MALAYSIA AND A WORLD IN TURMOIL

Posted by Dr. Mahathir Mohamad at July 3, 2008 11:38 AM

1. The Malaysian Government appears not to be perturbed by what is happening in the world.

2. It appears to be convinced that it can isolate and insulate itself from whatever is happening to the world.

3. It seems to be confident that it will be left untouched.

4. It merely reacts to situations as they arise one by one.

5. The mainstream media hardly ever mention the turmoil that the world is facing. Certainly no in-depth analysis has been made. Only Malaysian Business has asked whether we are prepared for the worldwide catastrophe that must bring chaos and problems to our economy, finance, politics and social life. The rest seemed blithely unconcerned. Certainly the people are not being prepared for the inevitable.

6. We are admittedly more fortunate than many other countries. When costs are rising and manufactured exports are shrinking, our commodities have come to our aid. Our export earnings from petroleum and gas, palm oil, rubber and tin have increased many times over.

7. The rise in the price of petrol and products has begun to affect our lives, our living standards and our complacency.

8. We produce about 650,000 barrels a day, consume 400,000 and export roughly 250,000 barrels. We used to earn 30 US Dollar per barrel; today we earn 140 US Dollar, almost all profit. Work out the revenue from 250,000 barrels per day for one year.

9. Besides, we produce 900,000 barrels equivalent of gas, mostly exported. There is no need to take notice of the petrol we produce in Sudan and elsewhere, all selling at 100 US Dollar plus.

10. But we also earn more, much more from palm oil. It used to cost us RM600 per ton to produce. It must be slightly more now. But one ton of palm oil used to sell for RM800 before. Now it sells for more than RM3,000. The palm oil plantation companies are laughing all the way to the bank.

11. But the prices of rubber and even tin have also increased tremendously.

12. For the Government it must mean a great increase in revenue. The profits from petroleum accrue 100% to the Government. I believe in 2006 when oil price was about 70 US Dollar Petronas made a profit before tax of 60 billion Ringgit.

13. Whereas the tax on corporate incomes of the manufacturing companies is minimal, corporate tax revenue from companies producing and exporting palm oil, rubber and tin is very high. If we care to look at the profits of companies today many make well over a billion a year, some more than three billion.

14. So the Government should be flushed with money. But companies not involved in the production of raw material cannot be doing so well. Their imported raw materials including oil and components have all increased in price. They have to increase their export and domestic prices but profits may be less.

15. The construction companies have few contracts to share among themselves. The big Government projects have not materialised. The sub-contractors and building material suppliers are not doing well either.

16. The big construction companies have gone abroad. Some are doing quite well but they cannot help Malaysian subcontractors as the local subcontractors are entitled to get the contracts.

17. Malaysian investors are also not investing in the country. They have a good choice for making money investing in such countries as China and Vietnam. They will pay taxes in these countries.

18. In the meantime the world is undergoing a traumatic economic and financial turmoil. It began with the devaluation of the US Dollar. I do not know how much US Dollar bonds are held by Malaysia. I remember telling the Governor of Bank Negara to reduce our dollar holdings before I stepped down. I hope she has done so. Otherwise we would lose 80 Malaysian sen for every US Dollar we hold. When we hold 30 or 40 billion US Dollar the loss can be considerable.

19. We may make some money from the other currencies which have appreciated against our Ringgit.

20. The US Dollar is going to go down further due to unwise playing around with money. Sub-prime lending was considered profitable before but now the market has collapsed. The loan papers had been readily bought by institutions but now the papers are worthless because no one wants to buy them. And the borrowers are not paying simply because they have no money.

21. The US which condemned us so righteously for bailing out companies now approves massive bailouts by Institutions and the Federal Reserve Bank. These are not small amounts. They are talking about US200 - US400 billion dollars.

22. Bear Stearns sale is a classic case but other banks are faring no better. They will have to sell at fire-sale prices like the banks of Southeast Asia had to do after currency traders bankrupted these banks. A taste of their own medicine should have a salutary effect on the arrogance of the big money people, and their countries.

23. The financial problems of the United States have spilled over to the European countries. They too had been involved in sub-prime lending, either directly or indirectly.

24. The US dollar is going to shrink further as countries unload their dollar holdings, refuse to buy US Dollar bonds, and use other currencies for trading. Oil producers may demand to be paid in their own currencies. The international financial regime will then collapse.

25. The US Dollar is not backed by anything. It sustains its value because it is used as a trading currency. When countries start using other currencies for trading and quickly dispose off the US Dollar in favour of Euro or Yen; when the US Dollar is no longer used for the reserves of the rich countries, then the US Dollar will not be worth the paper on which it is printed.

26. The United States already suffers from twin deficits. When the dollar becomes useless the United States will go into deep recession. Printing more money by the Federal Reserve Bank (which incidentally is not owned by the Government but by other banks) will only result in its devaluation and inflation in the United States.

27. The United States must surely go into severe recession (I am sure the United States will do something illegal in order to prevent this from happening). But whatever, United States recession will affect the whole world.

28. Unprecedentedly the world is experiencing food shortages, something which it had not seen for decades.

29. I will not say anything about the world as everyone knows and I know I am not an economist or a financial expert. But I will try and guess what would happen to Malaysia.

30. Twenty percent of our export goes to the United States. Obviously this market would not be able to absorb what we have to sell to them. We will not lose all but quite a substantial sum will be lost.

31. The economies of the developed countries will also suffer, maybe less than the United States. But our export to them would shrink also.

32. With the money form our petroleum export and revenue from other raw materials we had been able to subsidise for some time. But the prices of fuel and other goods will all increase far beyond the percentage of the increase in oil prices after the subsidy was withdrawn. This is aggravated by the actual increase in prices of foodstuff and food grains, building materials, and assorted imported goods. Even the items produced within the country will increase in price because of imported contents.

33. But the Government is still talking about 5%-7% inflation. This is quite meaningless to lower and middle-income people who must pay 40% more for petrol and 100% more for rice. Other necessities too have increased in price by well over 5%-7%. Stopping price control in the belief that the market will determine prices is imprudent.

34. One of the reasons why Malaysia's inflation rates had remained low compared to other developing countries and even some developed countries is the control over prices of essential goods. Without control there will always be profiteering. And profiteering will result in a high rate of inflation.

35. Today wage earners in particular are suffering. Wages have not increased to compensate for increased cost of living. While chasing prices with increases in wages can cause a wage/price spiral, but judicious increases to cushion off the rising costs would reduce the impact of inflation on the lower income people.

36. Malaysia must give up the idea of competing on the basis of low cost labour. Against China, Vietnam, Thailand, Indonesia we just cannot win. We must provide other elements attractive to investors.

37. Confidence in the consistency of Government policies and political stability would be among the factors attractive to business. There can be a lot of other things that can be provided to offset the rise in wages. After all we must remember that many developed countries have very high wages. Even if we double the salaries and wages paid in Malaysia we would still be far lower than wages in developed countries.

38. We had planned to go hi-tech in order to increase income. But there is not much moving in the implementation of this policy. Instead we want to be an agricultural country again. Planting food crops on the side tables of roads may increase food production but it will not help fight inflation on the scale needed for overcoming the turmoil in the world.