Whatever the results may be for the gross domestic product growth rate for the first quarter of the year, let us be clear about one thing. The two fiscal stimulus packages have only insignificant impact, if not at all, to Malaysian economy in that period.
Any effort to paint the stimulus packages as having helped to cushion the impact economic slowdown we saw in the first quarter should be received with extreme skepticism.
One has to remember that, while the first fiscal stimulus package was announced by the Abdullah administration in November 2008, there was no real spending done even as February 2009 passed us by with the speed of a tortoise. The government at that time was still scrambling to distribute money to various ministries and not actually spending it.
This has been admitted by the Second Finance Minister himself. In early March, he was reported as saying that barely half a billion ringgit from a total of RM7 billion had been spent.
Two months later — by May 12 2009 — according to a website established by the Treasury to inform the public of the status of the two stimulus packages, only a further quarter billion ringgit was spent from the RM7 billion.
Given the horrifying demand gap caused by weakened external demand, actual spending derived from the first fiscal stimulus is very much irrelevant to the GDP growth figure for the first quarter of the year.
If one insists that the RM750 million did cushion the fall that certain Ministers claimed it would earlier in the year, perhaps I am obliged to share the following analogy: it is only akin to preparing a mattress on the ground with the intention of saving a person who has just jumped off from level 88.
One also has to remember that the second, much larger, stimulus package was only announced on March 10 2009, which was already close to the end of the first quarter. Furthermore, it is impossible to believe that the second stimulus package came into effect immediately, especially accounting for the kind of lag suffered by the first stimulus package.
How much of the second stimulus worth RM15 billion of government spending has been spent is unclear. The same website commissioned by the Treasury is coy about divulging the same information it shares when it comes to the RM7 billion stimulus package. Nevertheless, experience tells us to be rational and not to expect too much.
Consider this: if the government faces trouble in spending RM7 billion even after approximately 7 months have passed, how exactly does one expect the government to spend another RM15 billion within just over 2 months?
That skepticism should be strengthened further with the knowledge that the government only began to borrow massively in April. We know that the second fiscal stimulus needs to be financed through borrowings. And we know that April is not part of the first quarter.
The best hope of making the second stimulus relevant is the RM3 billion tax cuts as well as the loan guarantees attached to the second fiscal stimulus, or the mini-budget in the language of the government. Alas, information about that is not so forthcoming for us to move beyond mere speculation.
Hence, the effect of tax cuts and guarantees notwithstanding, the effect of the two government spending-based stimulus packages has to be largely discounted if we are interested in explaining the results of the first quarter for the year 2009.
What might make the two stimulus packages all the more irrelevant is the manner which the economy behaved in the first quarter. While the jury is no doubt still out there, early indications do not bode well for proponents of government spending as the heart of fiscal stimulus.
The reason is that the economy — as indicated by various indicators — is arguably performing better with each passing month since January, on the margin. It is better in a sense it has been less bad than before; to be precise, the change of sign of the second derivative.
This happens in spite of the lack of significant interference in the economic cycle as planned by the two fiscal stimuli. The significance of this is that it may prove to those who lack confidence in the market that the economy does not desperately need government spending. This also provides a damning evident that we do not need a third stimulus package at all.
So far, the best factor to explain possible turning of the economy may be the very factor that brought the economy to a tailspin in the first place: external demand.
It is hard to resist connecting the improved local condition with the health of the blessed Chinese economy. Even in the US — another major destination for Malaysian goods — talks of green shoots are aplenty.
If the trend continues, we may see a bottoming out soon enough even without additional government spending as allocated by the two fiscal stimuli. Indeed, the chances that the economy gets better before the full effect of the stimulus packages kick in are becoming brighter now than anytime before.
As it may turn out, the billions of ringgit of government spending may only increase our public debts. That will increase the cost of borrowing in the future and possibly later, the imposition of higher taxes for all, on average.
First published in The Malaysian Insider on May 26 2009.