While disappointing, the results weren’t totally unexpected. In fact, the y-o-y number of 4.0% came in somewhat higher than the consensus estimate of around 3.6% (and well above that implied by net trade or industrial production output).
In point of fact, apart from the external side, the numbers don’t look half bad (log quarterly changes; seasonally adjusted; annualised):
It’s a stylised fact and almost universally accepted that Malaysia is caught in a middle income trap. But a funny thing happened when I went looking for the evidence – it’ incredibly hard to find. And thinking about the issue made me more convinced that the whole idea is about as real as Hogwarts.
Taken at face value was does the term mean? Simply that a middle-income country stays a middle income country, and doesn’t make the leap into high income status. There’s also the notion of a poverty trap for countries; that low-income countries are unable or unwilling to make the necessary structural changes to achieve a growth “take-off” and start on the long road of development.
I hadn’t touched a computer since last Friday, so I only heard the news Monday morning. While S&P’s move was a bit of a surprise, coming as it did on the heels of the agreement last week on the US debt ceiling, it wasn’t an absolute shocker. The magnitude of the US national debt – and more importantly, who’s holding it – suggests that the risk was always there.
Fundamentally though, nothing has really changed since last week or last month. I can’t help feeling that the ratings agencies are bolting the stable door after the horses have fled. They were roundly criticised and partly blamed for the CDO mess that caused the liquidity crunch in 2007-2008 – both in rating structured products at AAA grades as well as for failing to downgrade fast enough when it became clear that most of the stuff was junk. This is perhaps S&P’s way of saying never again, as the downgrade is a bit of a paper tiger.
What makes this all ironical is that because US government borrowing is all denominated in US dollars, the risk of default is effectively zero. Hence, I don’t know if there’s going to be any real impact on US debt issuance or investor appetite for US treasuries. Even as equities worldwide faced a sell-off, when I checked just now – as I suspected would happen – US treasury yields were down, not up as you would expect on a ratings downgrade. The news just provided investors an excuse to act on their fears over global growth, as equities have looked overbought to me and many others since early this year.
But flight to safety leads directly back to US sovereign debt. So you’ll have this paradoxical situation of the debt downgrade leading to higher demand for the very debt that supposed to be less credit worthy (and incidentally, higher demand for the USD). Go figure.
And before anyone starts blaming the Fed for treasury price movements, let’s note that QE2 ended last month and hasn’t been extended (yet). I’ll also note in passing that the ECB took the opportunity today to quietly expand their QE program, adding in Spain and Italy to the existing support they’ve extended towards Greek, Irish and Portuguese debt.
We’re truly living in interesting times.
Hard to say whether we’re seeing incipient signs of recovery, but yesterday’s report from Matrade shows that Malaysia’s external trade has levelled out (log annual and monthly changes; seasonally adjusted):
After two straight months of declines, both exports and imports swung up…slightly. After all the disruptions to trade through the first half of the year, though, any positive signs are welcome.
After a short hiatus for the beginning of fasting month, I’m back…or at least until we come up to Aidil Fitri
As a follow up to my post a couple of weeks back on the monetary transmission mechanism, there’s a new working paper out from the IMF that essentially confirms my findings (abstract):
Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?
Nikoloz Gigineishvili
Summary: Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it.
My calculated elasticities for Malaysia’s policy interest rate pass through falls right on the average for Asia as a whole. So Malaysia's not that far out of line.
Decided on in the Wednesday cabinet meeting, we’ve got another National Key Result Area to go along with the six already in place:
PM announces NKRA to deal with rising cost of living
PUTRAJAYA: The cabinet decided Wednesday to add another National Key Result Area (NKRA) to the list of six to make it seven altogether.
Prime Minister Datuk Seri Najib Tun Razak said the new NKRA dealt with the rising cost of living...
...Najib said the government would leverage the expertise of Pemandu to assist the relevant ministries and agencies as well as the Cabinet Committee on Supply and Price headed by Deputy Prime Minister Tan Sri Muhyiddin Yassin.
At The Economist’s Free Exchange blog, A.D. tries to figure out whether gold is in a bubble (excerpt):
WHILE equity and bond markets have remained relatively sanguine regarding the impasse in negotiations on America's debt ceiling, gold nevertheless achieved another (nominal) high today, at $1,622. That’s one more milestone in an extraordinary run that began over a decade ago. As of Monday, gold’s 10-year annualised real return was 16.8%. By comparison, American stocks managed a return of just 14.8% during the 1990s, in a roaring bull market.
I can sooooo relate to the problem outlined in this post:
How to find a topic for an economics research essay
Calculus. Years of macro theory. Micro theory. Econometrics. Study the lecture notes, practice old exams, give the prof what he or she wants. It works.
Until the day the prof says "Come up with an original research topic."
Panic. "But no one's ever taught me how to be original."
Finding an original research topic is a bit like finding a friend or a lover or a soulmate. There's no magic formula that guarantees you will meet the one person who is right for you. But you can do things that will stack the odds in your favour…
I've been putting off starting on a doctoral thesis because I haven't found a topic I'm "in love" with. I could build on my Masters thesis on exchange rate valuation, but that would be boring – it’s like retracing your steps, and mining ground you’ve already dug up once before.
I don’t have any passion for micro, so that’s out of the picture. Neither am I really enamoured of some of the sexier topics of today, such as behavourial economics or financial economics. Ideally I’d want to do something relevant to policy, that is, something of some practical purpose rather than just another math exercise, as James Hamilton puts it here.
But I’m also operating under the constraint that I’ll need a local supervisor who’s actually familiar with whatever topic that I’d want to pick (I can only do a PhD part time), and a browse-through of the local professorial talent reveals a disappointingly narrow range of research interests. So for the last couple of years I’ve been in a holding pattern, picking at a range of potential topics but never really settling on one.
But I’d really want to get a start on things by the end of this year, so if you guys want to help me out a bit here, feel free to suggest potential PhD research topics in the comments. I promise to look at every one seriously.
And hey, even if I don’t use’em, they might make good topics for blog posts!
The Ringgit has continued to rise against the USD, despite some hiccoughs along the way (index numbers; 2000=100):
What’s apparent is that the pace of appreciation has slowed to something closer to the pre-crisis rate of around 0.3% per month, rather than the torrid 0.7% pace in the recovery phase.
May’s employment numbers, released last week, show job losses of about 200k in May:
In an rather unusual move by central bank standards, BNM issued a statement on Friday marking the 6th anniversary of the lifting of the USD peg:
Managed float regime continues to support growth
Today marks the sixth year since the shift to the managed float regime for the ringgit exchange rate. In the six years, the global economic and financial landscape experienced exceptional developments - the worst global economic and financial crisis since the Second World War, and extreme volatility in two-way capital flows. The exchange rate regime has accorded the economy with greater flexibility in facing these challenges. As the global economy recovers, the ringgit has strengthened in line with Malaysia's stronger economic fundamentals. The gradual and orderly adjustments of the ringgit have facilitated the corresponding changes to take place in the real economy.
The Central Bank will continue to focus on facilitating orderly market conditions so that international financial transactions can be conducted in an efficient manner. Going forward, the managed float regime and the flexibility it accords will also continue to facilitate the transformation of the economy as we advance towards being a high-income nation.
Central banking is generally a thankless job – if you get things right, nobody notices you. If you get things wrong…
But the tone of the statement suggests an answering to critics, though I don’t know of anybody really hankering after the old days of the fixed rate USD peg. Also, to my recollection, there’s never been a statement to mark past anniversaries. So the fact that BNM saw fit to issue the statement in the first place is really strange.
Unless it’s tacit approval for the Ringgit’s move below RM3.00 to the USD last week. That would fit with the anti-inflation message the Governor was supposed to have sent last week.
Comments welcome, because I have no other idea what’s behind this.
Yesterday’s inflation report suggests at best a deceleration in inflationary pressures (log annual and monthly changes):
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