Spend Wisely, Please

Stimulus packages here, there and everywhere! They seem to be the order of the day. They are there simply to provide an impetus for growth in a dwindling economy where financial markets cannot.

Interestingly, these current efforts are not taken by individual countries, but rather en bloc. For example, at the recently concluded Asia Pacific Economic Cooperation (Apec) summit, the member economies agreed to coordinate their stimulus packages to avert a global recession.

Late last month, the European Union (EU) launched a Euro 200b financial package, equivalent to 1.5% of the 27-nation union's gross domestic product (GDP). Of this amount, 85 per cent will come from national government budgets with the remainder coming from the EU and the European Investment Bank's budgets.

Thus far, the United States had announced a package totalling US$1.5 trillion. Observers do not discount this ballooning to US$2.0b as economists are expecting an additional US$500b tax cut plan soon. The latest was a second stimulus package worth US$800b of two parts – US$600b to buy mortgage related debt and securities; and US$200b to buy consumer debt securities.

These do not include the possibility of President-elect Barack Obama considering a circa US$1.1 trillion economic stimulus package as soon as he takes office on Jan 20 in a bid to create or save 2.5 million jobs.

Other stimulus packages include Britain's £20 billion (slightly more than 1% of its GDP) and China's 4 trillion yuan over the next two years with emphasis on public welfare projects, infrastructure, environment protection and post quake reconstruction in south-western China.


IS RM7B FOR MALAYSIA ENOUGH?

In Malaysia, a RM7b stimulus package was announced, to be spent on “high impact” projects. The funds would come from savings due to lower than expected subsidies on retail fuel prices following battered global crude oil prices. It remains to be seen if this is sufficient to withstand the current onslaught of the global economic crisis.

What is certain is that the package appears minute, considering it is only 0.93% of Malaysia’s annualised GDP, at current prices of RM751b based on figures for the first three quarters of 2008.

Some may argue that the funds are complemented by the three-percentage-point reduction in the employees' contribution to the Employees Provident Fund, which could release RM4.8b per annum to private consumption if all employees opt for it. However, dwindling exports and net outflow of portfolio and overseas investments are points of concern.

Malaysia’s exports are already affected as its major trading partners – such as the United States, Europe, Japan and Singapore – have either gone into technical recession or are experiencing acute slowdown. Net real exports of goods and services dropped 14.8% in 3Q08, down from 20.0% growth in the previous quarter – a major factor that pulled down the 3Q08 GDP to 4.7% from a revised 6.7% in 2Q08.

Portfolio investment outflow rose to RM38.4b in 3Q08 from RM31.0b in 2Q08, due to the continued global de-leveraging process. Additionally, there was a RM16.1b outflow in 3Q08 for overseas investments by Malaysian companies against an inflow of RM3.6b in the previous quarter.

Hence, we expect additional stimulus to be introduced early next year.


BETWEEN STIMULUS, RESCUE AND BAILOUT

Certainly, the world's governments will have to face cynical comments from their respective opposition political parties and even the people who voted for them. Their cynicism may include their usage positive-sounding words like “stimulus package” to mask what is essentially a “bailout” of financial giants.

Political differences aside, one of the main reasons the leaders must use positive words, from an economic perspective, is to avoid extreme worry among consumers as this would aggravate the already subdued economic situation.

The value of national income is computed from the sum of private investments, public consumption and investments, and exports, minus imports. It would be a disaster if all the elements of investment, consumption and exports contract. So, it all boils down to managing confidence.

While growth in consumer spending, private investments and exports are moving into negative territory, one way to cushion the fall in national income is to increase government spending, with a view that over time, this will mend private sector sentiment.

Granted, stimulus packages must be spent wisely and channeled to sectors that are deemed to have a “higher economic multiplier”. As EU Monetary Affairs commissioner Joaquin Almunia puts it: “If the impulse is not coordinated, one plus one might not equal two, but less, even zero. If it is coordinated, one plus one may equal three.”

If a stimulus package is geared to rescue sinking financial giants, it must be done carefully – to rescue, not to bailout – for two main reasons, namely to rescue the financial sector (an important component of the economy) and to save the employees.

It is a “bailout” if, in the process, the current major or controlling shareholder(s) and top executives of the financial giants are protected while the employees, who have no say in the running of the institution, get retrenched. Giant institutions falter due to the doing or oversight of the top executives and, to a certain extent, the chairman and board members. Hence, they should be replaced if government monies are used to finance the rescue. Otherwise, the same mistakes may be repeated once the economic cycle comes back in the future.

Independent non-executive directors should also be seen to act in the interests of minority shareholders, and not for the benefit of controlling shareholders. It is high time indeed for corporate journalists, in their coverage of listed companies, to also quote independent non-executive directors to make them answerable to minority shareholders and employees.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.

Republished with permission.
This article was published in the Just Say It column in Shares Investment (Malaysia edition) December 2008. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.