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A 10 year Economic Transformation Programme (the "ETP") coupled with Private-Public Partnership and flanked by economic corridors such as Iskandar in Johor and Sarawak Corridor of Renewable Energy; provide hope.
CONOMIC predictability has been mankind's greatest obsession in playing God on par with the quest to uncover antidotes for diseases. I listened with utmost concentration to what was said by an economic specialist from one of the leading banks in the country. He had many perspectives worth sharing touching on subject matters arising or that arose from both domestic and international affairs. He made it sound as easy as an algebraic mathematical hypothesis. It was as if all we needed to do is to balance the both sides of the equation. This is what I learnt from him:
Many of us are still in the lost why emerging markets are so much linked to the United States (the "US"). Why do worry when the economy half way round the world is collapsing? The US recently delayed its conclusion on Quantitative Easing (the "QE"). As a result investors in emerging markets had to live with large swings of short term capital. This is because the funds flowed to emerging markets in bulk while waiting for the conclusion of the US QE. Once it was resolved, the funds moved out from emerging markets. Such behaviour causes fluctuations in foreign investments in emerging markets, a condition not favourable to emerging markets such as Brazil, Indonesia, India, Turkey and South Africa ("BIITS").
This Generation Y spends more money and represent majority of the consumers in the market. This helps increase the economic activity
Wikipedia defines QE as an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. A central bank implements QE by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base and lowering the yield on those financial assets. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value. To do this, the US had to get both the Democrats and the Republicans to agree in increasing the debt ceiling for the US. The former is an advocate of a big Government having their hands on all the control panels and the latter prefers small Government that leaves economy to invisible hands. At last, Obama managed to achieve consensus. A saved US economy cascaded into a saved emerging markets.
Malaysia has not yet escape risks. Even though the US debacle was concluded, it (Malaysia) has its own issues hungry for remedies. 50% of Malaysians are aged less than 24 years old. This Generation Y spends more money and represent majority of the consumers in the market. This helps increase the economic activity. To complete the equation, they have to earn income. Many efforts are in place to address this. A 10 year Economic Transformation Programme (the "ETP") coupled with Private-Public Partnership and flanked by economic corridors such as Iskandar in Johor and Sarawak Corridor of Renewable Energy; provide hope. They create jobs and add volume into the system. However, there are not enough technological elements and resources to push local industries such as oil and gas, plantation and manufacturing. Property construction is growing faster than the economic development itself. This causes low occupancy leaving surplus realty supply. The net effect is only expected to produce a medium velocity of 5% economic growth for Malaysia.
The most efficient way to increase revenue is to spread the taxing system into a wider broad base structure. A spider that has larger web catches more flies. that web is Goods and Services tax ("GST")
Malaysian Government and households are experiencing rising debts and budget deficits. In 2013 the Government Debt tantamount to 53% of the Gross Domestic Product ("GDP"). RM55 billion Government guarantees in 2005 has now rocketed to RM147 billion in 2013. These guarantees are indirect debts given to mostly the Government Linked Companies ("GLC"). Whilst detrimental in its impact, it is necessary to support long term plans embedded in the ETP over the next 10 years fuelling investments of approximately RM1.4 trillion. Malaysia spends 95% of its revenues on operational expenses leaving very little for development. Why? Well, high civil service headcount representing 10% of the labour force eats a lot of money. 22% of the operation expenses cover subsidies enjoyed by the citizens. Inadequate open tender for major procurement also tend to increase costs. These need to be cut.
On the flip side of it, revenues need to be inflated. 15% of income earners pay tax. 11% of companies pay tax. Very. very pathetic figures. It appears that less than 20% of the country is subsidising 80% of the country. No wonder the Government is experiencing a budget deficit. The citizen of Malaysia needs to learn simple economics. It is easy really. If you only earn RM1,000 per month, you cannot be renting a house at RM4,000 a month (using the ratio of 20:80). That 20% (or less) needs to be grown into something more palatable. The most efficient way to increase revenue is to spread the taxing system into a wider broad base structure. A spider that has larger web catches more flies. that web is Goods and Services tax ("GST"). The very nature of GST scares people particularly the mass. It is probably not a popular political move but certainly a brilliant economic move. To remedy the fear, people need to be educated. People need to be fed with sweeteners such as reduction in income taxes to compensate the GST expected to range between 4% to 5%. History can be a lesson. The Howard administration fell flat on their faces when implementing GST in Australia.
If certain segment of the economy is left to behave erratically, such as the ever increasing prices of property, it will cause a deadly elevation flight of inflation whilst significant portion of the market is still facing issues getting decent income. This is an unwanted state of stagflation.
Household debts of 66% of GDP in 2004 has now arisen to 82% in 2013. 44% is backed by properties and 17% by vehicles. If too much of household income is stuck in asset based expenditure, little is left for consumption expenditure. Hence, Government fiscal policies will be less effective. Together, the citizens and Government must work to safe the country. Economics 101 teaches us that the economy, i.e., GDP equals to the sum of consumption expenditure, investments, government spending and exports net of imports. Citizen needs to reduce asset based spending and start spending in consumer products. Investments need to be ramped up whether or not they come from within or from foreign investors. As it is now, foreign investors are parking their monies in fixed income rather than equity market at ratio of 60:40. This needs to be reversed. Government need to identify areas requiring support in the form of policies, infrastructure and other amenities that promote economic growth. Reliance on imports should be reduced and exports should be increased so that we become a producing nation instead of consuming nation globally.
Again Economic 101 plays its role. The inflationary rate has increased from 2.2% to 3%. This needs to be reduced. Don't confuse this with consumption. Consumption needs to be increased but the prices needs to be controlled. Normally the central bank, in our case the Bank Negara, will increase interest to reduce supply of money in the market which in turn will reduce demand for products in the market. Reduced demand will reduce prices as a strategy to recreate the demand. However, this is contradictory to the quest to ramp up the consumption. How are people supposed to consume more when they are faced with more expensive funds. Expensive funds means less opportunity to do business and less opportunity to create jobs. Such catch 22 situation needs to be driven to an equilibrium that is fair for all. If certain segment of the economy is left to behave erratically, such as the ever increasing prices of property, it will cause a deadly elevation flight of inflation whilst significant portion of the market is still facing issues getting decent income. This is an unwanted state of stagflation. A situation where fire meets sulphur. This has to be avoided.
Malaysian Government and households are experiencing rising debts and budget deficits. In 2013 the Government Debt tantamount to 53% of the Gross Domestic Product ("GDP") and the household debts at 82% of GDP.
* kopihangtuah
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