Thursday, 30 May 2013

How Does GST, Subsidy Cuts, Credit Rating affects us as Malaysian?

An article from The Edge dated 1st March 2013 highlighted the following:

The article states that if the Malaysia Government is able to reduce the national debt, better credit ratings will be given to Malaysia by Standards & Poor Rating Agency (S&P). Therefore a country with excellent credit rating would most likely attract more foreign investors to invest in Malaysia. In some ways the article created a feel good factor to showcase that the government (pre-election) was doing a great job at reducing our national debt. 

However does the article above truly reflects the current situation of our country's debt? 

Digging further back to an article from The Malaysian Insider dated 6th September 2012 as shown below:

In this article from The Malaysian Insider, it clearly states that our country's debt is in serious shit trouble. S&P is in fact threatening to downgrade our credit rating if measures such as introduction of "Goods and Services Tax (GST)" and subsidy cuts. 

Both pre-election articles painted different pictures of our country's debt situation. So which exactly is the true situation of our country's debt? Here's an article from The Edge published on the 17th May 2013 (post election) as shown below:

Based on this article, the implementation of GST is indeed inevitable in Malaysia thereby concurring with the earlier article from The Malaysian Insider. Our country's debt situation is in serious situation and measures recommended by S&P to introduce GST and subsidy cuts must be implemented to please the rating agency. Despite all the well worded press release from Datuk Seri Idris Jala about GST, the fact remains the same! 

If our country's rating is downgraded, our Economic Transformation Program (ETP) which is highly dependent on foreign investors would eventually fail. Similar to a business, if ETP fails to attract foreign investors, the borrowed billions being pumped into this program would lead to further debt crisis for our country. 

To cut the long story short, here are some key points I would like to summarize:
  1. GST and Subsidy Cuts will be carried out in order create additional income for the government and to prevent our debt situation from worsening.
  2. The Economic Transformation Program must succeed in terms of generating income for the country to offset the spending.
  3. Our country cannot afford a rating downgrade by S&P or we might be the next Greece in the making.
How Does GST, Subsidy Cuts, Credit Rating and all the mumbo-jumbo above affects us as Malaysian?
For many of us whom are ignorant, we might not be overly concerned about credit rating and national debt.

"This is all Government fault-lar!" that's what many of us would say. Politics aside, the issue of national debt is a worrying situation which would eventually be cascaded down to the rakyat as seen from the implementation of GST.

Then we have subsidy cuts which most likely see the rise in petrol prices, cooking gas, cooking oil, sugar, flour and rice. By removing subsidies from the above items, we are looking at a rise in the country's inflation rate and ultimately reducing the rakyat's purchasing power.
(to know more about government subsidy and consumer price index, do read my article on Do You Really Know What Inflation Is?)

Here's a simple illustration of the situation (click to enlarge):

Our country's current inflation currently stands at about 2%. However from my article Discovering Malaysia's Actual Inflation Rate, I've calculated that after removing all government subsidies, our inflation rate would increase by an additional 5.82%. Therefore the actual inflation rate is actually 7.82%!!!

FYI, if your savings and retirement funds are kept in EPF (6%) or Fixed Deposite Rate (3.5%), then you better start worrying!

Die-lar...What To Do Next?
Here are some recommended ways to offset the problem of inflation as well as to retain your purchasing power:
1. Make more money then you can spend.
2. Invest in instruments that can provide returns higher then the inflation rate such as Unit Trust or Stocks.
3. Hedge your money into Gold or Property.
4. Last resort, migrate to another country.

For myself, I selected to invest into Item 2 and 3 as my counter measures for the above situation. 

How about you?

Cheers and Happy Investing!

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