IF there's one certainty about the forthcoming economic stimulus package, it's this: the government will need to come up with a tremendous formula to spur consumer spending.
Pockets may be a-bulging with money for a lot of Malaysians, but whether it's the Malaysian penchant for saving or their fear of uncertain climes, the general feeling out there is better hang on to what you have.
Consumer spending has decelerated, and had slowed down even before the Severe Acute Respiratory Syndrome (SARS) outbreak, that being particularly true of big-ticket items such as property and vehicles. Credit card spending is also down, while housing non-performing loans are creeping up.
Will interest rates be slashed further in an effort to boost spending?
Players in the financial sector may be divided on this, but most seem convinced a rate reduction won't quite do the trick. What's needed, they say, is a big boost in confidence.
The financial system is flush with liquidity, and the interest rate regime already so low that reducing rates further will not stimulate investment or spending, bankers said, citing Japan as an example.
Businesses are not expanding because there is no demand. Corporate clients are repaying their loans, and those that need to raise funds and have the right pedigree, are turning to the bond market in a big way.
It's wishful thinking that demand for loans would go up when there's no strong external demand, pointed out a banking analyst.
Earlier forecasts for loans to grow 5% this year have been cut to between 3% and 4% now.
Last year, loans expanded 4.5% on average.
The banking analyst has been waiting the past 20 months for a cut to the present intervention rate of 5%, not so much because it would boost consumption, but because of what she sees as a misalignment in rates.
Banks have the capacity to absorb a rate cut and be profitable given that the net margins between the cost of funds and lending rates is some 2.75% to 3.6%, and as high as 4.5% for those with bigger hire purchase portfolios. But on such low margins, banks would rather put their money in MGS (Malaysian Government Securities) and earn better yields at a lower risk, according to another banking analyst.
Slashing the intervention rate could lead to a cut in deposit rates, which then reduces the real returns of pensioners in particular, and also impacts negatively on the Ringgit.
How then to sustain an economy that has been domestically driven in the past few years?
On the plus side, Malaysia's economy is very diverse, and money has been flowing in, thanks to good crude palm oil and petroleum prices. Unemployment remains low, said OCBC (M) Bhd senior vice-president and head of consumer financial services division Cheong Chin Kuan. But the government seems to be running out of ammo, market observers noted, having in the first half spent more than it had budgeted for. People would rather spend from more disposable income than to borrow.
While reducing personal taxes would appeal to all, the government's financial constraints do not allow for it. Slashing the Employees Provident Fund contribution rates, most agree, may be one way to increase disposal income. But whether it will generate more spending is again debatable.
The uncertainties are more global than local, but as Bumiputra-Commerce Bank Bhd executive vice-president Nik Hassan Mohd Amin noted, in a global economy Malaysia cannot be immune from the world's problems and uncertainties, which have recently been compounded by SARS.
Perhaps he best summed it up when he said, Because of the uncertainties, the mood to spend isn't there.