ICYMI: Talking FX on BFM

Me, pontificating on the Ringgit and BNM’s new measures, over the past week:

FX: Onshore Versus Offshore

Imagine you have a widget to sell, something that helps pick apples. You offer the widget to a bunch of apple farmers, who think, yes, very useful, and offer you a price for it. Then you go to another set of orange growers and offer the same widget, and they’ll say, well we could use it, but its a different shape, and offer you a price half of what you got before (I’m assuming away the ability to arbitrage).

In essence, that’s the problem facing central banks with currencies traded both onshore and offshore – while the product’s the same, the market players are different and you’ll get different prices as a result.

Effective Exchange Rate Indexes: November 2016 Update

The NEER and REER page has been updated.

Summary

Since there’s a lot of interest in exchange rate movements this past few weeks, I’ve accelerated the timetable for this month. As expected, we’re seeing broad based declines across all the indexes, with the nominal broad index falling -2.03% in November, and -2.11% in real terms, compared to –0.61% and –0.79% in October. On a yoy basis though, the Ringgit has dropped just –0.74% in nominal terms and is actually up 0.08% in real terms. Across the currency components, the sharpest drops were recorded against the USD, GBP and HKD (no surprise, since the HKD is on a currency board with the USD), and MYR falls were recorded against every component currency with the exception of the JPY, which saw a 0.7% increase.

Changelog:

1. Indexes have been updated to November 2016
2. CPI deflators and forecasts have been updated for October/November 2016
3. Trade weights have been updated for the 2Q2016 and the 3Q2016. This caused revisions to the indexes from April 2016 onwards

Effective Exchange Rate Indexes: October 2016 Update

The NEER and REER page has been updated.

Summary

Since the last update in August, both broad indexes have slowly declined, and are now close to revisiting last year’s lows, at least as of the cut-off date (October 2016). The declines have been broad based since April, against all currencies with the exception of the GBP (still +8% since April). I’m expecting to see a further decline in November.

Changelog:

1. Indexes have been updated to October 2016
2. CPI deflators and forecasts have been updated for September/October 2016

The Ringgit and 1MDB

I’m still hearing people talking about the 1MDB effect on the Ringgit. Here’s what I’ve worked out:

4 Thoughts for the Week

GDP Report

Surprisingly strong at 4.3% yoy…or may be not. Iwas expecting a pickup as we had the minimum wage revision, civil service pay revision, cut in the OPR and cut in the EPF contribution rate. The end result was a 6% (qoq SAAR), which is the best quarterly growth rate since 4Q2014. I haven’t delved into the details yet (the bond market tantrum is occupying my working hour attention at the moment), but apparently there was a pretty decent growth contribution from external trade as well.

ICYMI: Malaysia’s Pension Crisis

My latest (excerpt):

Challenges of a pension system

ONE aspect of an ageing society is obvious to everyone – care for the elderly will take on greater importance. How adequate are Malaysia’s pension systems?

In western societies, most countries have achieved universal coverage, with net income replacement values ranging from 29% in the United Kingdom, to 96% in the Netherlands (based on OECD data)….

…The challenge in these western economies is one of sustainability. The problem with DB schemes is that they are based on the principle of pay-go – current workers’ contributions pay for the pension entitlements of retirees. This is not an issue if the demographic profile of the country is relatively stable...

Click the link for the rest.

Assessing Budget 2017

Today’s the first chance I’ve had to sit down and really think about the budget, past the first impressions we all got on Friday.

Overall, it somewhat exceeded my expectations. Granted, my expectations were undemandingly low, which is what happens when you commit to a hard limit on public debt and promise to cut spending over the medium term. But within those constraints, there was still some nice ideas in the budget speech.

Budget 2017: Going Live

…but not in the usual way. I’ll be running around like a headless chicken for most of today (apologies to all headless chickens, by the way), so live bloggin the budget as I’ve done over the last few years won’t be possible.

However, I’ll try to put something up when the budget speech ends, and more importantly, you can catch me on NTV7’s post-budget show at 8pm.

Further analysis by next week (the weekend’s going to be pretty hectic too).

Alternative Budget 2017

It’s that time of the year again!

I’m not going to comment extensively about the Alternative Budget (you can download it here), especially on the numbers. I’ve already spotted one whopper of an error, and another biggie that can be put down to lack of info (more on this later). Given the assymmetry in information between government and opposition, I’m not going to be too critical over these.

Rather I want to touch on the broad themes raised in the document. As an aside, I’d also note that mainstream media coverage on the Alternative Budget is far more widespread than it used to be. There was a time when barely anyone wrote about it.

Explaining Inflation…Again

I had some input into an article the Malay Mail published last month:

Is there really a gap between the official inflation rate and reality? Well, yes and no

KUALA LUMPUR, Sept 5 — As Malaysia’s urbanites begin to feel the bite of soaring living costs, there is growing suspicion that the official inflation rate does not quite reflect the economic reality….

…So is there a gap between real consumer experience and official data? The explanation itself is quite technical but in short, it’s a yes and no.

On one hand, economists worldwide have long decried the method used to measure inflation—the consumer price index (CPI) — saying it is far from reliable.

Domestically, there have been debates about whether or not the CPI model accurately depicts the reality on the ground....

They only used some of my reply (because, as usual, it was long-winded), so I thought I might take the liberty of publishing my remarks in full:

The Population Bubble

Came across this tweet this morning:

The mother of all bubbles. pic.twitter.com/2sQxLySwwX

— David Andolfatto (@dandolfa) October 4, 2016

How very true.

ICYMI: Growth and Ageing on BFM

I was on BFM this morning talking about growth in the long run:

Demand For Housing

My latest column in the Star (excerpt):

Danger of dip in demand lurks

RECENTLY, the Urban Wellbeing, Housing and Local Government Ministry proposed allowing housing developers to extend loans to homebuyers. One common refrain in support of this policy and for house buying in general is that “house prices only go up”.

In one sense, this is rational. Land is the biggest single input into house prices and land isn’t being made anymore (bar the occasional land reclamation or undersea volcano eruption). Global warming is raising sea levels, which reduces available land even further. But this is entirely a supply side argument.

Historically, there have been periods where house prices have not gone up or even gone into retreat. There is nothing inherently special about the housing market in that respect. The global financial crisis was partly triggered by a US housing bubble that burst, as house prices fell over 20% from their peak in 2007 and took eight years to recover.

ICYMI: Economic Growth Over The Very Long Run

I keep meaning to post on this topic, but what with work and all, it’s been on the back burner. In any case, I wrote an article published in the Star last week that covers the main points (excerpt):

Economic growth in an ageing world

MOST people take growth for granted. We expect living standards to increase over time and that our children will enjoy a better quality of life than us.

But growth is not a given and it is driven by economic processes that can and do change. There has been a gradual slowing in global growth over the past couple of decades, and some of this can be pinned on structural factors that form the very foundation of growth itself....

It’s partly secular stagnation, but more in the Hansen sense than in Summers new formulation, and over a larger scope than just what’s going on in developed economies.

Have a read and let me know what you think in the comments.

Dear God, I dearly hope I’m wrong on this.

Affordable Homes: Finance Is Not The Problem

In a rather unusual move, BNM issued a statement yesterday on the current hot topic of housing (in full, emphasis added):

Responsible lending guidelines ensures borrowers' affordability

This is with reference to a media report on requests for Bank Negara Malaysia to review the lending guidelines in relation to the extension of the loan repayment period from 35 to 40 years.

Bank Negara Malaysia wishes to state that financial institutions will continue to lend to individuals who can afford to take on a housing loan, including for the purchases of their first homes. In July 2016, outstanding housing loans extended by financial institutions continue to grow at 10.1%y-y and totalled RM460.2 billion. About 75 per cent of borrowers (approximately 1.5 million borrowers) with housing loans are first time house buyers.

Access to financing is not the main problem confronting potential buyers of affordable houses. The fundamental issues that require resolution are affordability and the shortage of supply of reasonably priced houses.

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

How To Make Housing Affordable In Malaysia

Read this.

This Is NOT How To Finance Affordable Housing

Coming late to this particular party, but better late than never (excerpt):

Putrajaya allows developers to give housing loans

PETALING JAYA, Sept 8 — The Urban Wellbeing, Housing and Local Government Ministry today announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 and 18 per cent.

Minister Tan Sri Noh Omar said that the move is intended to assist Malaysians who are unable to get a full housing loan from banks or those who may only be given a partial housing loan….

BNM On Hold (Again)

As promised, the MPC didn’t make a move yesterday (excerpt; 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 3.00 percent.

The global economy continues to expand at a moderate pace…Going forward, downside risks to global growth remain high following uncertainty over the growth momentum and policy shifts in major economies, and unresolved issues post the EU referendum in the United Kingdom.

For Malaysia, growth moderated slightly in the second quarter of the year, following weaker net exports and a drawdown in stocks…Going forward, private consumption will remain supported by wage and employment growth, with additional impetus coming from announced Government measures to increase disposable income. Investment activity will continue to be anchored by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. On the external front, export growth is expected to remain weak following subdued demand from Malaysia’s key trading partners. Overall, the economy is projected to expand within expectations in 2016, and to remain on a steady growth path in 2017….

…At the current level of the OPR, the degree of monetary accommodativeness is consistent with the policy stance to ensure that the domestic economy continues on a steady growth path amid stable inflation, supported by continued healthy financial intermediation in the economy. The MPC will continue to monitor and assess the balance of risks surrounding the outlook for domestic growth and inflation.

Translation: That’s all…for now.

Having said that, I’m looking for another cut before the end of the year. My base case this year has always been for stronger second half, due to the minimum wage revision, civil service pay hike, EPF contribution cut, and now, from the last OPR cut. Private consumption is likely to be strong this year, especially as we get past the base effects from GST implementation last year.

However, the numbers coming out from the government suggests a much stronger pullback of government spending than I expected to happen. Revenue for the first half of the year was much weaker than I thought it would be, which makes things in the second half even dicier, what with the full impact of the crash in oil and gas prices earlier only now hitting revenues. There’s a lot of pressure on MOF to pull a rabbit out of its hat to hit the 3.1% deficit target, and while they can perform seeming miracles (e.g. the spectrum auction), there’s always a tradeoff involved.

That, and the budget speech next month, will bear watching.

In any case, weaker public consumption and investment could force the MPC into action. Not deliberately mind, just that the downdraft from lower government spending would turn up as weaker than expected economic growth, which should start showing up in the numbers when the MPC meets for the last time this year, in November.

Effective Exchange Rate Indexes: August 2016 Update

The NEER and REER page has been updated.

Summary

The last three months have seen some stability for the Ringgit, with the strong bounce up from April eventually losing steam. Over August, both the nominal and real broad indexes are roughly 3 points down from the April peak, and a point down from July. Relative to April, the Ringgit weakened against the currencies of all maor trade partners, with the understandable exception of the GBP.

Changelog:

1. Indexes have been updated to August 2016
2. CPI deflators and forecasts have been updated for July/August 2016
3. Change of CPI deflator for Japan (from 2010=100 to 2015=100). This caused some revisions to the entire time series for both Broad and Narrow indexes

Visualising Malaysian Data

Despite budget cutbacks and a laundry list of statistics to compile, DOS has managed to launch some new data extraction and visualisation tools. I’m still playing around with them, but the fact that they’ve managed to do this on top of all the other stuff they’re working on should be acknowledged. Even if the image links are currently bust, I quibble not.

State of the Households II

I was at the launch ceremony at Khazanah Research yesterday, and while the report doesn’t present anything new, it compiles all the various statistics domestically available into one document to present a holistic picture of Malaysian households.

You can download the report here.

Oh, and I love the new interactive socio-economic map of Malaysia!

Thanks go to @Inequality_MYS for the invite.

Malaysia’s Government Contingent Liabilities

A fast one (seems like all I have time for these days are fast ones), on contingent liabilities (excerpt):

Analysts say Govt’s contingent liabilities likely to rise

...In recent years, the Government has relied on what is called contingent liabilities, or off-the-books debt, to fund major development projects. Big-ticket items such as the rail lines cost billions of ringgit, and with Government debt close to its self-imposed ceiling of 55% of gross domestic product, the use of special-purpose vehicles (SPVs) that take the debt burden off the Government’s books has been almost the preferred way of funding such mega projects.

Cumulatively, contingent liabilities amount to RM178bil worth of guaranteed debt by the Government. With government debt at RM630.5bil at the end of last year, the off-the-books debt that is guaranteed by the Government is worth 28% of the public sector’s total debt.

...Structuring debt in such a way is by design, according to economist Datuk Dr R. Thillainathan, who is the former president of the Malaysian Economic Association....

Apples, Oranges and A Whole Fruit Orchard

On Bloomberg last week (excerpt):

Bloated Malaysia Civil Service Presents Headache for Najib

...Malaysia’s civil service employs 1.6 million people, or about 11 percent of the labor force. The jobs provide stability and security, including for ethnic Malays who are the majority of the population. Now the bloated bureaucracy presents a challenge to Prime Minister Najib Razak.

Najib, whose ruling coalition Barisan Nasional has been in power for nearly 60 years with the help of the Malay vote, has pledged to gradually narrow a budget deficit the country has been running since the Asian financial crisis. The commodity-driven $296-billion economy is expected to grow at the slowest pace in seven years in 2016, with lower oil prices eating into revenue.

But trimming the public workforce to improve the government’s coffers is difficult. While Najib has survived a year of political turmoil over funding scandals, he needs the support of Malays to win the next election due by 2018. His party, the United Malays National Organisation, has for decades propagated policies that provide favorable access to education, jobs and housing for Malays and indigenous people, known collectively as Bumiputeras....

I’ve written about this before – the statistics on civil servic headcounts across the world are fraught with measurement errors. Malaysia’s civil service looks “bloated” because we include many categories of workers under the civil service (such as the armed forces, state and local government workers) which other countries do not. In Japan for instance, the “official” civil service is only a quarter of all government workers.

Not exactly apples to apples.

The Power of Narrative

I remember getting into a forum argument on this issue more than a decade back (excerpt):

Opinion: Think nothing is made in America? Output has doubled in three decades

The U.S. manufacturing sector doesn’t get any respect.

Ask a random sample of people on the street and you’re likely to hear that America doesn’t make anything anymore, that China, Mexico and Vietnam took all of our factories, and that the only jobs left in America are flipping burgers and cleaning hotel rooms.

“Throughout history, at the center of any thriving country has been a thriving manufacturing sector,” says presidential candidate Donald Trump. “But under decades of failed leadership, the United States has gone from being the globe’s manufacturing powerhouse — the envy of the world — through a rapid deindustrialization.”

As with all myths, there’s some element of truth in what everyone says.

5 Thoughts on the OPR Cut

At the risk of getting a phone call from across the road, here’s what I think of last week’s 25bp OPR cut:

1. Surprise!

One of the reasons the move came as a surprise to the markets and everyone else was that it was not telegraphed beforehand. Nobody got a hint of any change in policy, right up to the announcement. On the one hand, this breaks with recent practice around the world, where guidance is given so that markets adjust in a relatively orderly fashion. On the other hand, if you believe in the neutrality of money and rational expectations, surprise changes in monetary policy are the only changes that work. More on this in a bit (see point 5).

BNM Watch: Surprise, Surprise!

In a move that caught nearly everyone looking the other way, the MPC cu the OPR by 25bp yesterday (as if you could have missed this bit of news) (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to reduce the Overnight Policy Rate (OPR) to 3.00 percent. The ceiling and floor rates of the corridor for the OPR are correspondingly reduced to 3.25 percent and 2.75 percent respectively….

…Looking ahead, there are increasing signs of moderating growth momentum in the major economies. Global growth prospects have also become more susceptible to increased downside risks in light of possible repercussions from the EU referendum in the United Kingdom….

…For Malaysia, domestic demand continues to be the main driver of growth. Private consumption will be supported by growth in income and employment, and measures implemented by the Government. While investment in the oil and gas sector is moderating, overall investment is expected to be supported by the on-going implementation of infrastructure projects and capital spending in the manufacturing and services sectors. Exports are projected to remain weak following more subdued demand from Malaysia’s key trading partners. Overall, while the domestic economy remains on track to expand in 2016 and 2017, the uncertainties in the global environment could weigh on Malaysia’s growth prospects….

Borrowing GDP

First of all, Selamat Hari Raya, Maaf Zahir dan Batin to all. I’m back from my annual Ramadhan break, and fully determined to blog more regularly from now on.

An interesting data release yesterday has the economics profession completely bemused – Ireland has just restated their 2015 GDP growth to 26.3% (!) from an initial estimate of 7.8% (excerpt):

Ireland’s Economists Left Speechless by 26% Growth Figure

In three days, Jim Power is due in London to brief the British-Irish Trade Association on the state of the Irish economy. Now, he has no idea what he is going to say.

The economy grew 26 percent in 2015, officials from the Central Statistics Office told a stunned room full of economists and reporters in Dublin on Tuesday. Previously, they had estimated growth of 7.8 percent.

Ramadhan Ruminations

Throwing this out there because this is a narrative that really ought to change:

In the runup to BNM’s latest MPC, there was a lot of market speculation that BNM should cut the OPR, because the numbers appear to justify it (lower credit growth, poor business and consumer sentiment, slowing GDP growth etc). In fact, even as the MPC stayed on hold, there continues to be opinions out there that a rate cut is and should be in the offing, with some thinking that the weakness in the MYR vis-a-vis the USD is what’s holding the central bank back from easing monetary policy.

Under different circumstances, I’d fully agree that monetary policy should be loosened. But I think in the present case, the narrative should be turned on its head, as I think the causality runs the other way.

Social Mobility Across The Centuries

This has been one of the most widely read recent columns on VoxEU – over 65,000 hits in barely two weeks (excerpt):

What’s your (sur)name? Intergenerational mobility over six centuries
Guglielmo Barone, Sauro Mocetti

Societies characterised by a high transmission of socioeconomic status across generations are not only more likely to be perceived as ‘unfair’, they may also be less efficient as they waste the skills of those coming from disadvantaged backgrounds. Existing evidence suggests that the related earnings advantages disappear after several generations. This column challenges this view by comparing tax records for family dynasties (identified by surname) in Florence, Italy in 1427 and 2011. The top earners among the current taxpayers were found to have already been at the top of the socioeconomic ladder six centuries ago. This persistence is identified despite the huge political, demographic, and economic upheavals that occurred between the two dates.

I'm not as confident as the authors that one can generalise these results to other countries and cities, but they do emphasise the point that the social/wealth structure of societies left to themselves tend to ossify. Literature on more recent times (discussed in the article) suggest intergenerational advantages tend to dissipate after a number of generations, but this is in an environment of government intervention and redistribution (such as mass education). Nevertheless, the fact that income generation and wealth remains concentrated in the same families after close to 700 years is staggering.

Technical Notes

Link to original paper:

Barone, G and Mocetti, S (2016) “Intergenerational mobility in the very long run: Florence 1427-2011”, Bank of Italy working papers, 1060

The REAL Origin of Money

WARNING: Gold bugs beware. Existential crisis ahead:

Close But No Cigar

You’re nearly there Tan Sri, just a little bit further (excerpt; emphasis mine):

The alchemy of money
BY ANDREW SHENG

…When money was fully backed by gold, money was tied to real goods. But when paper currency was invented, money became a promisory note, first of the state – fiat money, supported by the power to impose taxes to repay that debt, and today, bank-created money, which is backed only by the assets and equity of the bank. The power to create “paper” money is truly alchemy – since promises by either the state or the banks can go on almost forever, until the trust runs out.

When Investment Isn’t Investment

From VoxEU (excerpt):

The ‘real’ explanation of the Feldstein-Horioka puzzle – and what it means
Nicholas Ford, Charles Yuji Horioka

…The nature of the Feldstein-Horioka puzzle concerns the mobility of the world’s supply of capital. There is a presumption amongst economists that financial markets can rapidly, and nearly without cost, divert ‘financial capital’ from one country to another. This being the case, it would be expected that savings should be diverted from wherever they occur to where the best investment opportunities are by agents seeking to maximise returns. There is no reason the best investment opportunities should be in a savers’ home country; as a consequence, according to this reasoning, the levels of investment and saving should not be correlated across countries. However, Feldstein and Horioka (1980) found that this is not the case and that most incremental saving is in fact invested in the country in which it occurs. The puzzle is to try to understand why this should be the case….

To GDP Or Not To GDP

Quick one, highlighting a few articles on whether GDP remains an appropriate measure for human welfare.

First from Sir Charles Bean (excerpt):

Measuring the Value of Free

...One particular challenge for economic measurement stems from the fact that an increasing share of consumption comprises digital products delivered at a zero price or funded through alternative means, such as advertising. While free virtual goods clearly have value to consumers, they are entirely excluded from GDP, in accordance with internationally accepted statistical standards. As a result, our measurements may not be capturing a growing share of economic activity....

Effective Exchange Rate Indexes: April 2016 Update

The NEER and REER page has been updated.

Summary

The bounce up from January lows continued in April, with the nominal broad index gaining 2.74 points to 90.77 (p) and the real broad index gaining 3.1 points to 93.33 (p) in April. The Ringgit advanced against the currencies of all of Malaysia’s major trading partners, but in particular the US Dollar bloc (USD, CNY, HKD, PHP and VND) by around 3.8%-4.2% during the month. Also of note is the gain against the GBP of around 3.8%, largely due to uncertainty over the June referendum.

Changelog:

1. Indexes have been updated to April 2016, with revisions for January to March 2016
2. CPI deflators have been updated for March/April 2016

Never Reason From A Price Change: Inflation Edition

The quote comes from Scott Sumner, and I’m not using it in the original sense (identifying causality in a supply-demand equilibrium), but there’s a certain truth to it when applied to monetary policy.

There’s a lot of speculation in the market right now that Bank Negara will cut interest rates in the next two meetings of the MPC, largely because (1) political pressure and (2) the coming drop in inflation. I think (1) is nonsense (I see no evidence of it, nor have I heard anything), and (2) is mistaken.

This post is about point 2.

The Difference Between Quantitative Easing and Helicopter Money

I just read a report from a major international bank this morning(who shall remain nameless) that claimed helicopter money was already being implemented in a few countries, herein defined as monetary financing of fiscal deficits.

This is wrong, and they’re confusing quantitative easing (QE) with helicopter money (HM). The difference between the two is more than just semantics, despite the superficial similarities between the two in largely involving central bank buying of government bonds.

The easiest way to show this is via an example. Let’s say the private sector has $100. The government wishes to borrow $50 to finance its spending. So the private sector buys $50 worth of government bonds, the proceeds from which the government uses to spend on goods and services. But that money goes back to the private sector, so the asset side of the private sector balance sheet now reads $100 cash and $50 in bonds. The private sector balance sheet has expanded, as has the government’s.

Now that we’ve set the stage, we can work out how QE and HM affects the economy.

Proton in Perspective: Industrial Policy Gone Wrong

Proton has hit the headlines again (excerpt):

Proton must ‘graduate’ from govt protection, says Mustapa

PETALING JAYA: Proton needs to “graduate” from Government protection, says International Trade and Industry Minister Datuk Mustapa Mohamed (pic).

In a statement on Friday, Mustapa said that the Government could not continuously protect heavy industries, including the automotive sector, noting that although other countries such as Japan and South Korea have protected their automotive industry, these measures were short- and medium-term in nature, and were eventually abolished.

“Proton, which is our national car project, needs to graduate from this protection,” he said.

Effective Exchange Rate Indexes: March 2016 Update

The NEER and REER page has been updated.

Summary

The Ringgit continued to gain ground in both the broad and narrow indexes, driven by advances against the USD, CNY, HKD and GBP, although the pace of advance slowed. The broad nominal index rose 1.22 points to 88.03 (p), while the broad real index rose 1.41 points to 89.79 (p).

Changelog:

1. Indexes have been updated to March 2016, with revisions for January and February 2016
2. CPI deflators have been updated for February/March 2016
3. Both real and nominal ASEAN indexes have been completely revised, due to a spreadsheet error

MOF Smackdown…Of Me

Mea Culpa!

Last week, the government tabled a supplmentary supply bill in Parliament, seeking retrospective approval for RM3.3 billion extra in spending allocation for 2015. The usual headlines ensued.

My impression had always been that supplementary bills of this sort (and we’ve had one every single year that I can recall) were additive to the original annual budget estimates i.e. the government overspent the previous year, and had to seek Parliamentary approval for the overspend. I didn’t really have a problem with this, because MOF has also always been pretty conservative with their revenue estimates. On occasion the extra collection can be pretty large – in 2011 for example, they underestimated actual revenue by 11.2%(!).

In coversation with a senior MOF official yesterday (actually, it was more of a polite scolding), it turns out I was wrong.

We’re still looking at a case of overspending, but the supplementary bills are not necessarily an addition to the original budget. It turns out they only cover cases where some ministries have overspent their allocation; but as some ministries also don’t fully utilise theirs, the impact on the aggregate budget isn’t necessarily the same as the figure in the supplementary bill. We could for instance have a situation where even a largish supplementary bill might not imply an increase in actual versus planned government outlays.

I’ll probably need to reach out to MOF to clarify the situation further (for example the implication that parliamentary budget allocation approval is at the ministry/agency level), but it looks like the supplmentary bills aren’t exactly what they seem.

So, humble pie time. Mea Culpa!

Thinking About Labour Markets: Partial Equilibrium Fallacies

I think by this time we all know that empirically, a minimum wage doesn’t seem to have the negative effect on employment that conventional economic analysis says it does. The reason for that is the Econ 101 standby of analysing policy changes based on ceteris paribus – a partial equilibrium approach. Holding everything constant and changing just one variable is a very useful way of thinking about economic issues, but it risks missing out on real world implications when you forget that economic systems are, in fact, actually systems.

Changing The Reserve Ratio ≠ Changing Monetary Policy

Or, Part Three of Why I Feel Snarky This Week

A few weeks back, Bank Negara cut the Malaysian statutory reserve ratio by 0.50%, and the People’s Bank of China did the same thing last week. Most of the commentary was along the lines of “easing monetary policy” and “adding to stimulus” and “boosting lending and investment”.

That’s a load of bull.

I’ve had to explain this multiple times over the past few weeks, so rather than having to do it all again, I thought I might as well write it out.

Exchange Rates Are Relative Prices: China Edition

Or Part Two: The Real Reason Why I Feel Snarky This Week

Last week, an article by Prof Xiao Geng and our very own Tan Sri Andrew Sheng appeared on Project Syndicate (excerpt):

China’s Lonely Fight Against Deflation
…the current battle over the renminbi’s exchange rate reflects a tension between the interests of the “financial engineers” (such as the managers of dollar-based hedge funds) and the “real engineers” (Chinese policymakers).

Foreign-exchange markets are, in theory, zero-sum games: the buyer’s loss is the seller’s gain, and vice versa. Financial engineers love speculating on these markets, because transaction costs are very low and leveraged naked shorts are allowed, without the need to hedge an underlying asset. The exchange rate, however, is an asset price that has huge economic spillovers, because it affects real trade and direct-investment flows....

This is a mix of a witch-hunt, denial of economic theory and reality, flawed analysis, and historical revisionism. It's perhaps a blessing (and telling) that this appeared under the business and finance section, and not under economics.

Levels and Growth: The Twain Are Not The Same

I promised myself I will not be snarky this week.

I will not be snarky this week.

I will not be snarky this week.

Unfortunately, this week, I have a lot to be snarky about.

Take this Star article published over the weekend. Please.

I will not be snarky this week.

Ok, no more jokes. Deep breath, start again (excerpt; emphasis added).

A slowing Malaysian economy

PETALING JAYA: Businesses and consumers remain wary of the economic outlook, judging from the money supply gauges of M3, also known as broad money, and M1, a narrower definition, used to measure the amount of money circulating in the economy. What is interesting to note is that M3 has shrunk by more than 86% over a span of four years....

For M3 to decline by 86%, would require every single current account, savings deposit and fixed deposit to be withdrawn from the banking system (and you'd still have a chunk of change left over). Which isn't physically possible, because physical notes and coins only form about 5% of M3. There simply isn't enough cash in the system to handle that magnitude of decline. What he's really trying to say of course is that the growth of M3, not the level of M3, has shrunk. He's confusing growth rates with levels, and confusing the reader at the same time.

To be fair to Mr Ng, in my experience that kind of mistake is terribly common among Malaysians. I come across it way too often, both at work and in the local media. Another common mistake: stock-flow confusion, like comparing an individual's wealth or a corporate balance sheet to a country's GDP (though this error is common in other places too).

I don't know if its a flaw in the way math is taught in the Malaysian school system, or an unfamiliarity with the nuances of the English language. Either way, it's the sort of pesky little detail that can jeopardise the credibility of a piece, and the point that the author is trying to make.

Yes, I'm anal about things like this, but we live in an open, globalised world. Paying attention to details matters.

The Consumer Price Index: Updated and Revised

In case you missed it, last month’s CPI numbers from DOS came with some changes.

First, the basket weights and components were updated to reflect 2014’s Household Expenditure Survey. This included adding 32 items, and removing 12. Weight changes were also made – as I suspected might happen, the drop in crude oil prices resulted in a reduced weighting for transport costs. Utilities costs (rent, water, electricity and gas) saw the biggest increase in weighting.

Second, the approach that DOS had taken previously was to rebase the CPI series to the new base year (2015 in this case). Instead, this time they’ve added to their methodological arsenal by chain-linking the new series to the old 2010 series. Essentially, they’ve saved researchers a lot of time and grief by splicing the new and old series together, so we don’t have to.

Effective Exchange Rate Indexes: February 2016 Update

The NEER and REER page has been updated.

Summary
All indexes showed gains during the month, with the Broad NEER gaining 2.3 points to 86.81 (p), and the Broad REER gaining 2.5 points to 88.12 (p). The Ringgit recorded gains against all index component currencies in February. On a trade weighted basis, the biggest factors contributing to the increase in the indexes were gains against the CNY, USD, SGD and KRW.

Changelog:

1. All indexes have been updated to February 2016, with revisions from October 2015 onwards
2. Trade weights have been updated for the 4Q2015 onwards
3. CPI deflators have been updated for all countries up to December 2015, with many countries up to January 2016

Mexican Two Step

Last week, Banco de Mexico and the Mexican government delivered a double whammy to the financial markets (excerpt):

Mexico Battles Emerging-Market Bears With Surprise Peso Defense

The Mexican government’s unprecedented steps to protect the peso are off to a good start.

The currency posted its biggest rally in five years Wednesday after officials said they will increase the benchmark interest rate, reconfigure an intervention program to contain volatility and reduce government spending. It advanced another 0.5 percent on Thursday. The new measures came after the peso plunged 8.9 percent to start the year, the worst performance among major currencies, and was down 31 percent over the past 18 months as investors sold off emerging-market assets.

MYR Nominal and Real Effective Exchange Rate Indexes

I’ve been reworking my MYR exchange rate indexes, with the idea that I might put them out as a public service. There’s no official effective exchange rate indexes for the Ringgit, though there are many unofficial ones, on top of the indexes published by the IMF and the BIS. I’ve never been happy with any of them, mainly due to either a lack of documentation or the somewhat biased construction some of them have.

So here’s my version, based largely on international best practice (where I diverge is in using quarterly weights, instead of annual weights). There're six indexes altogether, comprising a broad 16 currency index, a more narrow 5 currency index of Malaysia's top trading partners, and an ASEAN index, with nominal and real versions for each.

I’m hoping to have these updated by the 7th of each month, though I can’t promise to meet that service level standard regularly. I’m hoping to follow this up with a technical document describing the construction of the indexes and data sources, as well as a running change log. The indexes aren’t perfect by any means, but the best I can come up with.

To access the data, click the permanent link on the top right of this blog post (“MYR Nominal and Real Effective Exchange Rates”), or click here.

Managing Risk: TPPA Edition

The treaty document has been out for a couple of months now, and the treaty itself was signed last week. But there's still plenty of opposition to the pact, as we will have another couple of years two go under the ratification process - yup, it still isn't a treaty we have to abide by yet.

In any case, some of that opposition is getting a bit shrill, repeating nostrums that don't really apply any more. Part of the problem is the sheer length of the treaty document; another is the legalese language used.

Take ISDS for example. There seems to be this notion that ISDS would override the ability of governments to regulate, including matters of national interest such as labour laws, health and the environment. That's not true.

Selling Low and Buying High

From the Malaysian Insider (excerpt):

Scandals, weak ringgit spurring Malaysians abroad to cash out EPF funds

Some Malaysians are making the drastic choice of renouncing their citizenship to withdraw their EPF savings before the age of 55. – The Malaysian Insider file pic, February 11, 2016.

When Joanne Koo first emigrated to Australia with her young family six years ago, she never planned on renouncing her citizenship as she was eager to hold on to her Malaysian ties, savings and investments.

However, earlier this month, Koo and her husband made a trip to Kuala Lumpur to surrender their Malaysian passports for the sole purpose of making a full withdrawal of their Employees Provident Fund (EPF) savings. (Savers are allowed full withdrawal at age 55.)

Raising The Foreign Worker Levy

The measure is on hold at the moment, but I want to put forward my thought process on the subject.

The main debating points are obvious - Malaysia relies too much on foreign workers, and they are generally paid wages below that of locals. The levies on foreign workers goes some way towards redressing that imbalance. On the other hand, raising the levy raises business costs and could force some industries to retrench without necessarily increasing demand for local labour, not to mention the impact on consumer inflation.

What most commentators might have missed is the existing discrepancy between employing a foreign worker relative to a Malaysian one, which boils down to one thing - EPF contributions.

Thoughts On Budget Recalibration

Assume you have 20 marbles. I take 4 and borrow 1 from you, for a total of 5. I then give back 5 to you. How many marbles do you have?

Start with the same 20 marbles. I take 3 and borrow 1, then give back only 4. How many marbles do you have now?

If the first scenario was the original government budget for 2016, last week's budget "recalibration" is the second. In aggregate terms, the revised budget is fairly neutral. With no change to the deficit, either in absolute or relative terms, the impact on the economy should be muted.

That's the theory anyway.

Pigovian Taxes: Are We Finally Ready For It?

This past week, I met up with a senior official at MOF, and he surprised me by supporting a resumption of duty on petrol (via GST). Relief had been granted for RON95 since GST was implemented, and before that, relief from sales tax had already been in force for years.

It turns out he (and I) are not alone:

Debate on petroleum tax

Amidst the falling price of crude, a question that is being debated by some within and outside the Government is whether there should be a tax on petrol.

The current automatic pricing mechanism (APM) for determining petrol prices comprises multiple components, including product costs, operation costs, vendor margins and a tax, among others.

Notably, the current managed float system is based on monthly reviews on the APM based on prevailing crude oil prices and the margins enjoyed by petrol dealers are closely monitored by the government.

Before the APM came into place, for each litre of petrol the tax portion was 58 sen.
However because of the high oil price, the government did not collect the tax and instead subsidised petrol to keep prices low.

Now the question being asked is whether the Government should reduce its relief on RON97 since petrol is a consumption item and involves draining the natural resources....

The discussion is starting to surface, though I would have been happier if this was pushed through in stronger economic times. Has the time finally come for doing the right thing?

TPPA and Jomo: The Academic Debate

Recently, KS Jomo has been in the headlines on his criticisms about the TPPA (e.g. here), or more specifically, the models that showed that the TPPA would be a net benefit to Malaysia (however marginal).

Some of his concerns I consider absolutely legitimate – assuming full employment and ignoring the impact on labour utilisation, labour income and inequality undermines the net-benefit conclusion of the CGE models most have used to analyse the TPPA. I also think that his call for the ongoing debate on the TPPA to encompass more than trade and include the socio-economic aspects should be supported.

Having said that, the GPAM model used by Prof Jomo and his colleagues has significant weaknesses too. Not least because the claim that Malaysia would see job losses, a reduction in the labour share of income, and a negative impact on GDP growth don’t stand up to much scrutiny.

I haven’t as yet tracked down the details of the GPAM model, but the paper analysing the TPPA (link here) treats Malaysia as part of a bloc that includes Singapore, Vietnam and Brunei as a single entity. How you can make any definite conclusions on a single country based on aggregated regional data is beyond me, especially since the raw data in the paper shows the labour income share dropping (pg 16; for the bloc as a whole), whereas Malaysia over the past decade and a half has seen the labour share of income stable and then rising.

I’m also really surprised that Jomo neglects the huge, huge impact that the TPPA will have on Malaysia’s labour laws, particularly in terms of freedom of association. For decades, trade unions have been highly restricted in how they can operate and to what degree (MTUC for example is registered as an NGO, and cannot operate as a trade union). That will change with the TPPA, and the resulting increase in labour bargaining power should, ceteris paribus, act to increase the labour share of income. That’s an institutional change that few if any models, trade or otherwise, incorporate in their framework.

For a more thorough critique of the GPAM model, try here. Prof Jamal notes the same problem as I did, and then some.

On a larger note, and this isn’t confined to the current topic, I wish more people would bother to read the damn academic papers before taking their conclusions at face value. It saves embarrassment in the long run.

Sugary Sweet

From a Bloomberg editorial this weekend (excerpt):

Mexico's Soda Tax Success

One of the world’s highest soda taxes appears to be working. After just one year, purchases of sugary drinks in Mexico are down 12 percent, a new study shows. Even better, the biggest reductions have occurred among the poor, who can least afford health care.

Other governments -- including in the U.S. -- should be encouraged to impose similar taxes and take other strong actions to curb soda drinking.

Sugary drinks are among the primary drivers of obesity, and Mexico’s obesity rate is the second-highest in the developed world, trailing only the U.S. But increasingly, obesity is becoming a global epidemic -- and it’s catching governments flat-footed....

I'm on the record as saying we should tax sugar, and wonder of wonders, somebody's actually tried it. Here's another article looking at the issue (excerpt):

Sugar Is the New Public Health Enemy #1
Governments try to reduce consumption of the sweet stuff through guidelines and taxes.

On Thursday, the U.S. government issued a new version of its dietary guidelines, which include the new, concrete recommendation that people receive less than 10 percent of their daily calorie intake from added sugar.

This is far more specific than the 2010 edition of the guidelines, which simply said to “reduce the intake of calories … from added sugars,” with no particular numbers attached. Based on Americans’ increasing sugar intake over the past few decades, a more concrete goal might be helpful—between 1977 and 2010, Americans’ consumption of added sugars went up by 30 percent, according to the Obesity Society….

…But for the time being, the U.S. isn’t the only country trying to get people off the sweet stuff. David Cameron, the prime minster of the U.K., said on Thursday that he wouldn’t rule out the possibility of a sugar tax as a measure against the obesity crisis, the BBC reports. A paper by Public Health England, published in October 2015, recommended a tax of between 10 and 20 percent on “high-sugar products … such as on full-sugar soft drinks.” Though Cameron said he would “rather avoid” a tax, he also said, “What matters is we do make progress” on obesity.

The evidence suggests a tax would likely lead to progress—according to a recent study published in The BMJ, when Mexico implemented a tax on sugary beverages on January 1, 2014, purchases of the taxed beverages went down by 12 percent by December of that year.

Legislating sugar is a strategy that’s popped up in the U.S. as well—Berkeley, California, was the first U.S. city to implement a soda tax in March 2015. But no word yet on whether Berkeley residents are any closer than the rest of the country to meeting the new dietary guidelines….

I’m also on record as saying we should tax petrol too, and for the same reasoning; taxes on fossil fuel use are even more common. Dare I wish it?