I AGREE with the prime minister that, in view of the challenging economic scenario for 2016, a recalibration of the Federal Government’s budget is inevitable to take into account the continuous drop in the world price of crude oil.
Thankfully, due to the fiscal reforms introduced last year, including the Goods and Services Tax and the removal of fuel subsidies, the country is better prepared to address the sharp fall in the price of crude oil and its impact on government revenue. We can expect that while the calibration may involve spending cuts to the budget for this year and possibly next year, too, the adjustment will not be too drastic, unlike in previous economic downturns.
Malaysia is confronted with poor sentiments among consumers due to the anticipated one-time effects of the GST and the depreciation of the ringgit, all feeding into the cost of living. There is a wait-and-see attitude in the private sector about how 1Malaysia Development Bhd issues will be resolved and when the political in-fighting will end.
At the same time, the external economic outlook is not looking better. There are fresh worries about the sustainability of growth in the two largest economies in the world — the United States and China — and with the geopolitics in the conflict zones getting more complicated, there is a likelihood of greater volatility in the world economy.
Despite these short-term worries, several Malaysian corporations are planning to increase their investments abroad in search of bigger markets and higher returns, as seen in the announcement by Khazanah Nasional Berhad recently. The president of the Federation of Malaysian Manufacturers also said at the Malaysian Economic Association forum recently that many of its members were looking at external markets for growth, as Malaysia is too small a market for more expansion. Sixty per cent of its members are small- and medium-scale industries (SMEs). They, too, are looking abroad for new opportunities.
It is therefore not surprising to see from the government statistics that we are already a capital-exporting country, with outflows of investments outpacing the inflows of foreign direct investments. This trend is clearly happening with the major government-linked companies such as Petronas, Employees’ Provident Fund and Sime Darby, and several private sector corporations.
Basically, they have no choice but to go abroad. The government itself is encouraging Malaysian corporations to become global champions. When they go abroad, they will choose the countries that are safe for their investments — countries that practise high standards of governance.
One smart decision that the government can take to lift business spirits and give a helping hand to the Malaysian corporations venturing abroad is by joining the Trans-Pacific Partnership (TPP) agreement because this will open up opportunities to have access to the biggest trading block in the world.
Investor sentiments will be encouraged that as a TPP country, Malaysia is showing a commitment to the high standards of governance that are becoming the common expectation in international trade. Our corporations should not have a problem meeting the high TPP standards of doing business wherever they go because for the last 10 years, our regulatory authorities like the Securities Commission Malaysia, Bursa and Bank Negara Malaysia have been introducing guidelines on the codes of conduct and ethics, and integrity and transparency to raise the standards of governance in the corporate sector.
Indeed, our standards are as high as those found in the most advanced countries. In Malaysia, it is mandatory for company directors and top executives to attend training on good corporate practices so that they can be prepared for the competition on the world stage and for attracting world class corporations to establish themselves in the country.
The TPP is the most comprehensive, high standard trade agreement to date as its provisions on governance make it binding on member countries, unlike the Asean Economic Community (AEC) agreement, which is loose on the obligations of member countries that business leaders are left wondering whether the AEC is serious about creating a regional free trade area.
Although Malaysia should not ignore Asean, this regional economic community is not a substitute for the stronger TPP framework of trade in goods and services, which is governed by clear rules on transparency and integrity on the part of corporations and governments, so as to make the playing field level for all players.
No doubt the TPP provisions on intellectual property rights, settlement of investor disputes (through the Investor-State Dispute Settlement), government procurement, minority rights, labour standards, human rights, etc go beyond trade issues, but in modern-day trade negotiations with developed countries, these are often the stumbling blocks for the West to open up their markets to developing countries that are in violation of these universal principles of justice and fair play.
Now that the TPP has laid down the rules, it will facilitate the flow of trade, as well as foreign investments to and from the developed countries.
How much benefit this will bring to our gross domestic product (GDP) is a matter for discussion. Some estimates say the benefit will be minimal — only about one to two per cent additional growth, while other estimates say eight per cent. Malaysian manufacturers and exporters are saying that whatever the econometric models say about the benefits of TPP, the fundamental point is that when free trade opens the doors wider for business, our corporate leaders, including the SMEs, will know how to grab the opportunities that come their way, either locally or in foreign countries.
Critics of TPP argue that since the governance standards require that member countries must allow a separate legal authority (the ISDS) to be set up to settle investor disputes with the host country, Malaysia will be sacrificing its sovereignty if we join the international trade treaty, especially as it is driven by the US for its own strategic reasons.
American and European multinationals have also been prolific in suing foreign governments, including Australia.
Critics argue that our legal system is already good and should be allowed to sit in judgment when a foreign investor sues the government for breach of promise. They also recognise that there are flaws in our legal institutions, and lack of trust in our courts, which explain why, even now, most commercial agreements with foreign partners stipulate that the arbitration on commercial disputes be done outside Malaysia, preferably Singapore.
These flaws, they argue, can be rectified by us internally without being forced to do so by outside parties. The truth is that, without outside pressure, it’s unlikely Third-World countries will introduce the reforms to make their justice system independent and trustworthy, and since it is going to be difficult to make all countries raise their standards to the same high level of governance, the best solution is to have a separate system to deal with investment disputes involving foreign corporations.
I think this is an acceptable arrangement, given the reality that most large corporations prefer to operate abroad in safe countries. Indeed, as our own corporations have said, they, too, would feel safer to be in TPP countries because of the ISDS provision, which is a much more binding requirement than in the other existing free trade agreements. It is these high standards of protection against abuse of power by host country governments that make the TPP superior to the free trade agreements that we have signed before with several countries.
The International Trade and Industry Ministry has explained that the ISDS under the TPP have incorporated several safeguards against frivolous and unfair claims against the governments of host countries, and that it will be more transparent to the public. These safeguards have been introduced at the insistence of the smaller countries in the final stages of the negotiations.
I believe that members of parliament should support Malaysia signing up for the TPP because the broad political consensus will have a positive impact on public sentiments, which in turn will help to create the feel-good factor in the economy.
With Malaysia committing itself to the high standards of governance under the TPP, this will give support to our sovereign ratings and help the ringgit strengthen to a level closer to its fair value.
A more cheerful market sentiment is what we need in these trying times, especially for the working public. Many are now worried about their job security. When the mood in the market is more cheerful, workers will be less worried about retrenchment. Their families will be confident to spend more and with stronger consumer demand, this will help the country’s GDP to grow, despite the external uncertainties.
Parliament can help to boost public and market sentiments by voting for the TPP.
n TAN SRI MOHD SHERIFF MOHD KASSIM, Kuala Lumpur