MARKET CONTAGION & MALAYSIAN ECONOMY

Over the last few days we have seen the stock market throughout the whole world tumbled down like falling snow avalanches. On average, the markets throughout the world has dropped anywhere in the range of 30% to 40%. The total amount of value that has dissipated is in few trillion dollars. The trend will continue for a while and it seems that there is no abatement anytime soon. Why did the market dropped? This is the question that deserve some answers.

The key word is: contagion. This is the same disease that afflicted the East Asian markets in 1997 (and all other financial crisis of the past), that, when one market started to fall due to some reasons – investors believe that others will fall too – and this believe feeds into investors psychology, and everyone believes that everyone believes in the same things – then everyone will start to rush for the exist (or stampede) and sometimes it will become a major panic scenarios.

When the US markets fell, which is due to sell-offs by banks and fund managers, as flight to quality (or increased “risk aversion” attitude), the Dow took the heavy plunge. This is probably one of the “unintended” consequence of Basel II (and all the Risk to Capital requirements), as the Banks capital got eroded by the crisis, they have to get rid off riskier assets off the book, in order to meet the minimum Risk/Capital ratio requirements. Once the Wall Street crashes, the rest of the markets follow suits as the contagion spreads on, and then the whole process continues unabated and a self-feeding mechanism took place.

So, why am I worried? (Since I am not a player in the markets – if you are a market player, off course you should be dead worried). I am worried about the long term impact of the stock market drops on the economy (global and domestic). Losses of this magnitude (few trillion dollars -is roughly about 15% to 20% of the World GDP), will have a massive impact on the Global economic growth. This impact is not immediate, and will have about one to two years lag. Which means that we will see the full impact of it in the years 2009 and 2010 onwards. This will bring us a Global as well as local recession, which translates to unemployment, loss of income, slower business environment, and so on.

Will Najib (or whoever the new leadership of the country under UMNO) be prepared to brace for these upcoming tough environment? Under Pak Lah, we have seen how the economy was “poorly managed”: for example, the fuel subsidy. It was done in a haste (as if the Oil prices will remains above $100 for a while), whereas now we can see that it has come down below $100 – and yet we have put in motion an inflationary trend that was the highest in our history. If better calculation was done, probably, a lesser negative impact could be accomplished.

At the same the fiscal management of the country has never been that much in good shape. Hardship times calls for scaling down and curtailing things that are excessive (which should not be there in the first place). One of the example is the so-called PFI (Private Funding Initiatives) program – which as the title implied, government projects to be funded by private money. An example of such project is Syarikat BLT, which got the award for many government projects such as police quarters etc., to be build-lease-the transfer to government. BLT then parcel out and awarded the various contracts to various “politically linked” parties to perform the jobs. But where does the money comes from? Employee Provident Fund and Bank Pembangunan. EPF funds the equity and Bank Pembangunan gives loans to the contractors.

If this is what is meant by PFI, then it is a total mockery -as EPF is never “private” under any definitions, as all the money belongs to the public contributors. The same scheme was also structured for the various “development corridors” – which fortunately (case of PGCC is an example), cannot continue due to changes in state governments.

Let us hope that the crisis and contagion has much limited effects on Malaysia, so that the impact will be lesser. However, hope alone will be futile, as we also would require good leadership, to rest our hope upon.

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