The Horizon

Recently i got asked some very interesting questions (thanks Rajan) :

Just out of curiosity.. how does this domino effect end? I mean, I know it gets better when the economy gets better, but what causes the economy to get better if people are constantly prudent with spending? When people want to spend more, what has changed to want them to spend more? Higher salaries? What has prompted the higher salaries? Just wondering and will be interesting to know what stops the cycle. Once we know what stops the cycle, can’t we do it now?

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I have been so focused on the immediate problems i see, i failed to look forward and that is exactly what the questions above asks. My greatest wish is for leaders in Malaysia to ask the questions above.

I will try to answer it but in the end i think my honest answer is i am not sure.

We need to understand first where our economy gets its growth from. Then we need to make some assumptions on what will happen in 6 months. Finally we need to have plans to address the problems we face in the short term (< 1yr) and in the long term. I believe only when we see those plans in action or being put in action...only then we will be turning the corner.

Malaysia has six engines of growth :

1. net oil proceeds (we export high grade oil and import low grade oil), we make on the margins
2. manufacturing exports (electronic goods etc)
3. commodity exports
4. domestic consumption
5. Foreign Direct Investment (foreign investments in factories, or true capital investment)
6. Portfolio funds (these are short term investments in our shares and bonds. Most of our leaders claim that these are actually destabilising forces BUT only when money flows out. No one complains when money is flowing in

What a great economy. If only our leaders started focusing on it making it even greater.

What is happening now?

Oil prices have crashed from the high levels of 145 all the way to 50. I cant be sure but i suspect this is hitting Petronas profits. I will look to track this soon (if i can find the data). Commodity prices have crashed over 50% and this again is not good for our exports. Manufacturing activity in Malaysia has been steadily declining as factories have moved to Vietnam, Thailand and Indonesia. The govt claims that FDI is steady but have you seen any major investments by foreign companies recently. I haven't. Portfolio funds are now actually leaving the country and all of Asia actually.

Our economy is very dependent on exports. So as US and the rest of the world slow, we dont have enough domestic consumption to sustain the drop in exports.

These are my personal views on what will happen in the next 6 months :

• Obama will introduce a huge tax incentive for companies to bring jobs back to the US. This may lead to business investment in Asia flowing back to US (especially outsourcing jobs in manufacturing)
• we could see commodity prices stay range from here (especially energy related commodities - oil and so on) as business activity continues to slow. BUT i believe soft commodities - food related commodities will start to rise over the next two years. This is hard to predict but once the shocks of financial meltdown is overcome, people will resume their eating habits. They may not travel so much or buy watches or expensive shoes but they will resume their normal eating habits
• default rates globally is still gonna rise especially among smaller companies and Malaysia is no exception
• our currency is gonna continue to weaken (again here we could see a time when the USD cracks and MYR will appreciate fast) but i think this will be temporary. Our fortunes are oo closely linked to the US and Europe who are still our biggest buyers of our exports.
• alternative energy will be a big global industry in time to come
  

What needs to be done?

• our leaders need to stop telling us everything is ok. The limo driver who makes his living ferrying passengers from KLIA to hotels will tell you that their business is suffering. Private drivers who pay 5 to 6k for limo permits will tell you that in the last 6 months, at least 40% of them are now driving taxis as well as they cant make ends meet. Crime would not be so high if all was good.
• they need to boost consumption now and not wait for the economy to slide. Cut personal taxes, drop EPF savings rate to 6% but maintain employers min contribution
• stop spending money building houses or buildings nobody wants. Decide now that Malaysia has to be self sufficient in terms of food production and boost net exports of soft commodities. Spend the money rebuilding our Agriculture business with tax incentives
• make each state accountable for growing specific objectives - improving infrastructure, rebuilding their agriculture business
• start a forum with banking leaders and look to restructure all loans that are due in the next two years for our Malaysian companies. DO not wait for defaults to accelerate.
• issue tax free bonds to any Malaysian or corporation to fund the fiscal packages (the spending in agriculture)
• issue a one off waiver in 2009, that any profits from overseas repatriated to Malaysia in 2009 is tax exempt
• Allow individuals a tax free year

We have the makings of a great economy but we need to be more efficient and we need to develop our own sustainable economy. The only way to do this is to ensure the wealth created filters down throughout the system.

We all know that a huge chunk of Malaysia's wealth is abroad. There is a real need to bring that wealth back into Malaysia. To do this, we need to restore faith that our leaders are really serving us and not their own needs.

I would say WE will turn the corner when we see one or all the measures above implemented. Unfortunately i see none.

For individuals i think at the end of the day, they will spend/invest when they feel secure in their jobs and in the leadership of the country. SO the question to answer - "do you feel secure in your job and do we have faith in our leaders"


d.