RM60 billion mini-budget a bigger and better stimulus plan?

Here is the mini-budget I read in the edge:-

The RM60 billion mini-budget tabled in Parliament on Tuesday is by far a better and more comprehensive package than the first RM7 billion plan that was announced last November.

But then again, the economic environment today has taken a turn for the worst compared to a few months ago, and there is now recognition that despite strong fundamentals, Malaysia will not escape the impact of global recession.

Tough times therefore call for tough measures. Thus, the second plan contains measures that will tackle the key problems facing the economy – rising unemployment in the manufacturing sector, difficulty in accessing funds by small- and medium scale enterprises, a squeeze on corporate earnings and waning consumer confidence.

The strategy is two-pronged – measures are aimed at tackling the immediate problems facing the economy to prevent a deep recession, as well as at addressing the longer-term structural issues facing the economy.

However, given the severity of the global economic downturn, billed as the Great Recession by the International Monetary Fund, it is not a certainty that the two packages combined will be effective enough to prevent the domestic economy from sliding into a recession this year and enable a quick recovery in 2010.

In fact, Deputy Prime Minister and Finance Minister Datuk Seri Najib Razak, when tabling the mini-budget, said that with the fiscal boost, economic growth this year is projected at between minus 1% and 1%. In effect, this means Malaysia is in real danger of falling into a recession.

The silver lining, however, is that with the latest fiscal stimulus, the trough will not as deep as originally expected.

Prior to the announcement of the mini-budget, market consensus was the domestic economy would likely contract by between 3% and 4% this year, before recovering to grow by between 2% and 3% next year.

While RM60 billion seemed like a huge amount at first glance, at almost 9% of Malaysia’s Gross Domestic Product (GDP), the actual direct fiscal stimulus is just RM15 billion, a sum that will be spent over two years – RM10 billion this year and RM5 billion in 2010.

Of the remainder, RM25 billion will be in guarantee funds, RM10 billion directed towards equity investments, RM7 billion in private finance initiative and off-budget projects and RM3 billion in tax incentives.

Certainly, we laud the measures, such as encouraging companies to employ retrenched workers by giving them tax incentives, the issuance of another RM5 billion of savings bonds, allowing a deferment of one year the repayment of housing loans by the retrenched, as well as incentives to buy homes and cars.

However, economists generally agree that the mini-budget, as a stimulus plan, seemed to lack a “big bang” impact. At best, it will help shore up short-term confidence and prevent the economy from sliding into a deep recession. But like it or not, Malaysians must still brace themselves for a recession in 2009.

Given that the recession is now a global phenomenon, what the local economy needs immediately is a big boost to domestic spending, and the mini-budget does not appear to have addressed this issue adequately.

This is especially with regard to putting more money into the rakyat’s pockets to immediately boost consumer spending. The effect of some of the tax incentives, for example, will not be felt until early next year.

The need to focus on domestic demand is all the more important and urgent in view of the fact that the economic environment, both globally and domestically, continues to deteriorate. The end, at this point in time, is still nowhere in sight.

It must be noted that not all the RM60 billion will be translated into multiplier effects during the two years of the plan. Take the RM25 billion in guarantee funds. These are not cash injections but just a guarantee to enable companies, especially the small and medium scale enterprises (SMEs), access to funds.

For the SMEs, the biggest problem is the collapse in the export sector. Most of them are involved in the export sector supply chain. If there is no demand for exports at the end of the supply chain, SMEs will still be faced with an untenable situation inevitably. Having funds but no demand will be the eventual dilemma that must be dealt with, preferably earlier rather than later.

The government may decide to err on the side of caution when it comes to fiscal spending, given budget deficit constraints. At 7.6% of GDP, the deficit is among the highest in recent history. Still, given the severity of the economic crisis, the deficit is no longer a priority concern.

Having said that, the just-announced mini-budget is a step in the right direction. The toughest time for the economy may manifest between May and July, and depending on how much worse things can get, the government may need to come up with further pump-priming measures. The good thing is, there are still some bullets left in the government’s arsenal, insofar as fiscal and monetary policies are concerned.

Did the budget will help us come out from this crisis? I not think so.