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?

Bonds and Stocks

When I read the headline, I thought the article would be about the difficulty of finding a return in the current low yield environment. It turns out its on something completely different (excerpt):

In search of higher yields

THE correlation between yields and stock markets are clear to see. When yields are high, stock markets are down. When yields are down, money pours into the stock market, and hence it goes up (see chart).

From the chart, it is obvious that since the Fed launched quantitative easing in 2009, rates have sunk to all time lows – close to zero. Meanwhile stock markets start rising when money is in search of yield and growth. Thus when yields are low, the stock market moves up. 

An interesting observation from the chart is the huge gap between rates and the stock market from 1985 to 1993. 

In 1985, the US Treasury 5-year notes were offering yields of above 10%. Not surprisingly, investors would gladly take their money out of the markets and put it in treasury notes or bonds, which are almost risk free. 

Now, as the yields started to drop, notice how the stock market starts inching up. This is because investors start to realise that bonds can no longer give them the best yields, and thus they shift their money into the stock market. 

From 1993 to 2006, yields on the 5-year note and the stock market moved almost in tandem. 

Over that period, the yields moved in a band of between 4% to 6%. At this level, bond yields and stock market returns are about equal. So investors are interchanging; when yields go closer to 4%, they shift their assets into the stock market. Then when yields move up again, they shift back out of equity markets and into treasury notes….

Malaysia's National Savings

As a follow up to yesterday’s post, here’s some graphs showing some of the other interesting data from the distribution of income accounts.

First, gross savings across all institutional sectors (RM billions):

Note that the bulk of national savings actually comes from corporations (the first two sectors). Household savings is by comparison pretty small.

Malaysia’s Household Savings Rate

The question of the household savings rate has come up a few times in the last few weeks, so I thought I might as well set out the data and evidence for it.

At this stage, I have a confession to make. I was under the impression that gross savings excluded net changes in pension assets (contributions less withdrawals from EPF, KWAP, LTAT and the like), but a closer reading of the accounts and the SNA2008 manual showed that this is already captured under the income accounts. For that I have to apologise to everyone whom I told that the household savings rate would be substantially higher if the net pension contributions were taken into account. In fact, the opposite is true and the difference is quite significant, as I’ll demonstrate in a bit.