While disappointing, the results weren’t totally unexpected. In fact, the y-o-y number of 4.0% came in somewhat higher than the consensus estimate of around 3.6% (and well above that implied by net trade or industrial production output).
In point of fact, apart from the external side, the numbers don’t look half bad (log quarterly changes; seasonally adjusted; annualised):
It’s a stylised fact and almost universally accepted that Malaysia is caught in a middle income trap. But a funny thing happened when I went looking for the evidence – it’ incredibly hard to find. And thinking about the issue made me more convinced that the whole idea is about as real as Hogwarts.
Taken at face value was does the term mean? Simply that a middle-income country stays a middle income country, and doesn’t make the leap into high income status. There’s also the notion of a poverty trap for countries; that low-income countries are unable or unwilling to make the necessary structural changes to achieve a growth “take-off” and start on the long road of development.
I hadn’t touched a computer since last Friday, so I only heard the news Monday morning. While S&P’s move was a bit of a surprise, coming as it did on the heels of the agreement last week on the US debt ceiling, it wasn’t an absolute shocker. The magnitude of the US national debt – and more importantly, who’s holding it – suggests that the risk was always there.
Fundamentally though, nothing has really changed since last week or last month. I can’t help feeling that the ratings agencies are bolting the stable door after the horses have fled. They were roundly criticised and partly blamed for the CDO mess that caused the liquidity crunch in 2007-2008 – both in rating structured products at AAA grades as well as for failing to downgrade fast enough when it became clear that most of the stuff was junk. This is perhaps S&P’s way of saying never again, as the downgrade is a bit of a paper tiger.
What makes this all ironical is that because US government borrowing is all denominated in US dollars, the risk of default is effectively zero. Hence, I don’t know if there’s going to be any real impact on US debt issuance or investor appetite for US treasuries. Even as equities worldwide faced a sell-off, when I checked just now – as I suspected would happen – US treasury yields were down, not up as you would expect on a ratings downgrade. The news just provided investors an excuse to act on their fears over global growth, as equities have looked overbought to me and many others since early this year.
But flight to safety leads directly back to US sovereign debt. So you’ll have this paradoxical situation of the debt downgrade leading to higher demand for the very debt that supposed to be less credit worthy (and incidentally, higher demand for the USD). Go figure.
And before anyone starts blaming the Fed for treasury price movements, let’s note that QE2 ended last month and hasn’t been extended (yet). I’ll also note in passing that the ECB took the opportunity today to quietly expand their QE program, adding in Spain and Italy to the existing support they’ve extended towards Greek, Irish and Portuguese debt.
We’re truly living in interesting times.
Hard to say whether we’re seeing incipient signs of recovery, but yesterday’s report from Matrade shows that Malaysia’s external trade has levelled out (log annual and monthly changes; seasonally adjusted):
After two straight months of declines, both exports and imports swung up…slightly. After all the disruptions to trade through the first half of the year, though, any positive signs are welcome.
After a short hiatus for the beginning of fasting month, I’m back…or at least until we come up to Aidil Fitri
As a follow up to my post a couple of weeks back on the monetary transmission mechanism, there’s a new working paper out from the IMF that essentially confirms my findings (abstract):
Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?
Nikoloz Gigineishvili
Summary: Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it.
My calculated elasticities for Malaysia’s policy interest rate pass through falls right on the average for Asia as a whole. So Malaysia's not that far out of line.
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