much as he can from an upswing in the country’s economic performance in the last three months of 2009. His administration is expected to announce the latest official figures and forecasts on Wednesday.

But experts have already anticipated better numbers given the faster-than-expected recovery in the global economy.

“The economic conditions of first world nations and many of our main trading partners improved quite a lot last year and that has helped to boost the Malaysian performance rather than any purely local factor,” Azrul Azwar, chief economist at Bank Islam, told Harakahdaily.

“What we fear is that the global picture may sour in the second half of 2010 and this will derail Malaysian growth as the authorities here have not been able to build sufficient domestic buffers to override the external drags.”

For the October to December period, Azrul has forecast a return to positive growth of 1.8 percent year-on-year after three consecutive quarters of contraction. He is looking at negative 2.4 percent year-on-year for the full twelve months of 2009.

Maybank Investment Bank and AmResearch are more optimistic and predict between positive 2.5 to 3.0 percent for the fourth quarter and negative 2.2 percent for the entire 2009

2010 – still murky

However, there was consensus that the 2010 outlook – both globally and for Malaysia – was still murky.

Economic growth for this year was forecast at between 3.0 to 4.0 percent, lower than the 5.0 percent mostly recently indicated by government authorities.

“Based on initial indicators of industrial sectors, which includes the manufacturing sector, we are now looking at a stronger growth of 2.5% to 3% (for the 4th quarter), compared to a slower 1.5% growth predicted earlier. This will push full-year contraction to a much slower -2.2% in 2009, before accelerating to 3.5% growth in 2010,” AmResearch said in a note.

“The first half of 2010 may see stronger growth due to the base effect as well as further improvement in external demand and partly due to the residual impact from the stimulus package. However, the momentum may taper off in the second half of 2010 as those factors may start to lose its steam,” Kenanga Investment Bank said in a note.