Further burden on working class and young people
In the middle of preparations to celebrate the Eid festival, Malaysia’s share and currency values were badly hit by news that Fitch’s had downgraded Malaysia’s credit status - from ‘stable’ to ‘negative’. The news immediately affected the Kuala Lumpur Composite Index (KLCI) which covers Malaysia’s 30 largest companies; it sank 1.3%, to the lowest point in seven weeks. The Malaysian currency dropped to RM 3.25 to 1 USD - a three year low and a 15 year low against the Singapore dollar.
Earlier, the Malaysian Institute of Economic Research (Mier) had revised downwards Malaysia’s economic growth forecast to 4.8% for this year from the 5.6% estimated earlier. It said, “The lower growth projection was due to external factors such as a weak global recovery, China’s economic slowdown, moderate expansion in Asean (Association of Southeast Asian Nations), financial market volatility and the tightening of financial conditions…somehow, our engine of growth in the external sector is slowing down. Our exports are declining quite substantially, especially in April and May, while the trade balance is very small”.
Fitch Ratings gave the main reason for the credit ratings downgrade as the further deterioration of Malaysia’s public financial health. The federal debt had risen steadily from 39.8% of GDP at the end of 2008 to the current 53.3%. The public debt is significantly higher compared to neighbouring Indonesia with only 25% and even Thailand with 41%.
Prime Minister Najib Razak has promised to keep the debt level below 55% in the coming year but the hidden guaranteed debt that Malaysia will receive in the future is already totaling 68% of GDP. Fitch’s revision reflects the drop in confidence of the international capitalists with Malaysian economic growth. Other South East Asian countries such as Vietnam and Indonesia would be a more attractive venue for foreign investment as indicated by the positive credit outlook of Fitch.
The alarming state of Malaysian federal debt is directly connected to the implementation of neo-liberal policies such as privatisation in recent years.
Many public companies were privatised and billions borrowed to fund infrastructure and ‘mega’ construction projects. The federal government has been borrowing exponentially since the 1997 Asian Financial Crisis. At the end of 1996, Malaysian public debt was only RM 91 billion. Currently it is at RM 502 billion.
Given an increase of RM 228 billion in the last 5 years, the IMF has projected the Malaysian public debt to be at RM 779 billion by the year 2017. This projection shows Malaysia heading in the direction of Greece and Northern Ireland in terms of public debt if the trend continues.
A significant increase of debt since 2008 comes from the effects of the global financial crisis and increased government expenditure in the run-up to the recent general election. The Najib administration has been downplaying the real effects of the global financial crisis on Malaysia and has continued to borrow enormous amounts to patch up the problems temporarily.
The slowdown in trade and exports over the past few years accelerated the deficit and the government was approaching an economic crisis as the election year was nearing. As a counter-measure, last year it announced plans to ‘liberalise’ seventeen service sub-sectors, including health and education services, in phases throughout 2013. Some of the Government Linked Companies (GLCs), which had a majority public share were fully privatised. However, the worsening of the Chinese economy has not favoured Malaysia. Last April, Malaysian exports to China unexpectedly fell and pushed the country’s trade surplus to a 16 year low.
Najib Razak, who is finance minister as well as prime minister, is under pressure from the markets to maintain the plan of a 3% yearly reduction of the deficit by reducing subsidies and broadening the tax base. The details of his plans might not be announced until the 2014 Budget Planning on October 25th.
The government has also planned to implement its long awaited Goods and Service Tax (GST) which is similar to Value Added Tax (VAT) in Europe. Experience has shown the inability of such taxes to solve debt crises; Greece, Spain, Northern Ireland and Portugal have a high rate of VAT - at around 23% over the years - without being able to reduce their deficit. Evidence shows that such short term solutions would eventually worsen the conditions and increase the economic burden on the working people especially the poorest 40% of the population.
The government is also attempting to attract more investments especially from the USA, through the TPPA (Trans-Pacific Partnership Agreement) which could further liberalise the markets to the advantage of multinational capitalist companies. This would undermine the rights and welfare of ordinary people.
Cost of living
The implications of the Fitch downgrade are even bigger on the life of millions of ordinary Malaysians. Recently inflation has steadily risen and the situation is forcing more and more Malaysians into borrowing. Household debt is currently at 82.9% of GDP and growing at 11.5% a year - among the highest in Asia. Further reduction of subsidies and the implementation of GST will result in an unbearable burden for the people. Prices increased by as much as 1.6% in the one month of March due to the higher cost of food. It resulted in a higher number of people finding themselves bankrupt.
Housing prices have been soaring, especially in the city areas. The average cost of a house in Kuala Lumpur is RM 498,000 while the average income in Malaysia is a mere RM 2,000 a month, with a recently set government minimum wage of only RM 900. House prices are affecting young people who are facing difficulties in buying a house for themselves and are further suffering in the competitive, low-paying jobs market.
Although the official unemployment rate is 3.5%, in reality, most of the jobs are on a contractual and temporary basis. Many youth fill in doing cheap part time jobs for outsourcing agencies who exploit them without meeting even basic labour rights requirements. This shows that the Malaysian economy, which is now dependent on domestic demand as Malaysia’s key source of growth, would be further undermined by the growing household debt.
The Fitch Ratings, like other rating agencies, are not always accurate but they have an effect on the capital in-flow and out-flow of a certain amount of the market. Malaysia, being an export-dependent economy, has to succumb to the will of the international capitalists due to the nature of its market arrangements. The negative outlook of capitalist Malaysia will result in a flight of capital out of Malaysia at the same time as providing reasons for the government to further liberalise the market.
As the basic needs of workers and young people will be continuously worsened, the struggle for their rights and welfare is inevitable. More struggles of workers and young people can be foreseen in the near future. That would open up more avenues for the formation and expansion of independent worker-based organisations, and socialist ideas would be sought as the only real alternative to vulture, market capitalist ideas and practice.