PORAM: An Honest Word by Wong Chen
Here is my 3,400 words speech titled “Economic Updates and Trade Challenges”. For those who want to better understand what issues are important to me, do brave through this longish read. It is written in conversational style, in a speech format.
YB Wong Chen, PORAM Forum 22nd November 2019
Economic Updates and Trade Challenges
I have about 40 minutes to talk about the Malaysian economy and international trade. 40 minutes is kind of short for such wide topics, but I will do my best to provide snapshots and some personal views. I hope that my speech will trigger questions later at the Q & A session. That is simply because I don’t really like to give long speeches but much prefer answering questions. Anyhow, let’s start.
Economic expectations for 2019 were high. When the budget for 2019 was announced in October last year, two very big items in the budget went largely unnoticed. These were the RM19 billion GST refund and a mysterious RM18 billion income tax refund. In total, they amounted to a whopping RM37 billion returned to high net worth individuals and corporations at the expense of Petronas, who had to cough up an additional special dividend of RM30 billion. Without going into an argument on whether these rebates are justifiable or not (do note that there was a PAC hearing on the GST refund), the rebates were paid out in full this year. Having a RM37 billion injection of money from government into the private sector should have, at least theoretically, stimulated the Malaysian economy.
However, with one more month to go before 2019 ends, I am sceptical that this RM37 billion had the intended effect of stimulating the Malaysian economy. This is by far the single biggest issue that I have with my own government on what economic policy direction we should take. Rebating rich individuals and corporations with the hope that these individuals and corporations will push up domestic consumption and re-invest domestically is at best a 50-50 crap shoot. Now with hindsight, it is clear that even the rich and powerful did little investing. By looking at the Bursa falling 14 per cent since PH took over, negatively outpacing all regional bourses, and high end condos remain unsold, we can guess that most of the money did not go into investments nor consumption.
I am a former corporate lawyer, from a pure capitalist family with 50 years of business history, yet I would have preferred an economic policy that helps the poorest of the poor, rather than the richest of the rich. Helping the poorest, for instance by increasing the minimum wage, would have at least ensure resilient domestic spending resulting in some economic growth for Malaysia.
So, what is the current economic situation in Malaysia today?
Economists and bankers are estimating that GDP growth for 2019 may hit 4.5 per cent. We will only know the numbers by end February 2020. However, last weekend, the Q3 2019 data showed a year on year 4.4 per cent quarterly growth. However, the underlying aspect of the growth is problematic and worrying. We saw overall export numbers drop by negative 0.9% but import numbers dropping further at negative 2.0%. This double negative drops ironically helped to produce positive net export growth numbers. A drop in imports, in particular, the drop in purchases of capital items and technology, is worrying because it is a clear sign that manufacturers and producers are not investing to increase higher production of goods and services in the near term. It boils down to a question of confidence. And the big elephant in the room question of confidence, is political in nature.
Luckily, the third quarter of 2019 saw some resilient consumption, presumably due to Hari Raya. I would like to believe that the RM37 billion in income tax and GST rebates contributed a bit to this consumption. However, as I stated earlier, I suspect a very large component of that RM37 billion are preserved and salted away rather than invested.
It is again, a question of confidence. At the heart of this lack of confidence is the political uncertainty that has arisen in the last two quarters. With the Pakatan Harapan government struggling to systemically reform core issues on governance, the people and the business community are generally unhappy and feel directionless.
This unhappy situation is compounded by external headwinds from a global slowdown, the US-China trade war and outbreaks of political protests around the world including Brexit, Hong Kong and several South American democracies. Climate change issues are also becoming more alarming, adding to the negative global vibe. Domestically, we have not managed to inspire confidence, externally we are challenged by global problems.
Let me now quickly explore the second topic of this talk, the US-China trade war. A few weeks ago, I gave a talk at the Kuala Lumpur and Selangor Chinese Association Hall on the same topic and its impact on the Malaysian economy.
In the early few months after the trade war started in July 2018, the prospects of Malaysia gaining economically from this spat were supremely positive. Malaysia and Vietnam were identified by economic experts as the two top countries to gain most from this trade war.
To arrive at an answer, we need to ask two simple questions. First question, will we sell more of our goods and services as a result of the trade war? The second question is will China and US increase their manufacturing facilities in Malaysia to bypass the tariffs?
Let’s answer the first question; did the trade war resulted in higher sales of Malaysian goods and services? The answer is yes, but only for select goods and up to Q2 2019 only. Because as you know, we saw an overall dip in exports, at negative 0.9% in Q3.
We can start by asking, are we supplying Malaysian goods that are on the tariff hit list of America and China. In other words, are we supplying peanuts, washing machines, cars, pork and soybeans?
For example, China’s tariff on US peanuts has had zero impact on Malaysia simply because we do not export peanuts.
Nevertheless, there may be some grey benefits that naughty Malaysians can gain, by acting as a transhipment hub for American peanuts and then rebranding the same as Malaysian peanuts. Malaysians are very smart but usually for the wrong reasons. However, these kind of illegal activities are somewhat limited, or at least that is what, I hope to be the case.
The obvious product that will benefit Malaysia resulting from this trade war is Malaysian palm oil. When China imposed tariffs on US soya oil, Malaysian palm oil simply became more price competitive. According to China’s National Grain and Oils Information Centre, China’s total palm oil consumption rose more than 20% in the first seven months of 2019.
You, the palm oil refiners here today have probably enjoyed a pretty decent year from this trade war. I hope there are no IRB officers here. Based on MPOB data, Malaysian palm oil exports to China were at 1.86 million metric tons for 2018. For 2019, up to September our exports have already hit 1.62 million metric tons. By looking at the trends of the last quarter, we can make an educated guess that Malaysian palm oil exports to China will hit 2.3 million metric tons by the end of this year. This represents a 22 per cent growth in palm oil exports to China; resulting primarily from the trade war.
Despite this positive result from China, we were however challenged by India’s reaction to political statements made by our Prime Minister. Of course, we are now in the process of resolving this by offering a $5 US dollar discount on Malaysian palm oil to India. Bear in mind that traditionally we get a 5 to 15-dollar premium with India compared to the global market price. The only good news from this episode is now, we can actually put a value cost to having Zakir Naik in Malaysia.
What about the exports of other Malaysian goods and services?
According to a Bank Negara bulletin report, the report noted four specific products where Chinese products going to the US have reduced and Malaysian products going to the US have increased. The report focussed on photosensitive semi-conductor devices where China lost a 10 per cent market share and Malaysia had a 12 per cent market share increase. For radio broadcaster receivers, China exports dropped by 3 per cent and Malaysian exports grew by 5 per cent. For Vacuum cleaners, China’s exports dropped 2 per cent and Malaysia gained 3 per cent. For non-surgical rubber gloves, China’s exports dropped 1 per cent and Malaysia gained 2 per cent. Based on these four items we can see the average growth for Malaysia was 5.5 per cent on the back of China’s average 4 per cent drop to the US. This is understandable because China’s production volume is much bigger than Malaysia.
Now, let’s consider Malaysian products going into China at the expense of the US. For petrochemicals, the US saw a decline of around 5 per cent, whereas Malaysian exports increased 22 per cent. For oil and oil products, the US dropped by 1 per cent whereas Malaysia grew by 13 per cent. For electrical measurement instruments, US exports dropped by 3 per cent whereas Malaysia’s grew by 5 per cent. Finally, US cleaning agent exports dropped by 9 per cent whilst Malaysia’s grew by 5 per cent. Based on these four items we can see the average growth for Malaysia was 11.25 per cent and average drop in US exports was 4.5 per cent.
In conclusion, the trade war has actually helped Malaysia to increase its exports, at around 5.5 percent at the expense of China, and 11.25 per cent at the expense of the US. So, the average growth experienced by Malaysia is very strong at 8.37 per cent. However please remember that this growth is on select goods where we are actually competing directly with China or the US.
Now to the second and bigger question. Will the trade war incentivise American and Chinese companies to relocate to Malaysia to bypass tariffs? My answer is at best speculative, but I will try to present to you a few scenarios.
To better understand this, we need to differentiate the types of Chinese investments to Malaysia. There are 3 broad categories. 1. BRI Infrastructure investments, 2. Property investment as in Forest City and Bandar Malaysia and 3. Manufacturing FDI. For the purpose of analysing the impact of the trade war, we should only look at the manufacturing FDI.
There is a persistent perception amongst Malaysian Chinese business that in this trade war, it is China that will invest more than America in manufacturing facilities in Malaysia. This is just simply not true. In October 2019, the government announced that the total approved manufacturing FDI from China to be RM4.8 billion, compared to America’s RM11.7 billion. America’s approved investment is more than double that of China. In addition, despite the approved investments the Chinese manufacturing investments have not materialised yet and remain today, as mere announcements and intentions.
Why are the China approved manufacturing investment numbers so small? It is basic economics, China’s cost of production is just slightly higher than Malaysia’s. The small cost differential simply does not justify a move by Chinese companies. Moreover, there is Vietnam, cheaper and nearer to China.
Going forward, China is also at a labour/technology crossroads. Should they invest in automation technology in China to improve their internal productivity, or should they relocate to cheaper labour-intensive countries such as Vietnam and Ethiopia.
Let me now deal with the prospects of American manufacturing investments going into Malaysia. Will American tech companies shift more operations into Malaysia? We know companies such as Dell, Intel and HP are currently big investors in Malaysia. Have they recently expanded their factories and capacity in Malaysia? The answer is a resounding yes. I don’t have the exact numbers but I have been informed that many American tech companies have increased new production lines and intend to continue to expand in the next few years to come.
However, only time will tell whether we will continue to receive substantial foreign direct investments from American companies as a result of the trade war. So the next question we should ask, is how long will this trade war last?
Donald Trump faces a Presidential election next year, and thus it is very likely that Trump will seek to cool down the trade war. His core supporters in the bible belt need to sell their agricultural produce to China. As such, it will be in the interest of Donald Trump, to normalise trade with China leading up to the Presidential election. After the presidential election, we will likely see the resumption of the US-China trade war because irrespective of who wins, both the republicans and the democrats view China as an existential long term threat to the US’s economy and security.
Now let me address the current global economic outlook. Let me turn to Europe. Brexit, Brexit, Brexit. I don’t think I need to say anything more. How about the rest of Europe? I was in Germany and Austria in September with my wife for a short holiday. I don’t drink alcohol, so we weren’t there for Oktoberfest, but we did do a sound of music bicycle tour in Salzburg. A highly recommended tour, if you want to make your wife very happy.
One of my main reasons for going to Germany was to catch up with some of my German High School friends. One is a senior manager in the IT sector, one an engineer at Siemens and another a private equity manager. Munich, as you may know it is the city that produces BMWs. ON the surface everything seems fine, but my friends tell me that Germany has recorded a significant fall in car sales. Three nights ago, I met a German economist, who tells me that they are doing all they can to avoid another two-quarters of negative growth, otherwise Germany will risk being in an official recession.
What I’m saying is, there is a 50-50 chance that a global recession may start from Europe from Brexit sometime next year. Mark the date 31st January 2020. Some bankers and economists, who are more optimistic, believe that it may happen in 2021 instead. Despite all efforts of the global rock star central bankers, a nasty recession looks likely. This is a result of the lack of substantive financial reforms since 2008 and the liberal usage of quantitative easing policies.
So, if a global recession hits us, what can Malaysia do?
In my recent parliamentary budget speech, I discussed my personal experiences during the great Asian financial crash of 1997. So, if indeed a global recession is coming next year or the year after next, what should the PH government do to protect the Malaysian economy? My personal bitter experience of 1997 saw the then BN government channelled all of its resources to salvage the big crony corporations, resulting in hundreds of thousands of people losing their jobs. I’m sure many of you still remember those tough dark years that follow the financial crash.
So, what should the Pakatan Harapan government do this time if such a crisis hits us again? Firstly, I don’t think it will be as catastrophic as 1997 simple because our foreign currency denominated external debt is smaller at 45% of GDP compare to 60% in 1997.
If the crisis indeed hits, I for one would advocate the protection of people’s livelihoods rather than crony corporate interests. Corporations that rely on crony capitalism should be allowed to fade away. We should have done this in 1997, instead we prolonged our pain for the next 20 plus years. Small medium industries should be protected, people’s jobs, people’s livelihoods and cost of living must receive direct government intervention to alleviate sufferings and stabilize the economy.
I know, up till now, my speech seems to talk a lot of doom going forward, but believe me, I am naturally an optimistic person. I rather acknowledge the problem first, so that we can then prepare for it. As they say, pray for the best and prepare for the worst. There are many things that a government can do to resolve our economic problems.
We can cut out rent seeking fats. Removing APs on five thousand items, removing monopolies, have proper open tenders and fighting corruption can positively impact the economy. These governance policies can be implemented relatively easily. Fighting monopolies, removing APs, open tenders do not require legislative actions but merely enforcing and rewriting government directives and guidelines. Won’t cost the government a sen, just ink and paper only. Implementing anti corruption and better governance policies may cost money but an investment to beef up anti corruption efforts of around RM200 million could save at least RM30 billion from public and private sector corruption. What is short and what is truly needed is the political will to reform. Other than the will, we also need to change our overall economic strategy.
Focussing on domestic direct investment will greatly help to make our economy more varied and resilient. Instead of providing tax holidays to invite foreign direct investments, we must focus more on creating our own national champions. We need to have our own Samsung, our own Mitsubishi and our own Apple and our own Huawei.
In my humble opinion, I suspect that one of the reasons why we are fixated with foreign direct investments is that whenever foreigners come to our country, our politicians and their cronies will ask to get a share or equity from the foreigners. The foreigners will usually oblige, but since there is no such thing as a free lunch in business, in return for those shares, politicians pass on these costs to our workers who are underpaid with limited labour rights. The overly generous tax incentives we favour to foreign companies, effectively means forgoing taxes that should be used to help provide social security and welfare programs for the poorest Malaysians.
I want to stress that I am not anti-business or anti-entrepreneurship. Nor do I want to discourage entrepreneurship, but I do want corporations, domestic and foreign to serve Malaysia and the rakyat. And as such we must ensure the grave corporate abuses are rectified and resolved.
The Malaysia Baharu is supposed to address systemic and fundamental issues regarding government, governance and also the economy.
I tend to agree that we must continue adopting a more developmental state approach towards our economy, but of course minus the crony capitalism. We must re-organize our industries, which is largely still based on low-cost manufacturing powered by migrant workers, into an economy based on a larger pool of innovative SME companies. I personally look to Taiwan as a great model for Malaysia to emulate.
For that to happen, we need to resolve our racial and religious divide. As long as irresponsible politicians continue to divide and segregate us based on race and religion, our ambition for a resilient and nationalistic economy will continue to face challenges. As a parliamentarian, I see a lot of hope in Parliament itself. Most of you only get to see the controversial bits like parliamentarians misbehaving in the hall. In reality, I do have a lot of policy meetings and discussions with fellow MPs from both the government and the opposition. If there is one common theme, it is that most of us want to improve the economic livelihoods of the people and have nationalistic desire for the country to become more resilient.
I believe that in the coming months, we may see a positive change in the leadership direction of this country. We all want the leadership to be more inclusive and not to separate people in racial groups. Claiming dignity does not make a person dignified. Dignity is earned by service to the people and by uniting the people. I also believe despite all the current disappointments, all the secret back door meetings, the leadership going forward will be more reform minded.
I also believe a global economic crisis may in fact spur us to unite the different political parties together to face such a crisis. Only by uniting, by mutual understanding, by moderation of views and finally by shifting to a needs based economic system, can we start to chart a better Malaysia for all.
That is the big harapan of each and every Malaysian. I intend to continue to do my part to keep that harapan alive. Thank you very much for the opportunity to speak to you.