Musa Aman races to bring wealth to his people

By Sebastian Lee

The Sabah assembly this week passed its biggest ever budget that speaks of one man’s obsession with wanting the best for his people: Chief minister Musa Aman wants his resource-rich east Malaysian north Borneo island state to be the most developed by 2015. That is six years from now. By then many of his 3.5 million people are expected to be high income earners. So, he isn’t going to waste time debating the merits of his 3.3 billion-ringgit ($970.6m) financial plan.

“What is good for the people must be given priority,” he told his lawmakers on November 19 at the end of the assembly sitting. “The budget is aimed at bringing the economy to another level in line with efforts to drive the nation towards a high income economy.”

Slightly more than 2 billion ringgit will be spent on development next year. The money will mostly pay for construction, infrastructure, utilities, agriculture, agro-based industries and projects that will raise rural income to rid the state of poverty which now stands at 16%, making Sabah the poorest in Malaysia. This is in addition to 866.8m ringgit from two federal stimulus packages and an extra 1 billion ringgit for development under the 9th five-year Malaysia plan which ends next year.

Keynesian economics doesn’t figure in Sabah’s big spending. The state is booming. It is well sheltered from the global recession although it does suffer a drop in export earnings from commodities such as palm oil and timber. Its economy is expected to grow by 3.6% this year and between 4% and 4.5% next. This is despite Malaysia having suffered a technical recession during the first half of the year as the economy contracted by 3.9% of last year’s GDP. It has since recovered, expanding by 4.8% from the second quarter and is expected to grow between 2% and 3% next year.

Sabah is cash-rich

Sabah is also financially healthy with a reserve of 2 billion ringgit, the highest ever since Mr Musa became chief minister six years ago. He also takes charge of the finance ministry. Trade surplus more than doubled to 18.1 billion ringgit last year, unemployment was down to 4.9% from 5.5% in 2007 although inflation rose a little to 6% because of higher fuel prices. However inflation has dropped to 4.2% this year on lower costs of fuel, clothing, communication and transport.

Although there were 7.2% fewer foreign tourists last year, revenue stayed at about 4 billion ringgit as domestic tourists from other Malaysian states more than made up the shortfall. Tourism is Sabah’s third biggest earner and earnings this year are likely to stay the same. It is on track to meet its target of 2.3m tourists this year once the Kota Kinabalu International Airport terminal which can handle 3,200 passengers an hour is ready. There were 1.6m tourists up to end September.

Confidence in Sabah’s economy is evident in private investments which saw a 4.2% growth in bank loans to 27.6 billion ringgit during the first nine months of this year despite bankers being wary of the global economic downturn. The investments are mostly in construction, real estate, finance and insurance and agro-business.

However a global decline in demands for goods saw earnings from manufacturing and services drop by about a third last year to 705m ringgit from 1.1 billion ringgit in 2007.

Yet, finding the money to spend does pose a challenge to the Sabah government which has limited sources of income. Its biggest source is sales tax at 910m ringgit, largely from taxes on crude palm oil sales which are estimated at 820m ringgit next year. The rest comes from taxes on gaming (90m ringgit) and land (50m ringgit).

Royalties mostly from oil and timber will give the state 725m ringgit next year, down by a quarter because Sabah is estimated to receive about 13% less of its 5% oil royalties at 647m ringgit since Petronas, the national oil company, expects lower fuel prices. This year it is estimated to get 742m ringgit.

Healthy fiscal position

Timber royalties will fall sharply to about 66m ringgit next year for the first time in almost 40 years mainly because the Sabah government is conserving most of its forests and placing all of its commercial ones under sustainable management. Timber prices have also been depressed for many years as buyers seek substitutes for building materials such as PVC and aluminium because the small supply of sustainable timber is costly. The world recession has also pushed prices down.

Thus about 1.2 billion ringgit, slightly more than half, of the 2-billion-ringgit development expenditure will come from federal funds. Sabah is also raising a 544m-ringgit five-year bond for the first time; part of which will be used for its working capital while the rest will pay for setting up strategic ventures that will pay dividends in the longer term.

It is the first Malaysian state that is tapping the credit market. Though this has raised eyebrows and criticisms mainly from opposition politicians, it is nevertheless a prudent move by the Sabah government which refuses to draw on its hefty reserves for its expenditure. Using other people’s money for funding is what every businessman desires but few are rated high on creditworthiness. The Sabah bonds have received the highest triple “A” rating from the Rating Agency of Malaysia (RAM) which speaks much for Sabah’s financial standing.

RAM says that the rating “reflects the state’s healthy fiscal position, strong fiscal-adjustment capacity and supportive relationship with the federal Government, complemented by the availability of natural resources for future economic growth. These strengths balance the challenge of unlocking the state’s development potential over the long term.”

Hafiza Abdul Rashid, RAM’s head of public finance ratings, says Sabah always has strong revenue and fiscal surpluses. Last year it had a fiscal surplus of 637m ringgit with cash of 2.05 billion ringgit against debts of 2.36 billion ringgit which were all federal loans.

The federal government has approved Sabah’s bond issue.

Next year’s unprecedented spending spree will result in a small deficit of 177m ringgit, less than 1% of Sabah’s GDP estimated at about 20 billion ringgit last year. Official GDP figures will only be released in March by the statistics department. The deficit is thus well manageable and can be easily financed by the state’s reserves.

In managing the Sabah economy, a little of Schumpeter is rubbing off on Mr Musa who knows that innovation is at the heart of economic progress.

“We cannot delay any longer,” Mr Musa says. “We have to spend for development.” – Insight Sabah
 

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