He says govt needs to act and think in interest of the people, and be pragmatic in doing the right thing
by ALIFAH ZAINUDDIN / pic by MUHD AMIN NAHARUL
ECONOMIST Prof Jomo Kwame Sundaram (picture) has warned the government of overly depending on credit rating agencies to decide whether Putrajaya should increase public spending to counter the effects of the Covid-19 pandemic.
Jomo said rating agencies have repeatedly been proven wrong in the past, and governments, including Malaysia, should adopt countercyclical policies in dealing with extraordinary situations.
“Credit rating agencies have got things so wrong so many times over. If we allow our countries to be ruled by them, I think we will simply put handcuffs onto ourselves,” he said at Khazanah Research Institute’s (KRI) webinar on its latest “The State of Households” report.
He cited recent calls by International Monetary Fund (IMF) MD Kristalina Georgieva, who urged policymakers to spend more on recovery efforts.
“The IMF emphasised the need to spend, spend and spend. They see no other way to deal with this crisis.
“There is also a consensus that when you are dealing with an extraordinary event, the way governments should balance their budgets is not on a year-to-year basis, but rather over a business cycle.
“So, the role of the government should always be countercyclical. The government should be dampening things when the bubble flattens and it should try to stimulate the economy when things are going slow,” Jomo said.
“The government needs to act and think in the interest of the people, and be pragmatic in doing the right thing.”
S&P Global Ratings in June revised its outlook on Malaysia to negative to reflect the additional downside risk to the government’s fiscal metrics, given the weak global economic climate and heightened policy uncertainty.
The credit rating agency said the economic impact of Covid-19, combined with depressed oil prices and fiscal stimulus, will weaken the government’s debt position over the next few years.
In January, Moody’s Investors Service Inc retained Malaysia’s A3 ‘Stable’ rating, attributable to the nation’s strong medium-term growth prospects.
However, it noted that the credit score could be upgraded if prospects for fiscal consolidation were to improve significantly.
KRI chairman Tan Sri Nor Mohamed Yakcop earlier said it was clear that further support is required to mitigate the financial and economic impact of the pandemic.
“It has to continue because we are not out of the woods,” he said when asked on the possibility of further stimulus measures.
“We should not be unduly worried about raising debt at this time. I believe we can borrow, not overseas but locally, to provide an ecosystem to get us through this difficult period.
“There are undoubtedly many vulnerable households as we speak now, worrying about tomorrow, whenever there are some forms of (business) closure,” the former second finance minister said.
“The question is not can the government continue to spend, but rather can the government afford not to spend.”
Putrajaya last month announced an additional economic stimulus package worth RM10 billion comprising cash aid for struggling households and grants for micro-businesses.
The new package takes Malaysia’s total spending to combat the virus fallout to RM305 billion, or about 20% of GDP.
KRI’s latest report titled “Welfare in Malaysia Across Three Decades” found that 1.2 million households were at risk of absolute poverty as income growth continued to lag behind rising consumption costs.
It noted that households in the bottom 10% income group had negative net savings amid stagnating incomes and increasing household expenditures.
In contrast, the top 10% had RM12,653 in residual gross income on average, which is considerably more than the second top 10% who had RM5,763 in excess.
Data from 1993 to 2019 showed notable shifts on items spent within household budgets.
The fastest-growing consumption category was communication, having increased by more than eight times over the 26-year period. This included items such as phone purchases and charges for Internet and phone bills.
In terms of necessities, consumption on housing and utilities grew by 2.6 times. While this was not as high a growth in percentage terms, the increase translated into an additional spending of RM662, higher than any other consumption category.
Another key expense was transport, which grew by 2.1 times, translating to an increase of RM319. Food away from home showed increasing importance for households, multiplying by 2.3 times or RM280 since 1993. This contrasts with the trend of food at home expenses, which only increased by 1.1 times or RM85.