Easy money: now is the time to quit the habit

The Budget 2015 revision last week and the circumstances surrounding it provide much food for thought for all Malaysians.

One cluster of questions arises from Prime Minister Datuk Seri Najib Razak’s announcement of the budget revision at a special televised session from the Putrajaya International Convention Centre instead of in Parliament. As critics have pointed out, this poses a question about the role of parliamentary oversight in budgetary matters.

If the national budget needs to be passed in Parliament for it to have legal effect, should not a revision of that budget need parliamentary approval for it to be valid? Secondly, circumventing a parliamentary review of the budget opens the door to non-accountable allocations of public funds, obstructs scrutiny of public spending decisions and deflects national attention from structural and systemic problems affecting the economy that may need to be given top priority.

In short, the Budget 2015 revision is problematic even from the regulatory perspective and in terms of government accountability to the people, both in the immediate and long-term management of the economy.

Perhaps it is not surprising that these issues have gained a sudden urgency.

As a host of analysts have noted, the over-dependence of the Malaysian economy on commodities is just one of a number of structural weaknesses that are threatening to drag down the country’s sovereign rating. While the sharp drop in oil revenue is the immediate crisis that warrants an adjustment of the government’s budgetary allocations for the year, it merely emphasises the growing concerns over the sustainability of Malaysia’s economic performance.

Indeed, there are ample warnings that the Malaysian economy may be heading for a perfect storm if the country does not take decisive action to address numerous glaring structural weaknesses.

Among them, if the government continues to allow its operating expenditure – now some 80% of the budget – to balloon, while its development expenditure commands a shrinking share of the pie, it is as clear as crystal that future growth prospects will be rather dim. No rocket science in this.

The rest of the risk factors are equally plain to the eye. For the record, they include the low income levels of a huge majority of the population, excessive dependence on low-skilled foreign labour, a major deficit in human capital development, the poor quality of education, endemic corruption, a serious illicit outflow of funds, deteriorating race relations and dysfunctional political and governance processes.

Hence, it is also not surprising that Najib’s Budget 2015 revision failed to convince the markets that it was the correct prescription for the country’s economic malaise, as evidenced by the continuing slide in the value of the Malaysian ringgit against the US dollar, and the lack of buying interest on Bursa Malaysia.

What value then, one is prompted to ask, is there in revising the budget deficit from 3% to 3.2% based on a projected crude oil price of US$55 per barrel, when the price has dropped to the US$40s and is expected to stay low for some three years? If anything, it only reveals the policy paralysis of the administration.

Above all, the perils which have been highlighted by Najib’s attempt to maintain the status quo with the Budget 2015 revision underscore the paramount importance of changing the country’s economic game for the sake of its future prosperity.

To anchor the Malaysian economy to a financially prudent pathway, the first prerequisite, before any policy directions are even considered, is for the country’s political culture to be cured of its addiction to easy money.

This habit manifests itself in a variety of forms, most evidently in the over-dependence on extractive industries, a penchant for promoting massive infrastructure projects, rent-seeking and similar schemes that feed the political apparatus.

To change course will not be easy, and will require tremendous motivation to cut the umbilical cord that connects business with politics. Such determination may arise when the public becomes disenchanted with the quality of governance in a country and there is apparently no end to financial and other scandals at the cost of the public’s welfare.

That awareness often results when a majority of the people discovers that a chosen elite are privy to a privileged life, while the rest eke out a meagre living hamstrung by a poor skills base, unaffordable social goods and a lack of opportunity, and are generally constrained by poor life outcomes.

While this scenario may not appear imminent today, it is not unimaginable that events on the horizon may conspire to push the country into a harsh economic environment, if we take the cues from a slew of cautionary reports that are beginning to warn investors about Malaysia’s sovereign risks.

To illustrate, following the budget revision, Fitch maintained a “negative” outlook on Malaysia's chances of defaulting on its bonds in the long term, which means that it is more likely than not to downgrade the ratings within the next 12-18 months.

Further, it flagged as negative the government’s failure to meet its fiscal targets, underscoring the vulnerability of Malaysia's economy and credit profile to sharp movements in commodity prices, which will impact its external accounts.

The emergence of twin fiscal and current account deficits will remain a rating sensitivity for Malaysia, according to Fitch. “Such a scenario would risk greater volatility in capital flows to a degree that could become disruptive for the economy,” the report said. Malaysia's rising contingent sovereign liabilities also are likely to remain a credit weakness.

To prevent the country from sliding into these doldrums, now is the time to excise the economic profligacy that is compromising the country’s future resilience.

Deliverance will not come from merely asserting that we are not in crisis. – January 24, 2015.

* R.B. Bhattacharjee is associate editor at The Edge.

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