Its the Economy, boys!

Over this weekend, on the 18^th, Tengku Razaleigh Hamzah has been invited to speak at a forum on the world economy in crisis. The forum is organized by a Singaporean organization. Singapore which is currently experiencing a technical recession, sees it fitting to hold such forum. A technical recession takes place, when an economy suffers 2 consecutive drop in growth rate.

Singapore’s real gross domestic product (GDP) declined by 6.3 per cent in the third quarter after contracting 5.7 per cent in the previous quarter. Two consecutive contractions in GDP growth give rise to a technical recession.

Sakmongkol is perplexed. This is a high level forum on the world economy in crisis. The more pertinent people who should be there are either MOF1 who is the DPM and PM to be, or the MOF2- the vaday for breakfast eating minister. Yet these people who helm the Malaysian economy either declined the invitation or were too busy.

MOF2 is not contesting any post in the UMNO elections, he should be available. MOF1 must stay around as the weeks ending October are very crucial.

They are in concert saying our fundamentals are very strong. Sakmongkol has heard this term used many times and consider it an overused and tired term. When the term fundamentals are used, what do they mean? Our exports are up? Our liquidity in the financial market is sound? Banks lend money easy? There’s credit available for consumption and investments? Our balance of trade is OK? We have trade surpluses? Our reserves are sound? Our growth rates are increasing unlike Singapore’s. what of the FDI, the investment lubricant required to finance our development projects? Our economy diversifying into emerging economic frontiers? .

The world economy which is intimately linked to the American economy is moving towards recession. Yet in this country bankers and our finance minister say our economic fundamentals are strong. That is most reassuring. But these statements will have to compared to what is actually going on.

The IMF are revising the growth projections for the global economy. It further predicts the US economy will continue to loose traction. The US economy is losing liquidity. In order to inject liquidity into the economy, Congress has approved as USD700 billion rescue package. And the money is not only meant for the financial markets but also for the real economy- the sector that actually produces goods and services. retail businesses are being ruined as we speak. People are afraid to spend money. The economy is contracting.

According to the IMF- "The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.

The IMF now projects that the global economy, which grew by a hardy 5 percent last year, will lose considerable speed, slowing to 3.9 percent this year. It is forecast to weaken even more - to just 3 percent - next year, the worst showing since 2002. In the past, the IMF has called growth of 3 percent or less the equivalent to a recession.

The IMF's projection was made before the Federal Reserve and other major central banks from around the world slashed interest rates Wednesday in an attempt to prevent a financial crisis from becoming a global economic meltdown.

How would our finance minister handle this situation? With FDI moving out of Malaysia faster that it enters, Malaysia will soon be experiencing a credit crunch.

year	outflow	inflow
2007	38.00	29.07
2006	20.89	20.91

For a country that depends on FDI, the flight of investments elsewhere must be cause for concern. FDI outflow has almost doubled the outflow in 2006. the rate of outflow exceeded the rate of inflow; 82% outflow vs. 42% inflow.

Yet a renowned banker who is the brother of the DPM stated that Malaysia is fortunate to be insulated from the economic meltdown. The sentiments were echoed later by the finance minister when he said, Malaysia’s economic fundamentals are strong.

Sakmongkol is always suspicious when people say, there’s nothing to worry. Of course people with deep pockets have nothing to worry. Our leaders don’t go shopping for groceries right? Inflation has reached a record high of 8.5%. There are 100,000 Malay graduates who have yet to find meaningful jobs commensurate with the course the government hyped were useful. During recessions only the most resilient economic sectors prevailed. These unfortunately don’t require the services of Bumi graduates without the required market friendly skills. Such as overreaching the religious studies, sports and similar courses which do not have marketable value.

The usual IMF prescription will call for more regulatory measures- meaning more credit control.

Just so our finance minister appreciates it, he may find it interesting to study what the USA did when confronted with economic crises. These, despite the preachy good for others, not suitable for America, ala IMF descriptions. Quite the reverse, the economic czar of USA for quite some time, did the following:-

The Greenspan Doctrine

The move to re-inflate through easy monetary policy is now considered by many as the “Greenspan doctrine.” Alan Greenspan’s response to financial crisis was to inflate his way out them:

* In the stock market crash of 1987, Greenspan inflated the monetary base.

* During the 1994 Mexican peso crisis, Greenspan inflated.

* During the 1997 Asian crisis and LTCM debacle, Greenspan inflated.

* During the 1998 Russian Ruble crisis, Greenspan inflated.

* In the wake of the dot-com crash in March 2000, Greenspan inflated.

* After 9/11/01, Greenspan inflated.

In every instance, the fed re-inflates through easy monetary policy. Making credit available to finance growth, consumption and production.

Perhaps, its time to see whether pegging the Ringgit can pre-empt our own recession before the contagion spreads?