Stagflation and Budget 2009

It is possible to have inflation and economy stagnation happening at the same time. Whilst while we know what's inflation (rise in prices of goods and services) stagnation is when the economy grows at about 2-3%. You may want to ask what the heck is a recession then- a recession is when our economy grows...I should say contract rather than growth, at a negative rate. Malaysia is not at economic stagnation yet, at the expected growth rate of 4.6% in 2008 (Source: MIER), but it is very near that stage with the slowed down growth happening this year. At the the same time, consumer prices are also spiking sky high as a result of the fuel price hike in June 2008. The two noticeable indicators that stand out like a sore thumb are:

• highest 27-year inflation rate occuring in June 2008 at 7.7%
• GDP is downtrending with constant downward revisions very month (now at 4.6%)

Based on the above ground rules our economic condition is very close to what's being called stagflation- the combination of inflation and economy stagnation. The tricky thing about stagflation is that you are being faced by the rising costs of doing business, but you can't raise the selling price of your products because your business will loose sales volume if you do so.

Historically Malaysia achieved very high GDP rates from 1988 to 1996, in excess of 9%, hitting 10% in 1996. Those were the greatest Mahathir years. During Mahathir's tenure as PM, the only years when Malaysia hit a technical negative growth was in 1985 and 1998- and those were also the years of global economic recession.

Bank Negara and sound monetary policies

I applaud the manner Bank Negara handled inflation by not increasing the overnight policy rate unchanged at 3.50% on 25th July 2008. You may want to ask what's an overnight policy rate about?? It's the interest rate which one bank charges another for lending available funds. This rate is governed by BNM and if it raises we are screwed if we have home loans and so on, because interest rates are going to rise. So what if BNM does not increase this rate? You see, by the book, the central bank should increase interest rates to curb the supply of broad money during inflation but Zeti did not do it. High interest rates will result in the higher cost of obtaining credit- when cost of capital is more expensive to obtain, the supply of money reduces, spending reduces thus inflation is kept in check. For people in who have taken up loans the idea is to force them out of it via bankruptcy. That's the harsh reality of economics.

Zeti in fact recognized the root cause of Malaysia's inflation- which is not natural but cost push inflation, as a result of the government's fiscal policy of increasing petrol prices by 41% overnight at the beginning of June 2008. Immediately following this electricity tarrifs increased 26%; hauliers and fowarders increased their costs by 30-40%. Zeti knew that there's no point increasing interest rates because if BNM did so, Malaysia would be in bigger trouble because the inflation will still be there. That means inflation + higher interest rates. I remember back in 1998, many home owners failed to settle their home loans. I for one was on the lucky side as I got my house pretty cheap because demand for property in that area was bad. Zeti is certainly much smarter that Pak Lah and the rest of the Putrajaya goons. Gotta thank Zeti for watching closely the BN Government.

Budget 2009

This year's budget must prop up the economy ie expansionary, by the adopting the following measures:

-the government must seriously look into further reduction of the petrol price. I understand that it was a global oil crisis at that time but petrol price should not have been increased overnight!!! Luckily I miss that Parliament session with Wee Choo Keong in June otherwise I would have kicked Badawi's ass myself.

-2009 must have tax cuts in personal income tax (corporate tax reduction is a foregone conclusion) to stimulate personal spending and boost the retail industry.

-adopt a deficit budget, with expansionary fiscal policies. A deficit budget of about 4% is expected this time around.

-increase tax allowance for families with children.

-remove service tax completely- service tax holiday for 2009.

-control the prices of steel to prevent construction companies from going bankrupt.

Prices of essential goods will not reduce much unless they are controlled items because they are sticky-downward; and wages, depends a lot on the people's sentiments on inflation. Hopefully inflation will taper off in Q4 to finish at below 6% for the year 2009. With the situation cooler, wage inflation will also reduce, easing out the higher cost of staffing for employers.

Deficit 2009 budget yes, but what's the source of funding it?