Un-bondage

For this piece, I want to wear the hat of Lu Xun's fictional Chinese village idiot, Ah Q.

You may recall that when the Ministry of Finance announced that they were considering a windfall tax on the Independent Power Producers (IPP) there was hue and cry. The IPP association, Janabebas decried the proposed move. Nasir Razak of CIMB lobbied hard against it.

But the damage was done. In the first half of 2008, a total of RM125 billion worth of foreign funds were withdrawn from Malaysian shores. In the first half 2008 outflow exceeded the total outflows of RM92.3 billion for the whole of 2007.

Four reasons were offered for the outflow. First, there was political uncertainty. Second, they blamed inflation which rose to a 26-year high of 8.5% in July following the infamous fuel price hike. Then they blamed the proposed windfall tax on the IPPs. Finally, they blamed the 4.6% fiscal deficit that was tabled in Parliament last month.

We saw the Kuala Lumpur Composite Index (KLCI) sold down, with drastic changes in foreign shareholdings, while prices of bonds begin depreciating sharply.

In that time Bank Negara Malaysia was panned for failing to raise OPR rates to protect the Ringgit. In response, investors began discounting the value of the inflated Ringgit and immediately sold down the currency.

Remember all that?

The economic management of Malaysia was roundly criticised.

Fastforward
Today, in the wake of the economic turmoil in all major economies, a turmoil that has not shown signs of abating yet, we read about how our Malaysian economy is relatively unscathed by the economic turmoil. Wonderful isn't it?

History is replete with happy accidents. For example, the microwave technology used in our microwave ovens was discovered when a scientist that was part of the atomic bomb team in Los Alamos found that a bar of chocolate left in his lab coat had melted in proximity to radiation.

Likewise, by making all the wrong moves the Malaysian Ministry of Finance can now claim to have pre-empted the economic turmoil by inducing a minor economic downturn in Malaysia's capital market.

Un-bondage
By these wrong moves Malaysia was inadvertently unshackled from bondage to foreign hot money.

This is the classic Ah Q mindset. Truly, wonderful.

Building more fortifications
Any gambling person will tell you that you should not challenge the odds. Since the odds of another happy accident is pretty remote at this time, Malaysians should renew the call upon the new Minister of Finance and his existing No.2, to get cracking...NOW.

I had blogged earlier about serious reconsideration of pegging the Ringgit. I want to add a few more points for consideration.

First, the MOF I and II needs to look at the risk of contagion affecting FDIs in Malaysia as their parents, especially in the U.S., are confronting turmoil. Giants like General Motors are teetering from share price collapse in Wall Street. For Malaysia, plant closures cause unemployment.

Second, traditional pump-priming solutions may not be so easy at a time when sovereign debt fundraising may find few takers in a credit-crunch environment. So, MOF I and II needs to review the 4.6% fiscal deficit.

Third, fundamentally sound companies in the plantation sector are being battered by CPO futures prices that have breached RM2,000-00 per metric tonne. This sector may not be the star contributor to Malaysia's economy as previously thought.

Fourth, the local automotive sector is also facing falling demand for new cars.

Fifth, there is a serious possibility of a revival of the spectre of real property overhang as demand softens.

Finally, global oil prices have softened. It has touched USD83-00 per barrel. While Malaysian consumers can cheer the prospect of reductions in petrol prices, Malaysia's national wealth from oil revenues will decline commensurately. Petronas may not necessarily be the panacea to cushion the sharp edge of economic turmoil. To be perfectly objective, we must recall that Petronas bailed out Dr M. Otherwise Dr M may not have been so heroic.

This is only a shortlist. But all Malaysians can see that MOF I and II needs to do a LOT of work if they are to earn the everlasting gratitude of Malaysians in the aftermath of the impending economic challenges to Malaysia.