Economic think tank calls a spade, a spade

The Malaysian Institute of Economic Research (MIER) reckons that the ringgit will be almost a washout for the rest of 2008 arising from a growing fiscal deficit, political turmoil and policy inaction on inflation. These factors have the effect of putting off investor confidence in the Malaysian economy.

MIER projects that the ringgit will probably weaken to 3.5 ringgit per US Dollar by year-end. This view is a revision of the earlier MIER forecast that the ringgit would strengthen to 3 ringgit per US Dollar by the end of 2008.

Based on the recently tabled 2009 Budget, the budget deficit will rise to RM34.5 billion, which is a five-year high of 4.8 per cent of GDP. The increased deficit is blamed on a trebling in food and oil subsidies.

Interestingly, MIER's Ariff is quoted as saying, “The deficit is enormous and doesn’t speak well for fiscal management. The ringgit is almost a washout. It’s partly a verdict on how the country is being governed. This budget doesn’t help, it worsens the currency position.” Somehow, I don't think MIER will be receiving a Hari Raya card from the Ministers of Finance, both I and II.

As for the ringgit's prospects of appreciating, MIER says it may take another three years, instead of two, to reach its “fair value” of 2.8 ringgit against the US Dollar. This will not go down well with parents who have children studying overseas. Nor will it be well-received by importers. Inflation-busters at Shahrir's Ministry won't be pleased to hear this either.

Bloomberg reckons that Pak Lah is counting on oil prices to average US$125 a barrel in 2009, unchanged from 2008, to lift revenue by 9.1 per cent to RM176.2 billion and narrow the deficit to 3.6 per cent of GDP. If that is the case, he must be having cold sweat watching the downward trend of oil prices.

Poor sovereign rating expected
“Political uncertainty, perception about the country’s leadership, all these don’t augur well for investor perception,” MIER said. “The sovereign rating could be affected.” This observation comes at a time when Bank Negara is reported to have announced on Tuesday Sept 2 that the Finance Ministry was expected to conduct four bond sales this September month comprising three-year and 20-year notes. Do these guys know what they are doing?

Obsession with growth
Malaysia’s GDP grew at a respectable 6.3 per cent in the second quarter. Still, it was the slowest pace in a year. Annual growth will ease to 5.7 per cent in 2008 and 5.4 per cent in 2009, from 6.3 per cent in 2007, the government said last week.

MIER makes the interesting observation that the Malaysian government is too obsessed with growth, saying, “There’s no way we can get back to the growth rate of the late 1980s and it’s not in our interest to get back on track when we grew too fast for our own good.”

This is revisionist thinking at MIER. It is refreshing. But this recent fit of candour should also pique the interest of political observers.

Pump-priming: An overreaction by the government?
MIER reckons that the government may be overreacting in its attempt to pump-prime the economy. This is depleting its resources before a further expected slowdown in 2009. MIER says that it will probably lower its 5 per cent growth forecast for 2009 at a later date.

MIER further reckons that fiscal measures to boost the purchasing power of consumers will “unwittingly” fuel inflation.

And, one almost feels some electricity in the air when MIER is quoted as saying that a “laid back” interest-rate policy will push inflation-adjusted interest rates deeper into negative territory and spur capital flight. This is a direct and negative critique of Bank Negara's reticence and relatively sanguine view towards raising the OPR by at least 25 basis points, if not 50.

Bank Negara has kept its overnight policy rate at 3.5 per cent in 19 straight meetings since April 2006. This has been the policy position even as other Asian nations raised borrowing costs this year to cool soaring prices. MIER is urging that Bank Negara raise the OPR (overnight interest rates set by Benak Negara as part of its menu of monetary policies). Such a move will restore credibility to Malaysia's monetary and fiscal management.

As a result, MIER predicts inflation will increase even higher from the 26-year high of 8.5 per cent in July in the months ahead.

Read a similar report from NST Online here.

As I said above, MIER's more robust position this time around is very refreshing. But it seems to signal a degree of independence that we haven't seen from MIER before. Like many others, I very much hope that a think tank like MIER will be able to maintain its independence and, not see pressure build to replace this new-found independence with timorous and mousy sycophants. Good call, MIER!