Tuesday, March 31, 2015

Thinking Like An Economist: GST Edition

I was at Giant supermarket this weekend, doing my usual grocery shopping. Of course, there was a massive crowd stocking up on everything from flour to diapers, as this article aptly describes.

Some of the purchases are warranted; some are not. Personally, I only bought what my family needed this week and no more. It wasn’t worth the time and effort for me to get more. The point I want to make here today is that calculating the cost-benefit of stocking up isn’t as simple as calculating the money savings one might have relative to after GST comes in.

For high-ticket items, the logic is pretty clear – it’s worth the trouble…mostly. Buying a new smartphone now for instance – say one costing RM1k – one would save about RM60. For the vast majority of the population, such savings are worth it.

The cost-benefit for groceries is not nearly as simple.

Tuesday, March 24, 2015

Wages and The CE/GDP Ratio

I’ve come across the same dilemma myself, but a box article in BNM’s 2014 Annual Report outlines the latest data (excerpt; emphasis added):

Trends in Malaysia’s Gross Domestic Product by Income

…In terms of share, capital income forms the largest component of GDPI (Chart 3). However, with the growth of labour income outpacing the growth of capital income, the share of labour income to GDP has risen steadily from 29.5% in 2005 to 33.6% in 2013. By definition, however, the labour income component in GDPI excludes income earned by self-employed individuals…With such adjustments, the share of labour income for Malaysia is higher, on average, by 8.0 ppt. throughout the period (Chart 4)….

Monday, March 23, 2015

Tears For Singapore

Condolences to the people of Singapore, for the passing of Lee Kuan Yew. Love him or hate him, nobody can deny his achievements or what he has meant for Singaporeans.

The sad thing is that Singapore is now at an economic crossroads, and probably needs LKY’s brand of pragmatism more than ever. Whether this next generation of leaders will be able to steer the country through the challenges it faces now remains to be seen.

Thursday, March 19, 2015

Economic Efficiency and GST

We’re less than two weeks away from GST going live, so it might be appropriate to look at the economic arguments in favour of it.

On the WCI blog, Frances Woolley reviews the textbook arguments (excerpt):

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US, Canada, and New Zealand.

The equity argument for taxing groceries is straightforward. Suppose everyone spends $500 a month on groceries. If groceries were taxed at 10 percent, everyone would pay about $50 in tax (or slightly less, if people cut back on their food expenditures when the tax is introduced). If part of the revenue raised by taxing groceries was used to give every low income individual a $60 tax credit, the tax on groceries would actually increase the well-being of the worst off members of society. Any additional revenues raised could be used either to decrease other taxes, leading to greater economic efficiency, or to provide needed social or infrastructure programs, further enhancing efficiency and/or equity.

Income Traps: It’s All About Convergence

A couple of recent papers have come out on “middle income traps”. First up from the World Bank (abstract):

Transitioning from low-income growth to high-income growth : is there a middle income trap?

Is there a "middle income trap"? Theory suggests that the determinants of growth at low and high income levels may be different. If countries struggle to transition from growth strategies that are effective at low income levels to growth strategies that are effective at high income levels, they may stagnate at some middle income level; this phenomenon can be thought of as a "middle income trap." This paper does not find evidence for (unusual) stagnation at any particular middle income level. However, it does find evidence that the determinants of growth at low and high income levels differ. These findings suggest a mixed conclusion: middle-income countries may need to change growth strategies to transition smoothly to high-income growth strategies, but this can be done smoothly and does not imply the existence of a middle income trap.

Translation: No, there’s no such thing as a middle income trap.

Wednesday, March 18, 2015

GST Price Guides

These were supposed to come out a couple of months ago based on the original planned timeline, but I remember some concerns being raised that releasing them too soon might render them inaccurate enough that people might not trust them.

In any case, here they are:

  1. Northern Zone
  2. Eastern Zone
  3. Central Zone
  4. Southern Zone
  5. Sarawak
  6. Sabah

Complaints about retail pricing or price gouging can be addressed to the 1Malaysia One Call Centre (1 800 886 800)

Government Debt: Revisionism

Tengku Razaleigh made a speech in Parliament yesterday that made some waves.

I thought I might have a look back at the fiscal metrics during Ku Li’s time as finance minister (fiscal deficit and government debt as ratios to GDP; shaded area):



The truth is, fiscal management is and can be event specific. Ku Li had to deal with the biggest and sharpest collapse in global commodity prices in modern history. This government on the other hand had to deal with the longest and most severe global recession since the Great Depression.

Just sayin’.

Tuesday, March 17, 2015

Why Fuel Subsidies Had To Go

All explained in two slides from last week’s BNM Annual Report Briefing:



You can find the box article these were taken from here.

Thursday, March 12, 2015

Explaining External Debt

Yesterday, the media (social, online, offline) were agog at Malaysia’s external debt numbers. They shouldn’t have been – the inflated numbers were due to a redefinition of external debt made last year (see here, especially the last four pages), which was announced, though nobody appeared to have caught on.

So what’s the deal?

Hafiz Noor Shams has a nice graph showing the difference between the old definition and the new one. I agree with him, the reporting on this has been deplorable, and not just from the local media (sorry guys, it has been pretty bad), but from the foreign media as well. One joker speculated that with external debt so high, Malaysia might have trouble “servicing” it, because the foreign exchange reserve cover was low. Hah!

Friday, March 6, 2015

Ringgit Depreciation In Perspective

This is from June 2014 to December 2014, and to February 2015 (% appreciation of USD; sorted based on the latter date; click on the image for a larger version):


The Ringgit is in the top half of the list, but just barely. Most of the bottom half are currencies pegged to the USD (i.e. from Honduras down to Saudi Arabia), while most of the top half are mostly European and pegged to the Euro. Not all currencies are on the list, but these exceptions are also mostly pegged currencies (most of the Caribbean and Africa for example).

Some people have been calling on the Governor to resign due to the deterioration in the USD value of the Ringgit. I don’t think Tan Sri Zeti is worse than the Governor of the Central Bank of Sudan. It’s clear from here that the sell down of the Ringgit is at worse only partially due to local factors, and much more to do with a strong global rotation towards the USD.

So much for “worse performing currency” and “foreign investors leaving due to lack of confidence in the economy”.

Technical Notes:

FX price data from the Pacific Exchange Rate Service

BNM Watch: Saying Nothing At All

As expected, the Monetary Policy Committee meeting yesterday left the Overnight Policy Rate unchanged 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….

…the downside risks to the global economic outlook remain given the weak growth momentum in a number of major economies. The uncertainties in the policy environment are also contributing to the shift in sentiments in the international financial markets.

While the Malaysian financial markets have been affected by these global developments, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets….

…Going forward, domestic demand will remain as a key driver of growth…household spending will continue to be supported by the steady increase in income and employment.…The prospects are therefore for the Malaysian economy to still remain on a steady growth path….

…For the rest of the year, headline inflation is expected to trend higher, but to be below its historical average….

…At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity….The MPC will also continue to monitor the risks of destabilising financial imbalances to ensure the sustainability of the overall growth prospects.

Thursday, March 5, 2015

2014 IMF Article IV Report on Malaysia

It’s out, and available here. The summary is per the link below (excerpt):

Favorable Prospects for Malaysia’s Diversified Economy

  • Growth likely to remain healthy in 2015, despite lower energy prices
  • End of fuel subsidies and start of Goods and Services tax is timely, and good for efficiency, equity, and the environment
  • Exchange rate flexibility will help non-energy exports

After a year of very strong growth of 6 percent, lower energy export prices in 2015 will likely contribute to growth moderating to a still impressive rate of close to 5 percent, say IMF economists.

In their annual report on the health of the Malaysian economy, the report’s authors say growth is expected to moderate to about 4¾ percent this year while headline inflation will likely increase slightly to about 3¼ percent in 2015 as a result of an end to fuel subsidies, the introduction of a Goods and Services Tax (GST), and exchange rate depreciation.