Dr M thinks RM28 billion stimulus is necessary

Dr M is reported to have suggested that an RM28 billion stimulus package is necessary. He also suggests that this large stimulus package can be funded from EPF's RM250 billion worth of savings.

Echoing what Ku Li had observed, Dr M said that any stimulus package needed to take into account the total economy. The package has to be selective and, the government should not merely dish out assistance to any sector alone.

He is quoted as having said that, "It is not a question of just giving out the money and suddenly the economy grows. You have to pick and choose what you do in order to really achieve some impact from the money that is being spent".

EPF as a lender to the government
Frankly, I'm comfortable if the government is the borrower of RM28 billion from EPF. Here are my reasons:

• First, the yield on the borrowing and repayment terms must be reasonable. It cannot be lop-sided. The government collects a lot of revenue. It is the most reliable borrower in the current economic climate.

• Second, detractors must not decry their EPF savings being put to work by the government. In the current economic climate, lending to the government is a damn sight better than to have EPF punt in Bursa Malaysia.

• Third, if we all regard Malaysia as being one big boat that we are all in and, if lending EPF money to the government will enable a concerted and targeted fiscal stimulus package to be implemented, we should support it. Such a move will create more liquidity in the economy. It will create more economic activity. This will restore business confidence. Aggregate investment by the private sector will rise again. Malaysians will be assured of jobs. Aggregate demand and household consumption will increase. The boat will be saved. We will be economically saved.

MGS @ 6% p.a yield
To keep it simple, the borrowing should be made via issuance of 5-year term MGS at an annual yield of 6%. This should allay any concerns by EPF stakeholders.

The current state of play: Malaysia is the 3rd most exposed economy in Asia
Credit Suisse, in its latest bulletin (alerted to me courtesy of the great walla), reckons that Malaysia is Asia’s most exposed economy to the global downturn after Hong Kong and Singapore.

E&E sector is looking worse by the day
Almost half of Malaysia's GDP is directly connected to the export market led by the electrical & electronics (E&E) sector. It is estimated that more than one-third of Malaysia's GDP is directly related to merchandise exports, which are heavily concentrated in E&E products that form 40% of the value of total exports.

Tourism?
The tourism sector contributes to 7% of the total value of GDP. This is the highest tourism component in any Asian economy outside of Japan.

Commodities export values down
Petroleum products and palm oil contributed to 10% of Malaysia's GDP last year. This is expected to fall to 5% of GDP in 2009.

Consumer and business sentiment near all time low
Based on MIER indicia, Malaysia's consumer and business sentiment dropped sharply in 4Q08 and continues to be deeply pessimistic.

Business sentiment is at its lowest since the index’s inception in 1987, while consumer confidence is also close to its lowest point. Similarly, retail trade, residential property, and employment indices all fell sharply in 4Q08.

Now, does anyone dispute the government lending RM28 billion from EPF?
Given the bleak picture painted above, the current economic trajectory is headed towards a contraction of negative 0.5% of GDP.

I think Dr M's call makes sense.

But, I worry about the specifics of where the stimulus should be directed.

We need a big picture strategy. I need to re-visit my previous posts under the label strategy to embellish the proposals that I made earlier. Heaven knows, Malaysia's economic managers could do with some help. But will they listen to bloggers?