The Economic Conundrum

If one were to consider the stock and bond markets in Malaysia, one might be forced to conclude that the Malaysian economy is in deep trouble.

Actually, that is not the case, well, at least not yet. Despite higher prices, consumer spending — one of the biggest drivers of the economy over the last five years — remains reasonably robust, growing at between 8 and 12 per cent year on year.

Unlike its Western counterparts, the banking system is still sound with non-performing loans continuing to trend downwards — six-month NPLs are around 3 per cent of total loans. And bank lending which bottomed out in 2000 is growing pretty decently — at close to 15 per cent last year.

The bad news is that inflation is expected to hit a record 6 per cent or more this year. And employment in the manufacturing sector has been dropping since late 2006. That is a dangerous sign as manufacturing employs the largest number of Malaysians.

Having said that, Malaysia is still a lucky country for it is blessed with resources such as oil and commodities such as rubber, palm oil and gold, all of which are shooting through the roof price-wise. This has made smallholders in the rural areas relatively wealthy in these troubled times.
The ones that are really hurting are the lower middle-class urbanites(who make up a third of the country) who are struggling to make ends meet. Buffeted by higher fuel costs and let down by inefficient public transport, they find themselves being treated unfairly by a dearth of governance amid what seems like political paralysis.

All things fall apart if the centre does not hold. The administration of Datuk Seri Abdullah Ahmad Badawi must get its act together because the country is not yet in deep economic trouble. But it could be if the government continues dithering and instituting policies that aren't thought through.

The recent announcement of a windfall tax on independent power producers (IPPs) is one example. Such a tax is fine but it has to be properly constructed. In this case, it is levied without taking borrowings — a huge figure compared to equity where IPPs are concerned — into account.

That is madness for it will undermine the bond markets because paper issued by the (Association of) IPPs constitute almost 20 per cent of the total corporate market. That, in the nature of a vicious circle, will have knock-on effects on the Employees Provident Fund, probably the single largest holder of bonds, and the banks which not only issue the bonds but hold them as well.

These kind of policies do not inspire much confidence in the government. The windfall tax must be modified to reflect reality and the government must do it fast to show that it does listen to the business community.

Having said that, the Opposition must also do its part to reduce political tension in Malaysia, of which there is already an overachiever's share in circulation. The results of the March 8 general election could portend the evolution of a two-party system in Malaysia, but so far its beginnings haven't been very salutary.

Going by various surveys, it is clear that Malaysians are sick and tired of the fractious politicking being exhibited by their lawmakers of all political stripes. It is time to step back; it may even be a time for conciliation. In fact, if the Opposition shows that it can be bipartisan, it may even have a great future.