Honeymoon is over, the pain starts now
The first 100 days have gone well for the government. The next six months are fraught with external and internal challenges ranging from rising federal government deficit to growing global uncertainties.
THE low voter turnout in the Sungai Kandis state by-election proves one thing – voters are down with political fatigue.
The turnout in the by-election that was won by the PKR candidate was only 49.4% of the constituency’s 50,800 registered voters.
“Voters are no longer interested in politics. They have voted in the Pakatan Harapan coalition. Now, they want to see them rule,” says an analyst.
Come Aug 17, the Pakatan government would have completed its first 100-day period of being the ruling government.
Generally, in the eyes of consumers, the Pakatan government has delivered if one goes by the consumer sentiment.
Firstly, Malaysia’s consumer sentiment index (CSI) has risen to a 21-year high of 132.9 points following the 14th general election (GE14).
Consumer sentiment in the country had been firmly below the optimistic level of 100 points mainly due to the effects of the oil price plunge in 2014 and the subsidy rationalisation programme.
The CSI has been dragged down by the slowdown in economic growth, while the goods and services tax (GST) had put downward pressure only for a short period of time.
The sudden rise in the index is due to the Pakatan government’s move to zerorise and abolish the GST following the GE14 win, along with stable retail fuel prices. These two factors have reduced the cost of doing business.
Omni Capital Partners Sdn Bhd managing director Scott Lim opines that the Pakatan government will most likely fulfil most of its promises, but will drag its feet on sensitive issues such as religion, bumiputra rights and education reforms.
“Confidence will return slowly as we repair and restore our country’s financial health. The Pakatan pact is somewhat stable but yet to be stress-tested.
“As new challenges emerge, we will see if Pakatan can withstand the test of time. The honeymoon period may not be over but a marriage of convenience hardly lasts. It is all due to the fundamental differences in the core values,” says Lim.
Private equity banker Ian Yoong says that a hundred days are insufficient to formulate policies and effect changes.
“The new ministers have been refreshingly honest and intelligent. The philosophy of a level playing field, less corruption and rule of law is a major paradigm shift for Malaysian businesses,” says Yoong.
He says the business community has to be constantly reassured that all these positive changes are permanent and that the country will not revert to the old way of doing business, which have benefited cronies of former leaders.
Managing the budget deficit
One of the first things the government needs to do is fix the “missing” RM18bil in GST refund money.
Earlier this week, Finance Minister Lim Guan Eng told the Dewan Rakyat that about RM18bil in GST collection that was due for refund to businesses since the implementation of the tax in 2015 was not in the trust account.
Former Treasury secretary-general Tan Sri Mohd Irwan Siregar Abdullah has refuted allegations that the money was “missing” and stated that all proceeds from the GST collection have been put into the Federal Government Consolidated Fund. The amount of the GST refunds is transferred to the trust account in stages based on the requirements of the Customs Department and the government’s financial position.
In the latest development, Customs director-general Datuk Seri Subromaniam Tholasy said that since the implementation of the GST on April 1, 2015, the department had claimed RM82.9bil from the Consolidated Fund, but only RM63.5bil was given, leaving a shortfall of RM19.4bil.
Reports have been lodged with the authorities and the government wants a White Paper on it.
However, the bottom line is that the money has gone into the Consolidated Fund but not allocted to the trust account – hence effectively, there is a shortfall to the tune of RM19.4bil that the government has to refund companies since the GST has been discontinued.
This shortfall is something that was not taken into account by the federal government when it announced on May 31 this year that the budget deficit for 2018 would remain at 2.8% despite not having the revenue from the GST.
The question now is, can the federal government budget deficit be at 2.8% with a shortfall of RM18bil to cover?
“If we really cannot replace the RM18bil, this will bring up the fiscal deficit level closer to 4% from 2.8% currently,” says Alliance Bank Malaysia Bhd chief economist Manokaran Mottain.
“It is definitely a major challenge and a serious dampener for the overall economy. As it is, the government needs to think of how to plug the revenue shortfall, especially the impact from the new finding and the GST abolition.
“Revenue from the implementation of the sales and service tax (SST) would be far off from the GST,” says Manokaran.
This week, the SST was passed to replace the GST. The SST will come into effect on Sept 1 following the zerorisation of the GST on June 1. The net effect of replacing the GST with the SST is a shortfall of RM17bil, which Finance Minister Lim had proposed to make up with higher dividends from government-linked agencies and reduction in government expenditure income.
Now, economists are looking at a tighter hold on the government’s expenditure purse to cover the shortfall.
As guided by Pakatan’s manifesto, the government would need to squeeze other income sources to cover the GST loss and also to finance subsidy-type expenditures. For instance, stabilising retail fuel prices – RON95 and diesel – will push up expenditure on subsidies and social assistance.
Manokaran says the government has already targeted RM10bil from the minimising of leakages, cost cutting and creating efficiencies.
“Overall, the government should review and start aggressively to collect more than the earlier budgeted RM10bil from the efficiency of its machinery, as well as sell more strategic assets to raise
more revenue,” he say
He feels that the government may need to sell off strategic stakes in its assets or government-linked investment e huge shortfall. companies to cover th “Now that it has reshuffled the Khazanah Nasional board, perhaps it could hasten this proessss, if and when the time comes,” he says.
Charting the course over the next six months
While the clean-up of the country is far from over, politics certainly is.
It is a known fact that the world is in a slowdown mode. Malaysia isn’t spared, with most economists predicting the Malaysian economy to slow to under 5% by 2019, from 5.1% to 5.3% in 2018.
While much more needs to be done, there is growing confidence among investors that the economy is headed in the right direction.
There are a few other major decisions pending to date and these include the minimum wage hike as well as the review of toll road concessions and the Petroleum Development Act 1974.
Rakuten Trade Sdn Bhd vice-president of research Vincent Lau says the challenges include containing the debt fears and making Malaysia more competitive and innovative.
“The new government needs to see through its reforms on transparency, accountability, minimising leakages and ensuring the rule of law. Foreign investors are watching,” says Lau.
Yoong says he is confident that given time, the new government will lead Malaysia to greater economic growth
and prosperity.
He says he will not be surprised if gross domestic product or GDP growth surpasses 6% in 2019.
“The new government’s 2019 budget will be tabled on Nov 2, 2018. This budget will cover many areas of the economy. We expect this maiden budget to be a roadmap for Malaysia’s economy for the next five years.
“It is likely that the new government will focus on attracting technology-related foreign direct investment,” says Yoong.
Lim says there is no doubt that the Pakatan government is better in managing public finances, and hopefully, it will come up with some sound policies.
He says that it has to focus on recuperating over the short term.
“There is simply no chance for the government’s balance sheet expansion. Do not expect any financial miracle to happen. Hopefully, with support from more open and bolder economic policies, the private sector will take the lead to revive growth,” he says.
Lim adds that Budget 2019 is just an annual budget and it will not dramatically alter Malaysia’s competitive advantage and long-term economic outlook.
“Let’s get real. The financial ruin has been serious and no annual budget can be a catalyst for quite sometime to come.
“A true and revealing budget can only provide more insight into the coming economic pains. Get ready for a rough ride if the budget reveals the depth of the problems,” says Lim.
MIDF head of investment research Mohd Redza Abdul Rahman predicts business confidence to come back strongly in the third quarter once Budget 2019 is tabled in November, followed by a mid-term review of the 11th Malaysia Plan.
A research head, who declined to be quoted, says the people want to see how the government will grow the economy.
“For example, what are some of the policies and measures to be put into place. It is good that the rakyat is made aware of all the skeletons in the closet. However, now we need policies to grow.
“The Pakatan government just recently came out of being in the Opposition camp. Perhaps they need some time to get used to being the ruling government,” says the research head.
For the next six months, Lim suggests that the private sector take the lead in Malaysia’s recovery, while the government restores its financial health.
He adds that the government should stop crowding out the private sector, as it should not be in business over the long term.
“Promote new industries and technologies. Encourage entrepreneurship. Take new risks and promote diversity. It is time for constructive destruction. Tear the old house down and rebuild. The chance will not last forever,” says Lim.
Yoong adds that a big challenge for the new government is to transform the country’s labour-intensive industries to become more automated and higher value-added.
“Also, in Asia, the Malaysian stock market probably ranks somewhere in the bottom rungs when it comes to liquidity, investor profile and money raised.
“While Malaysia has created a niche in Islamic banking, it is still very much seen as a marginalised market,” he says.
Malaysian stocks only have a weightage of some 3% on the MSCI index. In terms of being a financial heavyweight, the fight is still very much between Hong Kong and Singapore.
For two years in a row now, the Hong Kong stock exchange has held the trophy of largest initial public offering, both from mainland China companies.
Thus, what will the new government do to inject more vibrancy into Malaysia’s capital market and also to attract international listings?
If Malaysia is doing things right, coupled with favourable external factors, the country will also see a strengthening of the ringgit.
Lim says the government must take the bold step to remove unfair practices and promote fair competition.
“If they reform the NEP now, we may have a chance to stop the brain drain. The talent lost over the years will unlikely return. If they do, consider that a bonus,” he says.