Can RM50 billion ward off recession? Maybe not

KUALA LUMPUR, March 10 – The Malaysian government is set to announce its largest ever stimulus package of more than RM50 billion this afternoon.

But even the administration concedes that this infusion of cash, tariff cuts, retraining grants may not be enough to stave off a recession this year.

Sources told the Malaysian Insider that in addition to the RM10 billion to be spent by the government to stimulate the economy, today’s package could also include tax and tariff cuts, suspension of employer contributions to several funds, all of which will add more than RM40 billion of liquidity to the market.

The government hopes that this stabilization package will reduce the cost of doing business and encourage employers to retrench workers only as a last resort. As many as 200,000 Malaysians are expected to be laid off work in 2009, as companies in the manufacturing and logistics sectors hit by falling demand close their shutters.

The mini-budget will be presented at a special Cabinet meeting today before Finance Minister Datuk Seri Najib Tun Razak tables it in Parliament this afternoon.

Perhaps as important as the numbers and the size of the budget will be stark scenario that Najib will sketch today. The government has maintained for months that the Malaysia will still experience growth despite the global slowdown.

As recently as a month ago, the official position was that the growth would still be around the 3.5 per cent announced by Najib when he unveiled the first RM7billion stimulus package.

But privately, Ministry of Finance and Economic Planning Unit officials have revised growth figures since January to between 0.5 per cent and 1.5 per cent on the back of worsening economic data from Malaysia’s main trading partners and export nations.

Since then, the news around the world has become worse. On Monday, the World Bank said that the world is on track to post its worst performance since the Great Depression, with developing countries bearing much of the economic pain.

“The global economy is likely to shrink this year for the first time since World War II,” the bank said, noting that global industrial production, by the middle of 2009, could be as much as 15 per cent lower than in 2008.

Based on those projections, world trade is on track to record its largest decline in 80 years, with the sharpest losses expected in East Asia.

The World Bank, which helps finance the debt of developing nations, says the financial crisis will have long-term implications for them.

“Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future,” the bank said.

Government sources said that the administration did not paint the worst case scenario as done by Singapore and several other countries because the structure of the Malaysian economy is different from their neighbour down south and not as exposed to the gyrations of the global economy.

In addition, until recently, there was little evidence that recession would visit Japan and several other markets for Malaysian goods and services so quickly and in such a devastating fashion.

And most importantly, the consensus among Prime Minister Datuk Seri Abdullah Ahmad Badawi, Najib and other members of the Cabinet was that bad news should be managed well to prevent a plunge in consumer spending.

A senior government official told The Malaysian Insider: “The view was that Malaysians are by nature a pessimistic group and could overreact, making the recession a self-fulfilling prophecy.”

Not everyone in the government agreed with this approach but as long as Abdullah and Najib kept to this line, others followed suit, regardless of how ridiculous it made them sound.

Despite efforts by some bloggers to paint Najib as a renegade who has been prepared to call a spade a spade in this economic crisis, he was very much part of the team that believed in staying on message.

Only in recent weeks has he signalled a willingness to paint a dire picture of the Malaysian economy. But even then, he and other ministers have been reluctant to admit the possibility of the economy entering negative territory.

At a briefing for senior editors last night, Najib sketched a gloomy scenario for Malaysia in 2009 and said that recession was a possibility, given the waves of continuous bad news from around the world.

Today, the country’s next prime minister will paint this dark picture for the rest of the country. His job in the coming weeks and months will be to convince Malaysians that his administration has the tools and ideas to alleviate the pain and suffering on main street.