Wednesday, 4 September 2013

Hands Tied & Limited Options, Think Outside The Box

A lot hinges on the upcoming Budget. If the government fails to address our fiscal deficit and current account position, we can safely say that it will bring the ringgit and stock market into a bearish phase, with more ratings agencies looking to downgrade our country further. It could very well send the ringgit to 3.45-3.50 and the local bourse to test 1600 on the downside. Many are waiting to see what levers the government are willing to pull to address the situation. What happened in Indonesia and India could very well happen to Malaysia if we are not careful.

Measures to improve finances. The Goods and Services Tax (GST) will likely be announced in the upcoming Budget that will be tabled in Parliament on 25 October 2013. It needs to be a substantive figure of at least 5% as a start (thanks to reader and learned economist Hisham for pointing out that it has to be at least 5% to be meaningful). Gradual cuts in subsidies are also likely, which will result in higher fuel and energy prices. Although these measures will contribute towards improving the fiscal deficit, it will also result in higher inflation. A cost pass-through mechanism will be positive for Tenaga.

Reprioritisation of projects. The Government is also looking to review the implementation of planned projects. Priority will be given to low import content and high multiplier projects.

Potential delays for oil & gas projects? Petronas' RAPID project has been delayed with commissioning in 2018 (from 2016 initially). The Pengerang deepwater terminal phase 2 is meant to service the storage demand from RAPID clients and that may see a delay. Other O&G upstream projects such as marginal fields, new exploration & production activities may slow down but to a lesser extent due to the importance of increasing oil production for Malaysia. 

High multiplier effect from MRT. For construction,  MRT Lines 2 and 3 are high multiplier projects. In our view, lower multiplier contracts such as Tun Razak Exchange, Rubber Research Institute Malaysia (RRIM) and Warisan Merdeka could and should be rescheduled. For the high speed rail, it is better to delay that till we bring the deficit down to 3%.

For property, RPGT may revert to the original 5-30% for disposal within 5 years (currently 15% for disposal within 2 years & 10% for 3-5 years). Minimum purchase price by foreigners may also be raised from RM500k to RM1m. While sentiments may be negatively affected, impact of RPGT hikes in the past has been short-lived. 

 As there are limited options available to the government, almost every measure will be painful. There will be constriction and a slowdown in the economy for sure if the measures go as planned. However, the government should think a little outside the box. You can increase the circulation of money or the velocity of money without hampering your deficit or current account. My suggestion is to get EPF and other major local funds to allocate maybe RM2bn-4bn for a start to invest in companies under RM300m valuation on the Bursa. It will create strong interest from investors, help owners and shareholders of those companies to focus more intently on their bottom line. Raised valuations of good companies will help them to grow via acquisitions as well. 

At the moment the smaller companies find little incentive to do well as no institutions are willing to buy up their shares even if they do well. Many do revert to share pumping and distribution to get interest and additional income. We can stir the velocity of money in a good way to promote competition and better corporate behaviour, without hindering our deficit or current account. Its kind of like "reinvesting wisely" in ourselves to better align "good productive behaviour" in that portion of the economy.

Doing cuts now to public service is politically unthinkable, the government should at least freeze hiring for one year. Reduce military spending by a huge quantum, we are not at war, we have more pressing issues at hand.

As there will be many handbrakes applied by the upcoming Budget, we must look for ways to improve velocity of money without damaging deficit and current account. A substantial portion of the country are not allowed to fully participate in the real economy due to our archaic and debilitating bankruptcy laws. Implement immediately to clear off all bankruptcies that are longer than 5 years and move the bankruptcy threshold to RM60,000 from the current RM30,000. You will see a good multiplier effect from this substantive group being allowed to participate in the real economy again.

A large portion of our real economy resides in our shadow economy, the portion that does not get taxed, mostly running below the radar, causing us to lose billions in taxes. Not to mention the plethora of illegal activities, some which can be legitimise to capture and regulate thus bringing in good revenues (horse racing, 4D, football betting to start ... just look at the additional revenues from these activities in HK and Singapore). They are going to flourish whether you legitimise them or not. Hence its better to regulate, capture the revenues and weed out bad hats. Political will baby ... do we have that?

I would not worry too much about exporters as our ringgit will stay weak for the next 12 months at least. With our weaker currency, we should attract long term FDI into the country in a more aggressive way. Many foreign companies would be looking intently on the ringgit and whether to relocate or invest in operations in Malaysia. The government should implement a one off, tax free holiday for all long term FDI for maybe 3 years if they bring their funds in from now till end 2014 - all funds must begin investing be end 2014 as well.



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