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Sakmongkol ak 47

ariff.sabri@gmail.com

Thursday, 16 October 2008

Its the Economy, boys!

Over this weekend, on the 18th, 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?

15 comments:

Anonymous,  16 October 2008 at 10:17  

Excellent piece!

Semua tengah sibuk sarapan politik, lunch politik, tea break politic, dinner politik, ... lepas bersama bini pun politik.

Agaknya mereka tidak percaya dan yakin utk menjemput bekas MOF dan current MOF.

Anonymous,  16 October 2008 at 10:47  

I THINK KU LI WILL JOIN PKR OR SET UP A NEW PARTY TO BECOME A MEMBER OF PR SOON. IF HE IS ABLE TO BRING SUFFICIENT NO OF MPS WITH HIM THEN DSAI WILL GIVE HIM THE PM-SHIP TILL NEXT GE. TAKE MY WORDS.

ctchoo 16 October 2008 at 10:47  

Well said, bro. Powerful and compelling. It also quite nicely posits the absurd scenario where Ku Li is rightly seen as one of the few Malaysian political leaders who really understand the workings of the economy and, dares to speak on it. Good piece and, an enjoyable read.

ctchoo 16 October 2008 at 10:51  

My apologies. By "absurd scenario" I meant the situation where a politician with a sound understanding of economics like Ku Li is NOT in the Cabinet while those in the Cabinet are not able to give a clear guidance on the near future state of the Malaysian economy. My apologies for being prolix.

Anonymous,  16 October 2008 at 11:04  

Sakmongkol,

A welcome read. Najib should engage u as his economic advisor. U can balance between politics and economy rather well.

Siput Sabah

walla 16 October 2008 at 12:20  

One analyst suggested that Malaysia's GDP growth rate would fall from 5.1% to 3.8% next year based on the OEF model of every 1 percent US contraction equals 0.6 percent Malaysian contraction for a 2.2% US contraction.

The posited headwinds include:

- manufacturing and export slowdown;

- payroll pulldown;

- credit crunch;

- lower commodity prices;

- bigger government deficits;

- further reduction in private sector development investments;

- poorer sovereign rating and increased financing costs;

These may be followed by:

- reduced middle-east FDI for corridor projects from falling oil revenues; and

- backflow of Malaysian workers repatriated from Singapore adding more pressure to local job market already saturated with unemployable graduates and sundry workers.

Both US and Singapore are already in recessionary modes. The impact may advent by first quarter next year which will not be relieved by development spending whose increase will only pay for material cost increases while exacerbating deficits.

Also see basic numbers for comparison purpose:

http://ifile.it/b7gvduj

The middle income folks may be able to ride it out if they have not been pushing their luck by over-committing their finances - but that's about ten percent of the population. What will happen to the other ninety percent, including those who use 555 booklets? What will the production workers be doing? What new things and services can we quickly produce to keep afloat?

Meanwhile those in Umno can only think and coax money politics.

mamasita 16 October 2008 at 13:15  

I am teary-eyed a bit..glad that so many of our bloggers know what they're rattling about..reflects their very high IQ!I know I'm learning a thing or two now through their articles and their lively to and fro comments.

Anonymous,  16 October 2008 at 17:02  

On the local fronts many of the free trade zones factories will start to retrench workers by the thousands. that happened in the 87 recession only this time it would be many times worse.

The US problem is very very serious indeed this time.

There is just no way government is able to balance the budget using the just announced budget based on high oil price and normal global economy.

Advise to all, do not commit anything long term. Cash (maybe only - may not be if you hold US dollars) is better or go into easily disposable highly demanded items.

It normally takes 6 months to hit our shores through past experience.

Then even Datuks would be selling goreng pisang as happened. Worse hit would be many government dependent contractors.

walla 16 October 2008 at 17:21  

One more day for PMR..mamasita..then next, SPM. Bapak ni sudah hilang rambut sekaligus.

Najib will announce an economic rationalisation plan on Monday.

now where did i put that infernal notebook with pure leather covers and a strap (like Dr Jones, Sr's notebook) that i intend to send to AK47 (if only i knew his address)....?

walla 16 October 2008 at 17:36  

meanwhile for him:

http://tinyurl.com/3mjbq4
http://tinyurl.com/4zst6x

signed
moriarty

mamasita 16 October 2008 at 17:38  

Walla wallah!You're such a joy!Bukan his rambut yang dropping!Mine lah..PMR then SPM then with aging process plus Sak yanking my hair when I nag too much!Must get a stronger hair tonic!hahaha

walla 16 October 2008 at 17:46  

i have this 101 tonic that missus here been pouring on her head..you want some? hehe (= it's a delight reading the warm posts from such a young heart) ;)

sakmongkol AK47 aka Mat Tomoi 16 October 2008 at 18:37  

walla,
thanks for the Sherlock Holmes material. i have one LCD (old one) with actual interview with Conan Doyle. i usually read Holmes over and over again.
thanks again.
the game is afoot! once again.

walla 16 October 2008 at 18:49  

As i find, you shall have, sakmongkol.

You may also want to visit the old famous tv detective series..Columbo. They're available in some CD shops.

Write more. It's an intellectual fest of the highest order just reading your posts. Gobsmacking great, in fact. Umno is privileged to have such a member as you. Najib, you buffoon, wake up on your HR practices lah.

Anonymous,  17 October 2008 at 10:41  

Sakmongkol,

Which currency do you suggest that we peg it to ? When you peg you import the problems of the currency.

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