Thursday, October 30, 2008

Malaysian Economy:A Gloom On The Horizon

Hantu Laut

The Prime Minister or Finance Minister should have tabled it in Parliament and seek the approval of majority of the house.Government should act more responsibly and not used taxpayers money,foreign exchange reserves and pension funds for bailout purposes without getting the approval of Parliament.Opposition leader Anwar Ibrahim had asked for it to be debated in Parliament.

The American Administration is an example of transparency and responsible behaviour.It goes to Congress to get approval for the bailout.The President could not simply decide on his own without Congress approval as the bailout involved public funds.

Using the fund to prop up shares of certain companies on the KLSE may not be a good idea under the current market conditions.The market have not hit rock bottom yet.Further declines are expected.A free fall should not be ruled out as and when companies start to announce their year end financial results.

Click to enlarge

The Composite Index has shedded over 40% of its value from its peak in January this year and the bottom is not yet in sight.The fear of global recession will drive stocks all over the globe further down and Malaysia will not be isolated from the movement on Wall Street and other markets.To say we are insulated from the effect of the global recession is misleading and totally irresponsible.Most sensible governments would brace themselves for the worst and inform its citizens of the bad times to come.

The situation is actually much more serious than what the government made it out to be and saving some selected companies on the KLSE should not be a priority.Foreign investors and funds managers are not stupid to place money in our stocks if they see weak fundamentals and an economy heading for a tailspin.

With substantial loss of revenue from falling prices of crude oil the bottom line for Petronas is likely to move into the red zone if the price of crude falls below US$50 per barrel.Its cost of production would be around that region.

OPEC has seldom been effective at controlling prices, often referred to as a cartel, it does not justify the definition.There is no cohesiveness among members to adhere strictly to production quotas.The cut in production of 1.5 barrel per day starting in November seems to have no effect in stabilising prices.Nigeria has objected to production cut citing heavy reliance on crude oil for the country's budget.

OPEC Production 1990-2007 OPEC Production 1990-2005

In the event Petronas have to sell its crude at a loss than it should consider trimming its domestic production and keep the oil in the ground and concentrates on those of its overseas operations that have lower costs of production.

The other equally serious erosion of source of income is the oil palm industry.Price has nosedived to a low of RM1390 on the futures market with the short and long term prospect looking rather bearish.

Another bad news for the palm oil industry is China expected bumper harvest of its soybean.Some Chinese buyers have defaulted on their contracts with Malaysian companies and some are re-negotiating prices downward on their outstanding contracts.Prices are expected to slide further down.Some plantations may have to shut down production if prices fall below their costs of production. There would be major unemployment coming out of this industry if prices continue to fall.The government should remove all cess or duties on palm oil and palm oil products immediately to ease the burden.

With the big drop in export due to falling prices and declining demands overseas the forecasted growth rate next year would have to be revised to a more sensible level to keep in line with prevailing economic situation.The projected rate of 5.4% may not be achievable.

There would be significant increase in non-performing loans(NPL) and business failures.

Reduced corporate profits or losses would mean less income taxes going into government coffers, which among other things, would affect the government budget.New sources of funding would have to be found to finance the budget.Unless there is sudden upswing to the current gloomy global conditions the general economy will face serious contraction in the next few months which would affect the value of the ringgit.The ringgit may be traded at 3.80 to 4.00 range by 1st Quarter 2009 if no viable solution is found to stimulate growth.

Now that oil price has gone down substantially the prices of consumers goods have not come down and would not go down if there were no interference from the government to stop traders from profiteering.The only fast solution to bring down those prices is to bring down the price of petrol and diesel as quickly as possible.

By now the government should have a plan on how to combat the adverse effects of the global recession, somehow, there seems to be none so far.

It would be advisable to abandon the plan to prop up the shares market and set aside the money as contingency for other emergency uses should the need arises.

The next few months will see how precarious the problems would be.

Below is an extract from an article in Bernama on 25th October:
The situation has clearly made all countries vulnerable including Malaysia, an analyst said. "Eventhough the domestic economy is still strong and not expected to go into recession, foreign portfolio funds have continued to flow out to meet redemption by the investors in their respective home base.
It is economist and analyst like this that the government like to listen to.

It appears the leaders are more concerned with the UMNO Elections and spent more time jockeying for positions in the party rather than spending time to call for emergency sessions to find ways and means to shelter the nation from what would probably be the worst recessions in many decades.

The solution would be to bring the UMNO party elections back to December and be done with it so those taking the helm can get down to business of running a nation.

Note:I have earlier written this article under inappropriate title.I have added new features and updated some of the contents.I would call it re-branding and is what exactly our government need to do to get back the people's trust.They need to re-invent and re-branding.


de minimis said...


Strong post with scary content. It stays true to your blog moniker. But the economic truth about the near future for Malaysia is, indeed, a scary one. Better to frighten the powers that be into their senses now than wait for their spin control when the economic malaise embeds itself further into the Malaysian economy. Good post, bro.

SM said...


Bro, do you know what you are talking about?!
Come on, our "new" FM & PM in waiting i.e. Rosmah Mansur, er sorry Najib has already said that Malaysia will not go into a recession & that we wil only see "minimum" economic upheavel (as we all know due to the BN (read: UMNO), Malaysia is the ONLY country in the world that has taken steps well in advance, as we alreday knew of the economic problems that the world will be facing).
Do you think Rosmah (here I go again!), sorry Najib will say such things without thinking first?! You think she (he) will lie ah?
By the way bro, good article.