Tuesday October 11, 2011

Budget 2012: Is M'sia prepared for the global economic storm ahead?

By CECILIA KOK
cecilia_kok@thestar.com.my

KUALA LUMPUR: While it is undeniable that the goodies-packed and “perceivably optimistic” Budget 2012 has injected some feel-good factors into the lives of Malaysians, reality check has caused some quarters in the private sector to question the viability of the Government's fiscal deficit target and economic growth projections.

“Malaysia's growth outlook seems to stand out comparatively in the region,” Bank of America's (BoA) director of global research Dr Chua Hak Bin highlighted during a panel discussion at the 2012 Post-Budget Dialogue, which was jointly organised by the Malaysian Economic Association and Universiti Malaya's faculty of economics and administration.

“The question is, are we prepared for the storm ahead?” he said, citing worsening economic conditions in Europe and the United States as risks that could throw a damper on Malaysia's growth potential in the next two years.

The Government has maintained Malaysia's economy, as measured by the gross domestic product (GDP) or the total value of goods and services produced in the country, could grow between 5% and 5.5% this year, and between 5% and 6% in 2012.

The official projections are underpinned by domestic demand, which is expected to remain robust, driven by private investment and consumption as an effect of the accelerated roll-out of projects under the Economic Transformation Programme as well as the various infrastructure projects announced in the budget.

Chua said the BoA expected Malaysia's GDP to grow around 4% this year and 4.2% in 2012. His organisation's less-sanguine approach was shared by some leading local banks in view of the increasingly challenging external environment.

Maybank Investment Bank Bhd (MIB) said it expected Malaysia's GDP to slow to 4.5% this year and 3.5%-4% in 2012. CIMB Investment Bank Bhd had also forecast a GDP growth of 4.5% for 2011. It expected the country's economy to slow further to 3.8% in 2012.

“Although the budget measures will help to support the domestic engine, they cannot take up all the slack left by weak exports,” CIMB explained in its report.

With the country's economic growth potentially dragged down by the rising uncertainties in external environment, economists remained sceptical over the Government's ability to cut its fiscal deficit from 5.4% of GDP in 2011 to 4.7% in 2012.

For one thing, income tax collection, the main source of revenue for the Government, could fall in line with an economic slowdown.

“We have a generous handout under Budget 2012. But tax revenue for the Government could potentially be affected by the volatility ahead of us which remains quite large,” Chua said.

Economists at Nomura Group in their report even called the Government's fiscal-deficit target “unrealistic”, given the prospect of elections in the near term and the downside risks to growth.

Affin Investment Bank Bhd's chief economist, Alan Tan, in his report argued: “There is risk that country's budgetary position could get larger than the deficit of RM45bil or 4.7% of GDP projected for 2012, due to possible shortfall in tax revenue receipts, especially from direct taxes, with external environment remaining uncertain.

“If the Government were to spend its RM2bil contingencies reserve for development expenditure, barring any changes to revenue or operating expenditure, the Government's budget deficit could increase to 5% of GDP in 2012.”

MIB's more conservative growth projection also put its Budget 2012 deficit forecast higher at 5.3% of GDP, compared with the Government's target that was based on a more optimistic official growth projection.

In addressing the private sector's doubt over the Government's fiscal-deficit target, Finance Ministry secretary-general Tan Sri Dr Wan Abdul Aziz Wan Abdullah said at the post-budget dialogue session: “The Government has continued to be prudent in its spending to optimise the country's potential for the ultimate benefit of the rakyat.

“In the event the global economic conditions turn worse, there's no doubt that our projections would have to change. One has to be mindful that the numbers are not cast in stone.”

He maintained the Government would not compromise on the measures it had promised the people.

“We have to make sure what we have promised will happen ... if things go bad, we have to bite the bullet and still go for it,” Abdul Aziz explained.

Dr Sundaran Annamalai, undersecretary at the economic and international division of the Finance Ministry, nevertheless, remained optimistic of Malaysia's growth potential in the year ahead.

While not denying that the problems faced by Western developed nations could affect Malaysia, Sundaran stressed that strong intra-regional trade could cushion the downside risks faced by the country.

“Intra-regional trade constitutes more than 50% of our total trade now, and it is made up mainly of resource-based items. Therefore, our exports can still be sustained amid slowing electrical and electronic exports,” he explained, noting that while commodity prices had eased, they were still at considerably high levels.

“Private investments will also remain robust, largely because of the oil and gas projects,” Sundaran added.

On the country's fiscal deficit, he maintained that Malaysia was on track to reducing it to around 3% by 2015.

Dr Marie-Aimee Tourres, senior research fellow at Universiti Malaya's faculty of economics and administra-tion, who was one of the panellists at the dialogue, said that she was concerned over the fact that some goodies would not bring sustainable economic development to the country.

The one-off cash payment of RM500 to each household with income of RM3,000 and below, for one, was deemed counter-productive.

Tourres was also concerned about the fact that the measures introduced in the budget did not contribute to tackling the country's deep-seated subsidy mentality. Coming from a French background, she took the European Union (EU) example of governments having difficulty in implementing austerity drive to cut their budget deficits, as the people protested.

That's an example of previous poor policy measures of some of the EU governments in the past from which she hoped other countries could learn.

Abdul Aziz, however, stressed that Budget 2012 was an “unprecedented budget, as there is something for everybody.”

“It is inclusive and expansionary, yet fiscally responsible,” he said.