Prime Minister Abdullah Ahmad Badawi is confident that Malaysia will not have a recession and will not be affected by the contagion of the global financial meltdown.He said we have a strong reserves, strong surpluses,high savings and a stable currency.These are all true and there is no doubt that Malaysia can ride over the global upheaval provided the government took measures to pump the economy and keep investors' confidence alive.
In this particular exercise keeping the banking system liquid and no tightening of credit would help keep normal businesses to function and confidence in the economy for new investments.However, GDP growth may be affected by declining industrial output due to declining demands from overseas markets.This will not give us any choice or flexibility.
Malaysia is a major exporting nation and most of our manufactured products are exported overseas.The US is the biggest market for Malaysian products.To say we will not suffer the effect of the contagion may not be all that true.With less demand there would be decline in our industrial output and that would mean rising unemployment due to retrenchment of workers,reduced GDP growth and less spending.With less economic activity there would be less consumer's spending which is an essential element in a thriving economy.
With less economic activities and falling prices of crude oil the government would have less revenue in the form of reduction of income taxes,other taxes and less oil revenue.
Government debt is expected to rise substantially to meet the shortfall by the issuance of government bonds.A strong reserve is one thing.It is money to back liabilities and currency, not spending money, unless the government is thinking of drawing on the reserve.A currency is only as good as the confidence it has in the foreign exchange market and this confidence can evaporate very quickly if there were erosion of confidence in the economy.
A recent example of how fast a currency can depreciate is the Australian Dollar that was trading against the ringgit at its highest of 3.15 in June/July this year is now around 2.20 and against the US Dollar at o.98 and now 0.65.
For some unknown reason there always seems to be a time lag of 6 to 12 months before we catch the flu.Past recessions had shown that this region did not get the immediate effect of recession in the West but only suffered the consequence much later.
Although the global economy is more resilient now and many lessons have been learned from past upheavals, the recent meltdown that caused failure of the financial system were human greed compounded by government failure to regulate the financial markets.
Yesterday the Dow went up 11% and every where other markets soared.The Nikkei went up 12% in a day.Will the trend continue or was it a flash in the pan before the big dive to the abyss of economic disaster.
I believe the markets would stay good as long as the leaders of the world continue to support the bailouts of the troubled global economy.Any slackening of this support would spell disaster.
In the 1930s Depression 744 US banks failed in the first 10 months of 1930 and a total of 9,000 banks failed throughout the period.With almost everything including food production on downward spiral there were widespread hardship and starvation and it was the worse depression in modern history.Its recovery culminated with the 2nd World War.
The world leaders had probably learned from it and took immediate action to intervene in the present financial meltdown before it went out of control.
The government should not listen to Anwar Ibrahim asking for review of the budget.Any cut in development expenditure would dull economic activities and bring about economic downturn, which was exactly what he wanted to happen just to discredit the government and gave him opportunity to take over.What the government need to do is to trim operating expenditure and downsize the civil service.A chance I believe the government wouldn't dare take.
However, it would be imperative for Prime Minister Abdullah Ahmad Badawi and his successor Najib Tun Razak to ensure that money are wisely spent and ensure less wastage through corruption,nepotism and cronyism.
Majority of Malaysians are fed up with the excesses of those in power.Now is the time to show the people that the government is capable of change.
Badawi's State Of Euphoria