Budget 2011- A Tactical Blunder?

It was sad that the 2011 Budget hardly address any of the more serious issues as discussed in the New Economic Model (NEM) and its subsequent flagship programmes.

As such it comes as no surprise that the Malaysian Institute of Economic Research (MIER) continues to maintain Malaysia's economic growth forecast of 6.5 per cent for this year (2010) despite the government's revised GDP projection from 6x to 7 per cent.

Additionally, MIER  was also unhappy with the smaller than expected reduction in the budget deficit projected for next year and particularly, the lack of measures to tackle high levels of household debt which it described as “unhealthy” and one of the highest in Asia.

MIER opines that the global economy will slowdown in the second half of the year given weaker global trade conditions and the ongoing sovereign debt problem in the Eurozone and that developing Asia will continue to lead global growth because of resilient domestic demand.

"There are downside risks to growth and we have based this on slowing exports and weaker sentiment in our business conditions survey," it said.

MIER also maintained its growth forecast of 5.2 per cent for next year (2011), roughly in line with the government’s projections of between 5-6 per cent.

The think tank added that if the economy slows down, borrowers could face difficulty in servicing their households loans, especially housing loans which make up the bulk of the household debt and said more loans should be channelled to productive businesses instead.

The research organisation’s Business Conditions Index (BCI) fell sharply to 104.9 in the third quarter which it noted more than offset the surge in its Consumer Sentiment Index (CSI) to 115.8.

“Other indices also painted a similar gloomy environment ahead,” said MIER.

In terms of interest rates, the institute saw no increase this year but said it would rise to 3.25 per cent to help combat inflation which it projected to be 2.2 per cent in 2010 and 2.5 per cent in 2011.

Prime Minister Datuk Seri Najib Razak said in his budget speech that the government had revised this year’s growth forecast upwards from six to seven per cent due to positive developments such as export growth of 22 per cent in the first eight months of this year and imports of capital goods which grew 18 per cent.

Najib also said that the budget deficit is expected to decline to 5.4 per cent next year from 5.6 this year, a minor reduction which some analysts said was insufficient and could affect the nation’s credit rating while others said was reasonable given the forecast of stronger economic headwinds.

Anyway,so much for a great NEM side show and veiled crystal-balling.