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KUALA LUMPUR, Sept 15, 2015:

Lim Kit Siang says the ValueCap reactivation with a RM20 billion fund was a “palliative step” and called for several “drastic measures” to be taken.

The DAP supremo says the measures, which was announced by the Prime Minister yesterday, would only prop up the market briefly, pointing out the Chinese tried such an approach with limited success.

In a statement, the Gelang Patah lawmaker said such measures, while would benefit government-linked companies for a short period, would not result in lifting the gross domestic product (GDP) growth rate, enhancing investment, creating jobs, propping up employment or checking inflation.

It would also have no impact on the economic prospects or correcting the economic fundamentals.

Lim also warned of a possible backlash effect as artificially propped-up share prices may induce share investors, both local and foreign, to cash in and take the proceeds out of the country, subsequently adding to the capital flight that is being experienced.

“The RM 20 billion that is to be injected will have to be found from the already stretched Budget which has a deficit.

“The deficit will increase and it will have to be funded by increased borrowing; this in turn will lead to the self-imposed debt ceiling of about 55% being breached.”

The markets, Lim said, would react negatively to such a development and the rating agencies would downgrade the government debt, leading to a rise in government loans to rise.

“In brief, the steps taken represent ill-conceived panic measures. These desperate actions have ignored the long-term harm to the economy and have failed to take account of the side effects.”

To rectify this, Lim suggested that austerity measures were taken together with some tightening of borrowings by the public sector.

Further important measures, he added, would need to result in disinvestment and deregulation.

“Some of these measures are likely to be attacked by vested interests. However it will ultimately be needed.”

Lim said it must be noted that a continued avoidance of unpopular measures could lead to a deepened crisis and the government may be forced into accepting externally-forced measures such like an International Monetary Fund programme akin to the Greek situation.

“A heavy price for the country.”

The government, he added, would need to be strengthened if it is to embark on a programme to restore economic stability.

A true national government with a strong technocratic background and a clearly defined reform agenda, he said, may be the only recourse if the necessary unpopular measures are to be taken.

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