Business News - Starbiz Saturday July 5, 2014 MYT A slowdown is not all that bad but ... BY M. SHANMUGAM WHEN the going is still fairly good, nobody likes a prophet of doom. But these days, almost every conversation with bankers, developers and various businessmen ends with that sinking feeling of the economy going into a slowdown in the second half of the year. Economists are already predicting a slower second half for Malaysia. We are not going to see the 6.2% kind of growth in the economy that we had witnessed in the first quarter. Bank Negara has predicted a gross domestic product (GDP) growth of between 4.5% and 5.5% for 2014, while economists are looking at something that is closer to 5%. The exuberance in the property sector is dissipating. Some 18 months ago, even scrap metal dealers, who make a killing from the volatility in their piranha-infested world, were talking about building high-end residential dwellings that they felt brought them higher returns. Now, however, there is less talk on property development, not to mention the reduced number of new launches. The global stock markets are all at their peaks, including Malaysia, but talk to any remisier in town and they are not elated. The feeling is not anything like the 1993 Bull Run or anywhere near the bullish sentiment felt during the recovery in the aftermath of the 2008 financial crisis in the United States. The smart money has left most emerging markets and is finding its way into countries that offer better value such as Hong Kong, where valuations are undemanding, and fixed assets in the United States, where property yields are averaging 10% net. But really, a slowdown is not all that bad. It allows for some breathing space to correct the fundamental flaws of the economy due to the inflow of cheap funds into emerging economies. Sparks volatility It helps reduce the euphoria and soften the blow on the anticipated pain in the future when the cheap money flows out back to the United States and Europe. The United States has indicated that it will not raise interest rates, but continue with the tapering programme that will reduce the liquidity injected into the system instead. But the rates will rise some time not too far in the future. At least that’s what is being indicated by the rising yields of longer-term bond papers and lower unemployment figures in the United States. When the outflow of capital happens, it causes significant changes to the currencies of emerging countries and sparks volatility in asset prices. If nothing is done now, the consequences will be greater then. Let’s be frank. Anyone who was expecting house prices in general to keep on rising must be living in a fantasy world. And anyone who had expected the broader stock market to keep on rising must be out of whack. Also, anyone who had expected Bank Negara and the Finance Ministry not to do anything to address the excessive risk-taking that some investors were getting used to, such as speculating in the property market, must have short memories. In 1997, when there was excessive speculation in the stock market driven by cheap funds from overseas, Bank Negara imposed restrictions on lending to the equities market. It was a move taken a year before the crash in 1998. Now, the killer blow to the property market seems to be the hikes in the real property gains tax since 2010. The stricter lending guidelines on mortgage loans and over-building, particularly in Johor, have contributed to the falling demand. At least two research houses have downgraded the sector, particularly pointing out to the massive developments undertaken by the developers from China in Johor Baru that is causing a huge oversupply situation. The measures are designed to cool off asset price hikes. Going forward in the next few months or even a year, households are likely to feel the impact with lower disposable incomes. In line with the Government’s objective of reducing subsidies, there are already indications of marginally higher electricity rates. Painful measures Towards this end, MyPower Corp Bhd, the agency in charge of restructuring the highly subsidised electricity-generation sector, has recommended to the Government to implement a scheme whereby the higher cost of gas prices is passed on to the consumer. Bank Negara may raise interest rates by some 25 basis points when the Monetary Policy Committee meets next week. Households with one mortgage should be able to absorb the hike, but those with two or more properties are in for some adjustments in their spending levels. The goods and services tax of 6% is to be implemented in April next year, and although its implementation is expected to coincide with a reduction in the personal and corporate income tax, the net effect expected is an environment of higher cost of goods. With a household debt-to-GDP ratio of 86%, things will be tough. But if all the ringgit savings from the painful measures are channelled into productive areas that reduce the cost of living for the poor, the pain will be eased. Towards this end, the intense lobbying for the contract to undertake the petrol subsidy programme should stop. Instead, what we need is a holistic solution to stop the leakages in the various programmes undertaken by the Government to provide assistance to the poor. A more important outcome from this painful episode would be to lower the cost of doing business in Malaysia. The private sector, especially the businessmen, are tired of the escalating cost because of corruption and rent-seekers. There must be political will to see that every ringgit saved from the tightening measures does not become an effort in vain. Only then will there be a “buying in” of the pain that the people are likely to go through.
Posted on: Sat, 05 Jul 2014 14:20:07 +0000