It’s the economy

4 January, 2014
As appeared in TheStar.com.my

But the politics will be intertwined inextricably.

ON Dec 20, President Barack Obama called for a press conference at the White House Briefing Room at four hours’ notice. He clearly wanted to end the year and look forward to the next on a high note: Numbers showing US economic growth of 4.1% in the third quarter; two million new jobs created in the past year, bringing the jobless rate down to 7% (a five-year low, the length of time Obama has been president); high level of domestic oil and gas production ending import dependency.

The S&P 500 had reached record peaks, hitting the highest level since 1997 and the fifth best since the index was first started in 1957.

Instead, he was assailed by the press with an avalanche of domestic and foreign political issues which almost buried the good economic news. Just imagine if the economic news was bad as well.

In Malaysia, we can expect some challenging economic, and therefore political, issues that will raise the temperature in 2014. Removal of subsidies and expected price increases, not just from this but also from increases in electricity tariffs and toll rates, not to mention the proposed rate hike by DBKL, will all give rise to a feel bad factor.

It will provide great opportunity for oppositional politics – to propose nothing, oppose everything, and to turn out the Government. How the Government responds will in turn determine the political life of Malaysia. It is important for the Government to take the opposition on at its own game, show up its inconsistencies, and not be heavy-handed in dealing with the challenges that will no doubt be coming its way.

The 11 cost-saving measures in the public sector announced at the end of last year are a start, but the Government will be pressed to show they have achieved the desired result. Therefore, a before and after chart on progress has to be advertised at appropriate intervals.

Political management is just as important as management of the administration of the country and of the economy where asset prices will be tested by the tapering of American QE or quantitative easing. (It has been estimated by the International Monetary Fund the QE resulted in US$1 trillion coming the way of emerging economies since 2008 of which US$500bil was in excess of what would have been historical trend, contributing arguably to emerging market asset price “froth”; how much came to and would leave Malaysia, I really don’t know).

On the other hand, the strength of the American economy is a plus for the export-driven Malaysian economy. And, if the Chinese economy continues to grow at 7% or more (2013: expected growth still a robust 7.6% despite it being the lowest since 1999), with Japan also breaking out of its long malaise, the health of the top three world economies is very good news for Malaysia.

The current account surplus may be narrowing from 4.2% of GDP in 2013 to 3.3% in 2014 and to 2.5% in 2015. The other side of it is it is holding up based on growing GDP. The much-talked about fiscal deficit – the cause of subsidy removal, coming GST introduction and user-pay regime – will be reduced from 4% of GDP to 3.5% in 2014 to 3.0% in 2015. The deficit has lasted 15 years.

A balanced budget is not in prospect until 2020. But at least we are getting there. There is an issue raised on the sale and mortgage of national assets to get there which should be addressed to underline this positive development.

There is rising worry over government debt reported at 54.8% of GDP but feared to be higher and in excess of the self-imposed 55% ceiling. Again, calm explanation would help to calm down the worry.

Both corporate and household debt are also rising to 90% and 83 %of GDP respectively, but I know from my banking life how much Bank Negara are on top of this. Nevertheless, banking system risks have to be watched closely.

As always, the picture is mixed. Malaysian economic prospects are better than most in the world although we must also recognize some trump us. Our glass is a little more than half full whereas it is half empty or less almost everywhere else. There is no reason, however, to be complacent.

Indeed, increasingly, we are facing the risk of the politics upsetting the apple cart. This is no invitation to an immediate instinct to come down on everything hard, or to goad those in authority to have no alternative but to come down hard. We have seen how, even in a mature democracy like America, the game of chicken can bring government to a standstill. But, more significantly for Malaysia, we should learn from what is happening in Thailand, a country so irreparably politically divided.

There is the instinct to come down hard, for authority to be recognized. Otherwise, it will be challenged all the time. How then are we going to get on with the responsibility of growing the economy and governing the country. There is also the instinct to exercise unipolar power. Otherwise, how are the majority to be protected.

Best arguments

However, there are too many instances around the world, many still unfolding, which show such views are short-sighted. They bring the arguments to the streets, not to the councils of political management, which themselves should not be a gladiatorial arena of who can shout the loudest. What – who – should be nurtured are those who can come out with the best arguments to convince.

The premium on political management, and on the management of political change, is not unique to Malaysia. We do not have to look far. Just look at our neighbours. Even once politically sterile Singapore. I have mentioned Thailand, but also look at Indonesia. While Thailand is inextricably politically divided – an object lesson on how to achieve structured polarisation – Indonesia, despite its size, has negotiated political change since the fall of Suharto in 1998 rather well.

There will be a tipping point in Thailand, both political and economic. The Feb 2 election – if ever it is held – will solve nothing if there is no political reconciliation in the country. The economic resilience since the unsettling coup in 2006 is not going to be sustained forever. Asean’s second largest economy is slowing down, exports and domestic demand both falling.

The Thai ministry of finance has slashed expected 2013 GDP growth to 2.8% from 3.7%. The official forecast is 4%-5% in 2014, with a suggested 0.5% haircut because of political unrest. All of which may be way too optimistic.

The thing is confidence and investment will suffer. And how long will Bangkok remain the most visited city in the world, with 16 million arrivals in the past year? Political trouble is bad news, especially in emerging economies, and it will have serious economic ramifications.

On the other hand, Indonesia, the trillion-dollar economy which is Asean’s largest by far, has been chugging along at an average GDP growth rate of 5.4% between 2000-2013. Indonesia’s transition to democracy after three decades of one-man rule has been an outstanding success. It has serious problems, mind you, like corruption and a closed-market mentality, but even these are being addressed. Notice how the KPK, the anti-corruption agency, has been romping about – reaching up to the vice-president.

Like everywhere else, however, there are no unmixed blessings. There are economic dangers in the coming year. The rupiah is at a 5-year low of over 12,000 to the US dollar. The Indonesian budget for 2014 assumes 10,500. Government bond prices have been falling. More than any other country in Asean, Indonesia has been suffering the most from the tapering of the American QE. This also means, of course, that Indonesia has mostly benefited from the QE, particularly in financial asset prices, all of which had driven demand for the rupiah.

Like everybody else, but more so Indonesia, emerging economies have to prepare for the post-QE world, even if it might not come immediately or suddenly. A back-to-normal situation means greater competition and more structural reform to attract investment which has hitherto been filled by QE overflow. Indonesia has to be up to the task which will be a challenge, especially in an election year coming up in 2014.

It is not likely there will be political problems, as in Thailand. But there will still be uncertainty on the succession. The election is also a relatively long drawn-out process, as there will first be the legislative election in April for the regional representative council and for the central people’s representative council. The presidential election will take place in July and candidates must be supported by a party or coalition of parties winning at least 20% of the vote in the legislative election.

There will thus be a lot of horse-trading, if it has not already begun. One thing is certain: Susilo Bambang Yudhoyono (SBY) cannot stand again. But he will be king-maker which, hopefully, will presage continuity of reformist policies which have not proceeded swiftly during SBY’s two terms. Indeed runaway popular favourite Jakarta governor Jokowi – who is not from SBY’s party – will most likely be a greater reformist should he stand and be elected president.

Whoever wins, there will be an accepted transition in Indonesia, unlike in Thailand where there is not even a meeting point on the desirable political order.

Apart from so many countries around the world, Malaysia can also learn from the situations in our two neighboring countries. The good and the bad.

We are fond of saying we are different. Of course we are. It is a truism.

But it will be folly for us to think, it cannot happen to us – especially the bad.

The Malaysian agenda in 2014 should be political change management to protect the prospects of a growing economy and the welfare of its people. That agenda needs greater imagination and creative tolerance than have been evident in the contemporary political life of our country.