Wednesday, March 4, 2009

Economic Malaise: Will The Government 'Broke The Buck' ?

Hantu Laut

Reported in The Strait Times

MARCH 4 – The Malaysian ringgit could breach the psychological 3.80 to the greenback mark in the not too distant future, nudged by a deepening global recession and resultant flight to quality, plus a widening budget deficit.

Previously, few would have entertained the notion of the local unit tumbling back to 3.80 – the level at which it was fixed in 1998 during the Asian financial crisis before the peg was dismantled in 2005 – but it appears a distinct possibility now.

On the back of weakening exports and a growing budget shortfall, the ringgit climbed to within a 3.62/63 band a month ago.

Yesterday, it opened at 3.727/731 from Monday's close of 3.726/730. Full story here...

Read the one below:

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. Read the full story here...

Read this one:

KUALA LUMPUR: The property market in Kuala Lumpur could depreciate as much as 10% to 15% going forward, while the prices of high-end condominiums in the Kuala Lumpur City Centre (KLCC) area may fall up to 30% in the next two to three months, said property consultant Rahim & Co. Full story here...

Now read this one:

Presently, there is notable forced sale and marginal decline in the prices of medium and lower scale properties in cities like Kuala Lumpur and Johor Baru.If the economic crisis deepen the next few months and continues into the middle of 2009 the prices of properties for all sectors would take a tumble.Upscale properties would fall between 20 t0 40% mainly in big urban areas.Full story here...

The Straits Times was right only few had the notion how bad things can get when the domino hits us. I was one of the crazy prophets of doom that have had all my forecasts and predictions hitting bulls eye.

Is the government still living in a state of denial?

They are going to announce the second stimulus package on 10 March 2009.Will have to wait and see what kind of package they have in store to rescue the economy.

Anything less than RM30 billion (inclusive the RM7 billion) may not do a good job. The problem is the government do not have the money and would not get enough money from its normal sources of revenue to finance its main budget, let alone finance the stimulus package.Its budget deficit is expected to grow to unhealthy level if the stimulus package could not revive the economy by the 2nd half of 2009. The longer the delay to implement the stimulus package the longer the sickness would stay.The country may be looking at unpleasant negative growth.

Unpleasant, as it may be, the government needs to borrow to finance the budget and the stimulus package. It has a number of options that it can take for its deficit financing.

1.Issuance of Treasury Bonds for domestic and international markets.....unlikely. Response from the international financial community may not be strong enough, which can downgrade the credit rating of the nation.

2.Foreign borrowing in foreign currency..... unlikely.Can become very expensive in the long run.

3.Liquidation of government assets..... not efficient in a downturn and possible diminution in value of assets.

4.Borrow from pension funds and government-controlled trust funds......very likely.The most efficient, cheapest, easiest and quickest way to raise the funds. Most likely candidates would be EPF and savings in ASN and ASB.

When the government announces the stimulus package it would be imperative and responsible on the part of the Prime Minister to tell Malaysians where the money is coming from.

Should the government decides to use money from EPF, the Board of EPF should not agree to a term loan between EPF and the government but demand for the issuance of medium term bonds with reasonable rate of interest.A term loan can be renegotiated and the terms and conditions can be varied from time to time by the lender (EPF) which is controlled by the government but government bonds must be paid in full upon maturity.

EPF funds were already badly managed giving poor return for many years and investments in low-yield government bonds or low interest loans are going to worsen the earnings of the fund.

6 comments:

kittykat46 said...

Pak Lah - sudah cuti.
Najib - busy with Perak, also busy helping people with personal problems (remember Saiful ?)
The rest of the UMNO cabinet - busy with UMNO elections.
After UMNO elections - losers merajuk. Winners have to recoup the monies spent.
MCA, MIC, Gerakan ministers - you mean they exist ?

Don't place much hope for the First Stimulus Package - it was primarily aimed at stimulating people/ corporations with "Cables" to BN/UMNO

The Second Stimulus Package - too late. By then we would already be deep in recession.

The Export sector is already in deep recession. Workers being laid off, majority of others under-utilised (4, even 3 day work weeks - annual leave, pay cuts).

The rest of the economy will catch the disease very soon.

Anonymous said...

I fear it will be #4 -- the easiest and most convenient.

I have no politics, no ideals. Just someone trying to make my own way in life. Yet we get caught in the maelstrom.
And it would give us strength and hope if we know our country is united and we can all join hands in facing adversities. But no, all the politicians are busy engineering each other's downfall, turun naik court.

Ps
I know zilch about anything. So Why is USD so high agnst ringgit? But US is in economic low, with millions jobless. It doesn't follow that USD wd fall in tandem? Or izzit ringgit has depreciated much more?

YangTakTahu

donplaypuks® said...

Only yesterday I read about the Navy negotiating a non-tendered out proposal for 'submarine and personnel rescue' contract for $2 billion over 20 years (i.e. @ appx $98 per year.

Even if the eventual contract is for half that sum, we are still talking about $1 billion.

This is clearly what is wrong with our country. Having in the first place created the suspicion that these Scorpene Subs were bought at inflated prices (by giving Razak Baginda's company a whacking 10% non-tendered out & directly negotiated 'facilitation and maintenance' fee) they now propose to maintain the plundering of our national coffers with more directly negotiated contracts.

If they do not stop these suspicious practices immediately, all the money in EPF, Socoso and other pension funds will not be sufficient to save our economy from descending to the level of Bnagladesh or some African country!!
http://donplaypuks.blogspot.com

Hantu Laut said...

Anonymous,
First, the USD is a major currency used in trade and in foreign currency reserve of many nations.

The USD is appreciating against many major currencies because the US is selling billion of 'US Treasury Bonds' to raise money for the bail-outs.Major economy like China, Japan and others are buying these bonds.Added to this is the repatriation of capitals which are mostly denominated in USD.

In simple term,because of the above, the demand for USD has increased hence the appreciation.

Ever Onwards said...

Thanks for posting your thoughts: you are always at your best when you are focusing on the economy.

It is scary to think that the government does not and will not have the money to finance its main budget and it has to say good bye to its wishful stimulus package. Even scarier is the fact that the government is most likely to borrow from pension funds and government-controlled trust funds. The good probability that this will result in the elderly not being able to reap adequate benefit of their lifetime savings from their own pension fund makes the scenario truly tragic.

The future PM of Malaysia, as pointed by previous posters, is more interested in establishing BN's flimsy and controversial power in Perak than in doing something concrete for the economy. The prudent appeals to a government of national unity by Hadi Awang and Tengku Razaleigh are pooh poohed by the likes of UMNO's Ali Rustam, who is more interested in preserving ketuanan Melayu than in reviving the economy.

Mahathir's Vision 2020 was a joke even before the Asian economic crisis in the late nineties. It is even more of a joke now, except that no one in his right mind is able to laugh.

SM said...

HL,

The Malaysian Govt. has a very good excuse for the USD rise & thus the RM slide against the USD.
Wow, I hope Malaysians are happy too. After all we are still being told we will NOT go intorecession & our economic outlook is still good.
WOW! Lucky Malaysians! We are such an ungrateful bunch?! Or maybe it's just us stupid, no brained PR supporters who are just ungrateful!