IHS Global Insight Perspective | |
Significance | The government unveiled a huge fiscal stimulus package, equivalent to 9.0% of GDP as it forecast growth in 2009 at -1% to 1.0%. |
Implications | The package aims to bolster domestic demand through direct support to the corporate sector and households in a bid to offset the negative ramifications of the external-demand shock now percolating through the economy. |
Outlook | The expanded spending will push the budget balance into deficit equivalent to 7.8% of GDP. IHS Global Insight still expects the economy to contract in 2009 by -1.1% despite the increasingly-aggressive counter-cyclical macro-economic stimulus implemented by authorities. |
Record Spendthrift
The Malaysian government announced a huge fiscal stimulus package on Tuesday, as it warned of an outright contraction in the economy for the first time in a decade. The 60-billion-ringgit (US$16.3 billion) package is the government's second supplementary budget, but dwarfs the initial 7-billion-ringgit round of stimulus spending already implemented. The package's total spend is equivalent to 9.0% of gross domestic product (GDP). The new round of spending brings the total level of pledged fiscal stimulus to 10.0% of GDP. The spending package was unveiled by Finance Minister Najib Razak, currently the country's prime-minister-in-waiting.
Weakening Economic Outlook
The sharp escalation in counter-cyclical spending follows a sharp deterioration in the economy's outlook as external demand collapses. Malaysia is the third-most trade-dependent economy in Asia, after Hong Kong and Singapore, with total trade amounting to a staggering 220% of GDP. Growth braked to an eight-year low in the fourth quarter of 2008, barely scraping into positive territory at 0.1%. The outturn marked an abrupt deceleration on the 6.3% year-on-year (y/y) growth averaged in the first three quarters of the year. The slump in the fourth quarter dragged full-year growth down to 4.6% in 2008 from 6.3% the previous year. External demand had been weakening through 2008, but the rate of that decline has accelerated exponentially since the escalation of the global financial crisis, after the collapse of Lehman Brothers in mid-September.
Net exports of goods and services in real terms plunged by a dizzying 40.1% y/y in the three months through December, after a 14.8% contraction in the third quarter. Exports have not only been hit by the synchronised downturn in the G3 economies of the United States, Europe, and Japan, but also by tight credit conditions that have constricted trade finance. Commodity exports have also been hit by sharp reversals in commodity prices, as demand destruction has ensued globally. The retrenchment in external demand has also borne down heavily on manufacturing output, while inventories have continued to decline. Investment, which contracted by over 10% in the fourth quarter, has been compromised by falling profit margins and tight credit conditions casting a shadow over private consumer spending, as income and employment insecurity intensifies. Foreign direct investment is also expected to weaken sharply, with official forecasts projecting a 50% decline in inflows in 2009 to 26 billion ringgit. The government now expects the economy to contract 1.0% in 2009, with risks to that forecast weighted to the downside.
Bolstering Companies and Consumers
The fiscal package aims to bolster the corporate sector and consumers. One of the main foci of the plan is boosting the access of the corporate sector to financing, with 29 billion ringgit allocated to supporting private enterprise. The allocation incorporates a 5-billion-ringgit working capital fund that will support companies in raising financing from capital markets, while direct fiscal injections will be made to the acutely-exposed aviation, auto, and tourism industries. A further 19 billion ringgit will be disbursed to the government's state investment vehicle, or "Khazanah", with the brief of boosting investment in domestic industries over the next two years.
Job creation schemes feature heavily in the programme aimed at bolstering consumer spending. The implementation of infrastructure projects scheduled under the government's existing five-year plan will be accelerated, with 5 billion ringgit (US$1.35 billion) allocated in the stimulus package. Targeted projects include construction of a high-speed broadband network and expansion of existing airport facilities. A further 2 billion ringgit will be set aside for skills training and employment creation, with the aim of creating 163,000 apprentice and permanent positions in the public and private sectors. Employers who hire workers that have been made redundant will be eligible for tax breaks. Finally, the package aims to support household disposable income through tax relief on interest payments on mortgages, up to 10,000 ringgit per annum over three years, while famers and fishermen will be eligible for subsided loans.
Outlook and Implications
The huge expansion in government spending will push the budget balance deep into deficit. The government now forecasts that the deficit will rise as high as 7.6% of GDP in 2009. Malaysia's fiscal balance has witnessed steady deterioration in recent years, and had been expected to rise to 4.8% of GDP this year even before the latest round of spending. However, authorities remain confident that the deficit can be financed domestically, without any significant increase in debt yields that could constrict further the access of the private sector to credit.
Political Credit
The scale of the budget also has political overtones. Najib is expected to take over the leadership of the United Malays National Organisation (UMNO) at the end of this month, and with that the premiership. He enters office with considerable baggage after a suspected corruption case during his time as Defence Minister, and continued rumours that he was somehow involved in the murder of a Mongolian woman in 2006. Moreover, Najib’s political credibility has suffered as he has led two failed by-election campaigns, and his orchestration of the Perak State takeover has proved to be deeply unpopular with the electorate. With political tensions heating up in the run-up to three more by-elections on 7 April, the spending package is clearly designed to win over popular support for the Barisan Nasional. The politicisation of economic policy has been further enhanced by planned increases to restrictions on foreign workers, with outright bans on the hiring of non-nationals in key manufacturing and service industries, and edicts prioritising their redundancy in the case of mass layoffs. Malaysia is one of the main importers of foreign labour in south-east Asia, recruiting semi-skilled workers from Indonesia and South Asian countries such as Bangladesh and Nepal. At least 100,000 Indonesian workers are expected to lose their jobs as a result of the ruling.
Growth Still Headed for a Correction
The expanded fiscal stimulus will act in conjunction with the aggressive monetary-easing implemented by the central bank. However, while such policy easing is appropriate in the current climate, IHS Global Insight maintains that it will still be insufficient to avert a marked correction in growth in 2009. Our current growth forecast calls for growth to contract by -1.1% in 2009, with recovery lagging well into 2010 and 2011. The scale and speed of the export shock has served as a timely reminder to the region's export-dependent economies of Malaysia of the need for reforms to bolster domestic demand as a growth driver. These reforms were dodged when times were good, with countries now paying in terms of lost growth.