Tuesday, March 10, 2009

Mini-Budget Stimulus?

Is the RM60 billion mini-budget sufficiently stimulating?

Unfortunately the budget only gets a C or C- rating from me. You'll read about all the positive points in tomorrow's headlines, so I won't repeat it here, unless it's really good. So I'll focus specifically on the shortcomings on this post.
  1. 1. The announced package is RM60 billion. However, the actual additional expenditure by the Government is only RM15 billion, and even then, it's actually split between 2009 and 2010.

  2. Longer term measures are aplenty in the mini-budget. There's RM25 billion "allocated" as "Guarantee Funds" for corporations to secure loans from financial institutions (no actual money is spent by the Government unless a borrower defaults). There's also some funds allocated for major infrastructure projects. But short-term stimulus measures which are absolutely critical in stimulating our economy under duress are shockingly missing. The loans packages, construction of infrastructure etc., will take months, if not years to take off (i.e., for the effect to be truly felt by the economy).

  3. RM10 billion is allocated to equity investments! Well, that can only refer to ValueCap, and that certainly doesn't add any value at all to the real economy! It keeps some shareholders (probably preferred companies) happy, but it does zilch for the underlying economy. No stimulus impact from this RM10b at all! (Might as well add the total transaction value of Bursa Malaysia to the total "stimulus package" value!)

  4. The RM3 billion tax incentives package looks contrived at best. While I applaud the innovative double taxation relief to companies who employ retrenched workers based on their pay package, there's hardly anything else worth mentioning. Retrenched workers, for example, gets the tax-exempt threshold lifted from RM6,000 to RM10,000 for each year's retrenchment compensation - certainly not worth shouting about.

  5. There's a slew of Private Finance Initiative projects, and so-called off-budget measures which amounts to RM7 billion. This is largely funded by private parties on large infrastructure projects and can't be dictated or driven by the Government. Hence they can hardly be included into the "mini-budget". It's a little like since my actual expenditure is going to be so small (RM10b for 2009), let's find ways to boost the figure so that it'll look good on tomorrow's headlines! (As an example, 2009 Budget was RM209 billion expenditure by Government, it does not include any PFI-type project values, so why should a mini-budget include it?). Just to add, despite obvious short and longer term benefits, there's also no specific allocations for public transport infrastructure projects.

  6. To expand on the short term stimulus measures mentioned in (2) above - we are in a crisis mode. Measures implemented must have immediate impact to relieve the burden of the rakyat, or stimulate immediate domestic demand or investment. These measures may include short-term unemployment benefits for retrenched workers, traditional food-stamps, direct grants to the poor and deserving (who are unlikely to "save" this amount). You need to put money into the pockets of the ordinary Malaysians so that they could spend! But there's none of it at all here.
Therefore, while there are some decent medium to longer term measures committed in this mini-budget, I fail to see the urgency factor within the budget which seeks to immediately stall the continued economic decline, stimulate demand and raise business activities. And that is the most critical component when judging a crisis-driven "stimulus budget", which based on what was announced the DPM, was clearly and disappointingly absent.

It's just not stimulating enough in the immediate term when we are being hit worst, and we are set to be in recession.


Anonymous said...

C is fair grade for Najib as a leader and PM. He was really a C student and employee in the first place going by his track record. So what is so surprising about a C grade plan? Its consistent.

Its clear there is no enough direct short term stimulus but Malaysians are long suffering people so abusing them in the short term is a politician's privillege. BUT if you are going to abuse the Malaysian voters in the short term, you better also have a good long term plan and frankly, it may look like it but it fails on critical areas.


Plans on LRTs and other public transport project should be started now. You can't wait until the recovery and oil prices shoots up and make everything even more costly.

As for education, there is nothing on meritocracy. If you are going to improve education, you need meritocracy TOGETHER with spending. You can do one or the other only. Anyone who has done education knows this is the reality. You have to bring in better teachers and you have to pay them more. Creating jobs for hundreds of thousands of unemployable graduates in public sector is NOT temporary, it perpetuates the problem..When the recovery comes back and the economy is different, these graduates remain a burden to the nation.

C is pretty much the best grade for this plan and THE MAN HIMSELF.

Anonymous said...

All comments/articles in our local (non-chinese) newspapers seem to be praising the package. In reality, it fell far short of the investing community's expectations.

Back to marcoeconomics:
C+I+G+X. X is collapsing, our main hope lies with C (consumption). There is almost nothing much in the package to stimulate domestic consumption (except the 5,000 old car rebate).

I guess it is another case of "better than nothing" package from the BN govt...

hishamh said...

Tony, my comments:

1. Correct, but the RM20b remainder still needs to be funded.

2. I'm against short term stimulus measures under the current circumstances. This downturn is not cyclical but structural in nature; there will be no fast recovery predicated on a return of business and consumer confidence or spending. Tax cuts or rebates will have a short term impact on spending but won't address bringing back external demand or investment, nor are the multiplier effects very large. Having said that, this would have been a good time to cut corporate tax to the level of rest of the region - missed opportunity there.

3. Ugh, fully agree. This one is bizarre. Foreign investors are leaving because they need cash, not because of any loss of confidence in our markets. If this intended for non-listed companies, then the process isn't going to be transparent.

4. Better than nothing, but I'm suspicious of the real effectiveness of retraining as it is currently conceived. We risk just putting off unemployment for a few years (see point 6 below).

5. I think you're mistaken here. There are no PFIs included in the 2009 budget, because despite the fact that PFIs were a prominent part of RMK9 no PFI project has been started as yet. And the government can lead in these type of initiatives - think of PFIs as privitization projects, but with performance guarantees. Incidently, that also implies that any future public transportation project can fall under the ambit of a PFI.

6. Here's the way I see things - the US is going into a protracted period of both deleveraging and balance sheet repair on the part of both consumers and corporations. That means they've relinquished their role as 'consumer of last resort'. There will be no turnaround on the external demand side anytime soon - not from the US, or Europe, or Japan, or China. If we accept this premise, that means the structure of the Malaysian economy also has to change - we cannot rely on export-led manufacturing as a source for growth, nor on notoriously volatile commodity exports. This implies we need long term structural measures, not short term stimulus. While the latter might ease the pain for a while (what we want), the former is better for securing the long term foundations for prosperity (what we need). Also, from a macro perspective, the structure of this mini-budget is more likely to support the economy through the duration of the downturn and have stronger multiplier effects than short term consumption measures. Re: my comment above on retraining; our job losses are likely to be concentrated in export-manufacturing and commodity related areas. Growth is likely to come from the services sector instead. There's a big gap in the skills required between these sectors, so I'm not terribly optimistic about the effectiveness of retraining.

KoSong Cafe said...

As someone having an old big capacity car, I was hoping there is a chance to trade-in for a new small car.

When my car reached 25 years of age, my hope for classic car status was dashed by the requirement that I need to have two other cars in my name.

My car was idle for a number of years and it was without road tax for about a year and I renewed for 6 months, thinking I could keep it 'alive'. Then my recent attempt at renewing road tax was with a condition that I send it for Puspakom inspection first. This requirement helped in my decision to shelve it for now.

Now, for someone like me, there is no point in spending money to make the car 'Puspakom fit' and pay half year's road tax of Rm800, just to make it eligible for trade-in under the new scheme. The amount might be more than what it is worth ie. Rm5,000 trade-in value, without even taking into account that my car is likely to be worth more than Rm5,000 if I take it apart!

The second problem was the restriction that it can be traded-in only for Proton or Perodua cars. We do not even have a choice!

From a different perspective, the government aid is blatantly bias towards our own car producers, with scant regard for others who are also tax-payers.

This reminds me of the complaints that other tax-payers are subsidising users of tolled highways when government decided to pay compensation instead.

Anonymous said...

Mkt is giving the package a F.

At 2.35pm, KLCI is down despite DJIA is up nearly 6% last night!!!

Loh said...

Hi Tony,

I have the following concerns:

1) Whenever I see any big amount spending and/or investment by the Govt of Malaysia for the so called Stimulus Package, Budget deficit, Bail out & etc. I always worry there would be some kind of misappropriate and misuse of the fund recklessly. As such,it is advisable to have an independant body has the power to monitor, audit the account and publish the report regularly in the web. For America,I understand Obama had promised that The TARP fund account will be published in the web for the public scrutiny, is it possible to advise our Govt to do so, so the ordinary Rakyat can feel relief from the past experiences and also can participate to give constructive advice throughout the implmentations.

2)These days,the group of rakyat who had suffer the most are those Small & midium size enterprises and the unemployed. If the Govt can issue Coupon (has expired date,but work like Currency, eg Taiwan)to all Malaysian, I believe it can help them instantly.

3) Where is the source of the RM60 billion from. If it through monetizing by Bank Negara, I urge the fund must be managed professionally otherwise we might face hyperinflation in future (eg. Zimbawe).

4) I am more concern the return benefit from each Ringgit spend rather than the size of the fund.Make sure there is no overpriced project and spending, focus on domestic and the well being of Malaysian as a whole. Each Ringgit spend must resulted high productivity, quality of living, business activity and has good multiplier effect to the nation.

4) what kind of check & balance do we have on the proposed fund? To ensure the 25 million Malaysian interests are safeguarded.


Anonymous said...

In summary, no goodies or handout for ordinary folks like us ?

Raja Iskandar Shah said...

the incentive to pay for 500 phd and 10,000 masters education was good. but we really need at least 4 times those numbers. better still just provide them for free to all eligible malaysians ;p hopefully by the next pru, we will get better educated leaders.

Goh Wei Liang said...

I disagree Tony.

The Guarantee Funds provide as a collateral for banks to inject money into the economy.

If the Govt skips that part, banks in this financially critical moment will be very reluctant to lend money out.

Short term measures will only provide a shock to the economy. Like a jump start.

But we must look at what the RM 6000 proposed by DAP can do for the economy.

Will it have long term effects? That DAP has not explained.

A tax exemption of RM 6000 - RM 10000 is nothing to shout about but a RM 6000 from DAP is something to shout about?

Instead of tying up the money in consumers expenditure with taxes, these funds are then freed up for various other consumption spending.

This move is done without sacrificing any money from Petronas, Malaysia's largest funds provider to the Government.

The budget is not too big, not too small, not too early, not too late.

The extent of the economic crisis is still not felt fully yet.

People are saying that we will be worst than the Great Depression. Yet, as economists, shouldn't we ask ourselves are we really there yet?

When will it come and how bad will it be? No expert can give a definite answer.

There are even calls for AIG to shut down. And automotive execs are asking for more money.

When will it end or are we seeing the end yet?

No one knows.