Credit Rating Agencies In The Spotlight

The IMF says that markets should reduce their reliance on credit ratings (excerpts, emphasis added):

Reducing Role of Credit Ratings Would Aid Markets
By John Kiff

New IMF analysis says that ratings have inadvertently contributed to financial instability—in financial markets during the recent global crisis and, more recently, with regard to sovereign debt.

The analysis, in the IMF’s Global Financial Stability Report, recommends that regulators reduce their reliance on credit ratings as much as possible and increase their oversight of the agencies that assign the ratings used in regulations...

...In the case of sovereign debt, the IMF said in the report released September 29, the problem does not lie entirely with the ratings themselves, but with overreliance on ratings by market participants, coupled with deleterious selloffs of securities when they are abruptly downgraded — called “cliff effects.”…

Part-Time Work Regulations Implemented

If you recall my post on Dr Fong Chan Onn’s thoughts on the minimum wage, one of the things that he recommends and foresees is greater part time work and a more flexible labour force.

Well, the changes to the Employment Act 1955 enacted in August will come into force tomorrow:

New rules on part-time work

PUTRAJAYA: Only those working between 30% and 70% of the eight-hour stretch daily will be considered part-timers under new rules from next month, said Human Resource Minister Datuk Dr S. Subramaniam…

…He said staff working below 30% of the eight-hour stretch would be categorised as casual workers while those putting in more than 70% were full-timers.

Beyond GDP Part II

Back in July, I highlighted an article that argued for a more holistic approach to measuring changes in human welfare that goes beyond simple income/output based measures such as GDP. Now along comes this new paper by Charles Jones and Peter Klenow of Stanford University that takes the idea a step further (abstract):

Beyond GDP? Welfare across Countries and Time

We propose a simple summary statistic for a nation's flow of welfare, measured as a consumption equivalent, and compute its level and growth rate for a broad set of countries. This welfare metric combines data on consumption, leisure, inequality, and mortality. Although it is highly correlated with per capita GDP, deviations are often economically significant: Western Europe looks considerably closer to U.S. living standards, emerging Asia has not caught up as much, and many African and Latin American countries are farther behind due to lower levels of life expectancy and higher levels of inequality. In recent decades, rising life expectancy boosts annual growth in welfare by more than a full percentage point throughout much of the world. The notable exception is sub-Saharan Africa, where life expectancy actually declines.

The Minimum Wage And Bargaining

Over the weekend, Dr Fong Chan Onn wrote a very long focus article in The Star with an interesting perspective on the minimum wage proposal, summing up most of the arguments for and against (emphasis added):

Should we set a minimum wage?
By Dr FONG CHAN ONN

The issue of minimum wage for labour has been hotly debated since the advent of the industrial revolution in England in the 1760s.

Employers, using economic theories, argued that wages for labour should be determined by market forces – that is, the wage level at the interaction point of the supply and demand curves for labour. Any attempt at setting a minimum wage higher than that determined by the (assumed) efficient market, they argued, would lead to a distortion in the economy, and in fact would reduce employment opportunities for workers.

This argument held sway in industrial Europe for over a century.

But by 1824, Australia (Victoria) and New Zealand recognised that the labour market was imperfect and that employers would always have greater power in terms of setting wages. They enacted legislations to establish arbitration boards to set basic wages for industries that were deemed too lowly paid...

...In Asia, countries such as China, Indonesia, Thailand and Singapore have established national minimum wages or national wage councils, and as recently as in June this year, Hong Kong passed a law to set the minimum wage for its workers (at HK$ 28 or RM11.17 per hour)...

...Employers’ groups, led by the Malaysian Employers Federation (MEF), vehemently oppose any such move. Recently, they successfully lobbied for a delay in the implementation of the long overdue Wage Regulation Order for private security guards...

...The employers’ assertions, of course, assume that the Malay­sian labour market is efficient, with employers and employees in all sectors having equal bargaining power. This is obviously not true...

Why Build An MRT For Kuala Lumpur?

After just enduring a two-and-a-half hour ordeal in what’s usually a 45 minute drive trying to get home tonight, through snarling traffic, heavy rain, and a closed SMART tunnel, I’m a convert.

How much is it? RM50 billion all in? Cheap for the price. When do they start?

Wither The Ringgit

The Ringgit has going form strength to strength, as this article asserts:

Malaysian ringgit expected to remain strong
Robust demand and credit growth may entice fresh foreign funds

KUALA LUMPUR: The ringgit, which temporarily broke to 3.08 level last week, is expected to remain strong.

“The market may hold up at this current level,” a dealer said, adding that robust domestic demand and credit growth were expected to entice fresh funds from foreign investors.

A forex dealer told Bernama that the ringgit might breach the 3.06 mark against the greenback in about two weeks, after hitting its strongest level since October 1997 at 3.0873.

The local unit rallied to new 13-year highs in four straight weeks amid speculation that rules would be further loosened to enable the local currency to be traded offshore…

…Yesterday, the local unit ended higher at 3.0900/0930 against the US dollar compared to Thursday’s closing of 3.0950/0980 after the local bourse managed to pare some of its earlier losses on bargain hunting activities.

Bloomberg reported that Barclays Capital Plc had raised its forecast for the local currency, predicting a 6.1% appreciation over the next 12 months as foreigners plow more funds into the nation’s assets.

FTSE Group, a global index provider, had also upgraded Malaysia to “advanced emerging market” status, a move that will attract as much as US$3bil of new inflows to the local stock market, Bloomberg quoted Barclays as saying.

July 2010 Economic Indicators

I wrote about the economic indicators that are published by the Department of Statistics last year, and haven’t touched the subject since. Part of the reason has been that the indicators are published with a bit of a lag, probably because the IPI is a major component.

Now seems a good time to cover them again, since from last week’s report, the indicators are flashing warning signals:

July 2010 Employment Report

After a busy weekend – open houses (if you’re not Malaysian, check this link for what this is all about), shopping and home improvement – I only had the chance to go over the weekend’s news feeds last night. There’s lots in the new about the ETP and some commentary over the minimum wage, which puts me behind in catching up…again. So there will be a slew of quick posts over today and tomorrow.

First up, last week’s employment and unemployment report from DOS. The unemployment rate has dropped to the low end of its year-long range, dipping to about 3.3%:

August 2010 CPI: Trending Up

June’s subsidy cuts continued to affect the price level in August, and I suspect Ramadhan did as well. In any case, inflation for the month of August has accelerated:

Ringgit In The News Again

The second piece of news over the last couple of weeks I want to over is the internationalisation of the Ringgit, which was brought up by the PM in an interview just after Eid. This prompted quite a bit of feedback, notably this broadside:

He’s right…and wrong of course (hit this link for the original article in The Star). Much as I respect our former PM, characterising what happened in 1997-98 purely as a result of speculative attacks on the Ringgit is shallow analysis and displays a victim mentality (one fine day, I’ll get around to posting about 1997). Or, in the words of the immortal Han Solo, “It’s not my fault!”. But he does have a point over the scale of forex flows relative to the Malaysian market (see this post for the real source of that info).

Human Resource Minister: Minimum Wage Model Going Ahead

One of the downsides of having a long break is that you have to work double-time to catch up on everything when you get back – I’ve only just finished going through my news feeds for the past two weeks. There was quite a few items that I found worth commenting on, but they’re necessarily a little stale, but them’s the breaks.

Top of the list is that the minimum wage (due to be presented to cabinet in October) is again in the news with the Human Resource Minister outlining the bare outlines of the scheme (emphasis added):

Economic Transformation Programme Open Day

I’ve just come back from the ETP open day. I’m sorry to say I didn’t spend much time there, so there won’t be much analysis of the content until the ETP is actually published next month – apparently it’s going to be issued after the federal government budget is tabled in parliament.

The response was pretty good as I saw plenty of interested people browsing through the exhibits – most no doubt from companies who are going to be affected by the ETP proposals (including mine). The free-flow of food probably helped as well :)

Just some quick hit thoughts on some of the things that struck me, reading some of the proposals (thoughts on the actual targets are here):

July 2010 Industrial Production: Not A Good Start To The Quarter

This is the longest break from blogging I’ve taken since the end of last year – I’ve barely been online since last week, travelling and seeing family during Eid. The only thing I’m aware of that’s been happening is the developing news of the Sosilawati murders, and even that’s been peripheral. But I’m getting back in the groove from today onwards, and first up is last week’s industrial production report.

It’s not very encouraging, with the main index falling for two consecutive months, and manufacturing falling for three (log annual and monthly changes; seasonally adjusted; 2000=100):

Selamat Hari Raya; Eid Mubarak

Kepada semua muslimin dan muslimah, Selamat Hari Raya Aidil Fitri, Maaf Zahir dan Batin.

Posts are going to be understandably a little sporadic over the next few days. If you’re travelling, drive safely.

Enjoy the holidays, and the time with your families. I know I am.

This Isn’t And Never Has Been A Sub Prime Crisis

Back in 2008, when the Great Recession was just beginning, I told my staff not to label the financial problems facing the US and Europe as a “sub-prime” crisis. The default levels in the sub-prime mortgage market in the US weren’t actually much higher than they were in the previous US recession of 2000-2001. The big difference between then and now was the degree of securitisation – the problems arose because of structured derivatives built on sub-prime mortgage loans that were mispriced relative to their risk factors, not the sub-prime mortgage loans themselves. Calling it a “sub-prime” crisis risked causing people to misunderstand what the crisis was about, and what had to be done about it.

But two years on, the financial problems have spread far beyond asset-based securities as Scott Sumner discusses:

Which state had the most bank failures during 2008-10?

No, it’s not centers of sub-prime madness like Arizona or Nevada. Nor is it big states like California or Florida. It’s Georgia. And Illinois is second. Check out the graph in this link:

There is a good reason why most bank failures in 2009 did not occur in the sub-prime states; sub-prime loans were not the main problem. Indeed mortgages of all types were not the main problem. What was? According to McNewspaper USA Today it was construction loans, often for commercial real estate:

Tok Pah: Focus On Domestic Investment

When the news broke a couple of months back about the dramatic fall in FDI to Malaysia in 2009, I thought most of the commentary was missing the point. The issue to me was poor investment as a whole over the past decade – low FDI was just symptomatic of a bigger problem. The Minister of International Trade and Industry is now signalling that the government recognises the real issues:

Foreign Direct Investments vs Domestic Investments

THE domestic debate on whether a country should focus on foreign direct investments (FDIs) or direct domestic investments (DDIs) is gaining traction as Malaysia moves towards increasing private investment under the 10th Malaysia Plan. Questions are being raised on the impact and contribution of FDIs versus domestic investments on the economy.

...Looking at these numbers, questions may be asked as to whether FDIs are necessary. Or can we ignore FDIs completely and depend only on domestic investments?

Basel III In The Works: New Capital And Leverage Framework For Banks

Banks and bank-like entities were at the epicentre of the Great Global Recession, and there’s more than a few criticisms that the current prudential financial framework (aka Basel II) contributed to the crisis by being too pro-cyclical. The proposals for Basel III would tighten capital requirements significantly, though not to the point of killing banks’ ability to funnel credit to the economy at large:

Basel Capital Ratio Compromise Reached, Zeitler Says

Sept. 8 (Bloomberg) -- Global regulators reached a compromise on capital ratios for banks that will introduce higher capital requirements over a five- to 10-year period starting in 2013, a German central bank official said…

…Policy makers are seeking to raise the quality and quantity of reserves held by banks to avoid another financial crisis. Governments have been wrangling over the details with France and Germany among those concerned that their banks and economies wouldn’t be able to bear the burden of tougher capital requirements until economic recoveries took hold. Group of 20 leaders meet in November in Seoul to approve the rules.

Die Zeit newspaper reported Sept. 6 that the Basel Committee met to discuss a proposal demanding a minimum capital ratio for financial institutions of 6 percent as well as a “conservation buffer” of 3 percent for bad times. The proposal would have required an additional “anti-cyclical capital buffer” of 3 percent during “boom times,” the newspaper said.

As to the level of capital ratios, the committee has found a compromise as compared to the proposal,” Zeitler said. He didn’t reveal any numbers.

Banking And Housing Part III

I was going to write about this (again), as there has been quite a bit of talk regarding limiting loan to value ratios (here and here for instance), but Salvatore_Dali has a good write-up on it already, with up-to-date data on price movements:

Malaysian Property Bubble?

If you say Malaysian property bubble, it does not look so plausible ... but if you replace it with KL or Penang property bubble, you have more nodding heads - with possibly the property sales and developers disagreeing…

…Almost every single valuation matrix would put property prices in KL and Penang in the overvalued category…

…Foreign buyers are mostly leaving finished units and houses empty. Don't believe me, go check out houses and apartments costing more than RM2m and RM1m respectively. If you can get 50% occupancy, call me and tell me where!!!

Read the rest for his analysis.

Outward Investment: EPF And UK Property

I was struck by the juxtaposition of the articles on property in yesterday’s Star. On the one hand we have news of oversupply and softening rental yields in the KLCC Condo market (here, here and here), in stark contrast with the news that the Employees Provident Fund (EPF), the country’s largest fund manager public or private, is committing to invest GBP1 billion in the UK:

Should EPF house our money in real estate abroad?
Sideways by ANITA GABRIEL

IT’S as predictable as clockwork.

Any move by the Employees Provident Fund (EPF), unless it’s glaringly positive, tends to set off warning sirens. Much of it has to do with the fact that the employed, 12.4 million of them, have no choice but to channel part of their hard-earned savings to the fund, hence the perceived-right to voice dissent or concern.

There’s also the “legacy stigma” that now and then rears its suspicious head, that the EPF, with its bursting wallet, may be acting in ways that are not in sync with the pillar on which it was set up almost two decades ago – to safeguard the people’s retirement monies.

So, when it was recently revealed that EPF plans to tuck some £1bil (or 1.2% of its total investable sum) primarily into commercial properties in UK, the vibes were multi-pitch.

Now obviously, with the number of stakeholders that EPF has there’s going to be questions – as in this article. But I happen to think it’s a pretty positive move (and the consensus agrees).

Kelantan Gold Dinar Sold Out

Kelantan Gold Trade has run out of stock:

Dinar sold out in Kelantan
By ZUHRIN AZAM AHMAD

PETALING JAYA: Kelantan’s gold dinar that was recently introduced has been sold out with most people buying it for investment purposes.

Kelantan Gold Trade (KGT) Sdn Bhd that issues the dinar and the silver dirham said about RM1.5mil worth of dinar and RM1mil worth of dirham had been sold since it was introduced on Aug 12…

…KGT is the subsidiary of Kelantan Mentri Besar Corporation which also manages the syariah-compliant currency.

Umar said about 150,000 dinar and dirham coins were minted and many bought them for investment purposes.

Never mind whether it’s legal or not, the fact that many bought the coins for “investment” purposes rather than for actually use as currency points to gold’s current (and past) unsuitability as a monetary base.

NEM Part 2 To Be Published Next Month

When the New Economic Model document was first published back in March, it was criticised for being short on details. We were told that Part 2 of the plan would rectify that – well the countdown has begun:

Najib gets second part of NEM report

PUTRAJAYA: Prime Minister Datuk Seri Najib Tun Razak has received Part 2 of the New Economic Model (NEM) report from the National Economic Advisory Council (NEAC).

NEAC chairman Tan Sri Amirsham Abdul Aziz handed the report to Najib at the Prime Minister’s Office here yesterday.

The report titled “New Economic Model for Malaysia – Part 2: Strategic Policy Measures”, will be released to the public next month in the form of an Economic Transformation Prog­ramme (ETP) report, the Prime Minister’s Office said in a statement yesterday. It said the ETP report would spell out government plans and proposals for the 12 National Key Economic Areas (NKEAs).

It’s been a looong time coming, but once we get into the detailed implementation plans, that’s when the real public policy debate will begin. I rather suspect the timing will be closer to early October rather than late, as that will give a (short) lead time for any feedback to be included in the 2011 government budget program, which is due to be tabled at the end of next month.

Stay tuned.

2Q 2010 Federal Government Budget and National Debt Update

I’ve kept this on the back burner since last week because there have been more immediate news to attend to. But now I’ve had some time to go over the stats, the government fiscal position looks pretty decent if you’re a believer in fiscal consolidation (quarterly, RM millions):

In The Global Forex Market, The Ringgit Is A Minnow

The Forex Blog parses the Bank of International Settlements’ Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (warning: pdf link):

Trading In Emerging/Exotic Currencies Increases

…While emerging currencies as a group accounted for a smaller share of overall activity, certain individual currencies managed to increase their respective shares. The Singapore Dollar, Korean Won, New Turkish Lira, and Brazilian Real all fit into this category. Still other currencies, such as the Indonesian Rupiah and Malaysian Ringgit, also managed impressive gains but account for such a small share of volume as to be insignificant when looking at the overall the picture. Those who were expecting even bigger growth should remember that it’s ultimately a numbers game: the amount of Ringgit it [sic]outstanding is dwarfed by the number of Dollars, so any gains that the Ringgit can eke out are impressive. In addition, when you consider that the overall forex pie is also increasing, the nominal increase in volume for these small currencies was actually quite large...

July 2010 External Trade: At Least It Ain’t Falling

July’s trade report that was released today by MATRADE shows exports slightly down on the month, but not so much you’d notice (log annual and monthly changes; seasonally adjusted):

BNM On Hold

As expected, the Monetary Policy Committee kept the Official Policy Rate pegged at 2.75% today, pretty much as everyone was expecting (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 2.75 percent.

The global growth momentum has moderated in recent months….Domestic economic activity, however, remains strong. Given these developments, the assessment going forward is for the global recovery to proceed at a more moderate pace.

…As in other regional countries, Malaysia's export growth has, however, slowed in recent months…Leading indicators suggest that private consumption and private investment will continue to expand. This is also supported by the favourable labour market conditions, positive consumer and business sentiments, low inflation and conducive credit conditions.

…Going into 2011, inflation is projected to continue to remain moderate.

The MPC considers the current monetary policy as appropriate and consistent with the latest assessment of the economic growth and inflation prospects. At the current level of the OPR, the stance of monetary policy continues to remain accommodative and supportive of economic growth.

Banking And Housing Again

Further to my last post on this issue (see here), banks are apparently working with BNM to limit property speculation:

Banks to try and prevent speculation on property prices
By ANGIE NG and SHARIDAN M. ALI

PETALING JAYA: Bank Negara is engaging with banks on possible measures to curb excessive speculation on property prices while developers caution that it should not be imposed across the board to avoid dampening the property market.

Responding to queries on whether the central bank will be imposing a 80% loan-to-value ratio (LVR) for mortgages to avert the risk of a potential property bubble, the central bank said: “Bank Negara regularly engages with industry players as part of its surveillance and supervisory activity. The engagements cover a broad range of issues and areas that relate to developments on the ground, safety and soundness of the institutions and the overall system.”

…When contacted, banking industry players said it was likely that any measures to be introduced would be pre-emptive measures to target certain quarters of purchasers and would not be across the board.

The measures are believed to be targeted at the high-end and non-owner occupied house purchasers.

Property developers are predictably against the idea. I suspect however, that the consensus is right – if any guidelines on minimum downpayments is actually put in place, it’ll only affect properties at the high-end.

An Absence of Markets: Banking Edition

OK, I don’t mean that title literally, but if you’ll bear with me you’ll see what I mean. I got tickled pink – in a I-can’t-believe-this sort of way – reading this in the paper today:

Aid for banks to address staff pinching
By SHARIDAN M. ALI

They will get 25% from penalty paid by poacher bank to Financial Staff Training Fund

PETALING JAYA: Banks that suffered from staff poaching in the industry will be better compensated starting this year so that they can reinvest in training.

The compensation will be in the form of 25% allocation from the penalty paid by the poacher bank to Financial Staff Training Fund set up to address staff pinching.

Previously, the whole portion of the penalty, which amounts to six months new salary of the employee being pinched, goes to the fund.

However, the 25% allocation for banks that were pinched will be the form of credit that can be used to train staff at Institute of Bankers Malaysia (IBBM) and Financial Sector Talent Enrichment Programme (FSTEP).

It was reported that staff pinching in the country’s banking industry might become rampant with the entry of more foreign banks.

Reading the text, you'll note that there's nothing from the perspective of the workers involved. From my point of view, who gets the allocation from the penalty is beside the point – why is there a penalty in the first place? The idea that banks have to be compensated from the loss of trained and experienced staff doesn’t meet the smell test – practically no other industry in Malaysia does the same.

Gold To Rally To US$1500: Tell Me Why This Isn’t A Bubble

On Bloomberg today:

Gold Rallying to $1,500 as Soros’s Bubble Inflates

Aug. 31 (Bloomberg) -- Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Global economy gets better – gold will rise; economy gets worse – gold will rise. More than anything, that hints to me that gold has outrun its market fundamentals. The only reason the gold price is rising is...because the gold price is rising. The fact that Soros’ fund is trimming their holdings suggests that they see a bubble end game looming, so buyer beware. This thing still has legs so we’re nowhere near the peak yet, but given the dramatic rise in the gold price, you would expect an equally dramatic fall.