Assessing BNM’s Crisis Response

Quite in keeping with yesterday’s announcement, there’s a new working paper from the IMF which looks at the monetary measures implemented by BNM during the 2008-2009 recession and assesses their effectiveness (abstract):

An Assessment of Malaysian Monetary Policy during the Global Financial Crisis of 2008-09
Alp, Harun and Selim Elekdag & Subir Lall

Summary: Malaysia was hit hard by the global financial crisis of 2008-09. Anticipating the downturn that would follow the episode of extreme financial turbulence, Bank Negara Malaysia (BNM) let the exchange rate depreciate as capital flowed out, and preemptively cut the policy rate by 150 basis points. Against this backdrop, this paper tries to quantify how much deeper the recession would have been without the BNM’s monetary policy response. Taking the most intense year of the crisis as our baseline (2008:Q4-2009:Q3), counterfactual simulations indicate that rather the actual outcome of a -2.9 percent contraction, growth would have been -3.4 percent if the BNM had not implemented countercyclical and discretionary interest rate cuts. Furthermore, had a fixed exchange rate regime been in place, simulations indicate that output would have contracted by -5.5 percent over the same four-quarter period. In other words, exchange rate flexibility and the interest rate cuts implemented by the BNM helped substantially soften the impact of the global financial crisis on the Malaysian economy. These counterfactual experiments are based on a structural model estimated using Malaysian data.

BNM Watch: OPR Maintained At 3%

Not exactly an anti-climax, but pretty close (excerpt; emphasis added):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

BNM Watch: Liberalisation Measures

Announced yesterday, among the first moves under the new Financial Sector Blueprint:

Liberalisation measures to develop the domestic financial markets

As part of continuous efforts by Bank Negara Malaysia to enhance competitiveness in the economy and to develop the domestic financial markets, Bank Negara Malaysia wishes to announce the following liberalisation measures, with effect from 31 January 2012:

• To further spur the domestic foreign exchange market through greater product innovation, licensed onshore banks are permitted to trade foreign currency against another foreign currency with a resident.
• To further deepen the domestic interest rate derivatives market, a licensed onshore bank is allowed to offer ringgit-denominated interest rate derivatives to a non-bank non-resident.
• Towards enhancing the asset liability management of residents, flexibility is permitted for a resident to convert their existing ringgit or foreign currency debt obligation into a debt obligation of another foreign currency.

The above measures which are in line with the broad thrust of the Financial Sector Blueprint will contribute towards increasing the liquidity, depth and participation of wider range of players in the domestic financial markets.

The Public Health Crisis Called S-U-G-A-R

Can you tell a rock to roll uphill? Unlike Canute, can you order the tide to turn back to sea? Will porcine meat animals suddenly develop wings and take to an aerial mode of travel?

People respond to incentives, not exhortations (excerpt, emphasis added):

Cut down sugar intake, public urged

PETALING JAYA: Malaysians need to cut down on their sugar intake as it would not only be beneficial to their health, but also save on the Government's spending on subsidies.

Last year, the Government spent RM262.41mil in subsidies and it would be spending RM567mil this year due to the increased price of the commodity, the Domestic Trade, Cooperative and Consumerism Ministry said.

“If we can reduce our intake of sugar, the money spent on this subsidy could be extended to subsidise other commodities,” said its minister Datuk Seri Ismail Sabri Yaakob yesterday…

BNM Watch: MPC Meeting Today

The first meeting of 2012 is scheduled for today, and I honestly don’t expect any change in the policy stance. The new data coming in isn’t bad enough to justify a rate cut, even with the continuing uncertainty in Europe. Even if we’re looking forward, the impact of a global downturn is also uncertain – we’re not seeing the same dynamics as we were in 2008-2009.

So my vote is for status quo ante. But then, BNM has been voted the most unpredictable central bank in the region, and they might pull a fast one on us yet.

Getting More Women To Work

Malaysia’s female labour participation rate is quite frankly a disgrace. But getting more women into the workforce comes up against a host of factors, not least of which are cultural and religious. The effort however is well worth making – consider that more than half the women of working age are not in the work force. You could potentially increase the work force size by 25%, just by getting all the women into formal jobs, with the obvious impact on GDP/GNI. That’s a pipedream of course, but you can’t deny the potential impact involved.

And one effective way to do that is…paternity leave!

Sweet Nothings

YB Tony Pua wants some questions answered (excerpt):

Sweet Subsidies for Who?

The Star published on its front page news yesterday with the headline “Sweet Subsidies”. It reported that the Domestic Trade, Cooperatives and Consumerism Minister, Dato’ Seri lsmail Sabri Yaakob said that the government has increased subsidies from 20 sen to 54 sen per kilogramme of sugar in order to maintain the price of sugar at RM2.30 because the “global price of sugar is skyrocketing”…

…What is extremely intriguing however, was that global sugar prices over the past 6 months since the last price hike in May 2011 had in fact declined significantly, and not the purported “skyrocket”.

Critiquing The Critique; Or This Is NOT How You Calculate Inflation Part II

I got tipped off about an analysis of the ETP last week, which makes some of the same points I made two years ago (excerpt):

A Critique of the ETP (Part 2)
We won’t really be twice as rich in 2020

RM48,000 in 2020 is not real income.
The ETP promises to double gross national income GNI) per capita to RM48,000 by 2020 from RM23,700 in 2009. However, RM48,000 in 2020 will be worth a lot less than RM48,000 today, just like RM100 today buys a lot less than RM100 eight years ago, thanks to ever-rising prices. If Malaysians are really to be twice better off, nominal income must be RM64,000 by then, to compensate for the 2.8% per year inflation that PEMANDU expects.

Nothing transformational in the RM48,000 target.
This target is for nominal$ income, which includes inflation, and not real income, which strips out inflation. Because of inflation, nominal GNI per capita growth averaged 8.2% from 2001-2010, whereas real GNI grew only 3.2%. At the historical average 8.2% per year growth rate, nominal incomes will exceed RM48,000 by 2018 anyway, with or without the ETP or PEMANDU.

PEMANDU and its expensive consultants cannot even get basic mathematics correct.
If the income target is RM48,000, PEMANDU’s 6% real GNI growth rate and 2.8% inflation forecasts are wrong. If its growth and inflation forecasts are right, then the RM48,000 target is wrong - it should be RM54,145 in 2020, not RM48,000. Furthermore, key metrics of some EPPs – the investment value, GNI contribution and jobs created – are unavailable.

Grade ‘D’ for data transparency.
In this series, we evaluate the ETP on its own terms based on the goals and plans outlined in the ETP Roadmap. PEMANDU scores a ‘D’ for data transparency. Like us, Malaysia’s top research house finds it impossible to get the numbers to add up.

November 2011 Employment

I’m settling in and having fun at my new workplace, so I should begin blogging a bit more regularly soon. To be honest though, I might not have as much time to do that as I might wish. It’s been a pretty hectic couple of days, even without dealing with the (non-existent) city traffic – which by the way means that January economic numbers aren’t going to look good, as very few people are actually working this last week and more.

But back to business - quite unexpectedly (at least by me), the economy cut 250k jobs in November (’000):

December 2011 Consumer Prices

I’ll be quite busy until the end of next week – as much as taking as break as adjusting to a new working environment (moving jobs!). So postings will be a bit sporadic until I settle down, hopefully before the end of January.

On to last month’s CPI numbers, released yesterday: inflation slowed in December 2011 as core prices actually dropped while increases in food and transport costs slowed (log annual and monthly changes; 2000=100):

More On Dropping The Petrol Subsidy

There is, as one commentator put it, more than one way to kill [sic] a cat. I’ve been open about my support for dropping petrol subsidies in favour of taxes which cover the overall costs to society imposed by fossil fuel use i.e. a Pigovian tax.

There’s actually some method to my madness.

Labour Bargaining Power: Its Different At The Top

Last month I highlighted a working paper on calculating the optimal tax rate, especially with reference to top income earners.

One of the channels identified by the authors in which top income earners have increased their share of the income pie over the past few decades is through their stronger wage bargaining power – when marginal tax rates are low, it pays for CEOs and senior managers to supress income gains in lower pay grades. This maximises “shareholder value” by boosting profits, and earns them nice bonuses for being “aligned with shareholders’ interests”.

And here we can see this channel in action (excerpt):

Wall Street Said to Weigh Freezing Pay Bumps for Junior Bankers

Jan. 10 (Bloomberg) -- Wall Street’s biggest firms, facing a slump in investment-banking revenue, are considering freezing compensation levels for some junior bankers, according to people familiar with the deliberations.