UPDATED Malaysia gets set for borrowing spree, draws fire for slowness and financial indiscipline

Malaysia’s move to cut interest rates and flush the market with funds signals its readiness to embark on a borrowing spree to finance the budget deficit.

DPM and Finance Minister Najib Razak also drew fire for his slowness to react, with analysts saying he should not try to shift the blame as he had highly-paid staff to do the execution.

To-date, not a single prescription in the RM7 billion stimulus package unveiled last October has been implemented. The delay will make it tougher to stave off the economic turmoil …

Adds comments from analysts on the delay and shifting of blame

By Wong Choon Mei

Malaysia has slashed interest rates and pumped up liquidity ahead of a borrowing spree to fund its ballooning budget deficit - drawing fire from experts for both its financial indiscipline and slowness to react.

The central Bank Negara yesterday cut the overnight policy rate by a more-than-expected 75 basis points to 2.5 percent, a move that indicates the economy was worse off than deputy premier and finance minister Najib Abdul Razak has cared to admit.

“We are in uncharted territory and until the global situation stabilises, the local economy will remain at risk. It is presumptuous to predict the bottom, and what Najib must do now is to act quickly and decisively,” said Azrul Azwa, senior economist at Bank Islam.

Just two days ago, the finance minister dropped a bombshell. Najib admitted to reporters that none of the prescriptions in a RM7 billion economic stimulus package (ESP) unveiled in October had been carried out yet.

“This is unacceptable. If they started the ball rolling, say three or four weeks after announcing the package at the latest, it could have neutralised a lot of the nasty effects, such as the sharper than expected retrenchment levels that we are already starting to see,” said Azrul.

A vicious cycle, and one ESP at a time please

Najib also said a second ESP was on the cards, this time targeted at groups vulnerable to the global economic slowdown, and included assistance for retrenched workers. He declined to provide details as “a lot of things are still being looked into”.

“We are waiting for the right time to launch the second package. We want to ensure the focus of the second package is different from the first,” Najib said.

Nevertheless, financial practitioners were unimpressed. There has been talk the second package could amount to RM10 billion, which would jack up the 2009 budget deficit from the forecast 4.8 percent of GDP to perhaps 5.5 percent of GDP.

“Let’s get the first one off the ground before we even talk about the second one. I mean, this is nonsense. The government’s slowness is shocking and inexcusable,” said a head of research at a large brokerage who requested anonymity.

“They should know the longer they delay the implementation, the longer it takes for the knock-on effect to filter through, and wake up the economy.”

“Najib must stop blaming other people. This is not the Kuala Terengganu by-election. The RM7 billion package was finalised and announced by him. He had highly-paid staff to do the execution. If they didn’t, it reflects on him and shows a lack of leadership.”

Despite government assurances, analysts expect Malaysia to register never-before-seen unemployment, hit by job-losses from both within the country and in neighbouring Singapore, where there are at least 300,000 Malaysians working.

Just yesterday, Malaysia’s human resources ministry said 45,000 workers in the electronics sector would be laid off later this month due to production cutbacks by factories. This number compares against the 33,451 workers retrenched for the whole of 2008.

“Definitely, the pace of retrenchment is the sharpest and quickest we have ever experienced,” said Azrul. “And this makes it all the more difficult for the economy to recover. We can’t rely on domestic demand and consumer spending to ward off lower production and exports. If the people are out of jobs, how can they spend. It is a vicious cycle.”

Record debt and budget deficit on the cards

Bank Negara also reduced the statutory reserve requirement by 150 basis points to 2.0 percent, a move that will increase the pool of funds available for borrowing.

This measure, taken together with the sharp cut in interest rates, sparked talk that it would soon embark on a borrowing spree to fund the government’s growing budget deficit.

Money market analysts expect the government’s net issuance of debt securities to shoot past the RM60 billion mark and hit a fresh record high in 2009.

For comparison, in 1997 net debt issuance was just RM 3.8 billion, pushed up to RM17.7 billion in 1998 by the Asian financial crisis.

But despite the government’s promise to balance the budget, it has steadily ballooned from then on, crossing the RM50 billion ringgit mark for the first time in 2007.

“It’s just like using a credit card. If you don’t have much outstanding, then go ahead. Why suffer so much, borrow a bit to tide through,” an economist at a foreign bank had previously warned.

“But after a while, it becomes habitual and that’s the problem. It gets abused and soon you put the country in debt beyond control.”

Shares, ringgit hit as another slash in growth forecast looms

So far, the ringgit has borne the brunt of the government’s indecisiveness and lack of financial discipline. It fell to 3.6160/6210 against the US dollar from yesterday’s closing of 3.6080/6130.

The share market too has been lacklustre, failing to mount any sustainable rebound other than brief technical rallies. The Kuala Lumpur Composite Index touched a four-week low to close at 873.41 points on Wednesday, down by 0.79 percent.

Dealers are predicting further falls and expect the KLCI to breach the 800-points psychological mark in the first quarter, without any meaningful recovery until the second half of the year.

Earlier this week, Khazanah Malaysia , which oversees a chunk of the country’s wealth for the government, admitted the net value of assets under its management fell 37 percent in just eight months. Net asset value was RM33.7 billion at end-Dec 2008, versus RM53.1 billion in May.

Najib, who slashed the 2009 economic growth forecast to 3.5 percent from 5.5 percent in October is expected to further reduce the prediction to between 1.0 and 2.0 percent.

“It would need nothing short of a miracle to get 3.5 percent. Again, the keyword here is speed. Our leaders must be realistic and not try to give a false impression to the people,” said Azrul.

“Compare against Singapore. The government there has just pushed down their GDP forecast to between negative 2 and negative 5 percent. Just about a month or so ago, it had predicted between positive 1 and negative 2 percent. This is not being alarmist, it is being responsible.”

Sumber: Suara Keadilan