Friday, July 11, 2014

BNM Watch: OPR Raised To 3.25%, Market Yawns

It was so blatantly telegraphed after the last MPC meeting, the disappointing thing would be if they didn’t go through with it (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.25 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 3.00 percent and 3.50 percent respectively....

...For Malaysia, latest indicators point to continued strength in exports and private sector activity. Going forward, the overall growth momentum is expected to be sustained....The prospects are therefore for the Malaysian economy to remain firmly on a steady growth path....

...Amid the firm growth prospects and with inflation remaining above its long-run average, the MPC decided to adjust the degree of monetary accommodation. This normalisation of monetary conditions also aims to mitigate the risk of broader economic and financial imbalances that could undermine the growth prospects of the Malaysian economy. At the new level of the OPR, the stance of monetary policy remains supportive of the economy.

I’ll be honest, I don’t agree with this move. I can’t find any justification for it. I can find good arguments against any and all the reasons everybody else has been able to come with. Negative interest rates, higher inflation, slow deposit growth, exceptional GDP growth? Financial imbalances? What financial imbalances? These are all grasping at straws.

So it finally occurred to me: this hike in the OPR is not being driven by the incoming data. Nobody can find good reasons, because there really aren’t any.But that I think is precisely the point, and why BNM has made its move now – just as there are no good and cogent reasons for raising the OPR, there are also no good reasons against it.

I think this is the first time in years, where the economy is strong enough and growth is broadly spread enough, that the MPC feels comfortable raising interest rates. This is managing the economy by the seat of the pants and gut instincts, not by rules and slavish adherence to inflation targets.

Fair warning though – if I’m right, the goal will be to reach a particular level for the OPR. There will be no pause to “gauge” the reaction of the economy; it will be instead a gradual and inexorable march towards that goal. The only barrier to stopping it would be a slew of negative data, which I don’t think we’ll see until the beginning of next year, when the 4Q data starts coming in.

The question remains what level of OPR the MPC is aiming at or if they’ll spread it out to lessen the shock (as in 2010-2011) – my bet is between 3.75% and 4.00%, but I’ve no objective basis for that, just a Goldilocks (not too hot, not too cold) feeling.

Whatever the case, look for another 25bps increase at the next meeting (September), or the one following (November), or possibly even both.

20 comments:

  1. Always strike when the rod is hot and it is always better to prevent than to cure. Prevent as in preventing a bigger bubble and cure is to save the economy due to the burst of the bubble.

    I say 4%. Most definitely not 5%.

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    Replies
    1. Why not 5%?

      Zuo De

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    2. I think alot of household will struggle if it goes to 5%. don't think BNM or BN will allow this, unless they are forced to. forced as in USA's interest rate rise to 3-4%... which is almost unlikely. who knows, maybe it will rise to 6%

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  2. It kinda gives me a feeling that they are preparing for the possible repercussion when the US QE ends and not to mention the FED raising interest rates.

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  3. Ok, I admit there is a little bit of self-interest here... What does this do for property owners? You said last time the rise to 3.25% doesn't make much of a difference because banks tend to keep their long term rates steady? What about 4%?

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  4. Oh oh oh....And does that change the long term trend of the SGD-MYR exchange rate?

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  5. I very much doubt the US interest rates will hit the strato heights as being bandied about here. Private analyst projections, “realities” surrounding their growth and Fed sensibility will see to that:

    1.http://www.bloomberg.com/news/2014-07-03/fed-seen-raising-main-rate-earlier-after-june-employment-surge.html

    2.http://www.bloomberg.com/news/2014-05-26/bond-market-s-message-to-fed-your-4-rate-forecast-is-too-high.html

    However, I do see BNM’s move as a desperate attempt to cull debt fueled private consumption that have bolted the stables via the higher Household debt door. Money supply (broad money = M3) has hardly cooled in quantity as can be seen from the data below, and so has the purchase of big ticket items:

    http://www.bnm.gov.my/files/publication/msb/2014/5/ebook_5.pdf

    For money supply growth, pay attention to the quantum not YOY percentage growth which is deceptive.

    For big ticket items, peruse from page 28-33, paying particular attention to passenger cars, personal credit, credit cards and homes. Some may aver, property purchases is an investment that is bound to appreciate but the American experience and news like below makes that an iffy proposition.

    http://www.themalaymailonline.com/malaysia/article/an-oversupply-of-homes-in-iskandar

    Back to the BNM portal, note that loans approved (page 30) for property (homes) constitute 30% of total loans approved supporting my earlier contention in this blog that this has been a 'private debt fueled consumption driven growth' with speculative property bubbles being the mainstay. Throw in the public debt portion and you have lots of money sloshing around.

    Everything implies that BNM has run out of bullets to arrest burgeoning credit growth as it had complacently kept rates too low too long (2012 would have been ideal time to jack things up)at the behest of easy money policies that has seen the growth of speculative bubbles in the economy. Given street inflation is also way above “comfortable” official levels, BNM's hand was forced to apply the nuclear option of higher rates to cool over-exuberance.

    What will transpire when the next hike comes along is that the inevitable deleveraging will make a mess of private consumption especially amongst the middle class households and the newly minted debt fueled “wealthy” and that will impede the domestic sector’s role in the economy as consumption tanks.

    Warrior 231

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  6. Part 2

    I also perceive this BNM move as a first strike against the expected rush for credit to be seen from mid Q3 onwards as “inflation anticipation” regarding GST kicks in and the chattering classes rush to hasten their purchases of big tickets items before April 2015. Economic policy analysts have long understood this phenomenon the globe over so I will not elaborate further.

    As the “ bullish rate" advisory from BNM accompanying the rate adjustment indicates, there will be further increases going forward with an upside of .50 to 0.75 highly possible by Q1 2015. So brace yourselves for a hard landing....hahaha

    In AKJ’s blog regarding the kangkung issue, I predicted that growth in China would be a crucial determining factor in ensuring a healthy local economy. So far China has held up as the external sector has picked up the slack of a slight cooling in the domestic sector but for how long?:

    http://www.scmp.com/business/economy/article/1553597/slowing-china-economy-would-hit-singapore-worst-says-bnp-study

    And Europe, Japan and the US have also been helpful in that regard though I foresee problems with TPPA and Japanese cooling as cause for future concern.

    Yesterday’s news from Singapig is not encouraging as it is a major re-exporter of our products but I suspect Singapork’s problems are also partially structural and long term as its manufacturing base never really transited to the high skilled innovation based productivity driven model as it loved to brag vacuously about…so the chickens are flying home to roost:

    http://www.thestar.com.my/Business/Business-News/2014/07/14/Spore-economy-unexpectedly-shrinks-in-Q2-faces-structural-challenges/

    Singapig will probably allow its currency to devalue moderately as a stop-gap and that, with the expected “revaluation” of the Ringgit attributable to higher rates, will narrow the gap between the 2 currencies somewhat.

    Finally I see QE being eased significantly further in the US by year’s end then the fireworks here will begin and our phantom 'broad-based" growth falters. Broad based? I thought TSM said otherwise:

    http://malaysianewsjournal.com/muhyiddin-admits-economic-growth-doesnt-flow-to-the-poor-the-malaysian-insider-2/

    And many do know the myths associated with trickle down economics:

    http://dirp4.pids.gov.ph/webportal/CDN/PUBLICATIONS/pidsdps1402.pdf

    Warrior 231

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  7. Not wishing to distract attention from the main post whatsoever, thought that readers might find this intriguing. Mmmmm...as with the Singapig overyped highskilled manufacturing claim....could this one be indicative of a fraudulent mindset, something genetically coded in an ethnic or culturally encoded via Confucian superiority complexed norms......mmmm..interesting food for thought in Ramadan:

    Part 1

    How big is China's economy? Well, partly it depends on which economist you ask.

    About 36 per cent smaller than official government figures would have people believe, calculated economics professor Harry Wu, in a recent report for the Conference Board, a New York-based advisory group.

    "Examining changes over time, our new results show greater volatility and slower growth than the official estimates," Wu wrote.

    He said annual gross domestic product growth averaged 7.2 per cent between 1978, when market reforms began, and 2012, a significant 2.6 percentage points lower than China's National Bureau of Statistics' figure of 9.8 per cent. Between 1952 and 1977, growth was roughly in line with the government figure of 4.3 per cent.

    Wu's findings are likely to give business leaders and forecasters pause for thought and reignite the debate regarding reliability of official statistics. While the report does not diminish China's achievements - Wu believes China and the US are almost neck and neck when compared using purchasing power parity - it does suggest some of the more bullish forecasting and associated hyperbole could be tempered.

    "Given the sheer size of the Chinese economy, and its now enormous engagement in the world economy, a flaw in such a major growth indicator is anything but trivial," Wu wrote.

    When explaining discrepancies between his data and the statistics bureau's, Wu said the government under-reported inflation and so real GDP appeared larger than it was. Production output and prices were overstated, especially prior to 2002 when elements of the Soviet-style control economy still lingered, and the government also "covers up" economic slumps.

    Among other techniques, Wu built weighted indices as "anchors" to track the price of goods and services and their inputs and outputs, and he adjusted his weightings every five years. "The residual will give us the value added," he said. This is Wu's fifth revision of China's GDP.

    "We should not deceive ourselves into thinking that it is possible for anyone to come up with a definitive alternative GDP series to the official figures," said Arthur Kroeber, the managing director of Gavekal Dragonomics Research.

    Trying to work out historical growth patterns was highly judgmental, Kroeber said, and it might be better to simply accept that China's economy grew "really fast" over the past 30 years on a par with Japan, Taiwan and South Korea during their "investment-intensive high growth eras".

    Warrior 231

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  8. Part 2

    Underlining the challenge involved in studying economic growth, Chinese GDP data from the Conference Board's own in-house estimates shows a third set of results. Like Wu, the Conference Board uses purchasing power parity to compare economies, but under their scenario and based on last year's numbers, China's economy is 17.8 per cent smaller than the rebased NBS numbers.

    Wu's data shows especial divergence from official statistics during global downturns.

    In 1998, a year after the Asian financial crisis erupted, Wu said China's economy grew only 0.6 per cent, against an NBS number of 7.8 per cent. Likewise, in 2008, after the US sub-prime meltdown, Wu said China's economy expanded 4.7 per cent. The NBS reported 9.6 per cent growth.

    "I think this is very sordid evidence the official estimates tend to exaggerate their performance when the economy is in bad times," he said.

    "That there may have been an understatement of the GDP deflator is not something that people are going to disagree with very strongly," said Michael Pettis, a finance professor at Peking University. "I don't think we have seen anything as dramatic as Wu's argument."

    Wu said he did not use "anecdotal evidence", such as bad debts floating around the banking system, to influence his data. Nor does he discount any double counting or white elephant investment projects built by ambitious local officials hoping to boost GDP numbers, although he is aware they exist.

    If Chinese banks wrote down bad debts like banks in the US or Britain, GDP growth could be even lower, said Pettis, although he is not sure by how much.
    Japan's economy went from representing 10 per cent of global GDP in 1980, to 18 per cent by 1992, said Pettis. Today, Japan is again 10 per cent of the global economy. The huge swing was partly due to an initial reluctance to write off bad loans and this distorted analysts' understanding of the economy's performance, he said.

    Wu said economists still struggled to understand how the NBS calculated GDP. The service sector is growing 5 to 6 per cent a year, according to government data. Wu believes the sector's growth is closer to 1 per cent.
    As a new graduate, Wu joined the "Young Economist Forum" centred on former premier Zhao Ziyang. He left China in 1988, a year before his mentor's downfall during the Tiananmen Square protests. He now works at a Japanese university.

    Warrior 231

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  9. Part 3

    Beijing's habit of setting exhortatory GDP targets each year has long prompted concerns about manipulation.

    Analysts now construct quirky indices to capture "tangible" data less susceptible to human meddling.
    Stephen Green, the head of Greater China research at Standard Chartered Bank, has referenced cement and steel production, electricity usage, and KFC restaurant sales, as proxies to measure growth cycles. In a research paper last year, he recalculated 2011 and 2012 GDP growth to 7.2 and 5.5 per cent. This compared with NBS' 9.3 per cent and 7.8 per cent.

    Wu's data was less bullish. He thinks the economy grew 6.3 per cent and 4.1 per cent in those two years, respectively.

    "Anyone close to China's statistics-issuing process understands that the collection and analysis of data is uncorroborated, non-transparent, inconsistent over time, incomplete, and always self-contradictory," wrote Anne Stevenson-Yang, in a recent report on steel production numbers, which she tracks alongside other commodities.

    The co-founder of China research company J Capital, Stevenson-Yang feels GDP is a useful indicator of an economy's change and growth but it fails to capture static size.

    The NBS is reportedly going to amend its own accounting models by including research and development expenditure into its calculations. Nomura analysts estimate this will boost nominal GDP by 1.5 to 2 per cent and real GDP by 0.1 per cent, once inflation is taken into account.

    Even after taking into account Wu's research, China is still the second-largest economy when compared against other nations using market exchange rates.
    When economies are growing quickly, Wu said, people would not worry "if there is 1 or 2 per cent differences" in calculations, but as the economy matured, "the accuracy of the growth rates becomes more sensitive".

    This article appeared in the South China Morning Post print edition as "Mainland growth rates don't add up"

    Warrior 231

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  10. Warrior 231,

    You have a blog yourself??

    Interesting read about China GDP numbers. Just got back from China myself and I would believe the service sector is growing at a much higher rate than Wu's 1%. The domestic tourism is enormous.

    Just my 2 sens worth.

    Zuo De

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    1. No Zuo De, despite having oodles of time and being a man of semi-leisure, I would rather drop provocative, naughty comments in blogs like this to test certain assumptions, whilst whiling the days away watching the world go by and the birds chirping about from behind the ethereal veil enveloping me courtesy of wisps of smoke from my precious weed…..hahahaha. So blogging is out for me as it won’t be in sync with my wanderlust Bohemian ways and is anathema to both instinctive reasoning and impulsive creativity…hahahahaha (Oh oh!! what did I write there???)

      You could be right about tourism in China as I have seen it myself during my occasional forays to Shanghai and Beijing ( yup, I do pop into your motherland to observe certain things…hey! not everything is wrong with that civilization…..u see..they got this wonderful government structure that is admirable for its focus and for not brooking dissent that serves their ends pretty well…see the link in p/s below if you want to know what I mean).

      But back to tourism, probably what I suspect both of us are seeing is more of the day tripping cum sight seeing variety rather than those on real holidays or trips of leisure as we understand them here. Available online but not well written::

      A Study on the Changing Trends of Domestic Tourism Consumption Composition of Urban Residents Grouped by Travel Purpose in China by Guo-Ping ZHANG and Xiao-Ying LIU

      That probably explains why Wu downgraded his estimations.

      Away from that, I suspect the penchant for data manipulation:

      http://www.chinapost.com.tw/commentary/the-china-post/frank-ching/2014/07/02/411414/Seeking-truth.htm

      runs deep in the collective ethnic psyche, after all we are all familiar as to who the exponents are with regard to round tripping, double book-keeping, tax evasion, money laundering etc:

      http://www.lawgazette.com.sg/2012-02/330.htm

      The question is whether it is social DNA aka memes enabled, as Dawkins would put it, or culturally conditioned by an evidently deeply flawed and confused Confucian value system. That would be interesting to find out….but I am digressing am I?

      Warrior 231

      P/s: Ok….in the meanwhile enjoy this as promised (explains why I love ironfisted politics…works well all the time):

      http://www.nber.org/papers/w17132.pdf

      Now go to table 3 and observe which 2 countries kept their governing systems largely intact as quasi-dictatorships and are still doing well. Maybe Najib can learn something there.

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  11. Warrior,

    The danger with quasi-dictatorship is the quality of the dictator. Marcos made a mess in Philippine.

    But indeed a good dictator will raise the country much.

    There are always pros & cons for every systems. It will be up to the will of the community / citizens to decide and hopefully choose the appropriate one.

    Zuo De

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  12. But once they are there, they will always want to preserve themselves.

    The rent seekers all over the world same same, who in the world want to give up!?! They will only do so when forced either by legislation or the "sword".

    Zuo De

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    Replies
    1. I suppose one wouldn't count Marcos and Suharto among that elite coterie?

      Pinochet? Maybe, if you can overlook the egregious violation of human rights during his regime.

      Anyway, "human rights" is a nebulous concept to most economists because it can't be quantified or explained by economics logic.

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    2. Zuo de, sorry for posting this which I wrote earlier rather late:

      I reckon Marcos to be an aberration and ironically a product of democracy itself! Remember he was elected to office via popular plebiscite! And his democratically elected successors like Cory Aquino, Estrada and arroyo were hardly better! Except for military man Fidel Ramos of course.

      In fact, Asian dictators and quasi dictators have a better record in bringing economic growth than the democratic squibs. In fact, excepting idiots like Marcos, Pol Pot and gang plus maybe the Yangon mob, dictatorship or quasi dictatorship ( one party rule) have done remarkably well in providing for their polity. Examine the political landscape and you will find that holds true from Japan ( yes, it is technically a one party state) to Pakistan when people like Zia and Musharaf were holding the reins . All the so called vibrant democracies we have in Asia today were built on strong foundations lain by dictators or quasi dictatorships. But I think I am digressing from the topic.

      Regarding future rate hikes, I reckon future increases may be determined more by internal factors like inflation rather than US rollback of US QE as Yellen's intimations yesterday indicate that QE will be prolonged into the foreseeable future. That means an externally induced panic wrought by potential QE diminution has receded and the danger of rates trending upwards is probably curtailed but that does not mean domestic factors like asset speculation will not yield consequences. The general propensity is to naively assume that would not be the case unless you have an understanding of economic history and sadly that is either lacking or conveniently ignored in the greater scheme of things. Let me illustrate with a simple example. Study pages 36-43 in the link below:

      http://studentsrepo.um.edu.my/350/6/CHAP5.pdf

      Look at page 42 and note two of the three factors there i.e., low TFP and high

      Observe that loans to the non trade sector was at 23% just like now wherein loans to the property sector alone is 30% of all loans approved (data source: BNM as linked up there).

      Secondly asset worth has outstripped income growth and that will trigger an inevitable correction. It was the same scenario as in 1993 -1997 and a scenario that replicates scenarios elsewhere:

      http://online.wsj.com/articles/marc-sumerlin-and-phillip-swagel-investors-heed-the-fed-at-their-peril-1405552511

      Warrior 231


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  13. Part 2

    The problem with the capitalist economic framework are manifold. But two stand out. Firstly, there is this predilection to repeat past mistakes. I attribute that to either the "expired factor" wherein all the major actors of the bygone era are dead or the "amnesia factor" wherein the major actors conveniently ignore historical antecedents simply because the feel good factor has overwhelmed them. And the fact that the capitalist is inextricably wedded to the boom bust paradigm does not help matters at all. Another thing I observe in contemporary times is the shift from actual production and trading of good and services to generate wealth to shuffling phantom loads of cash or trading in dubious financial instruments like derivatives,bundled debts etc that invite and nurture speculation. So you can literally have financial alchemy giving you the illusion of wealth and prosperity while with few exceptions, innovation, creativity, hard work etc are given short shrift.

    Separately the capitalist frame does not have spiritual moorings. By this, I mean there is no inbuilt mechanism for wealth redistribution. Thus it is an easy prey for inequality's socially carnivorous inclinations. Take for example, as a Muslim I am obligated to pay a 20% wealth tax on all profits or excess income minus expenditure. Try imposing that on a homogenous Muslim polity within a capitalist framework and you will have the wrath of the rabble on your head despite it being lower than the operative tax rate! The point I am alluding to is that spiritual traditions have subtle mechanisms for ameliorating the effects of inequality such as tithes, alms, santha for Hindus etc etc. In the capitalist framework it is via taxation which is inevitably skewed in favor of the wealthy. And because it is not anchored to spiritual injunctions, there is a proclivity to abscond, evade, manipulate etc. but again I am digressing, ain't I? Just that I felt these few observations explains things for the way they are although there are many other factors not easily reducible in this limited forum.

    Warrior 231

    P/s : Drats! I wish the blogger would make this site more ipad friendly and fix his archaic authentication system that only makes the whole experience worse! Imagine a lunatic typing that out.......hahaha.....

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  14. Sorry : "lunatic robot" in above.

    Warrior 231

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  15. "lunatic robot".....well, it is claimed that a chimpanzee, if it bangs away at a computer keyboard long enough, is likely to come up with the collected works of Shakespeare!

    But I digress.

    What do you make of MAS managing director Ravi Menon's statement that the Singapore economy is on track to grow 2-4 per cent this year, with " headline inflation" in the lower half of the 1.5-2.5 per cent forecast range and "core inflation" expected to remain at 2-3 per cent?

    It appears that the Singapore economy is still struggling with the headwinds of foreign manpower restrictions and economic restructuring.

    But with MAS committed to "a modest and gradual appreciation in the S$NEER", it looks as if the Sing Dollar will maintain it's strength over regional currencies.

    Which means, as I see it, that the Malaysian Ringgit will not strengthen significantly against the Sing, even if BNM pushes the OPR up further by 50-75 basis points.

    What I would like to ask is this: in the Malaysian context, can the OPR be used as an effective tool to push economic restructuring and to wean the economy off cheap and unskilled foreign labour?

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