Leadership quagmire adds to fragility of economy

  • Economy
  • Saturday, 02 Nov 2019

Slow business: A salesman waits for customers at a cosmetic shop in a shopping district in Hong Kong. The city is in a technical recession after it contracted for a second straight quarter. — AP

Hong Kong is in technical recession, while Singapore narrowly evaded one, charting a growth of a measly 0.1% in the third quarter. The United States, Europe and Britain are all experiencing a slowdown in the economy.

Except for Hong Kong, where the economy contracted by 3.2% in the third quarter after a 0.5% negative growth in the second quarter, the slowing economy in the other countries is due to the trade war. The trade war has caused a disruption in the global supply chain and a relocation of manufacturing facilities.

Malaysia is no different. The economy is expected to grow 4.7% this year and 4.8% the next. This would mean that the economy has been growing at a tight range of between 4.7% and 4.8% for three consecutive years.

If anybody had thought that Malaysia would be insulated from a slowing global economy, they are wrong.

In fact, for a small economy such as Malaysia where the gross domestic product (GDP) is RM1.49 trillion, any growth of less than 5% is not healthy, considering that inflation in the major cities is higher than the official rate of 2%.

However, all is not doom and gloom for Malaysia.

Investments are not coming in as one would have expected after the change in government in May 2018. Approved foreign direct investment (FDI) is up, but domestic direct investment (DDI) has been coming down. FDI for the first six months of the year was at RM49.48bil and is expected to surpass the total of RM80.5bil that came into the country last year.

However, approved DDI for the first six months of the year came in at RM42.5bil, according to the Malaysian Investment Development Authority. The approved DDI in 2018 was RM121.1bil and it has been trending down since 2016.

Government spending, which had been the engine of growth previously, contracted last year and this year.

Next year, the government is spending again based on the numbers in Budget 2020. It is not spending as much as one would like it to, but its purse strings are tied down by the discipline to keep the budget deficit at 3.2% of the GDP.

Oil, which is a major component of the economy, appears to be steady at above US$60 per barrel. The price should remain above the level in the coming year because supply is not rising as expected due to less money going into shale oil and gas fields. According to reports, operators of shale oil and gas fields only managed to raise US$19.4bil in debt so far this year compared with US$56.6bil in 2016.

Budget 2020 is based on oil at US$62 per barrel, which is a realistic figure compared to the assumption of oil averaging US$70 per barrel in Budget 2019.

Apart from oil revenue, the government’s sales and service tax (SST) revenue is expected to grow to RM28.3bil next year compared with RM26.8bil this year.

The net effect on the Treasury is that the income from the SST is expected to be only slightly lower compared to the net proceeds (after refunds) from the goods and services tax or GST.

Next comes the question of governance in the handling of public funds. On that score, so far, we have not heard of any scandals such as another 1Malaysia Development Bhd (1MDB) or another Felda that would suggest that public funds are being mismanaged.

Leadership transistion

However, what is lacking is a leadership transition plan to succeed Prime Minister Tun Dr Mahathir Mohamad,

Dr Mahathir had said that he would hand over power to his supposedly designated successor Datuk Seri Anwar Ibrahim come May next year. Now, however, nobody is certain if the transition would take place in May next year or go on for another year or two, or three.

There are voices of support calling for Dr Mahathir to serve a full term, which ends in May 2023. In 2023, however, Dr Mahathir would be 97 years old...just three years short of hitting the century mark.

He has already got a place in history by being the oldest prime minister the nation has ever had and one that led a feeble Opposition to victory against the all-powerful Barisan Nasional coalition anchored on Umno.

However, seeing him serve a full term without a proper successor in place would not be an ideal situation, especially for investors. There will always be uncertainties as to who would succeed him and the policies – be it economic or government-related – to follow.

Business cannot afford to live on uncertainty. Who will in their right frame of mind pour hundreds of millions or billions into a country without knowing the direction of the political leadership?

The corporate sector went through one change in government in May last year and was prepared for it.

But there was a slew of changes in the government, government-linked companies, terms of contracts that were awarded and direction on the economy.

A substantial number of businessmen and people serving government agencies had voted for a change in government because they felt that the “hidden” cost of doing business under the old regime was just too much to bear.

When the change happened, many were prepared to give the new government up to one year to get its house in order and for the projects and contracts to start flowing again. However, after 18 months, the progress has been rather slow. Payments are slow to come in and have dealt many companies with acute cash-flow problems.

Some banks, especially the foreign ones, are not financing any work related to the government because they are uncertain if the projects would face hiccups pertaining to payments if there was a change in leadership.

The politicians in the ruling party say that they are not slowing down but are merely being cautious when it comes to public finances. As for the civil service, nobody wants to be held accountable for critical decisions, which they may be held responsible for if there is indeed a change in leadership.

At the end of the day, the economy and politics go hand-in-hand. One cannot live without the other. Without a steady economic growth policy, the politics of Pakatan Harapan cannot survive.

Speculation is rife on several candidates, apart from Anwar, being touted for the post of prime minister to succeed Dr Mahathir. The best solution is for Dr Mahathir to name the candidate based on the decision of the Pakatan Harapan council.

Once and for all, it will kill all speculation. It’s best for the economy.

Some economists are predicting that the global economy would rebound towards the second half of next year. If that rebound happens, Malaysia has to be there to take advantage. We should not be bogged down by the politics of transition.

The views expressed here are the writer’s own.

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Leadership , quagmire , fragility , economy , Mahathir , Anwar , GDP , growth , Hong Kong ,


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