Foreign Trade and the National Debt

by Harun Rashid

Sep 10, 2001

It is generally agreed the Asian Tiger phenomenon was based on foreign investment. The tiger is fast becoming as extinct as its namesake, as the withdrawal of foreign funds continues.

For a time it was announced that Malaysia was capable of independence, with internal resilience and strengths; that domestic demand would rise to provide sufficient economic activity to stave off any downturn. Now there is a growing awareness that foreign trade activity plays a larger role than the government is willing to admit.

The aggregate figure, derived from combining monthly import and export figures, tends to vary, and the trend is difficult to see. But it is possible to average the figures so that the trend approaches a smooth curve. In Figure 1, the curve shown in blue is based on the raw data, taken from the official government amounts (in billions of ringgit). The smoothed red curve is the moving average for the months of February through July last year. The figure shows what vigorous growth looks like on a graph.

The figures for July, 2001 have just been announced, and it is possible to construct the same graph, where the blue lines connect the raw numbers, and the red curve indicates the moving average. It is easy to see that things are not the same, and there is every expectation that the picture is to become worse. The trend is certainly not flat. It is down, though not down so sharply as it might become, because the figures refer to business activity past. The most recent data indicate there is no change in the trend, and indeed, the downward angle of the curve may be expected to increase in the coming period. This is because the July raw datum (49.6) is lowest of all the months shown.

The data for 2000 and 2001 may be plotted on the same chart for comparison. The difference in the trade situation is immediately obvious. Last year during this period there was support for unbounded optimism, and the economic policies of the government were defensible. This year, however, there is clearly a change in the situation. The level of economic activity that is related to foreign trade is less than flat, and the July figures are more disappointing.

While the 2001 curve (red) seems to be leveling, after the August figures are plotted together with the low July figure (49.6), the curve will continue its downward trend. One notes the sharp drop from RM61.4 in July last year to RM49.6 billion this year. This is a year-on-year decrease of RM 11.8 billion in foreign trade activity (-19.2%). Is such a drop a serious issue for the national economy? The prime minister says "No, there is no recession. The full year GDP can approach +2 percent growth." Many disagree. The tiger got fed on foreign trade.

The news from Japan and the US, our largest trading partners, is not good, and Singapore is also tightening its belt. More layoffs are reported daily. Over 200,000 Malaysians work in Singapore, and they are certainly to be affected as Singapore acts to protect its own. Because Singapore is a transhipment point for much that goes forward to Japan and the US, so far as Malaysia is concerned, all three trading partners are inter-related.

If the economic fate of Malaysia is free of dependence on foreign trade activity, as the government states, the fall in this sector is not worrysome in the long run. There is no urgency, no sense of danger, and there is no awareness that Malaysia faces a serious situation. The economic picture is, however, being treated seriously in Japan, Singapore and the US. The question then turns on whether the domestic demand in Malaysia is strong enough to ignore the lower foreign trade statistics.

Much that happens in Malaysia relates directly to the deposed finance minister, Anwar Ibrahim. At the time he took the post in 1991, the national debt was around RM25 billion. Over the next eight years he was able to reduce this figure until it was under RM10 billion. At the time of the '1997 crisis' there was enormous pressure to sharply increase the public spending, especially in the large mega-projects favored by the prime minister. One was the Bakun Dam, which was suspended by Anwar along with other projects, which he considered a form of plundering the public treasury to enhance favored financial friends of the prime minister.

Since the removal of Anwar Ibrahim from his post in September of 1998, the national debt at the federal level has escalated to over RM200 billion. To this must be added the state and other lower level debt, plus the debt in the private sector. Much of this debt will never be repaid.

It has been quite a party. But that is not the whole story. In addition to this increased debt load, the government has cleaned out the large corporations under its control. Maybank, Petronas, Telecom, and especially Tenaga National are essentially overburdened to technical bankuptcy. Their debts and non-performing loans are now too heavy to survive a significant downturn, and the current level of defaults on interest will soon be a major factor in the financial embarrassment of the country.

As if this were not enough, the pension funds of the public employees have been employed in the pump priming scheme, and it is impossible to get an an accurate accounting of the losses they have sustained. The financial arms of the government are broken, and the various funds under its control have lost their flexibility, along with the people's security.

The analysis here presented is a sad one, and begs to be proven wrong. But the government has a fetish for secrecy, and no reliable disclosure is to be forthcoming. The evidence is there, in the recurrent extension of payment dates, the lack of external audits, the rolling over of bonds due, and the total unwillingness to allow any investigation or prosecution of the enormous crimes and frauds which have been exposed to date.

In the present situation, one would expect humility, even prudence. Some acknowledgement of an interest in financial conservatism would seem wise. But no, the government daily announces new and useless mega-projects to further burden the public for generations to come. The picture resembles nothing so much as lemmings headed for the cliff. And dishonest lemmings at that. But the debts are to be left to the toll payers and tax payers. Those who plan and contract the bridges and dams take the profit now, and may be expected to withdraw to a safe haven before the inevitable collapse occurs.

If it took eight years to pay off RM15 billion in the good times of 1991-98, how many years will it take to pay down the present level, which is nearing ten times that figure? Can the Malaysian government continue its pump priming exercise at the same level indefinitely? Certainly not. The oil is sold years ahead, the timber resources are depleted, and agricultural commodity prices are low. Keynesian economics postulates that a country cannot go broke, that national debt can be internalised indefinitely. That theory is presently under test around the world.

Foreign sources for further borrowing will surely dry up as the defaults make the situation more transparent, forcing the government to admit its ridiculous 'spend our way out' policies have led to an unmitigated disaster. Government deficit spending at a rate of over RM75 billion per year has made things for a time look better than they are. But the fat, along with the butter, is now gone, and lean times are surely ahead.

But there is no official statement to indicate an awareness or concern. It is full steam ahead. The only man in Malaysia who will and can act to protect the public interest is in prison, while his conspiring accusers make merry, with jet engines running at the airport.