Thoughts on Alternative Budget 2018

So, I’ve finally sat down to read through Pakatan Harapan’s alternative budget for 2018. There are some good ideas here, and a fair share of bad ones, but no more than expected. The numbers are bonkers, but I expected that since this is more a political manifesto than a real fiscal document. I’ll give most of it a pass except the more egregious ones, and like many, I note that some of the policy objectives and prescriptions are contradictory. At least one proposal has me upset, but I’ll leave that for the very last.

Can the (overall) numbers be achieved? I’d say yes. If the government really wanted to, they could go with a balanced budget tomorrow. But I think it would involve as much cutting the provision of public goods and services, as it would be some putative “savings'” from reducing corruption and improving governance. I’m sceptical that there’s that much savings to be had from that source.

Budget 2016: Some Thoughts

The best laid plans of mice and men…

I was going to put up an analysis of Budget 2016 the day after the budget, but as luck would have it, I managed to come down with pneumonia and have spent most of the last two weeks trying to recover. So here’s a very belated, quick overview of what I think of the budget.

Or you can take this is as the confused, feverish ramblings of a diseased brain.

BNM Watch: Wishin’ I Was Lucky

The Monetary Policy Committee will be meeting this Thursday and the consensus opinion is that there won’t be any change. I don’t think so either, but pressure will be mounting.

BNM won’t be the only central bank deciding on monetary policy this week. Also on the clock are Australia, Canada, Brazil, Poland, Albania, the UK and the ECB. I expect no change from the latter two  with the ECB having already pre-announced the start of Euro-area QE beginning this month and the BOE likely to stay the course. Brazil was the odd man out, with a 50bp hike in January.

Notes On Oil Part II

These are some short notes taken from a presentation I gave last week:

Supply side issues

1. Global oversupply is only likely to ease by the end of this year. Peak oversupply will be in 2Q2015;
2. Despite the various contributions of Iraq, Libya and other countries, about 60% of the oversupply is coming from the US;
3. Just four countries commercially produce shale oil, and the vast majority of it is from the US;
4. But this production is expected to peak by 2020;
5. Bottom line: global oversupply is really a US story, and it will persist for the next half decade.

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.

Commodities and Currencies

There’s quite a bit of gloom in the air these last few weeks. The plunge in oil and other commodity prices, capital pulling out of emerging markets, and currency turmoil, have people getting very worried about growth prospects next year. There doesn’t appear to be a bottom yet on oil prices, and it’s anybody’s guess where all this will end up.

In Malaysia’s case, oil price depreciation and Ringgit depreciation seems like one piling on the other – the latter is making things worse (Malaysians feel relatively poorer), on top of the drop in oil and gas revenues. But conflating the two like this is wrong. The depreciation of the currency is in fact a required and necessary result of the drop in oil prices.

September 2012 External Trade

Last week’s trade numbers (released Friday) show the same bounce that affected industrial production (log annual and monthly changes; seasonally adjusted):

Yes, Minister; No, Minister

I was alerted to this yesterday by a reporter. Sometimes I wonder…do our politicians do any fact checking at all, or do they just pluck figures out of the air?

Our esteemed Deputy Minister of Finance needs some help (excerpt):

Govt to spend on devt, keep debt manageable, says Deputy Finance Minister

KUALA LUMPUR: The government will have to continue spending on development while at the same time keeping national debt at a manageable level, says Deputy Finance Minister Datuk Donald Lim Siang Chai…

…As at December 2011, the ratio of national debt to the gross domestic product (GDP) reached 51.8%.

Oil Royalties and the Resource Curse

I don’t usually comment on political issues, but I came across an interesting research paper that ties in directly to the issue at hand. Lost in all the sturm und drang over the payment of oil royalties to Kelantan, is the question of whether these royalties will benefit the Kelantanese people as opposed to the Kelantanese government. This paper on VoxEU rather wryly suggests not (excerpts, emphasis mine):

Oil windfalls and living standards: New evidence from Brazil

“Yet economists are increasingly sceptical and many of them openly entertain the seemingly paradoxical notion that resources and windfalls may actually be bad news. In fact, some go so far as to speak of the "curse of natural resources" (see Bhattacharyya and Hodler 2009)...

Before dismissing this as yet another instance of the economics profession’s disconnection from the real world, consider the following list: Angola, Congo, Nigeria, Venezuela and the Middle East. What these places have in common is an abundance of natural resources coupled with varying degrees of abject poverty, state failure, civil war, rampant corruption and political repression...

Our research attempts to bypass these difficulties in interpreting cross-country comparisons by looking at Brazilian municipalities. Oil endowments, and hence oil production, vary widely across municipalities, and we show that oil output is not correlated (conditional on a few geographical controls) with other municipal characteristics…

The results paint a complex picture, with no apparent changes in some areas, small improvements in others, and a small worsening in yet others. On balance, however, the data appear to suggest that the actual flow of goods, services, and transfers to the population is not quite commensurate with the reported spending increases stemming from the windfall. This shortfall we dub "missing money"...

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population’s living standards raises a key question – where are the oil revenues going? As a way of addressing this question, we put together a few pieces of tentative evidence:

• First, oil revenues increase the size of municipal workers’ houses (but not the size of other residents’ houses).
• Second, Brazil’s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis).
• Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms).
• And finally, we document anecdotal evidence of scandals involving mayors in several of the largest oil-producing municipalities, some of which involve large sums of money…

This may be because citizens themselves are more tolerant of corruption when the money does not come from tax revenues. Or it may be because they have less accurate information on the amounts flowing to the government in the form of oil royalties. We are unable to explore these possibilities with our data…

But our findings do suggest that it may be somewhat unwise to channel revenues from oil operations directly to local governments, at least if the officials are not properly monitored and accountable. For Brazil, this may be an especially important consideration as the system of property rights and royalties will probably be overhauled in response to the recent discovery of huge new offshore fields.”

I will forbear from mentioning the obvious comparisons between oil revenues and other state governments, or federal for that matter – you can draw your own conclusions.