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Thursday, November 14, 2013

A perfect storm in 2015?

NOVEMBER 14, 2013

Liew Chin Tong is the DAP MP for Kluang.

Last Saturday, I spoke at a forum on GST organised by Centre for Progressive Research and Penang Institute (formerly known as Seri) in Johor Bharu.

I asked whether there will be a perfect storm in 2015 in which several factors culminate into a crisis.

First, GST eats away disposable income and hence depresses domestic demand, as well as causes inflation at least in the first year.

Second, quantitative easing (QE) is likely to end by then. The interest rate is likely to be higher in 2015. A higher interest rate depresses domestic demand further. As the US dollar appreciates, imports would be more expensive.

On the other hand, exports may not be too good even with a depreciated ringgit largely because job growth in US and Europe would still be slow, thus demand of our exported goods would not be high. In addition, some US manufacturers are moving back to the States which means room for export-led growth is limited.

Third, I think it is safe to say that palm oil price is likely to further soften in 2015 mainly due to oversupply and a potential soya super harvest next year. The potential softening of palm oil prices will have major political consequences in Malaysia as small owners in small towns and rural areas depend heavily on commodities.

Fourth, would there be a property bubble? What would be the combined effect of GST implementation, higher interest rate (mostly as a result of QE tapering) and lower commodity prices? The moment someone begins to default, there is risk of a meltdown, especially in the context of very high domestic debt to GDP ratio.

Beyond that, the rating agencies' greater scrutiny of Malaysia's poorly managed public finances would likely to result in more expensive borrowing costs to the government and consequently pushing interest rate for everyone else up further.

Fuel prices are never easy to gauge. But petrol price may fall as the supply of shale gas comes through. The fall of petrol price will be a double edged sword.

It would mean less subsidy payment thus helping to reduce the deficit yet it will also erode Petronas's contribution to the public coffers thus potentially resulting in widening of deficit, which in turn further erodes the Government's creditworthiness.

I am working on a longer paper on the subject which I feel is of relevance to the debate on the future of Malaysian economy but has yet to receive much attention from the Government, which unfortunately not seeing the big picture at all. – November 14, 2013.

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

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