Indonesia's Inflation Crisis...Malaysians should learn from it!

In an article from The Star dated 12th of July 2013, our closest neighbor Indonesia is currently facing a mounting inflation crisis largely due to the fuel hike implemented by their government. A snippet from the article as shown below indicates that inflation in Indonesia would rise to about 7.5% on an annual basis due to the fuel hike.

Inflation rate as we all know is a measurement of price increase/decrease of consumer products and services. One of the key item from the list of consumer product is of course fuel. Hence any movement of the fuel price in terms of reduced subsidy or a hike in pricing would have a direct effect towards the inflation rate of a country. 

In Indonesia's case, the reduction of fuel subsidy was inevitable in a effort to reduce the country's debt as highlighted in this post from English.news.cn. 

Despite strong violent protest by students and workers from the lower income group, the fuel hike had to carried out in order to save guard the country's debt from spiraling further down and to prevent further downgrading of the country's credit rating.

Would Malaysia face the same problem in the near future?

Yes, a definite yes! The question is when would the inevitable arrive?

In an older post entitled "How Does GST, Subsidy Cuts, Credit Rating affects us as Malaysian?", I've clearly stated that our countries debt level is at a worrying level. What we would eventually face is what our neighbor, Indonesia is currently facing. Two key remedial strategy must be implemented by the government:

1. Goods and Service Tax (GST)

2. Subsidy Cut - in other words reducing/removal of subsidy for key items such as:

The implementation of subsidy cut would then increase the price of consumer products and ultimately inflation will rise. A simple flowchart below illustrates the impact Malaysians would eventually face:

Summary

If our neighbor Indonesia is already facing this problem, what reasons can we come up with to say that Malaysia would not face the same problem? Although we can't change the economic outlook, we can still safeguard the value of our money/savings through investing in investment vehicles that can potentially generate returns which are higher then the inflation rate. Taking for example Indonesia's inflation rate of 7.5% as a benchmark, do you think that the money sitting in your Fixed Deposit Account (4%), Savings Account (0.25%) or even your retirement fund (5.5%) would be insufficient to battle inflation?

You can choose to ignore what you've just read by brushing aside the facts, but regret not when the actual scenario befall upon you. Reality bites, so live with it!

Cheers and Happy Investing!

P.s : I've been an ardent supporter of utilizing unit trust (UT) investment for my retirement. I believe UT being a passive investment is capable to generate returns that are higher then inflation and at the same time gives me the freedom to pursue my interest as well as career. If you like to know more about UT investing from my point view, feel free to drop me an email at shanesee03@gmail.com 

P.p.s : Select the best unit trust to invest in by reading the Equity Malaysia category of this post : Top 10 Best Performing Unit Trust Funds As of 10th July 2013

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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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