Malaysia Matters Podcast

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.

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. 

Though he may continue to decry the latest accusation as conspiracy and a ploy to disrupt his resurgence to power, Anwar Ibrahim has now been formally charged with the the crime of sodomy with a former aid and is scheduled to receive a trial on September 10. 

In Malaysia, regardless of consent, sodomy carries a punishment of up to 20 years in jail and caning. Anwar has pleaded “not guilty” and is released on bail.

Ever the consummate politician, “after leaving the court, Anwar, who turns 61 on Aug. 10, greeted the crowd and shook hands with supporters. He had earlier arrived accompanied by his wife, Wan Azizah Wan Ismail, and at least two of his children.”

His supporters shouted “reformasi,” the Malay word for “reform,” repeating chants made 10 years ago. About 100 policemen, including riot police, stood by at the court complex. Malaysia’s political turmoil may worsen in the coming weeks and is beginning to hurt corporate earnings and valuations, Credit Suisse Group said today in a report.

It will be interesting to watch how Anwar’s popular status as an underdog weathers a second trial. On the way, he will almost assuredly secure the seat in Parliament his wife is vacating (for him) in the by-elections August 26. 

As reported by Bloomberg.com, “According to the charge read out in court in Malay, Anwar committed the offence with Mohd. Saiful Bukhari Azlan at an apartment block in Kuala Lumpur on the afternoon of June 26.” Since the charges have not included rape, it is unclear whether his accuser will be held to similar account. Saiful has lately been spending a good deal of time in protective custody. 

The Prime Minister, Abdullah Ahmad Badawi, has refuted Anwar’s claims that his prosecution is politically motivated and has cited that key officials involved in Anwar’s previous prosecution have abstained from participating in this case.

Malaysia is assisting the Philippines in brokering a deal with the Moro Islamic Liberation Front (MILF) to create a semi-independent Muslim state to be carved out of Mindanao.

A truce between the government of the Philippines and the Moro Islamic Liberation Front was to be signed on Tuesday in Kuala Lumpur, but a temporary restraining order filed by Filipino Catholics concerned about details and ramifications of the deal was accepted by the Supreme Court who will determine the validity of claims on August 15. In conjunction with the diplomatic standstill, there were reports of a mortar attack outside the town of Midsayap in the disputed area, with blame being directed towards MILF.

The insurrection has lasted about thirty years and the government of the Philipines has negotiated with the MILF over the course of the last ten years.

The agreement on Tuesday will give the Moros autonomy over eight provinces, with its own banking, legal and education systems, a civil service and an internal security force.

The prime minister’s department says the deal will give the MILF the homeland it has waged a civil war to achieve since 1978.

Parties hope that with stability on Mindanao, the natural resources there may beckon foreign investors and provide a boost for the Philippine economy. 

The government promises that there will be proper constitutional process and plebiscite before areas are handed over to Moro authority as Christian Filipinos on Mindanao are very concerned about their future. 

Because of the real chance that inequity may cause a backlash, we hope that Malaysian influence helps inspire both parties to lay the foundation for a lasting peace.

Malaysia has a chance to help Zimbabwe.

Well, help might not exactly be the right word. 

The Mugabe government, under an inflationary crisis, is rapidly running out of paper. And what does a dictator seek to do after he has over-printed his money beyond any value?

Well he seeks to print more money, of course. After all, the guys with the guns who have your back only will be there so long as the paychecks don’t run out.

So how does this involve Malaysia?

Well, since it appears that his current source of banknote paper (Germany) is likely to dry up as a result of sanctions against his government, Mugabe is looking to Malaysia and Indonesia to replenish his supply.  And, since neither country has taken the same posture as the EU regarding Zimbabwe, this may be only the first of a many orders that Mugabe might like to place with the Asia-Pacific nation(s).

Now a word to the wise: Mugabe doesn’t seem like a very good credit risk these days, and it doesn’t seem like the best bet taking a check from him either.  But, if you do decide to do business with him, for Heaven’s sake, don’t take his cash. Where will you put it all?

Under the weight of increasing food and fuel costs, leaders at the D8 are calling for a shift away from biofuel crops in favor of ensuring that sufficient quantities of food are produced.

Abdullah Badawi, the Malaysian prime minister, said the use of arable land for biofuels “should be stopped because such action will deepen the global food scarcity and further drive up food prices”.

“We must not allow the zeal for energy security to come into direct conflict with the basic need for food production,” he told the Developing Eight summit in Kuala Lumpur.

Data is beginning to support the contention that instead of attaining fuel security, the escalation in production of biofuels has instead been directly responsible for the increasing distortion of food prices as well as increases in the costs of fuel.

Last Friday the Guardian Newspaper printed a story on an as-yet unpublished World Bank report that indicates biofuel policy and production is responsible for a 75% increase in global fuel prices.

Rising food prices have pushed 100m people worldwide below the poverty line, estimates the World Bank, and have sparked riots from Bangladesh to Egypt. Government ministers here have described higher food and fuel prices as “the first real economic crisis of globalisation”.

“Without the increase in biofuels, global wheat and maize stocks would not have declined appreciably and price increases due to other factors would have been moderate,” says the report. The basket of food prices examined in the study rose by 140% between 2002 and this February. The report estimates that higher energy and fertiliser prices accounted for an increase of only 15%, while biofuels have been responsible for a 75% jump over that period.

It argues that production of biofuels has distorted food markets in three main ways. First, it has diverted grain away from food for fuel, with over a third of US corn now used to produce ethanol and about half of vegetable oils in the EU going towards the production of biodiesel. Second, farmers have been encouraged to set land aside for biofuel production. Third, it has sparked financial speculation in grains, driving prices up higher.

But from a much less empirical standpoint, shouldn’t the implications of intermingling food and fuel policies have seemed lacking in common sense right from the start?

After all, when I was a kid, my mother told me that it was bad manners to play with my food. I can only imagine that burning it would have horrified her.

This week, amidst growing concern over the increasing cost of commodities, Malaysia hosts the Developing 8 Countries (D-8) summit. The jury is still out, but talks may prove to have resulted in the subsequent ratification of a Preferential Trade Agreement on tariffs for selected commerce amongst the eight member nations.   

Calls on Sunday by Malaysian Foreign Minister Rais Yatim for the D8 to address soaring food prices and US$145 (RM475) a barrel oil led to sparing with fellow D8 member Iran, who scoffed at discussion of the price of crude during the D8 summit, an Iranian representative “saying it was not the appropriate platform.” 

Iranian official Suleiman Pour said that, unlike the Organisation of the Petroleum Exporting Countries, ‘the D8 is an economic organisation to enhance economic cooperation among member states,’ Bernama quoted him as saying.

But Rais said the rising cost of oil was pushing up food prices worldwide and that it would be ‘unrealistic’ to exclude it from the meeting.

‘In respect of the matter relating to increasing cost of oil and food, this will be included in the deliberation this afternoon,’ he said as foreign ministers convened ahead of Tuesday’s summit.

‘And if the leaders of governments will approve, it will become part of the Kuala Lumpur declaration,’ he told reporters.

‘Members have been discussing this matter… the relationship between food and the spiralling cost of energy is a real thing. Therefore, if there be any view to exclude this from such an august meeting, it would really be unrealistic.’

After bilateral talks with Iranian Foreign Minister Manouchehr Mottaki, Rais’ comments on Monday in Bernama, the national news agency, took a slightly different tone, kicking the ball back to OPEC:

According to Rais, Iran alone cannot come forward with the solution though it is one of the biggest oil producing countries in the world.

“A solution on the issue has to be collectively made. One of the biggest problems is that the oil producing countries are not clearly spelling out what they ought to do with this,” he said.

Rais also briefly addressed Iran’s nuclear program:

He said it should be acceptable if Tehran’s nuclear programme was for the purpose of creating energy and garnering of energy resources.

“It should be acceptable but the explanation must be clearly done and this is not the forum,” he added.

The D8 is an an economic development alliance constituted by member nations Iran, Malaysia, Nigeria, Pakistan, Bangladesh, Egypt, Indonesia, and Turkey  

In yet another pro-market reform under the leadership of Prime Minister Abdullah Ahmad Badawi, Malaysia yesterday lifted its price controls on steel and steel products. The cessation of state intervention, which was announced on Friday, was accompanied by the PM’s statement that regulatory barriers to trade and importation of steel products — from tariffs to reporting requirements — would be scrapped.

The free-market move was hailed by local builders’ organizations, including the Real Estate and Housing Developers Association, which said in a statement, “an open market [in steel] will ensure competitiveness for developers and subsequently cost savings for customers.” The Malaysian stock market saw the share prices for steel companies jump on the day of the move, even as the broader market suffered a daylong slump.

As noted in our earlier post on the Malaysian rice market, the free-market, pro-trade, and pro-growth instincts of the ruling coalition under PM Badawai are sound — and the lifting of controls on the steel sector is evidence of this. In a region, and an era, where classically liberal economics are too often eschewed for statist “solutions,” the Malaysian government is providing a salutary example for Asia and the world. Who benefits? In the short run, Malaysians — and in the long run, everyone who trades with them, including their number one foreign investor, the United States of America.

Recall, if you will, our previous post on Malaysian purchases of rice, and its effect on the U.S. market. It’s not just the U.S. market that is affected, of course — Malaysia’s internal rice markets respond these pressures even more readily than our own. Thus we see in today’s news reports that Kuala Lumpur is moving to cap rice prices within Malaysia itself. The policy is a mix of free-market and state interventions, with internal movement of rice being facilitated — and price controls simultaneously established. A short-term alleviation of the internal rice shortage is likely, but long-term effects remain to be seen. Price controls in particular are unsustainable, as they will lead to off-market trade and, in the long term, even higher prices than those they were imposed to control.

The probability is that the Malaysian executive grasps this. It’s an indicator of the importance of this issue that the announcement of the state’s moves came directly from Prime Minister Abdullah Ahmad Badawi himself. The PM is in a difficult spot here: he is known as a staunch advocate of markets, and especially of the intrinsic comparative advantages of Malaysia’s agricultural sector. On the other hand, that sector does not compete against the agriculture of other nations in a perfect free market — nearly every nation, including the United States, indulges in massive taxpayer subsidies to its food producers. Furthermore, the working of the free market in basic commodities is easier to theorize about than implement. When it’s a staple food like rice, a good pragmatist will attempt the middle course — in politics and in production. Observers of the Malaysian scene will watch with keen interest where the PM goes next on this front.

UPDATE: More on this story, with further details, here. Background on the relationship to world oil prices and the broader inflation fight here.

Reuters reports that Malaysian inflation has “hit a 13-month high,” which sounds alarming till the revelation that the high is all of 2.8 percent. By comparison, U.S. inflation in March was 3.98 percent, and apparently peaked in November at 4.31 percent. The present U.K. inflation rate is only slightly lower, at 2.5 percent; and recent reports put inflation in the Euro zone at 3.3 percent. Malaysia therefore meets and usually beats the inflation standards set by the major economic powers. If, as Milton Friedman said in 1963, “Inflation is always and everywhere a monetary phenomenon,” then the lesson is clear — Malaysia’s monetary fundamentals are sound. Good news indeed for American businesses seeking a safe and stable venue for investment.