To Peg Or Not To Peg

This question has been coming out a bit lately, so let me try heading off any more of this nonsense before it gets any more steam.

With the Ringgit declining, some of the those with long enough memories remember what happened in 1997-1998. In September 1998, Malaysia imposed “drastic measures” – we fixed the value of the Ringgit at RM3.80 to the USD and instituted capital controls. That halted the downward spiral of the Ringgit, and allowed BNM to regain control of domestic monetary policy. So people wonder, why not peg again?

Here’s the problem with that narrative.

BNM Watch: OPR Stays At 3.25%

Yesterday’s MPC statement came in more hawkish than expected (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….

…Volatility in the international financial markets has increased amid shifts in global liquidity and heightened uncertainty particularly with regard to global growth prospects and the decline in commodity prices….

The Latest, But Not The Last, Domino To Fall

In a surprise move, MAS has just eased their policy target (excerpt; emphasis added):

MAS Monetary Policy Statement

1. Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore’s CPI inflation outlook for 2015. As part of its ongoing economic surveillance, MAS has assessed that it is appropriate to adjust the prevailing monetary policy stance.

2. In October 2014, MAS maintained a modest and gradual appreciation path of the S$NEER (Singapore dollar nominal effective exchange rate) policy band, with no change to its slope, width, and the level at which it was centred. This policy stance, which has been in place since April 2012, was assessed to be appropriate for containing domestic and imported sources of inflation and for anchoring inflation expectations.

Minimum Wage Review

It’s been two years since the implementation of Malaysia’s minimum wage policy, and it’s now up for review (excerpt):

Review on minimum wage policy

THE minimum wage policy is up for a scheduled review this year and the trade unions are asking the Government to increase the current floor of RM900 a month by 30% to RM1,200….

…Minister in the Prime Minister’s De­p­artment Datuk Seri Abdul Wahid Omar said in September last year that the Government is loooking at gradually increasing the ratio of wages to gross domestic product (GDP) from 33.6% in 2013 to 40% in the long term.

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.

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%

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.

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.

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.

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.

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):

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 Amazon.com 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.

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.

Nov 2014 External Trade

Wednesday’s external trade report seems to defy the gloom that seems to pervade all things Malaysian these days (log annual and monthly changes; seasonally adjusted):

Tax Irrationality

Ay Caramba! (excerpt):

Cloudy with a chance of money

A NEW year means new resolutions, and maybe for some, a new look and a new home.

But for many, the New Year also ushers in new debts.

Amid the worries about possible tough times ahead – with rising cost of living, falling Ringgit, subsidy cuts and the impending implementation of the Goods and Services Tax (GST) on April 1 – many Malaysians have gone on a buying binge, especially on big-ticket items.

Why Aren’t Prices Dropping With The Price Of Oil?

Seems reasonable that they should, doesn’t it (excerpt):

Food stall operators maintain cost of their fare despite drop in price of fuel

PETALING JAYA: Rises in fuel cost usually lead to higher cost of food in eateries but there has been no corresponding drop in the prices of food in restaurants, coffee shops and stalls in spite of the much lower prices of fuel today.

Operators are blaming this on suppliers charging the same rates while they in turn point their fingers at transporters.

The Pan–Malaysia Lorry Owners’ Association (PMLOA) has urged its members to follow the current trend in diesel prices to adjust transportation charges.

However, its president Jong Foh Jit said the margin of adjustment could not be indicated because of restrictions set by the Malaysian Competition Commission (MYCC).

Zombie Economics

I was going to cover this when it came out, but didn’t find the time. Still, better late than never (excerpt, emphasis added):

Prepare for tough times ahead
BY DATUK ZAID IBRAHIM

We have often heard the phrase ‘we must change our lifestyles’ and the truth is that it will be difficult to adjust – but adjust we must….

…I wish our leaders at all levels would come together and ponder what it would be like if our country were to face a deep economic crisis.

Happy New Year!

I’ve just come back from a two week break. It’s been a good time off, if not for the news of the flooding on the East coast and the Air Asia tragedy.

My resolution for this brand new year of 2015 is to recommit to blogging. I’ve been letting it slide over the past year because of work commitments, but I’m hoping to hit at least one blog post every working day from now on. To do that though, there’ll have to be some changes in my approach – it’ll have to be with much shorter pieces than I’ve done before, though I’m hoping to keep up with the data-centric style I’ve managed to sustain in this blog.

So you’ll probably be hearing much more from me from now on.