Malaysia Matters Podcast

Access Malaysia Today has an overview of The Economist Intelligence Unit’s Forecast on Malaysia.  The forecast worries about increased political instability and reports mixed economic news:

There have been two downgrades - in the political stability and legal and regulatory risk categories - in the latest review of Malaysia’s operational risk model.

The fate of Anwar Ibrahim, the leader of the opposition party, Pakatan Rakyat, could spark large-scale social unrest in Kuala Lumpur, the capital, which could spread to other major cities on peninsular Malaysia.

[. . .]

As a result, we have increased the political stability risk score by five points, from 35 to 40.

The economic news is mixed:

There have been opposing movements in the underlying indicators of the macroeconomic risk category. As a result, the category score remains the same, at 15.

On the one hand, real GDP is expected to slow to 3.1% in 2009, as economic growth in Malaysia’s major export markets slows significantly in that year. Growth is expected to remain sluggish in 2010. On the other hand, the government has been cutting the administered price of fuel in recent months and is expected to continue this trend over the short term as international oil prices continue to fall.

Weak domestic demand coupled with persistent falls in the price of commodities, non-commodities and industrial raw materials will exert downward pressure on overall consumer prices. We expect consumer price inflation to average 2.4% in 2009.

As was noted yesterday, the government is attempting to balance stability with liberalization.  Finding the right mix will be critical.

Keeping Malaysia’s economy growing continues to be the focus of Najib Razak:

Malaysia is open to taking additional measures to boost the economy, Deputy Prime Minister Najib Razak said on Tuesday, days after the government waived import duties on raw materials and unfinished goods.

Najib, who is also Malaysia’s finance minister, said he was reasonably confident that the country would meet its economic growth targets for 2008 and 2009.

‘We are very open to additional measures that can be taken from time to time. Obviously we are watching and monitoring the situation very very carefully,’ he told reporters.

Razak seems to recognize that gradual liberalization is the best strategy for keeping Malaysia growing in these uncertain economic times:

In an effort to revive the stock market, which has fallen almost 40 percent this year, Najib said last week he would relax ownership rules that reserve 30 percent of companies for ethnic Malays.

However, he said on Tuesday a final decision has yet to be made.

‘There is no announcement in that regard. We are open. As I said it has to be a pace of liberalisation that we are comfortable with,’ he said.

‘There is a need for us to be competitive globally. There is need for us to examine how we can overcome the current financial crisis. Gradual liberalisation is something that we will consider.’

Earlier this month, Najib, who will become prime minister in March, shifted almost $2 billion in spending to infrastructure and tax cuts from savings in fuel subsidies.

The United State is an important trading partner with Malaysia and efforts to increase investment and spur economic growth would benefit both countries.  These efforts might also lead to progress in the stalled trade talks.

The top job is seemingly Najib’s to loose. But criticism of the government’s handling of the current economic condition exposes an area where he must be careful. In response to prodding that he should show more leadership, Najib has said that a plan will be unveiled along with the 2009 budget this Tuesday, November 4^th. Simultaneously, he is playing down the impact that economic news from abroad is having on the Malaysian economy. Najib…

…reiterated that Malaysia would not face recession this year and the gross domestic product would remain around five per cent.

He noted that in the last two or three days, the volatile global financial market had seen many countries being affected financially and economically.

“We should be grateful that the pressure on Malaysia is not so bad compared with other countries.”

But Najib needs to be careful. His own government - Badawi himself – recognizes the need to tighten the belt a bit.

A 1.7 billion ringgit (470 million dollar) deal to buy 12 military helicopters from Eurocopter because of the bleak global economy.

“At the moment, we have decided not to purchase the helicopters. We need to delay it … because of the financial crisis. We need to have money,” Prime Minister Abdullah Ahmad Badawi told reporters.

Abdullah’s decision to scrap the deal for the 12 Cougar EC725 helicopters awarded to the European company is one of the government’s first major cost-cutting move as it re-prioritises its budget to cope with the worsening global financial crisis.

“We just cannot be borrowing every time. We need money. The best thing to do now is to reallocate our budget,” said Abdullah, who is also defense minster.

There is much that Najib might get wrong, but still get away with. Mishandling the government reaction to the current economic crisis is not one of them.

Next week’s announcement will be critical.

 

Aiming to prop up some companies deemed undervalued, the government earlier this week announced that it would utilize the national pension fund as the source for a loan that would pump 5 billion ringgit ($2.1 billion) into the Malaysian stock market. This would double the resources available to ValueCap Sdn. Bhd, a state agency chartered to invest in the stock market. 

But critics argue that risking pension funds in the marketplace is unsound and that there is too great the potential for conflict of interest associated with companies well-connected to the government.

A call for greater transparency of Valuecap’s business practices was a concern raised by Lim Kit Siang, head of the opposition Democratic Action Party, who was reported to as saying that  ’Valuecap has operated in secrecy since it was set up in 2003 and that its accounts have not been audited.’

This are the people’s money. In order to ensure that this is not a bailout…there should be a public scrutiny’ of Valuecap’s accounts, he said.

Anwar rebuffed the plan saying that the impact would total 1% in market equity and no real effect. 

It ’serves no logical purpose other than to prop up some companies in the stock market,’ he told reporters in Parliament.

 

 

In his first big decision since becoming Finance Minister last week, Deputy Prime Minister Najib Abdul Razak announced that Malaysia would not re-peg the ringgit to the U.S. dollar despite calls by former Prime Minister Mahathir Mohamad who proposed it necessary to do so on Saturday to mitigate the impact of a declining dollar.

“I wish to categorically state that we have no intention to re-peg the ringgit now or in the future. We are committed to allow the market to determine the value of the ringgit,” Deputy Prime Minister Najib Abdul Razak said.

He said it was impossible for Malaysia not to be affected by the financial crisis in the United States as 20 percent of Malaysia’s exports go to the U.S. market.

Mahathir pegged the ringgit to the dollar in 1998 at 3.8 to the dollar during the Asian financial crisis. It remained there until 2005 when Abdullah Ahmad Badawi removed the peg. The ringgit is now about 3.4 to the dollar.

Najib is reportedly meeting with US fund managers in New York this week. 

 

Still ready as ever to stir the unease of Malaysians, Anwar has declared a new deadline for a shift in power. After utterly falling flat on his promise to be at the helm by September 16th, he now is demanding parliament convene an emergency session by Tuesday the 23rd so as to enable a vote of no confidence against Ahmad Badawi.  

The continued pressure from Anwar has led to a group of Malaysians to file a police report against him. The group of 15 to 25 individuals calling themselves ’Caring Public Which Loves Peace’ want to see police investigate Anwar for sedition for creating “… a near chaotic situation and panic among Malaysians. He posed a threat against the country’s economy and shook the confidence of foreign investors.”

The group claims that many Malaysian’s lives have been disrupted out of fear that the country could devolve into unrest, causing rushes for household goods and families keeping children home from school. Wan Abidin, a likely Umno member was reported as saying that the motivation of the report was not due to party bias but that ”We are all lodging this report against Anwar as concerned Malaysians who are worried for the stability and peace of the country.”"He is threatening the stability and peace of the country with his repeated allegations of a change in government,” said Abidin.

 

 

It has been apparent for some time that Anwar and his cohorts have been unable to get the backing needed to fulfill his promises. After many weeks promising that he would topple the government on the 16th, Anwar and his supporters backed of that statement last week. But now, after failing to come through, he is saying that he has had sufficient defectors to do the job all along, but that they will be named in “a few day’s time.”

We’ve previously discussed Anwar’s links to terrorism here at Malaysia Matters, but just what else can his campaign to destabilise the government be described as other than another form of terrorism? The Malaysian economy has been in decline since the March Opposition successes at the ballot box, and the more recent turbulence has caused investors to be yet again even more cautious “because of perceived political instability.” -Instability that Anwar has instigated for political gain. And having dug this hole, Anwar doesn’t inspire the confidence necessary to get Malaysia out having been unable to do so as Deputy Prime Minister and Finance Minister during the 1997 economic crisis.  

What is behind this disregard for the well-being of the country Anwar claims himself fit to lead? Anwar has been able to play down the case against him for sodomy and it is becoming clear that in his perverse and selfish see-saw of promises turned lies, the dominate motivation is his own ambition, and the casualty is Malaysia itself.

It is interesting to note that a couple of Anwar’s victories this year also mark points of downward spiral in the Malaysian economy. 

… the cost of insuring Malaysian bonds against default has risen sharply since Anwar’s coalition took a over a third of the seats in Malaysia’s election in March, increasing political risk. The 5-year CDS stood at 140.96 basis points on Monday, up from 91.85 on March 7, the day before the election.

That means it costs almost $141,000 to insure $10 million of Malaysian bonds against default.

According to Bank Negara’s latest statistics, some US$1.1bn (about RM3.8bn) of foreign funds exited from the country during the period Aug 15-29.

The exodus of foreign funds have plagued the weakening ringgit. Besides, a stronger greenback has also contributed to the departure of foreign funds.

Since the dollar began its upward trend in late July, the ringgit has been steadily on the slide. With the local currency going downhill, coupled with the lacklustre performances of the local markets, it is natural for profit-minded foreign investors to move their money elsewhere.

The ringgit has depreciated by about 6% since late July, from RM3.25 to RM3.45 to the dollar, with short-term prospects less than optimistic.

The highly unpredictable domestic politics and sluggish growth have gloomed the outlook of local markets among foreign investors, while the central bank’s decision not to increase the interest rates in late July has further consolidated their determination to withdraw from the country.

As an uncertain financial climate weighs on the US economy, appreciation for the significant bearing it has on the well-being of Malaysia’s economy is gaining attention in the press.

Shankaran Nambiar, writing for the Star, points out that, aside from the strain on the economy resulting from home-grown problems, that “shock waves” emanating from the US have a big impact on the Malaysian situation.

He points to data from the US dot-Com collapse in 2001 showing that the Malaysian growth rate slid to 0.5% In the meantime, with the US the largest destination for exports at 16% of the total, and with a substantial portion of the 15% that goes directly to Singapore eventually ending up in the US, a slowdown in US importation due to a shaky economic footing will mean a downturn for Malaysia as well. 

Nambiar points to milestones in making his case.

There was a double whammy June and July. After losing hundreds of thousands of US jobs in the first half of 2008 and with the rate of inflation at its highest in 17 years in June, the July IndyMac failure and Fannie and Freddie bailout underscored the enormity of the 2007 mortgage crisis, the full effects of which likely not yet have been felt.

With some reports that more than a million US citizens have been foreclosed upon.

In late February, Nouriel Roubini, in a written testimony to the House of Representatives’ Financial Services Committee, claimed that the US economy was at risk of a systemic financial meltdown. Roubini, a professor at the Stern School of Business, New York University, presented eight reasons why he thought a financial meltdown could not be avoided.

Structurally, the US economy has not been on solid ground for some time now. Its budget deficit has been rising, and now amounts to about US$357bil. It has a current account deficit of about 5.5% of gross domestic product, which declined from a deficit that stood at about 7%, a few years ago.

By many accounts worst is not over for the US economy. In addition to falling consumer confidence, high inflation, and reduced demand from firms, the US dollar is expected to drop further. The dollar, which has already dropped by 21% against the currencies of its major trading partners, is expected to drop further, reducing the purchasing capacity of Americans.

And with 60% of the economy reliant upon consumer purchase, that spells real trouble.

The result of all of this, according to Nambiar, is the likelihood that Malaysia will impose increasing interest rates in an attempt to stave off inflation in response to developments in the US, and thereby subsequently hamstring domestic investment. 

 

Malaysia must make a decision soon whether it will invest in nuclear power. 

Projecting that nuclear power plants would be needed by the year 2020, Dr MuhdNoor, Deputy Director of the Malaysian Nuclear Agency, has advocated such planing. [The] “longer Malaysia takes time for deciding upon the issue, the expenses to implement the option will also increase,” said Mr Noor during a present ation at the Asian Power Forum 2008 held in the country recently.

About 90% of Malaysia’s current energy is generated by coal or natural gas-fired plants.

Certainly, building a nuclear power plant will even now require a great deal of capital. “We are looking at about 10 billion ringgit (3.1 billion dollars) for a 1,000 MW plant,” Mohamad Zam Zam Jaafar, head of Tenaga’s nuclear energy task force.

But by dragging its feet, not only will Malaysia pay more later, it is already falling behind the energy curve even amongst its neighbors. In addition to existing reactors in the region, plans are underway for several brand new facilities:

Indonesia (4) 4,000 MW reactors online by 2016

Vietnam   (2) 2,000 MW reactors online by 2018

Thailand  (2) 2,000 MW reactors online by 2021

As the expense of resources burned in traditional plants continue to increase, Malaysia must be forward-thinking as it is in the national interest to have a plan underway to diversify sources of energy. Part of that diversification should be nuclear.