KUALA LUMPUR, Oct 27 — November 4 could be a make or break day for many Malaysians. On that day, Finance Minister Datuk Seri Najib Razak will reply to questions raised during the Budget debate and is likely to lay out a buffet of new measures to cushion the effects of the world economic slowdown.
He is likely to redraw all the assumptions that went into preparing the Budget which was presented by Prime Minister Datuk Seri Abdullah Ahmad Badawi in September.
The Malaysian Insider understands that Najib could also downgrade economic growth forecast for next year from 5 per cent to 3 per cent. He has little choice. The recent freefall of palm oil prices and the sharp drop in crude oil prices will dent the government's revenue in 2009 and 2010 and impact on its ability to fund projects over the next few years.
Also, with the United States economy in a recession and other markets for Malaysian exports slowing considerably, it is only natural that the manufacturing sector here will be affected.
If the government gets it right with its slew of measures on Nov 4, Malaysians will experience an economic slowdown for the next two years but will avoid a gut-wrenching recession.
Sources told The Malaysian Insider that to keep up domestic economy and consumption the government is likely to spend on several major infrastructure projects. But to do that, it must be prepared to allow the Budget deficit to grow even wider.
Government economists and Finance Ministry officials have been looking at the past economic slowdowns and examining strategies that worked then in 1986 and 1997. Clearly, there is consensus that the credit crises in the United States and its contagion effect across the world are more serious and unpredictable than the slump in commodity prices in the 1980s and the Asian Financial Crisis.
Today's global financial crisis is unlike any other in more than three decades. The turmoil has been exported from the US, and then western Europe, to emerging markets. Securitisation and the proliferation and global distribution of complex and opaque financial instruments mean that economies have become more interdependent.
After the resolution of the crises of the 1980s and 1990s, many emerging markets implemented key reforms, pursued prudent macroeconomic policies, strengthened banking and financial institutions and built up significant central bank reserves. In spite of their reforms, many of these countries have been caught in the downdraft of this credit crisis. They are the victims of financial stress that is both not of their making and is beyond their control. It is now affecting their real economies. No country will be spared.
A month ago, Brazil's president said that the crisis would produce only "a ripple" in his country. He was wrong. On Oct 16, the country's stock exchange index lost more than 11 per cent, its biggest single-day drop in a decade. The real has slid 30 per cent against the dollar since Aug 1.
The thinking within the Malaysian government appears to be that growth next year could hit a low of 2 per cent but 2010 could be more challenging if the government cuts back on developmental and infrastructure projects.
In mid-1980s, the Mahathir administration awarded large projects to the private sector with cheap loans, resulting in the North-South Expressway, the Penang Bridge and several other infrastructure projects being built. At the same time, it accelerated its privatisation policy and relaxed the Bumiputera ownership requirements.
The government succeeded in its bid to revive the economy. Indeed, Malaysia became one of the fastest growing countries in the world, averaging a growth in GDP of over 8 per cent for the decade of 1987 to 1997. The rapid growth also brought in massive foreign investment into the stock market and financial sector, creating bull runs in 1993 and 1994.
The difference between now and then is the significant budget deficit in the country today. This will restrict the government's ability to spend, spend and spend. -- MI
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