‘RM20b stimulus not the best idea for Malaysia’

by **Cals** Tue 10 Nov 2015, 23:56

‘RM20b stimulus not the best idea for Malaysia’

By Meena Lakshana / The Edge Financial Daily | November 9, 2015 : 9:48 AM MYT

This article first appeared in The Edge Financial Daily, on November 9, 2015.

KUALA LUMPUR: The RM20 billion stimulus package announced by Prime Minister Datuk Seri Najib Razak to prop up the feeble Malaysian market may be counterproductive to the economy in the long term, said Spain-based [size=16]University of Navarra’s Prof Pedro Videla, who is with its IESE Business School’s Department of Economics.

In an email interview with The Edge Financial Daily recently, Videla said the stimulus package warrants external borrowings that may cause the country to fail in meeting its fiscal deficit target of 3.2% of the gross domestic product (GDP) for 2015.

“The stimulus package cannot be good because, with the stimulus package, Malaysia cannot slash the fiscal deficit and do what they have committed to do,” he said.

“This [stimulus package] can be a big problem for the country actually, because this stimulus package might help the market in the short run but will increase the debt of the country,” he said.

And if the debt over the GDP of Malaysia goes up, the country may seem riskier in the eyes of foreign investors, he warned.

[You must be registered and logged in to see this image.]Videla: We have to be aware that despite the fact that this stimulus package can stimulate the domestic market, it can also foster a fall in confidence in the market.

Videla has been a guest professor at many universities worldwide, including the Reykjavik University in Iceland, the Nile University in Egypt,Lagos Business School in Nigeria, the China Europe International Business School in China, Universidad de los Andes in Chile, and Wharton School in the United States.

He has also served as project consultant with institutions such as theWorld Bank, the International Monetary Fund, the European Union, theInter-American Development Bank, and the United States Agency forInternational Development.

“Malaysia might need more external flows to finance it (the stimulus package) so this domestic policy may have a perverse effect on Malaysia.

“We have to be aware that despite the fact that this stimulus package can stimulate the domestic market, it can also foster a fall in confidence in the market,” he added.

Videla’s response came following the announcement by the prime minister in September that RM20 billion would be injected into ValueCap Sdn Bhd, to be invested in undervalued Malaysian firms.

ValueCap is an equity investment firm that is co-owned by Khazanah Nasional Bhd, Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Permodalan Nasional Bhd (PNB).

The RM20 billion represents about 2.01% of the benchmark FBM KLCI’s market capitalisation of RM994.34 billion as at last Friday’s close.

Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar said Khazanah, KWAP and PNB will raise the RM20 billion for the injection into ValueCap.

The stimulus package was announced to stave off the decline of the KLCI, which has been hammered over the year due to capital flight on the back of the ringgit’s decline, a possible interest rate hike by the US Federal Reserve (Fed), low commodity prices, slowing growth in China and domestic political uncertainties.

Last Friday, the ringgit weakened 0.3% to 4.3112 against the US dollar. Year to date, it has declined about 23.27% against the greenback, Bloomberg data showed.

Against the Singapore dollar, the ringgit weakened 0.07% last Friday to 3.0621. Year to date, the ringgit has shrunk 15.65% against the island-state’s currency.

Videla said he expects the ringgit to continue to decline due to factors such as the expected interest rate hike by the Fed, the continued slump in commodity prices, a further slowdown in China’s growth and persistent political uncertainties domestically.

There is a need for more “sensible, stable, non-discriminatory rules of the game”, he said.

“The political scenario is key because it determines the country’s risk. We need foreigners to keep their money in Malaysia. If they see the political scenario becoming more volatile, becoming more uncertain, they will take their money out,” Videla added.
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