Averting a crisis the Najib way

When Pakatan Harapan presented an alternative budget, entitled “Averting a crisis”, we were very aware why we have chosen the theme rather than any overworked cliche like “Prospering the rakyat” (of the Barisan National’s budget). We predicted by the third quarter as very trying times.

While arguably liable to be accused of being “alarmist”, we wanted to call “a spade a spade”. Let the public face the truth of what is to come.

For managing the economy badly for the last 18 years (and especially since 2009), we have emphatically said that the government doesn’t have much fiscal room, both for counter-cyclical fiscal and monetary policies. Today we are more than vindicated.

After many writings by economists and analysts alerting Putrajaya, they are obliviously still grinning. At the 10th Asia Economic Summit last Friday, the World Bank Group chief economist alluded to a number of weaknesses.

While not entirely in agreement, there are good policy prescriptions that deserve of attention. The call for structural reforms are very similar to ours i.e. improving public sector performance, namely expenditure efficiency (e.g. addressing leakages and corruption), accelerating human capital development and widening of the tax band as not to allow taxpayers to fall into a higher tax band quickly.

A local economist, to cite but one, has also criticised the government for failure to admit of fiscal mismanagement that has accentuated the weakening of ringgit, although admitting that currencies of major commodity-exporting economies have depreciated too. “The government would do well if only they could admit that economic fundamentals have deteriorated”, he said.

It need not be said again, that the fiscal deficits are stubborn, public debt continued ballooning with debt servicing cost, while current account surplus is now razor thin and net trade, especially with China’s slowing, will not contribute much to growth. With the likely prospect of the US raising its interest rate by year end, the situation is a lot grim.

Now, before entering 2016, with a tougher operating environment, rising cost and sluggish economic growth, Malaysian banking system is already facing a liquidity shrinkage, if not a credit crunch as yet.

The banking system is no longer flushed with liquidity. Banks are competing for deposits and looking for other sources of raising funds for working capital. With liquidity shrinking, the cost of funds will inevitably go up. That’s another bad news for all.

The loan-deposit ratio (LDR) is on an upward trend, hitting a new high of 91.2%, its third straight month of staying above 90%. Clearly, loans have been growing at a much faster pace than deposits.

Another sign is that growth in M2 – a measure of the country’s money supply which includes currency in circulation and demands deposit saving deposits and fixed deposits – is decelerating.

Not wanting to be alarmed, Bank Negara Malaysia (BNM) alluded to other factors to explain the observation. Inter alia, because of a more developed domestic capital markets where banks could source out their funding or due to moving investments abroad by Malaysian corporations and high net-worth individuals. Admittedly very logical though.

However, industry observers pointed to the likely reasons that individuals and corporates have less cash to place in deposits as they are also coping with the higher cost of living and as well the higher cost of doing business, especially after the good and services tax (GST) in April, begins to bite. As if GST wasn’t sufficient, Najib rub more salts into the wounds by substantial hike in highway tolls and public transport.

In a bid to improve falling margins and concern on their liquidity, banks have been reported to have increased interest rate for housing and car loans. That’s bad news too. With unemployment equally on the rise (job cuts), banking system’s assets would also adversely affected.

But will Bank Negara increase the Overnight Policy Rate (OPR) which in turn will affect the effective lending rate? The answer is very unlikely. Why not? I’ve said it earlier about the reduced option left. Although liquidity crunch will usually warrant a raise of the OPR, the option is not available to the BNM.

The OPR which now stands at 3.25%, is unlikely to be hiked by the Bank Negara. Given the sluggish economy and the over-burdened household debt, the medicine will in fact kill the patient. With the publuc paying higher interest rates to service their loans, that surely would be “the last straw that will break the camel’s back”. 

Datuk Seri Najib Razak should have known that a serious commitment to impose and display fiscal discipline will go a long way towards rebuilding credibility. The nation was willing to go on “austerity” measures with him if only he had displayed commitment and resolve.

But Najib’s irresponsible allocation of RM8.5 billion to his “slush funds” for his Prime Minister Department, to cite but one example, is despicable. Najib fails to exude basic understanding of “opportunity cost” in this dire straight situation. That is smack of arrogance, more than ignorance.

Worse still, his deafening silence on the RM2.6 billion donation and now the passing of the most draconian National Security Council Bill in the parliament, are final blow to the integrity overhang of his government. This is Najib’s way of averting a crisis, his party’s internal strife notwithstanding. – December 8, 2015.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.