Monday, January 26, 2015

Policy Analysis Isn’t For The Faint Of Heart

I read what I considered really bizarre articles in the Star last Saturday.

First, from Tan Sri Lin See Yan on the current turmoil in the currency and commodity markets. After noting the similarities with the 1990s and the divergent moves by central banks trying to restart growth, he says (excerpt; emphasis added):

A dismal world where oil and currencies are causing havoc

...Still, currency markets remain in turmoil. The recent abrupt move by Switzerland to remove the cap on its franc peg to the euro sent global markets reeling. This prompted the Wall Street Journal’s leader: “Murder in Zurich.” The Swiss franc had since revalued 20% against the euro.

Pressure is now on the Danish krone peg. It signals an end to stable money and a setback for growth. It blew a hole in Japan’s quantative easing (QE) strategy by undermining the credibility of central banks. So, the Swiss National Bank had to move or get run over. Currency market tumult harms. How will China respond to the challenge posed by a much weaker euro, yen and won? If Beijing caves-in and adopts the already in vogue beggar-thy-neighbour stance, ripples can become tidal waves. As I see it, the world has little choice but to go for a globally managed exchange regime.

Friday, January 23, 2015

Car Prices and GST: Bogus Arguments

Datuk Aishah of MAA on the impact of GST on car prices (excerpt):

MAA unclear of GST implications to car prices

PETALING JAYA: The Malaysian Automotive Association (MAA), which has projected a total industry volume (TIV) forecast of 680,000 units for 2015, is in doubt whether the implementation of the Goods and Services Tax (GST) would actually lower car prices.

Its president Datuk Aishah Ahmad said one of the issues is that for current stock held by distributors and dealers, Customs regulations denote that car companies cannot claim back the entire sales and service tax of 10%, but only 2%, meaning that the remaining 8% has to be borne by the company or be passed on to customers.

Dec 2014 Consumer Prices

With the (slight) fall in petrol prices, the aggregate price level moved a little lower in December (log annual and monthly changes):


Hey Fitch, What’s Up With This?

Just a follow up from yesterday evening’s post. To refresh your memory, here’s the data I posted:

  GDP growth (2014e) Gross Debt to GDP Fiscal Balance Current Account to GDP
Australia 2.80% 30.60% -3.30% -3.60%
Canada 2.30% 88.10% -2.60% -2.60%
Malaysia 5.90% 56.60% -3.60% 4.30%

Thursday, January 22, 2015

A Lesson In Macro Policy Choices

The Bank of Canada yesterday surprised everyone by cutting its policy rate by 25bps (excerpt):

Bank of Canada lowers overnight rate target to 3/4 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada….

…Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

Tuesday, January 20, 2015

2015 Budget Revisions

It’s neither as good as I hoped, nor as bad as I expected (you can read the speech here).

The government expects revenue to drop by RM13.8b in oil & gas related revenue, with some uptick from other sources. There will be cuts in operating expenditure along with the savings from the abolishment of petrol and diesel subsidies. Development expenditure will be held constant, based on the original budget estimates.

Monday, January 19, 2015

Living In The Past

As we say in BM, “mamat ni ketinggalan zaman” (excerpt):

‘Time to slash projects involving usage of foreign reserves’

Malaysia is expected to experience two to three years of slower growth rate due to the current stifling economic conditions, says independent analyst Prof Dr Hoo Ke Ping.

Pointing out that Malaysia’s current foreign reserves had depleted significantly since the 2015 Budget was tabled, the government and its people must be prepared for the worst case scenario.

Friday, January 16, 2015

2015 Budget “Restructuring”

A quick note on this (excerpt):

Budget 2015 review

PETALING JAYA: Budget 2015 is to be re-examined, with spending cuts likely to be made in the face of plummeting global oil prices.

Prime Minister Datuk Seri Najib Razak said there was a possibility that the budget tabled last Oct 10 would be restructured.

Tuesday, January 13, 2015

Dato’ Charon on the State of Malaysian Households

Khazanah Research Institute is a new policy think tank that just started up last year. Here's their MD on their first publication, "The State of Households" in Malaysia:

Your browser does not support native audio, but you can download this MP3 to listen on your device.

You can download the report here, and the Executive Summary here.

There's really no big surprises in the report (at least for me), but the KRIS report does a great job of showcasing the data in a very impactful way, for example showing the differences in access to public goods between rich states and poor states. I absolutely love two of the charts they came up with - household expenditure by income strata and category (pg 18) and GDP per capita comparing both states and cities internationally (pg 8). KL for instance, has a GDP per capita equivalent to Korea's and within striking distance of Seoul, but is nearly 2.5x the Malaysian average and almost 7x that of Kelantan. The Klang Valley is almost literally a different country from the rest of Malaysia.

Nov 2014 Industrial Production

Last week’s industrial production numbers points to a still resilient domestic economy (log annual and monthly changes; seasonally adjusted):


Monday, January 12, 2015

Transfer Pricing and Illicit Money Flows

I wonder how many people caught this, and how many of those understand the significance (excerpt):

Singapore updates corporate tax guidelines to better align with West

SINGAPORE: Singapore is updating guidelines on an accounting practice mired in controversy for helping multinational companies minimize their tax bills, as the city-state moves more in line with a crackdown by Western governments on aggressive tax avoidance.

International taxation has come under scrutiny since a quirk of "transfer pricing" was found to have helped lower the tax bills of a number of multinationals, including Starbucks Corp , Google Inc and Inc.

Such issues prompted the Organisation for Economic Co-operation and Development to call on governments to revise tax treaties, tighten rules and share more information, in a project due for completion by the end of this year.

In transfer pricing, a company sets a price for a good or service to be sold between two of its subsidiaries.

The company can use the price to minimise its tax bill by having a subsidiary in a low-tax jurisdiction such as Singapore sell products to a subsidiary in a higher-tax jurisdiction at a high price. This allows the company to book more of its profit in the low tax location.

From Jan. 6, the Inland Revenue Authority of Singapore (IRAS) will require related parties to keep contemporaneous records to support the pricing of such transactions.

The IRAS also detailed methods by which transactions are benchmarked to show that prices charged would be similar if the transactions had been with a party outside of the company….

Approximately a fifth of the “illicit” capital outflows recorded by GFI from Malaysia due to trade mispricing run through Singapore. If Singapore fixes its transfer pricing rules, that’s one positive step towards fixing the practice, not just for Malaysia, but for the region as a whole.

Note to LHDN and Customs: we should be doing the same.

Friday, January 9, 2015

Commodities and Currencies Part II (Very Wonkish)

I’ve maintained that the decline in the Ringgit is largely a function of the decline in global oil prices. Here’s some proof (or to be more precise, corroborating evidence):


The above charts show daily price movements of a barrel of Brent crude (in USD terms) and the USD/MYR exchange rate (in MYR terms) since 2012. The graphs are fairly similar, with a positive correlation of 60.5% between the two series.