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.

Thursday, May 3, 2018

GST, Exports, and the Ringgit

This is something I had to explain a few times as well over the past couple of weeks, so again, committing this to writing.

The Pakatan Harapan manifesto promises to abolish the Goods and Services Tax (GST) and bring back the old Sales and Services Tax (SST). Analysts expect this (along with the other spending plans in the manifesto) to result in a sell down of the stock market, and a drop in the Ringgit. Contrary what people may think, this has nothing to do with “investor sentiment”. There are fundamental reasons for thinking this will happen, though I’ll only touch on the SST/GST effect.

Wednesday, May 2, 2018

Fiscal Realities

A couple of things were raised last week that I want to address:

Issue 1: The Difference between Operating and Developing Expenditure

I’ve had to explain this at least twice over the last few days, so I thought I might as well spell it out. Malaysia is one of the very few countries that actually subdivides spending between operating and development expenditure – actually, I think Singapore is the only other country that does this. MOF keeps these accounts entirely separate (I’ll touch on how they intersect in a bit), whereas most other countries consolidate the two.

Wednesday, April 25, 2018

Rethinking the Macroeconomics of Resource Rich Countries

VoxEU has a new e-book out on the way forward for commodity producing economies (excerpt):

Rethinking the macroeconomics of resource-rich countries: A new eBook
Rabah Arezki, Raouf Boucekkine, Jeffrey Frankel, Mohammed Laksaci, Rick van der Ploeg 24 April 2018

After years of high commodity prices, a new era of lower ones, especially for oil, seems likely to persist. This will be challenging for resource-rich countries, which must cope with the decline in income that accompanies the lower prices and the potential widening of internal and external imbalances. This column presents a new VOXEU eBook in which leading economists from academia and the public and private sector examine the shifting landscape in commodity markets and look at the exchange rate, monetary, and fiscal options policymakers have, as well as the role of finance, including sovereign wealth funds, and diversification.

It’s a compilation of papers from a 2016 conference, and to be honest, doesn’t really present anything ground-shakingly new on the subject. However, it does provide a convenient entree for those not familiar with the conduct of macro-policy in commodity producing countries (i.e. most Malaysians).

The article itself provides a short precis of the e-book, which you can download here.

Thursday, April 12, 2018

Effective Exchange Rate Indexes: March 2018 Update

The NEER and REER page has been updated, as has the Google Docs version.

Summary

A late CPI release by Taiwan caused this update to be late, as well as an update to the trade weights, based on export-import data for 4Q17.

On contrast to the last few months, the Ringgit was largely stable for March 2018, though still tending to the upside.The nominal broad index was up 6.42% yoy, but just 0.05% on the month (REER: 6.23%, 0.06%). The picture for the sub-indexes was equally mixed, with the nominal broad index down –0.14% compared to February, but with the real index up 0.06%.

Still, gains were broad-based, with the Ringgit up against 11 currencies and down against just 4. The biggest gain was against the AUD (+1.52% mom), building further on gains since the middle of last year. The biggest decline was against the JPY (-1.58%), though this was after rising 5 out of the last 6 months.

01_indexes

Changelog:

  1. Indexes have been updated to March 2018
  2. CPI deflators and forecasts have been updated for Feburary/March 2018
  3. Trade weights were updated to December 2017. This required revisions to all the indexes from Jan-17 onwards

Thursday, April 5, 2018

Historical Revisionism Redux

P. Gunasegaran demonstrates – yet again – that he doesn’t understand exchange rates (excerpt):

How successive governments impoverished M'sians

A QUESTION OF BUSINESS | At least two ways - both very wrong in the longer term - were used to support the export sector in Malaysia in believing that growth through exports was the right thing for a developing country like Malaysia.

But even though there was economic growth, which means more wealth was created, there was impoverishment too. But how could that be? Basically, those who were rich got richer and those who were poor got poorer.

How did the government achieve export competitiveness over the years? Through two measures. First, they reduced the number of things Malaysians generally could buy by going for a policy which weakened the ringgit. And two, they imported poverty by allowing the uncontrolled import of cheap labour.

Tuesday, April 3, 2018

Stuck in the Middle

The Deputy PM thinks middlemen are the culprits for high prices (excerpt):

Zahid: Higher prices of goods and services the work of 'cartels', not GST

BAGAN DATUK: The rise of market prices were not caused by the Goods and Services Tax (GST) but the actions of middlemen and “cartels” who manipulated prices for their own gain.

Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi, who is also chairman of the National Cost of Living Action Council, said these middlemen and cartels also made things worse by accusing the government of raising the prices of goods and services when it was they who were the ones responsible.

“They blame GST as the main cause, but these cartels and middlemen are the ones who, before this, avoided paying the Sales and Service Tax (SST). It is because of these people that the government decided to (do away with SST and) implement GST….

…Zahid said it was true that there had been an increase in production, import, foreign exchange costs at one time, but this was due to the fact that the ringgit had fallen against the dollar.

However, he said, the ringgit had now risen against the Greenback but the prices of goods had yet to come down.

Despite the “cartels/middlemen” explanation being a fairly widespread belief, I’d like to see some evidence for it first. While the DPM might be using this to deflect the perfectly valid point that GST is not wholly and certainly not primarily responsible for higher prices, I don’t see it reflected in any of the (patchy) census data on distributive trade. If this was true, profits (value-added, less wages) in the wholesale/retail sector should be rising. Instead, margins have been declining, largely due to higher wage bills.

That last point is mostly wrong too. Based on the interaction between prices and the exchange rate, there has been very little passthrough of exchange rate movements into domestic prices, which implies margins shrank when the Ringgit declined, and just reverted to “normal” as the Ringgit regained value. This isn’t to say that there hasn’t been isolated cases of direct passthrough into prices (I’m looking at you, Apple), but there hasn’t been a general wave in that direction. Moreover, the exchange rate should be completely irrelevant for prices of services.

What disturbs me most about this, however, is that the last two times I’ve heard this sentiment being publically aired by a top government official was in Zimbabwe and Venezuela. Both were cases of hyperinflationary environments, and governments who’d prefer to scapegoat rather than address the real causes of price increases.

Would addressing distributional inefficiencies and monopolies/oligopolies reduce prices? If they exist, quite possibly. However, any such improvement would be a temporary one-off reduction in the price level, and won’t change underlying inflation.

Monday, April 2, 2018

More on Seafood Prices

Nobody can deny inflation in food prices, and seafood is a major contributor to that. The biggest reason behind seafood price inflation is a supply-demand mismatch – the world as a whole is eating more than the seas can provide, with obvious long term consequences unless this is managed. But China is a major factor behind that mismatch (excerpt):

China's Real Offshore Disaster
There isn't much left for a million tons of light oil to kill.

Last Sunday's sinking of an Iranian oil tanker 180 miles off the coast of Shanghai certainly looks like an environmental disaster. Depending on how many of the ship's 1 million barrels of condensate were released into the ocean and not burned off, the accident could end up being one of the biggest oil spills in half a century. The irony? Even that wouldn't represent the biggest disaster to befall the area.

The fact is, thanks to massive overfishing in China's territorial waters, there isn't much marine life left to kill in the disaster zone. According to He Pemin of Shanghai Ocean University, those waters have been so denuded over the last three decades that fishermen "normally bypass the area and go further afield for a bigger catch."

It's a dark twist to an accident that has the potential to send oil drifting to the California coast. And it should encourage the Chinese government to rethink how it manages its marine environment. The need is urgent: China's hunger for seafood is fast outstripping its domestic resources. Consequences already loom, including food inflation, a depleted environment for the hundreds of millions of Chinese who live along the coast, and rising international tensions.

Chinese fishermen traditionally concentrated on inland and coastal waters. But as the economy opened up in the late 1970s and private fishing fleets grew in size, those areas were quickly fished out.

Seeing the industry as a jobs creator, local officials were loath to restrain it. The national government didn't do much better. Instead of crafting policies to sustain inshore fishing (by controlling catches and combating massive coastal pollution, for starters), authorities offered subsidies and technical support to help fishermen venture further offshore into the East China Sea. (The money also supported other "blue economy" industries such as shipbuilding and offshore drilling.) In 1985, just 10 percent of China's catch was netted in those far-flung fishing grounds; by 2000, it was 35 percent.

The shift was driven by a massive jump in China's seafood consumption as its population has become more affluent. Growth has averaged 7.9 percent annually since the late 1970s. Chinese seafood consumption increased 50 percent in just the last decade, to 62 million tons annually. That accounts for nearly two-thirds of global growth.

Lesson 1: Unless we do something to manage fisheries on a sustainable basis, the situation will only get worse.

Lesson 2: Politicians can say what they like, but no amount of fiddling with taxes or the local economy will make a difference. This is a global problem and needs a global solution.

Thursday, March 15, 2018

Effective Exchange Rate Indexes: February 2018 Update

The NEER and REER page has been updated, as has the Google Docs version.

Summary

This update is a little late for a few reasons. First, I was travelling the whole of last week, and simply hadn’t the time. Second, there were major updates to a few of the CPI series (changes of base years), including the one for Malaysia, that required rejigging the spliced deflator series.

On the whole though, the picture hasn’t changed much since December 2017. The Ringgit was still climbing against most currencies, which resulted in a continued increase in all of the indexes. On the year, the nominal broad index was up 5.3% in January and 6.4% in February, while the real broad index was up 3.9% and 6.3%. The picture was broadly the same across all the sub-indexes.

On a bilateral basis, the Ringgit was up against 14 currencies in January and 11 in February (relative to the 15 that make up the broad index). The biggest gains were against regional currencies, with the only net declines over Jan-18-Feb-18 recorded against the EUR, JPY and CNY.

01_indexes

Changelog:

  1. Indexes have been updated to February 2018
  2. CPI deflators and forecasts have been updated for January/Feburary 2018
  3. CPI deflator data revisions were required for Malaysia, Thailand, and the Phillippines. This required revisions to the indexes from Jan-17 onwards

Thursday, February 15, 2018

4Q17 GDP: Momentum Slowing

A quick note on yesterday’s GDP report. The date brought the growth numbers for 2017 to a gratifyingly satisfying conclusion (log annual change and annualised seasonally adjusted quarterly change; 2010 constant prices):

01_gdp

GDP expanded at a 5.8% clip (in log terms; 5.9% in percentage terms), just a little lower than the 6.1% log change seen in 3Q17. That brings full year growth to 5.7% (log) and 5.9% (percentage), the best performance since 2014.

Wednesday, February 14, 2018

Food Stamps Don’t Work, Redux

My original take here. From a Tweetstorm I read this morning:

Worth reading the whole thread.