Friday, March 15, 2019

Talking About Belanjawanku

I was on BFM yesterday, talking about UM's new Belanjawanku reference budget:

One thing I should have mentioned/emphasised more is the splendid work done by Prof Datuk Dr Norma Mansor and her team at the Social Wellbeing Research Centre in coming up with it. You can also hear her talking about it here:

Wednesday, March 6, 2019

The CPI Is Not A Cost Of Living Index (And Shouldn't Be Treated As One)

With all due respect to the Minister, I think he gets it wrong here (excerpt):
Minister: New index to reflect ‘real’ cost of living
KUALA LUMPUR, March 5 — The Domestic Trade and Consumer Affairs Ministry is confident that a new cost of living index can reduce the people’s cost of living, especially in the context of the price of goods.

Its minister Datuk Seri Saifuddin Nasution Ismail said the current Consumer Price Index (CPI) was not reflective of the real cost of living, especially for the price of goods.

He said the new index would guarantee and identify more accurately readings on price of goods and cost of living.

“All these while, we (the government) have relied on the CPI or inflation index. For example, the CPI or inflation index can be very low, but then it might not be felt by the people in real life.

“So, we (the government) feel that the new index is a necessity to be made the new guideline that will paint a true picture of what is happening,” he told reporters after officiating the 2018 Excellent Service Award here today.

The problem is the assumption that the CPI is a COL index. It isn’t, or at best, it’s a limited subset of a COL index. First understand what a consumer price index actually does – it tracks a fixed basket of consumer goods and services over time. The goods and services included in the index are based on surveys tracking what people actually spend on. Follow-on surveys are conducted to update the basket, again based on what people actually spend on. So the idea that it doesn’t accurately reflect actual prices of goods is a non-starter.

Here’s where the CPI diverges from a COL index – first, since the CPI averages data across the whole country, it would naturally gloss over differences between areas and regions. Given the disparities in income and expenditure between urban and rural on one hand, and differences in tastes and preferences geographically on the other, it’s no surprise that the national CPI would diverge from individual and regional experiences of inflation.

Second, the CPI is laser focused on consumer goods and services, and ignores capital expenditure. Specifically, it only models the consumption portion of housing (in Malaysia, cars are assumed to be “consumption” items), and ignores housing equity. As a result, the CPI includes rent and imputed rent, but not changes in house prices. Mortgage payments would include elements of rent (consumption use and effectively the opportunity cost of buying a house), home equity (the value of the house over and above it’s consumption use), and interest, but only the first element is a part of the CPI (for a more detailed discussion, see here).

I have to keep pulling out this chart to illustrate what I mean (I know it’s a little out of date, but I’m too lazy to dig up the data again):

The increase in the cost of home ownership has exceeded almost every other item in the household budget, including food and petrol.

As a result, the CPI will never be an accurate measure of the cost of living, because it excludes a very major portion of people’s budgets, especially since the home ownership ratio in Malaysia is fairly high. However, this is not equivalent to saying that it is not a good measure of consumer inflation, because all the empirical research on it suggests that it actually does a decent job of it. If anything, the methodology of constructing the CPI results in it usually over-stating inflation, not under-stating it. The problem here is that the cost of living is a mix of both consumer prices (which the CPI tracks) as well as asset prices (which the CPI doesn't).

But saying the CPI isn’t a good measure of the cost of living is like saying my cat is a bad dog because it won’t bark. We're really talking about different animals here.

Tuesday, March 5, 2019


So I was at the launch yesterday, moderating the panel session after all the speeches. So far, the reception to the guide has been…interesting, to say the least. But since the media gave little attention to the panel discussion, I though I’d set out what topics were discussed. Not that we had any definitive answers, but then part of the motivation for publishing this thing in the first place was to raise awareness. So these were the 3 main themes that I gave to the panel:

Wednesday, February 27, 2019

Calculating Real Interest Rates Under Price Level Shifts

"You take the blue pill—the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill—you stay in Wonderland, and I show you how deep the rabbit hole goes. Remember: all I'm offering is the truth." - Morpheus, The Matrix (1999)

As a follow up to yesterday's post on interpreting measured deflation, someone on Twitter remarked that since inflation is negative, real interest rates would be high, so BNM should cut the OPR. A Bloomberg Opinion article said roughly the same thing. I could respond by saying that since this analysis is based on the false premise that Malaysia is in a deflationary environment, that policy prescription would also be false. But the question is interesting enough that it bears both examination and explanation.

What is a real interest rate, and why does it matter?

Tuesday, February 26, 2019

When Deflation Isn’t Deflation

It’s been an awfully long time since I wrote a post. There have been a lot of reasons for the hiatus, both professionally as well as personally. The change in government last year also caused some switches in senior management where I work, and my workload has risen as a result. At a personal level, the passing of my father in June and wrapping up his estate has taken a toll on the entire family, which obviously took up a lot of time. I’ve also been spending more time on my fitness level, since hitting the big 50 milestone last year. With all these things going on, blogging has taken a bit of a backseat for the past year. On the other hand, I first started writing this blog 10 years ago this month, and it has been a major part of my life, and I’m determined that it will continue to be. So as an entrée back into blogging regularly, I’m going to address the hot topic of the week: Deflation.

Thursday, August 30, 2018

Why low income households have more children

On social media lately, I’ve been reading this sentiment that people who are poor shouldn’t have so many children. The apparent reasoning is that if you can’t afford to bring children up properly, you shouldn’t have them.

This attitude is not just paternalistic and condescending, it also ignores the economic incentives facing the poor.

There are, I think, two main reasons for the poor having more children:

Tuesday, July 24, 2018

Effective Exchange Rate Indexes: June 2018 Update

This post is seriously late, as I’ve just switched laptops and my editing software is being cantankerous. However, the NEER and REER page has been updated, as has the Google Docs version.


Despite the moves in the bilateral USDMYR exchange rate, there has been almost no movement in either the NEER and REER since February. This also applied to the narrow and ASEAN indexes as well. In other words, almost all the currency volatility of the past six months has been due to USD movements, with very little coming from other currencies. The nominal broad index was up 5.30% yoy, but just -0.15% on the month (REER: 4.78%, -0.15%).

Breaking down on a bilateral basis, movements were predictably mixed, with the Ringgit roughly up against half the basket and down on the other half. On a cumulative three month basis, the MYR has gained the most against the EUR (+3.15%), the GBP (+2.68%), the INR (+1.78%), the THB (+1.45%), and the AUD (+1.15%). The biggest losses were against the USD bloc countries in the basket, I.e. the USD (-2.35%), the HKD (-2.28%), and the VND (-2.18%).



  1. Indexes have been updated to June 2018
  2. CPI deflators and forecasts have been updated for May/June 2018
  3. Trade weights were updated to March 2018. This required revisions to all the indexes from Jan-18 onwards

Wednesday, June 13, 2018

Here We Go Round the Mulberry Bush

Our PM in Japan (excerpt):

Malaysia asking for yen credit to help with national debt, says Dr Mahathir

MALAYSIA is asking Japan for credit as part of efforts to resolve its debt problem, Prime Minister Dr Mahathir Mohamad said today.

Speaking at a joint press conference with Japanese Prime Minister Shinzo Abe, Dr Mahathir said he was told Japan was considering the request.

“I have explained the financial problem faced by Malaysia, and towards solving this financial problem, I have requested for yen credit from Japan and Mr Abe, the prime minister, will study this request,” Dr Mahathir said.

I don’t have much time, so I’ll keep this short. I’ll give TDM the benefit of the doubt here – he could be talking about refinancing some of the USD debt under 1MDB, which makes sense since the yield on that debt was way above market. However, using JPY loans to cover MYR debt makes no sense at all.

Tuesday, June 5, 2018

No, International Reserves are NOT Government Savings

I’m starting to read this in social media comments about Malaysia’s public debt. That the government doesn’t have reserves; no, that Malaysia has plenty of international reserves; but Singapore has more reserves than we do! etc.

This is almost wholly nonsense.

Monday, June 4, 2018

RM1 trillion debt? Don’t Panic

I realise in writing this that I’ll probably be a very lonely voice in the wilderness, but I think this needs to be said and intellectual honesty forbids doing anything else. I also promised years ago that I would defend a Pakatan government when keeping an elevated level of government debt. I’m going to keep that promise now.
As the news of the Malaysian government’s real debt position has been slowly been revealed over the past two weeks, the reactions have predictably ranged from horrified to furious. Unfortunately, the prevailing thought is mostly about how this debt is to be paid back, and the burden on taxpayers as this is being done.
Let me flip my usual practice, and begin with my conclusion, before going into the reasons why.

Monday, May 21, 2018

BR1M: Good Or Bad?

Loanstreet has an article on the pros and cons of BR1M (excerpt):

Will BR1M Destroy Malaysia from Within?

Since BR1M was implemented in 2012, it's been heavily criticised by many sections of the public. Many view it as nothing more than vote buying from the marginalised in society. Its harshest critics even claim that such careless use of public funds will run the country to ruin.

We believe that politics aside, the merits of BR1M should be assessed on its own. Is it really such terrible policy? Will it ruin the country as some claim?

Because we ourselves did not know how to feel about it, we decided to thoroughly examine the issues surrounding BR1M to find out if it is actually good policy, or one that could lead Malaysia to ruin.

The “road to ruin” narrative might be a little over the top, but the article covers most of the essential points. This came out before GE14, so a rebrand is probably apposite – my vote would be for Dividend Rakyat.

Two things I would add to the articles points are:

  1. Cash transfers actually do address the root causes of poverty - for the next generation. Poverty should be seen not just in terms of the current poor, but the impact that poverty has on the chances for social mobility of their children. Meritocracy only works under the unspoken assumption that initial conditions for all children are the same, which under most circumstances they are not. It's not enough to provide a good education, since this ignores the importance of for example social capital. Studies on child development also point to the importance of education in the 0-5 age range in terms of soft skills development, which even universal pre-school will not fully address.
  2. BR1M was explicitly funded by the savings from the reduction in petrol subsidies. In fact, initially, they even shared the same account code in the government's books. The way government finance works in Malaysia, BR1M would be classified as operating expenditure, so it can ONLY be funded by revenues, and not by borrowing.

Wednesday, May 16, 2018

The First 100 Days

I’ve had multiple requests to comment on this, but haven’t had the time. To be honest, I didn’t read either side’s political manifesto too closely, as most election promises are so hedged with operational realities that the likelihood of full implementation was never going to be very high, when political idealism meets unyielding economic realities. However, now that we have some clarity on the direction forward, it’s time to seriously assess Pakatan Harapan’s manifesto.

I won’t go over the whole thing, just the 10 items that were promised for the first 100 days, and even then only those that are economics related. So, no comment on investigating scandals or the stature of Sabah and Sarawak.