Credit Suisse: Private investment to continue growing

Publication: NST

Date of publication: Jan 21, 2013

Section heading: Business Times

Page number: 002

KUALA LUMPUR: The recent strength in private investment in Malaysia is expected to continue after the general election as further benefits of the Economic Transformation Programme and Strategic Reform Initiatives come through, Credit Suisse said.

The current government is expected to return to power with a smaller majority, the firm added.

"On this basis and assuming Najib remains the Prime Minister, we think the ETP programme and its associated reforms will continue, boosting investment, lifting GDP growth," it said in a report focused on the first quarter outlook for 2013.

Credit Suisse has forecast a five per cent growth for 2013.

It described 2012 as an "excellent year" for Malaysia's economy, buoyed by strong domestic demand growth (offsetting export weakness), a rising private investment and low inflation averaging less than two per cent.

"Judging from one of the key metrics of macroeconomic performance we look at, the difference between real GDP growth and the inflation rate, Malaysia was the best performing country in Asia excluding China."

But it expects the government to be cautious in introducing fiscal consolidation measures such as hiking subsidised fuel prices or introducing broad-based goods and service tax (GST).

It expects the growth-inflation trade-off to remain supportive of the equity market in 2013, pointing to the potential for the market to catch up.

The growth-inflation trade-off measure rebounded from the local trough in 2011, staying in positive territory throughout last year.

The last time there was significant divergence between Malaysia's growth-inflation trade-off measure and the year-on-year growth in the country's equity index was right before the 2004 general election in March.

The gap was closed via a strong rebound in the latter to match the strong macroeconomic performance.

On the outlook for the rest of Asia, Credit Suisse said China is expected to disappoint with its regulations on shadow banking, the trust sector and local government funding will constrain public sector investment, while the private sector continues to struggle.

India's growth will be on the upside while a combination of strong GDP growth and structural fiscal improvements is likely to see the Philippines achieve investment grade status this year.

Likewise, it is optimistic that capex will continue to roar in Thailand in 2013, on the back of surging foreign investment applications, particularly from Japan, and the prospect of stronger government investment.

The Indonesian economy is overheating while its currency faces volatility, it added.

The depreciation of the Japanese yen is likely to impact Korea's exports the most.

In the case of Singapore it noted that inflation which has been outpacing real GDP growth for most of the past two years should unwind in 2013 as well as structural issues relating to the labour market and competitiveness.

Malaysia in the pink of health

Publication: NST

Date of publication: Jan 19, 2013

Section heading: Business Times

Page number: 006

Byline / Author: By Sulaiman Mahbob

I often read the Economist magazine and browse the table on Economic and Financial indicators in its last few pages. There are several key indicators of the economic health of nations worth noting, such as growth in gross domestic product, inflation, industrial production, unemployment, balance of payments, and budget balance.

In the most recent publication, the table showed that 36 out of 43 countries registered budget deficits, with Venezuela showing the largest deficit to the tune of 14.7 per cent of its GDP and Colombia showing the least at 0.1 per cent. In all, about 85 per cent of the listed countries showed negative budgetary position.

Excepting Switzerland, whose data was "not available", only seven nations recorded budget surplus with, expectedly, Norway showing a large surplus of 13.4 per cent of GDP, and Saudi Arabia registering 12.6 per cent. Greece and Spain registered deficits of seven per cent and 7.4 per cent, respectively. India recorded a deficit of six per cent while China, despite its large trade surplus, showed a deficit of more than two per cent.

Developed countries such as the United States, Japan, and Britain, also registered budget deficits to the order of seven per cent, 9.7 per cent, and 7.9 per cent.

In a lighter vein, one may think that the soul of Lord Keynes would not be able to rest in peace in view of the intractability of this budgetary issue, despite the many efforts to contain it.

Observing this scenario, Malaysia's corresponding number in the order of about 4.7 per cent appears tolerable. The government aims to see it continuosly reduced in the medium term. The bulk of the deficit is caused by our high subsidies for energy and social services. Yet, many think that the country is going down the Greek way.

To be sure, budgetary balance is but one measure of a nation's economic health; albeit an important one, of course, as it has few implications. There are several others, and one needs to look at some of these together before making conclusion on a nation's state of the economy. In this regard, Malaysia's GDP numbers, and statistics on unemployment, consumer price index and current account balance indicate that we are nowhere going Greek.

The same table gives unemployment for Greece and Spain in the region of 26 per cent, each. About 50 per cent of youths in Spain are unemployed, according to other sources. The US and the eurozone record unemployment levels of 7.7 per cent and 11.7 per cent, respectively. In comparison, Malaysia's unemployment is about three per cent, a level considered full employment.

In fact, our current account of the Balance of Payments indicating the nation's earning has been in surplus for over one hundred months, making Malaysia a resource-surplus nation. This surplus, however, rests largely with the private sector, which explains our high liquidity and low interest rate environment. This surplus makes up the nation's earning in its transactions with the world. It can finance over nine months of retained imports, much higher than the recommended minimum of about three months. This figure, in addition to our strong financial system, says that Malaysia, as a nation, cannot go the Greek way that easily as some would like us to believe.

At this juncture one needs to be appraised of the causes of our fiscal deficit. First is the difficulty in raising tax revenue, as taxes are unpopular. Second, it is also difficult to reduce operating expenditures (OE) as about 40 per cent of OE is made up of "locked-in" expenditures (salaries, debt payments, charged expenses, grants, and also subsidies). Third is the high level of development expenditure, some of which can be privatised.

This is not to say that we should easily tolerate the deficit. We should aim for a more sustainable level, such as below three per cent in the medium term and attain a surplus in five to 10 years. What worries us is the level of public sector debt, which is now about 54 per cent of GDP, and contingent liability, too. The government's idea of raising revenue by implementing the Goods and Services Tax (GST) has been stalled for quite some time. The private sector should be ready easily given the need for it to be more transparent in its accounting. GST will definitely beef up government revenue.

On the other hand, some public sector allocations can be done away with.

Loans for purchases of vehicles and houses for government staff can be passed on to the banking system. The banking system can accommodate such demand. In addition, some development projects can be undertaken through genuine public-private partnership (PPP) arrangements involving private sector financing and risk-sharing between government and the private sector operators. We have to move fast towards more genuine PPP initiatives to allow for greater private sector involvement. We may need a master plan for PPP to guide future action as we did for privatisation.

The government can also save public money through open bidding system for public procurements and projects, even including privatisation and PPP projects.

However, one often cited concern often cited is the need to enhance the efficiency and effectiveness of public expenditures. Let us also revisit this matter and give it a fresh commitment, in addition to a continuing rigorous examination of our fiscal management and planning.

Tan Sri Dr Sulaiman Mahbob is the chairman of Malaysian Institute of Economic Research (MIER)