Report of Malaysia Budget 2011

¶ … Malaysia's Budget, 2011

Individual Presentation

At the time of its independence in 1957, Malaysia's economy was based on primary exports of agricultural commodities and raw materials such as rice, rubber, palm oil and tin. In a series of five-year plans over the past fifty years, the country has been attempting to climb the value chain, becoming a major exporter of electronics. Malaysia has gradually moved away from its traditional Cold War alliance with Britain and the United States and became a nonaligned nation in the 1970s and 1980s, particularly under the Look East policy of Mohammad Mahathir. In the last thirty years, it has made greater efforts to improve its political and economic ties with China and other neighbors in the region, with less emphasis on the relationship with Britain, the U.S. And Australia (Malaysia 2010, p. 24). Private consumption represents 60% of domestic demand and fixed investment 25% (Malaysia 2010, p. 28). In the recession of 2008-09 the economy shrank by 1.7% and foreign investment fell 81%, which caused the government to enact a number Keynesian stimulus measures and deficit spending (Din Mercan 2010).

Since 1957, the ruling party has been the Barisan Nasional (BN), a coalition led by the United Malays National Organization (UMNO) and its allies the Malaysian Chinese Association (MCA) and Malaysian Indian Congress (MIC), while the opposition coalition is the People's Alliance or PA. The PA performed better than expected in the 2008 elections, winning 78 seats in parliament to the BN's 138, causing the ruling party to lose its two-third's majority for the fist time in history (Malaysia 2010, p. 23). Opposition leaders like Anwar Ibrahim criticized Prime Minister Najib Razak's 2011 Budget as "a naked appeal for votes that failed to deal with the deficit," full of mega-projects designed to appeal to "cronies" of the ruling party. (Din Mercan 2010).

Introduction

Malaysia's 2011 Budget is the first one under the Tenth Malaysia Five-Year Plan, with the intention of making the country a fully developed nation by 2020. Total expenditures were RM 212 billion, 162.8 billion for operating expenses and 49.2 billion for development. Because of the global recession in 2008-10, the Ninth Plan only achieved an average growth rate of 4.2% per year, which was at least 2% below expectations (Malaysia 2010, p. 33). Over 25% of the government's budget is for education in order to lay the foundations of a 21st Century economy based on "innovation, creativity, and high value-added activities" that will create "a knowledge-based workforce" by 2020 (Malaysia 2010, p. 12). Malaysia has a state-owned oil company, Petronas, and 21 billion barrels of offshore reserves, mostly in the Sabah and Sarawak territories on Borneo, and the Budget provides for more funds to develop these resources. The Ministry of Trade and Industry is "looking at additional sectors to be liberalized in line with the ASEAN Free Trade Area." For the Malaysian government, one very important economic goal is also to raise the national income per capita from $8,000 to $16,000 per year by 2020, with a growth rate of at least 6% per year, and "central to the model is the human capital strategy" (Malaysia 2010, p. 20). Malaysia's economy is one of "the most highly subsidized" in the world relative to population, at $21.4 billion per year, and because of the 1997-98 and 2008-10 crises, the government "has taken a more dominant role" in the economy (Malaysia 2010, p. 21). In 2008-09, the fiscal stimulus was 10% of GDP which "helped stave a fall in domestic demand," and the economy has rebounded better than those of most Western nations.

By 2010, the economy was again growing at 6-7% per year thanks to the stimulus and a recovery in exports of electronics and commodities. It had a "strong performance during the global downturn," not least because its banks had been insulated from speculative and short-term foreign debts since the 1997-98 crash (Malaysia 2010, p. 28). The brief but severe recession of 2008-09 was caused by "a sudden collapse of the demand among U.S. consumers," which is still Malaysia's third-largest export market. In the 2009 stimulus package, 30% of the money went to Khazanah Holdings, the state-owned investor in Malaysian industries, while 40% went to private enterprises. In addition, homeowners received a $3,000 tax deduction on their mortgages for three years to "support domestic demand" (Malaysia 2010, p. 29). At present, though, the private sector is insisting that the government "step back" as "the principle engine of growth," and the state has agreed that Malaysia will not achieve developed status by 2020 without the private sector (Malaysia 2010, p. 30). The success of this plan depends primarily on "the ability of the government to convince the private sector in Malaysia and abroad that it means business in opening markets and equity arrangements" (Malaysia 2010, p. 41).

Najib told parliament that the global economic environment would remain difficult for Malaysia and that in the long-term it would have to find new types of high-value exports and engines of domestic economic growth like education, health care, tourism and high technology. In short, it would have to move in the direction of a postmodern, postindustrial economy or risk stagnation, and these new investments would have to be made by the private sector. He noted that "the trend of external trade is increasingly challenging, while there is heightened competition to attract foreign investment." Thailand, Singapore, Vietnam and Indonesia are all attracting higher levels of Foreign Direct Investment, while private investment in Malaysia grew only 2% in 2006-10. Foreign investors were "frustrated with the lack of progress in reforms of Malaysia's subsidies and its race-based policies," while Professor James Chin of Monash University found that foreign investors thought that "the budget doesn't give them anything in terms of real money" (Din Mercan 2010).

Analysis & Review of 2011 Budget

Critics from the PA opposition, usually writing from a neoliberal perspective, panned the 2011 budget as continued Keynesianism, deficit spending and central planning despite the promises in the Tenth Malaysia Plan to reduce deficits and allowing the private sector to lead the economy. Dr. Ahmad Dzulkerfly in The Malaysian Insider wrote that "the budget was everything except 'fiscally prudent'" considering that the country had already run deficits since the 1998 crisis. Prime Minister Najib's promise to lower the deficit to 5.4% of GDP from 5.6% in 2010 was "still suspect," as were the actual deficit figures. Najib was a very skilled politician whose Budget was "crafted to appease as many a constituency as possible" and had "goodies" for everyone including women, youth, students, teachers, imams and NGOs. This is his strong "penchant" as a political leader, but in this Budget there was hardly any mention of government transformation, economic transformation of the New Economic Model so frequently touted in the Tenth Plan. There were billions for new construction projects such as highways, mass transit, resorts, and the 100-story Warsian Merdeka Tower, but no real commitment "to drastically restructure the economy by revamping efficiency, productivity and innovation." Although the Budget included some "modest incentives" in Islamic banking, green technology and oil and gas production, it was still "centrally-planned pump-priming" of a classically Keynesian and socialist variety. Nor did Najib make any real headway on liberalization or opening Malaysia to more foreign investment. Meanwhile, the private capital markets were "weary of too many federally-guaranteed semi-government entities raising money from the market." In Dzulkerfly's opinion, this Budget still reflected the country's "middle-income trap" and offered only continued economic and social stagnation (Dzulkerfly 2010).

Greg Lopez commented in New Mandala that Najib's 2011 Budget was proof that the UMNO found it impossible to break away from its traditional policies and ideology. Even though his party lost ground in the 2008 elections and promised to "transform the economy," Najib still went back to "what the UMNO knows best…money for the big boys, and then some for the Rakyat (common people)." Although Najib called it a Citizen's Budget and claimed that he had incorporated many suggestions from the ordinary voters on his 1 Malaysia website, Dr. Lim Teck Ghee stated that "we are returning to the era of mega high-status, expensive projects which will provide little value-added to the Malaysian economy." Najib also asserted that he took that 1 Malaysia promise of a new national identity beyond that of tribe or ethnicity seriously, but in private warned that if the UMNO were defeated then "Malays would lose their power." Indeed, 1 Malaysia was "rubbished by his administration and his party," while Mahathir had always denounced it and asserted that Chinese and Indians still "identified with their countries of origin": rather than Malaysia. In the 2011 Budget, Najib was already positioning his party for the next general election, by "buying off the elite" and using nationalism and supremacist ideas to appeal to the Malay masses (Lopez 2010).

In contrast to the supporters of the opposition party, the heads of the stock market, large banks and the Malaysian Industrial Development Finance (MIDF) all praised the 2011 Budget for prudently stimulating investment, consumption, demand, infrastructure and education during a global recession. As the Chairman of Maybank put it, the Budget would put Malaysia "on the path towards a stronger nation and a high income economy," with money for jobs and new industries. According to the head of the Association of Bankers in Malaysia, the country did not have to "aggressively slash its deficit and engage in painful austerity measures like the European countries" since its debt was only about 50% of GDP. In addition, "the global economic outlook remains cautious, hence the need to support domestic demand," and the 2011 Budget would begin to implement the Tenth Malaysia Plan by increasing investments in National Key Economic Areas (NKEAs) as well as large-scale infrastructure projects. It featured more measures "to improve the stock market's liquidity, products and services, as well as participation," added tax incentives for Islamic banking and created a Private Pension Fund. All banks would benefit from measures to stimulate consumption, capital and investment. Finally, the increase in the Service Tax from 5% to 6% would broaden the "government's revenue and plug tax leakages in the future."

For the Chairman of the Public Bank, the great danger was that the world economy would again sink into a deeper recession. Global economic conditions "remain challenging in which advanced economies will experience anemic growth with high unemployment and high sovereign debt," but this would not be the case with Malaysia. Its growth rate would be a normal 6% in 2011 and the fundamentals of its economy were sound, including high savings, low inflation, low interest rates, a strong banking sector, and strong household and corporate balance sheets. Government spending of new highways, power plants and hospitals will "boost aggregate domestic demand and productive capacity," and projects like the Kuala Lumpur International Financial District and mass transit system will stimulate the economy and create jobs. Aid to small and medium-sized enterprises (SMEs) in tourism, communications, agriculture and electronics was also a sign that the Tenth Malaysia Plan would be fulfilled. Another important feature of the 2011 Budget were the 100% loan guarantees to young, lower income homebuyers, who would longer have to pay 10% down.

For the CEO of the Bursa Malaysia Berhad (stock market), another sign that the government was moving in the direction of greater private sector growth was the fact that Government-Linked Investment Companies (GLICs) would continue to reduce their holdings in the private sector. It also encouraged an increase in the numbers of day traders and licenses for foreign and local brokers, as well as creating an International Board at the stock market. In one "much awaited" decision, the Budget provided for more shares in the state-owned Petronas Chemicals and Malaysia Marine and Heavy Engineering companies to be sold to the public. There were also tax deductions for Islamic securities that would make Malaysia "a key destination for Islamic finance and investments." From the viewpoint of the state-owned Khazanah Nasional BhD, the 2011 Budget had been formulated "amidst the challenging backdrop of a fragile external sector and a slowing global economic recover," and steered clear of both the dangers of inflation and deflation. It also provided more funding for "intangible capital and soft infrastructure," human capital and Corporate Social Responsibility (CSR). For the Director of the Malaysian Industrial Finance Group (MIDF) all the Western nations were "encountering headwinds that may stunt their recovery, thus the elevated risk of a 'double dip' recession." This was the first Budget of the Tenth Malaysia Plan, and reduced the deficit only slightly from 2010, in the face of a possible worsening in the global economy. Even so, Malaysia could expect 5-6% growth in 2011, much of it driven by the recovery of the private sector. MIDF expected private sector investment to increase by 10.2% in 2011 and consumption by 6.3%, while government subsidies would be reduced by 4.9%. There would be more money for green technology and large infrastructure projects that would have "high multiplier and spillover effects" in the construction and building materials sectors. Moreover, the 2011 Budget provided more assistance for education at all levels, and for importing more English teachers from Britain and Australia, as well as skills training for workers (Edge Financial Daily 2010).

SWOT ANALYSIS OF MALAYSIA'S 2011 BUDEGET

STRENGTHS

The Malaysian economy is fundamentally strong, with high savings, a high investment rate, an efficient workforce, and good household and corporate balance sheets, and will grow 5-6% in 2011.

Malaysia has a long history of internal stability and parliamentary rule, with a constitutional monarchy whose powers are mostly ceremonial. Sharia law courts apply to Muslims only, and radical Islamic fundamentalism is not a threat to the future stability of the country. In all cases, federal law has supremacy over sharia law.

Supporters of the government claim that this first Budget under the Tenth Malaysian Plan is in fact carrying out many of the Plan's promises, such as a greater role for the private sector, more spending on research and education, green technology, Islamic banking, and development of small and medium-sized enterprises.

Per capita income expected to rise 6.1% in 2011, to an equivalent of $16,000 (U.S.).

GDP growth in 2010 was revised upward to 7%, while the inflation rate remains a low 2.3%.

Exports in commodities and electronics led the way to recovery from the low point in 2008-09.

The new Academic Medical Centre will be a Public Private Partnership with Johns Hopkins International, the best medical school in the United States, and the Irish College of Surgeons. This will also increase medical tourism in Malaysia in search of high-quality, low cost medical care.

There will be more privatization of state-owned companies and GLICs, whose shares will be sold to the public on the stock market.

Import duties on 300 products that now stand at 5-30% will be abolished, indicating greater openness to trade liberalization.

There will be 60,000 scholarships for students in public services and an upgrade of the National Institute for Public Administration.

There will be more spending on the energy grid, broadband Internet, a low-cost carrier airport in Kuala Lumpur, and more money for hydroelectric power and liquefied natural gas.

WEAKNESSES

The greatest danger is the weakness of the global economy and the potential of a 'double dip' recession. Malaysia has weathered the crises of 1997-98 and 2008-10 better than many countries, but it has been forced to resort to heavy deficit spending and government direction of the economy. The ruling coalition maintains that such Keynesian policies will remain a necessity at least in the short-term because of the precarious condition of the world economy, but the opposition party is critical of these.

For its entire history since independence in 1957, Malaysia has been ruled by the same political coalition, the UMNO, although public disenchantment is increasing and the ruling party received its lowest share of the vote ever in 2008.

Neoliberal economists and opposition leaders criticize the leading role that the Malaysian federal government plays in the economy, and spending on infrastructure projects that they regard as gigantic boondoggles and white elephants.

Opposition leaders charge that much of the spending by the UMNO coalition represents political payoffs, crony capitalism and buying of votes rather than genuine efforts to stimulate the economy in a rational way, which should be left to the private sector in any case.

From the neoliberal and opposition viewpoint, the UMNO coalition is still playing the nationalist card against the Indian and Chinese minorities, as well as the class card, in order to obtain the votes of lower class Malaysians. The 1 Malaysia policy of forging a single national identity has not yet been successful.

Opposition party supporters question the veracity of the government's figures on economic growth, incomes and the size of the budget deficit. They also note that Malaysia has been running deficits continually since the 1997-98 melt down in Asia and the 'emerging market' economies.

From the opposition viewpoint, not enough is being spent on high technology and cutting edge education that will move Malaysia's economy to from middle-income to developed status.

Over the next five years, weak private sector investment is expected to be a major problem in achieving the long-term goal of developed nation status, although the government does not wish to continue in the role as the main supporter of domestic investment and demand.

OPPORTUNITIES

According to the Tenth Malaysia Plan, the country should achieve fully developed status by 2020 if it maintains a growth rate of 6% per year. One of the main tasks of the government will be to expand investment in research, education and new technological developments to push the nation finally into the high-income category, no longer solely dependent of the export of commodities and electronics.

In the economic field, the opportunities lie in continuing to move the economy up the value chain, shifting the government towards the role of regulator, expanding Islamic finance and entrepreneurship, and reducing the role of government in business.

The government will foster more creativity and innovation in the economy, especially through small and medium-sized enterprises (SMEs).

The government plans to reduce corrupt, improve access to public services to serve the needs of business and individual citizens, by creating a Unified Registry for business data, using the Internet of payment of fees and taxes, applications for loans, licenses and permits, creating a National Single Window (NSW) for trade, and building new tele-centers in poorer communities.

The Malaysia Investment Development Authority will be able to negotiate directly with local and foreign investors in industry, finance, services and utilities.

Tourism is one of the future growth areas for a postmodern economy, and the government investment in this area will attract more foreign tourists to the country, stimulating growth and development in more remote areas as well. Medical tourism will become an increasingly important factor as the populations of the Western countries continue to age.

Foreign investors will have more opportunities for participation in the Malaysian stock market and the buy shares in state-owned companies.

THREATS

The greatest threat facing Malaysia is another downturn in the global economy that will result in a prolonged recession or depression, and damage its export markets.

Another threat facing the country is the constant tension between the Chinese and Indian ethnic minorities and the Malay majority, although this is by no means a new issue. Minority groups resent the special privileges, subsidies and affirmative action that Malays receive from the government, as well as investment and spending that assists Malay-owned banks and businesses. Politicians routinely play these race and ethnic cards to win support at election time.

Neoliberal economic policies might increase the level of inequality in wealth and incomes, which might cause economic stagnation at the middle and lower levels, and increase class and ethnic tensions, leading to political instability.

Continued reductions in the budget deficit and reduced subsidies for food, fuel and housing may be politically unpopular and cause mass discontent.

Malaysia's status as an exporter of electronics is being threatened by lower-wage countries like Vietnam and Indonesia, which are already reducing its share of this trade. This is why the country will be forced to find substitutes in the years ahead, in green energy, tourism, finance, high technology and services.

Malaysia is having difficulty attracting private Foreign Direct Investment (FDI) compared to its neighbors like Thailand, Singapore and Indonesia, in part because of government policies that offer tax breaks and subsidies to its supporters and large infrastructure projects to 'crony capitalists'.

Without major changes, Malaysia risks becoming stuck in a "middle-income trap" rather than achieving the long-sought developed nation status.

Conclusions & Recommendations

In large part, the 2011 Budget in Malaysia reflects the political necessities of the BN/UMNO coalition in winning elections and staying in power, while naturally the PA opposition is strongly criticizing the Budget in preparation for the next elections. All of this is simply part of the normal political give-and-take in any democratic process, in which the type priority of any party is to gain the maximum number of votes. Unlike the academic economists, political leaders have as their first imperative the gaining and holding of office, which means they must reward their supporters and punish enemies. This is perfectly normal in every democratic country in the world, even though the results are often 'messy' and may not conform to the strict economic principles advocated by scholars and the investing class. To say that Prime Minister Najib is dispensing all kinds of 'goodies' to attract votes, and big government contracts to reward supporters is simply to state that he is, after all, a politician. This is what all politicians do, and indeed what they must do and have always done.