Wednesday, December 17, 2014

Commodities and Currencies

There’s quite a bit of gloom in the air these last few weeks. The plunge in oil and other commodity prices, capital pulling out of emerging markets, and currency turmoil, have people getting very worried about growth prospects next year. There doesn’t appear to be a bottom yet on oil prices, and it’s anybody’s guess where all this will end up.

In Malaysia’s case, oil price depreciation and Ringgit depreciation seems like one piling on the other – the latter is making things worse (Malaysians feel relatively poorer), on top of the drop in oil and gas revenues. But conflating the two like this is wrong. The depreciation of the currency is in fact a required and necessary result of the drop in oil prices.

Wednesday, December 10, 2014

OECD: Income Inequality Harms Growth

Just a quick note – unfortunately, quick notes appear to be all I have time for these days. The OECD has released a new report on the influence of income inequality on economic growth (excerpt):

Inequality hurts economic growth, finds OECD research

09/12/2014 - Reducing income inequality would boost economic growth, according to new OECD analysis. This work finds that countries where income inequality is decreasing grow faster than those with rising inequality.

The single biggest impact on growth is the widening gap between the lower middle class and poor households compared to the rest of society. Education is the key: a lack of investment in education by the poor is the main factor behind inequality hurting growth....

Monday, December 8, 2014

Notes On Oil

I came up with some talking points for a presentation last week, and since so many people have been asking for a comment on the drop in oil prices, I thought I might as well publish them.

Why is the price of oil dropping?

Essentially, its a demand and supply imbalance. On the one hand, China has been slowing down while Europe has backslid and Japan went into technical recession after implementing a sharp increase in its consumption tax. The only two real bright spots of growth in the developed world is the US and UK, and the US has rapidly developed its domestic oil supply in the last five years. To compound this, the energy intensity of growth (how much energy is required to support a higher standard of living) has been declining for decades.

Wednesday, November 26, 2014

Malaysia Human Development Report 2013 [UPDATED]

I attended the launch yesterday, which included commentary by the authors, led by YBhg Tan Sri Kamal Salih, and a very lengthy panel discussion.

You can download the full copy here.

This has been a looong time coming as publication was held up for a year. though I’m not a liberty for revealing why. In any case, if you want the very short version, this video explains everything in 2 minutes and 34 seconds:


Due to bandwidth limitations (too many people have tried to download the report), the MHDR site has been overwhelmed. You can try this alternative link instead to download the report. Warning: it’s a massive 66MB file, so the download could take a while.

Monday, November 24, 2014

Ringgit Under Pressure? Markets Are Irrational

I was going to write about this last week, but it got put on the back burner by the suspension of the fuel subsidy (excerpt):

Ringgit down to four-and-half-year low

KUALA LUMPUR: The ringgit has fallen to a fresh multi-year low against the US dollar, as sentiment has been somewhat dented by Malaysia’s shrinking current account surplus and slower economic growth in the third quarter of 2014.

At 5pm yesterday, the ringgit was being traded at 3.3565 against the greenback – the weakest level since May 2010. The ringgit is the second-worst performer in the region after the Singapore dollar so far this year. Over the last two weeks, it had declined 2% against the greenback….

…Analysts said the narrowing current account surplus put Malaysia in a less favourable position compared with the other countries….

Friday, November 21, 2014

Bye-Bye Fuel Subsidies

The Government has had an outbreak of common sense (excerpt):

Hasan Malek: No more RON95 petrol, diesel subsidies from Dec 1

PUTRAJAYA: All subsidies for RON95 petrol and diesel will be stopped beginning Dec 1, said Datuk Hasan Malek.

The Domestic Trade, Cooperatives and Consumerism Minister, who announced this at a press conference here on Friday, said the retail prices for RON95 petrol and diesel will be fixed according to a managed float, similar to the mechanism dictating the RON97 petrol price.

Hasan said there would be an announcement at the end of each month to set the following month's fuel prices.

He said it would be determined based on a monthly average price….

There’s still the super-subsidy on diesel (for public transport and fishermen) and subsidies on natural gas (which are huge), but the latter has been starting to be phased out as well. The gas subsidy in particular has been prone to abuse, with businesses using gas cylinders intended for households.

In any case, we’re well rid of the dangerously complicated multi-income-tier subsidy idea that the government has been mulling over. With global oil prices so low – for November, it appears that consumers have actually been paying a small tax on petrol – there would have been no better time for this move to have been made. We had that opportunity once in 2009-2010, and missed the chance. I’m happy it wasn’t missed this time.

If global oil prices stay low, and this is the scenario market participants are looking at at least for the next couple of years, then well and good. If prices move back up, then the government will no longer have to bear the cost of subsidising petrol and diesel, and use the increase in revenue on something more important – like public transport for instance, or education, or *gasp* paying down debt.

Having said that, we’re still not home free. Prices going forward will still fall under the Automatic Pricing Mechanism, which means profit margins are guaranteed for distribution and retailing. Oil retailers in Malaysia have been used to competing on a non-price basis; that’s not necessarily the optimum for consumer welfare. The next step should be to free up the market, and let the oil companies compete on price. That should give back to consumers some of the welfare loss associated with being exposed to global oil price volatility, essentially sharing some of the risk with producers.

I know, I’m asking for the sky. Still, I’m pretty happy with the decision today. It’s been a very long journey over the last five years.

Wednesday, November 19, 2014

3Q2014 GDP: Momentum Slowing

I’m still torn. Last week’s GDP report was a little better than I thought, but might just be the best growth we’re going to see for a while (log annual and SAAR changes):


Note that while annual growth is holding up pretty well, quarterly growth in 3Q2014 is actually the weakest in nearly two years. There’s little in either the global or domestic economy to suggest that growth will get any better over the short term.

Thursday, November 13, 2014

3Q2014 GDP Preview

I’m torn. Despite all the weak numbers over the past three months, all my forecasting models say real GDP growth will still be above 5%, and in most cases, above 6%, for 3Q2014 (log annual changes):


The IPI based forecast is probably the most bearish, and it still says we’ll be above 5% – my other models are far more bullish. The forecasts for 4Q2014 are weaker, but not unusually so. The generated forecasts for next year cluster a little above 5% growth, which is about right for the Malaysian economy.

Friday, November 7, 2014

BNM Watch: OPR Still On Hold

More or less as expected by just about everyone, yesterday’s MPC meeting has the OPR still on hold at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

Tuesday, October 28, 2014

Tiered Fuel Subsidy System: Please Don’t Go There

The floodgates are opening (excerpt):

Full fuel subsidy only for those earning under RM5,000 monthly

KUALA LUMPUR: Those who earn more than RM10,000 per month will not enjoy any fuel subsidy under the subsidy rationalisation scheme to be implemented next year.

In announcing this Monday, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said the programme would be divided into three tiers.

After early whispers before the budget, it’s now way out in the open. But, there’s much better ways of managing this than shifting to a convoluted system that’s going to be full of holes. Here’s one fellow Tweeter’s take on it (it’s in BM, but that shouldn’t be a problem, right?).

Thursday, October 23, 2014

Thoughts On The Alternative Budget

This is even later than my thoughts on the official budget (this was supposed to have been published two days ago), even though Pakatan’s budget proposals came out a day earlier.

I’m not going to do a head-to-head with the “official” budget – the two are very different animals, and any comparison will not be fair. Pakatan does not have full access to the minutae of government operations, and as such will not have the kind of detailed expenditure breakdown that the official budget does. I take it for what it really is – a policy platform, akin to a political manifesto.

Monday, October 20, 2014

Thoughts On Budget 2015

It’s been a really hectic week, which is the reason I haven’t put down my thoughts on the budget sooner. In one sense, that’s an advantage – it means I get some time to think about it more. In another sense, it’s not – people are probably suffering from budget “fatigue”.

Be that as it may, here’s what I really think: there was a little something in here for everyone…emphasis on “little”. Ok, I’m kidding, just a bit.