Why Spending RM160 Billion On Rail Isn’t Completely Bonkers

It’s last week’s news, but still relevant (excerpt):

Najib: An additional RM160bil to be invested in rail projects by 2020

KUALA LUMPUR: The Government is expected to spend an estimated RM160bil more on rail-related projects until 2020, said Datuk Seri Najib Tun Razak.

The Prime Minister said the railroad industry had seen "massive expansion" in Asia and was becoming an increasingly significant mode in Malaysia's efforts to improve public transportation...

PR1MA: This Isn’t Optimal Policy

I have a feeling I’m going to get a few brickbats for this post. From this weekend’s news:

Over 7,000 hopefuls apply for homes under PR1MA project

PUTRAJAYA: More than 7,000 people have applied for the 560 units of affordable homes under the first phase of the 1Malaysia Housing Programme (PR1MA) project.

With the demand 13 times more than the supply, the corporation will select the successful applicants through balloting.

The balloting will be carried out tomorrow, witnessed by Prime Minister Datuk Seri Najib Tun Razak and audited by KPMG Business Advisory Sdn Bhd.

PR1MA chief executive officer Datuk Abdul Mutalib Alias said more than 5,900 of the applicants – or 84% – are first-time house buyers...

Dec 2009 Consumer Prices

Inflation has remained benign over the past year. DOS reports that consumer prices only rose 0.6% for the whole of 2009, but that mild figure hides a lot of movement underneath. For instance, the food and non-alcoholic beverages index rose 4.1%, but transport costs dropped 9.4%. And of course, 2008's inflation rate of 5.3% was the highest since the CPI rose 5.5% in 1982, so there's a base effect from the wild ride in fuel prices in 2008.

Minus that aberration, the CPI has been on a fairly steady and consistent uptrend (with little change in slope) since 2003 (index levels, 2000=100):

You can see this pattern in the growth (i.e. CPI inflation) figures as well:

Note that month-on-month growth is rarely above 0.3%, and only twice above 1% in the last ten years. The core inflation story is even steadier - at least using my pseudo-core measure (dropping food and trasnport indexes):

Core monthly inflation averages out at about 0.1%, so most of the upward pressure on inflation is coming from food and transport costs. Even then there are some counterbalances, such as clothing and communication prices, which have consistently been going down over at least the last five years:

So this coming year, sans another zoom up in oil prices, inflation is probably going to stay quiet, even with the new petrol subsidy scheme coming into effect in the middle of the year and even as BNM keeps interest rates low.

The proximate problem that BNM has to deal with vis-a-vis inflation is really structural. Consider the continuous drop in clothing prices, which is primarily a result of the shift of textile manufacturers to low-cost production bases in places like Indonesia and Vietnam (and yes, China). Part of the problem facing many monetary authorities this decade is that with the almost sudden emergence of these low-cost exporting economies in the late 1990s, global goods prices have held steady or dropped which obviously colours consumer decisions on spending. Yet the increase in consumption did not result in inflationary pressures (at least until 2007-2008), or upward pressure on wages or interest rates. Hence central banks stood by, despite a consumption boom and bubbles in many asset markets.

How we deal with this issue in the future is still being debated, though I suspect that eventually the problem will solve itself over the next decade as labour costs continue to rise in the exporting economies.

Technical Notes:
1. Consumer Price Index report from DOS.
2. Want to know how to get quarterly or annual index numbers from the monthly numbers? Simple...just average out the monthly indexes for the period in question. For instance, the Q1 2009 CPI number is just the average of January-March 2009 monthly index readings. The 2009 CPI is gotten by averaging the monthly index numbers from January to December 2009.

September CPI: Raya Blues Again

Almost loss in the shuffle of Friday's budget was the CPI report for September. Not that there were any surprises (index numbers, log annual and monthly changes, 2005=100):





As the impact of the fuel price hikes in July fade, you'll see inflation ticking up again. The faster pace of price increases in September can be squarely blamed on Ramadhan, for obvious reasons. To underscore this, here's the chart for my pseudo-core inflation measure(index numbers, log annual changes, 2005=100):





Note that even as growth in the main index started climbing, growth in the core index has dropped. Reading the numbers from DOS' report shows food, transport and miscellaneous items contributed to the bulk of the increase.

Otherwise, I'd consider September's developments encouraging. Price pressures indicate higher economic activity, which augurs well for a higher consumption reading for 3Q 2009. But again, that's really just the Raya effect, and not necessarily a symptom of a more solid rebound in the economy.

Malaysia March Inflation Report

Nothing unexpected out of today's inflation report:



But we've had negative m-o-m growth since last August:



...driven by changes in these two categories (2005=100):




While the y-o-y number is more relevant to policymakers and investors, from a psychological standpoint the m-o-m number is probably more important in defining consumer and business behaviour. We're very likely to see negative numbers in the headline y-o-y rate, simply because of the high base level of last year. But on the ground, sustained deflation would be driven by what people see on a day to day basis.

Which is why I'm as much interested in what the level of the CPI is doing rather than its changes:



An essentially flat CPI, while not as dangerous as full-fledged deflation, can have the same dampening effect on businesses and consumer spending if only to a lesser degree. With a large output gap, flat price level and very low interest rates, businesses have no pricing power and workers no leverage for income increases. This can push back recovery further into next year.

We won't have March monetary aggregate data until next week, but M2 and M3 growth are slowing down faster than I'd like. No bets on whether BNM will cut interest rates at next week's Monetary Policy Committee meeting - I think it's a question of how much rather than yes or no.