Unique challenges in 2009
A SLEW of news reports in disparate countries, all released last week, underscore the unique challenges policymakers worldwide are likely to face next year. Even countries previously believed to be immune to the global economic crisis have seen their prospects darken considerably.
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n short, 2009 is shaping up to be a year when reality could exceed even the worst expectations. This suggests Malaysian policymakers should be flexible, rather than dogmatic, about stepping up government spending, even if this means a markedly higher budget deficit.
Last Wednesday, the US Treasury Department said for the first two months of the current fiscal year that began on Oct 1 this year, the federal budget deficit totalled US$401.6 billion (RM1.4 trillion) – almost matching the US$455 billion (RM1.6 trillion) deficit for the entire 2008 fiscal year.
Budget experts suggest the red ink in fiscal 2009 could approach US$1 trillion (RM3.57 trillion). This US$1 trillion figure doesn’t include the US$500 billion (RM1.8 trillion) to US$700 billion (RM2.5 trillion) economic recovery package that Congress is expected to pass early next year.
Two reasons have been advanced for the phenomenal expanding fiscal deficit – the Treasury’s financial stabilisation efforts and shrinking tax receipts. Since both trends are likely to continue in 2009, it doesn’t take a Nobel prize winner to realise that by end-September 2009, the current puddle of red ink could be the fiscal equivalent of the Pacific Ocean.
Meanwhile, the Rhineland-Westphalia Institute for Economic Research said Germany could find itself in the worst recession in its history. In its latest report, the institute said Germany’s gross domestic product will turn negative by 2% next year – a marked contrast from its forecast of 0.7% positive growth announced in September.
Additionally, the Munich-based Ifo Institute for Economic Research says Germany will remain in recession until 2010. If the outlook for Germany, the anchor for the eurozone, is bleak, that for other eurozone countries will be indescribably sadder.
Similarly, in an unusually gloomy report, the World Bank said the world economy was on the brink of a rare global recession, world trade will fall next year for the first time since 1982, and capital flows to developing countries could plunge by 50%.
"We know that the financial crisis now is likely to be the worst since the 1930s," said Justin Lin, the World Bank’s chief economist, a comment that summed up what lies ahead next year.
Two odd news items underscore the depth of investors’ fears. The UK-based Independent newspaper noted the spreads on credit default swaps (CDS) suggest Britain is more likely to go bust than companies like McDonald’s and Coca-Cola.
CDS measures the cost of insuring debt against the risk of default. While CDS isn’t the sole determinant of risks of sovereign and corporate debt, the higher spread for Britain supports those who claim the country is borrowing more than markets will tolerate, analysts said.
More worrying is the perception Britain is mortgaging its future in a possibly pointless attempt to reflate an economy that needs to be downsized after a long credit-fuelled boom, they add.
The International Herald Tribune reported another quirk – investors bought US$30 billion (RM107 billion) of one-month US Treasuries at zero yield. Even more astonishing, demand was so great the US government could have sold four times more than the actual offering.
This abnormality highlights the shell-shocked stance of investors – willing to forego yield in preference for absolute security of capital.
More depressing for Malaysian policymakers, the perception that countries like China and India are immune to the global economic crisis has been shattered.
(Bolehland always slow to react and act, always pretend, they will react if someone died, sad to say that)
China’s exports shrank last month, the first decline in more than seven years. November’s 2.2% drop in exports from the year ago figure underlines how rapidly China’s economy has deteriorated, news reports say. In October, China’s exports expanded by 19.2% from a year earlier.
Even more dramatic was the plunge in China’s imports – down 17.9% in November from a year earlier. The erosion of imports indicates weaker domestic demand while the pullback in export orders has wreaked considerable havoc among China’s manufacturers.
Meanwhile, the global slowdown has plunged India’s high-tech companies and outsourcing firms into negative territory. Many of India’s outsourcing companies like Infosys derive two-thirds of their business from the US while one-third comes from financial institutions like Citigroup.
"People think outsourcing is a recession-proof industry. It is not," says Siddharth Pai, a partner in Technology Partners International, a consulting firm that publishes an index of global outsourcing deals. Pai says the index is at a 10-year low.
That industrial powerhouses as well as low-cost developing countries have been caught in the global economic crisis suggests every country is possibly vulnerable. For Malaysian policymakers, complacency is a word that should be deleted from their vocabulary.
Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at schoo@noordinsopiee.com
Updated: 10:11AM Mon, 15 Dec 2008
source:http://www.sun2surf.com/section.cfm?id=363