News Room - Business/Economics

Posted on 03 Feb 2009

Malaysia's stimulus package not aggressive enough?

China’s package is a good example of what an aggressive and substantial stimulus looks like

 

THE International Monetary Fund (IMF), in its updated World Economic Outlook (WEO) published in November 2008, forecast a global recession in 2009. The IMF revised its projection of 2009 world output growth to 2.2%, down from the 3% projected in the October WEO.

 

In November, Malaysia announced a RM7bil economic stimulus package to avoid a possible recession in 2009. There have been criticisms about the timeliness of the package, which is understandable because by the fourth quarter of 2008, business conditions and the consumer sentiment in Malaysia had turned so bad that the MIER Business Conditions Index virtually collapsed to a new historical low of 53.8 points, way below the 100-point threshold.

 

The Consumer Sentiments Index fell to 71.4 points, its second lowest on record. The previous low of 70.5 points was achieved in the second quarter of 2008.

 

Year-on-year, the indices have plunged an unbelievable 51.7 points and 39.3 points respectively.

 

The VISTAGE-MIER CEO Confidence Index had also by then charted four lows in each successive quarters of 2008. In the fourth quarter of 2008, the index also plummeted to a new historical low of 52.3 points, lower year-on-year by a mind-boggling 43.5 points.

 

In uncommonly tough economic times like the present, government policies can do a lot to restore consumer confidence and help shore up aggregate demand. The key to successfully doing this lies in the optimal timing, scale, and composition of stimulus packages being put in place.

 

Though timing stimulus packages is extremely difficult, they should nevertheless be structured so that their peak effects are felt when most needed. By the time Malaysia’s measures finally kick in and the multiplier effect works its way through the economy, it is probably a bit too late considering the poor performances of the Business Conditions Index, Consumer Sentiments Index, and VISTAGE-MIER CEO Confidence Index in the fourth quarter of 2008.

 

Malaysia’s RM7bil stimulus package has also been criticised as being too small. The amount works out to about 1% of Malaysia’s gross domestic product (GDP).

 

The stimulus package signed into law in the United States in February 2008 also works out to about 1% of America’s GDP. As it turned out, it was not enough to jumpstart the US economy.

 

The new Obama administration is expected to call for a fiscal stimulus package to the tune of about 6% of GDP. China, on the other hand, announced in November 2008 an aggressive stimulus package that represented about 16% of its GDP and 66% of its annual budget in 2008.

 

Olivier Blanchard, the IMF chief economist, has suggested that the world’s advanced countries should enact stimulus packages equivalent to about 2% of their national GDPs. Taking 2% of GDP as the benchmark, as well as considering that both external and domestic demand for Malaysian products is expected to become even more lifeless in the months ahead, talk of a second Malaysian stimulus package coming within the year should not come as surprise.

 

Malaysia’s stimulus package announced in November 2008 has been allocated mostly to infrastructure projects, which include:

 

·The building of low and medium-cost houses;

 

· The upgrading, repairing and maintenance of police stations and living quarters, and army camps and quarters;

 

·Minor projects like village roads, community halls and small bridges;

 

·Public amenities such as roads, schools and hospitals; and

 

·The building and upgrading of roads in rural areas, villages, as well as agriculture roads.

 

The construction sector is, thus, the most likely to benefit from the stimulus package, but what about the economy itself?

 

It is possible that the much hoped-for multiplier effect from the stimulus spending may be muted. This is because the construction sector employs a substantial number of foreign workers and remittances made by them to their home countries constitute a leakage from the domestic economy.

 

Leakages of these sort can be serious because, according to the World Bank’s Migration and Remittances Report, the total of all officially recorded remittance flows out of Malaysia in 2006 equalled 3.7% of the GDP that year.

 

Though the timing may again be off, a second Malaysian economic stimulus package, more aggressive and substantial than the first in terms of scale and composition to stimulate the sliding domestic sector, is in order. After all, the US package announced in February 2008 failed to kick-start the US economy, which also happens to be Malaysia’s biggest export market.

 

China’s stimulus package announced in November 2008 is a good example of what an aggressive and substantial stimulus package looks like. According to news reports, the package would be used to, among others, ease credit restrictions; spend on agriculture, healthcare and social welfare services; and launch an infrastructure spending programme that would cover 10 areas, including the construction of new railways, as well as projects aimed at environmental protection and technological innovation.