Why Asian Economies are Faltering? Case Study : Malaysia
What used be the traditional Capitalistic model of economic growth where capital is generated from savings as a result surplus production. It has now transformed into a something for nothing economic system where we don’t need to save in order to generate capital.
Sam Chee Keong, The Market Oracle
Malaysia’s debt fuelled economy on steroids was the result of Bank Negara’s policy of low interest rates causing abundant availability of credit. To avert the economy from free falling credit expansion measures are taken to stabilize the economy. Economic growth as measured by the GDP is now a function of Government and private consumer spending financed by the credit expansion or put it simply ‘debts’. In the short run this might help mitigate the pain associated with a slowing economy such as a recession. Preventing a recession also means preventing the economy from performing its natural task on rebalancing such as getting rid of excesses accumulated along the way. One of the side effects of excesses is the inflating of assets prices to bubble levels. As a result we have various bubbles blown in the stock market, real estate, bonds and futures market in Malaysia.
Mis-allocation of Resources
Bubbles are created by misallocation of resources because credit is not directed to the most efficient part of the economy. Take for example to prevent a downturn in our housing market, interest rates are kept low and credits are made easily available. With low down payments our local speculators are able to purchases a few houses in one go due to the low monthly mortgage payments. It is like buying a lottery ticket where the returns are very high with a small investment. This can happen in the housing market if speculators can find greater fools to buy it from them every few months. With leverage of up to 300% in margin accounts, it will be difficult to prevent people from buying lottery tickets in the stock markets as well. Betting on such high leverage can only go on as long as the markets kept going up. There will be bloodbath when the markets implode sooner or later. Other form of misallocation of resources or mal-investments happening around our country includes the following.
- Crony capitalism. Bankrolling cronies at the expense of other businesses in the economy. A good example will be supplying cheap electricity to IPPs (Independent Power Producers).
- Bailing out GLCs. Bailing out loss making GLCs like MAS, Proton and so on does not help improve the economy. It’s like throwing money into a bottomless pit. Better channel the funds to provide credit to other industries to help improve their capacity and efficiency.
- Cost Overruns in public projects. A good example is the recent KLIA 2 project. Construction costs have ballooned from an initial RM1.7 billion to more than RM 4 billion. One way to justify cost overruns due to the rise in raw material prices, raining season and so on is by issuing VO or Variation Orders. Variation Order is one method used by companies participating in a tender exercise to quote at a very low price. Once they landed the projects then they will use Variation Orders to mark up the costs of the project and hence generate hefty profits in the end.
- Overpriced Public Sector Procurement. Recent report by the Auditor General reveals of exorbitantly over priced items supplied to our Government. Procurements of RM500 screw drivers, RM2000 car jacks and RM30,000 notebooks are common occurrence in the public sector.
- Wastages. Again the Auditor General also reveals massive wastage in the public sector. Buying things like odd sized safety shoes, under powered computers, building unusable open air public futsal courts, unsuitable or unusable defence assets and so on.
The above shows how our Government literally throw ‘good money after bad’ but that is just the tip of the iceberg. Earlier attempts to bolster consumer spending to lift the economy is not a long term solution either. As a result of the easy availability of credit through channels such as personal loans and credit cards, consumers are spending recklessly on fine dining, overseas travel, luxury goods and so on. The following graphs illustrate the composition and extent of the debts incurred by both the private and public sector in 2012.
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