Sunday, March 08, 2009
Second Stimulus Package & Information Dissemination (Lack Of)
Hmmm, now we will have the Second Stimulus Package, so I guess most of us were right after all. We have been proclaiming that the initial stimulus was not sufficient and the government was kidding themselves if they thought Malaysia was special in its ability to avert a global crisis when our industry make up is so open to exports and when we do not have a domestic market that is sustainable nor does it have critical mass. There is a big difference to "reacting" late, many jobs would have been lost already. By being late, it would have delayed attacking the problem, its like treating cancer at second stage when things would have been better if we had treated it earlier - the symptoms were all there but maybe we have been reading for different degrees at universities.
Citigroup economics came up with a credible analysis on the SSP and the probable economic impact, but apparently ALL the editors at ALL publications did not have the guts to publish the piece - were their hands tied, is that the way we still operate? Information dissemination must be made available to all Malaysians so that we can weigh all views. Basically the report looked at the fiscal deficit as a percentage of GDP and its implications. As things stand we will be incurring a 4.8% deficit. If the SSP is another RM10bn, the deficit will swell to 6.9%; if its RM15bn the figure will be 7.6%; and if the government is aggressive and do a RM30bn SSP, the figure will be a scary 9.6%.
I believe sober heads will prevail and it will be between RM10bn to RM15bn, any sum north of that will bring about a substantive downgrade in our sovereign ratings and could weaken our ringgit substantially.
Make no bones about it, we need the SSP, but we also need to be prudent. The SSP is likely to expedite on construction jobs but actual disbursements will be to lower labour costs and save jobs. There are already a huge number of construction projects in the 9th Plan so some of them needs to be brought forward in terms of priority.
Corporate taxes contributes about 21% of total federal government revenue while personal income taxes make up only 9%, hence reducing corporate taxes will be much more expensive. Hence it is more likely we will see preferential tax rate for SME's to go from 20% to 18% or 17% as that sector is hardest hit. At most, corporate tax rate will only come down 1 percentage point. As for personal tax rate the reduction should be the same for corporate rate. Reductions in personal tax rates will be regarded as not as effective because only 10% of the working population pays income taxes. Thus a cash rebate would be better, a one off would also be cheaper - e.g. rebating half the taxes already paid for 2008 (yea).
The other area will be credit availability. Currently Bank Negara's SME Assistance Guarantee scheme is at RM2bn and enable SMEs to obtain financing of up to RM500,000 for up to 5 years. It is likely that the sum will be increased and the size added.
The most controversial part will be using EPF contribution, am I the only one hopping up and down? Do not reduce our contribution rate, and do not reduce the employers' rate also. Any attempt to do that will be short-sighted as most Malaysians will not be able to retire well as things stand.
The bone of contention by Citigroup is that a big SSP will result in a huge issuance of MGS and GII and the funds to absorb those papers may be stretched. If its too big, it may weaken the sovereign ratings, then the appetite may reduce foreign funds participation in those papers. As it is, Fitch Ratings has already placed Malaysia on negative watch early last month.
The government should instead draw on the cash reserves at Petronas (via a special dividend) to finance the deficit. Yes, it might cutback future petroleum revenue and see reduced investments by Petronas, but we are in an unlikely crisis which requires unlikely measures. Petronas has RM72bn in cash reserves, a RM10-15bn drawdown is not too much. Then it would not necessitate such a large paper issuance.
For all of Citi's concerns, they are only concerns, not a sentence. Foreign institutions only hold some 14% of MGS and will not be a huge force. Just keep the SSP at RM15bn or below. Even if you compare country by country basis, every country is doing deficit funding, and thankfully Malaysia is at a better position than many to do one.
What irks me is that the media would shut the report out (it has been around for more than a few days) because it highlighted some credible concerns. Are we so shallow? Is that the pervading mentality in dealing with economic issues? What was even more galling was the papers would print shit-stuff like three Malaysian banks now having a larger market cap than Citigroup!!! That kind of shit gets printed but not an important report on the SSP, what the bloody fuck?!!! By printing that "ha-ha" kind of stuff, it tells a lot about our business mindset. Being censured by the government is not an excuse, it just enlarges the blame from the bottom all the way to the top, it does not absolve the media.
I also got very royally pissed off when a senior government official working in an important economics division pooh-pooh the Citi report by saying its not worth looking at it because the bank is collapsing. What an incredulity, what shallowness? What kind of people do we have at these places making critical economic and strategic decisions for the rest of us? What an idiot! For that idiot and those of you who think likewise, did you know that Citi's 7 local branches makes more money than Ambank's 180 branches collectively. Have a sense of perspective. I am not defending Citi's research, just that I wish better information gets disseminated to allow for better critical thought.
p/s photo: Deborah Priya Henry