Small Isn’t Beautiful

I have mixed feelings commenting on this issue, but I feel it must be said. From yesterday’s Star (excerpt):

Caring for the livelihood of smallholders

SMALLHOLDERS have always been the backbone of the country's agriculture sector.

Their role, however, is often underestimated despite the big contribution of about 94% of Malaysia's total rubber production, 75% of cocoa and about 40% of palm oil output annually.

Smallholders therefore need to be given the security of having a consistent income and incentives to ensure that they would be able to efficiently produce higher-yielding crops to enable local agriculture products remain competitive locally and abroad…

…Having said that, many have voiced their concern over the turn of events lately, which are expected to have a direct impact on the livelihood of smallholders…

BNM “Unpredictable”

From a Business Times report  yesterday (published in full):

Bank Negara Malaysia 'most unpredictable'
By Rupa Damodaran

Kuala Lumpur: Ever wondered which is the most predictable central bank in Asia as far as monetary policy rate decisions are concerned?

It is Bank Indonesia (BI), said Credit Suisse economist Robert Prior-Wandesforde in a report. And the least predictable central bank? Bank Negara Malaysia.

Credit Suisse compared the decisions of the seven central banks from Indonesia, the Philippines, Thailand, Taiwan, Malaysia, South Korea and India, based on their monetary policies from 2006.

At The Feet Of A Master

I had a good time this weekend, professionally speaking that is. Why? Muhammad Yunus was in town to deliver a lecture. If you don’t know who he is, Prof Yunus is an economist who has devoted his life to helping the poor, pioneered microcredit in the 1970s, a firm advocate of women’s rights (no small thing in the highly patriarchal society of his homeland of Bangladesh), and the winner of the Nobel Peace Prize in 2006. While he has no big presence academically, the pragmatic approach he took in dealing with poverty and its related issues sets a benchmark for effective poverty eradication policies, and not just ones that read well in the press.

The occasion was his appointment as “Nobel Laureate in Residence” at Universiti Kebangsaan Malaysia in Bangi, for which there was a big do last Friday, with the Minister of Higher Education in attendance. There was also a follow-up dialogue at UKM’s Faculty of Economics and Management the next day with a much smaller group. I’m already familiar with his work (and his books), so I learned nothing really new at either session. But the impact of hearing the same thoughts straight from this highly articulate man, with his very obvious passion and devotion to his calling, has a far greater impact than the written word.

Measuring The Effectiveness Of Forex Intervention

One of the basic tools used by emerging market central banks to manage high capital inflows is intervention in the foreign exchange markets. While foreign capital inflows are generally welcomed, they cause problems through overly expanding the domestic money supply (and credit), putting upward pressure on the exchange rate, and – the biggest problem – can be the trigger for a liquidity crisis should they reverse.

A new working paper from the IMF seeks to discover just under what conditions forex intervention can be effective, or if it’s any use at all (abstract):

Foreign Exchange Intervention: A Shield Against Appreciation Winds?
Adler, Gustavo ; Tovar Mora, Camilo E

This paper examines foreign exchange intervention practices and their effectiveness using a new qualitative and quantitative database for a panel of 15 economies covering 2004 - 10, with special focus on Latin America. Qualitatively, it examines institutional aspects such as declared motives, instruments employed, the use of rules versus discretion, and the degree of transparency. Quantitatively, it assesses the effectiveness of sterilized interventions in influencing the exchange rate using a two-stage IV-panel data approach to overcome endogeneity bias. Results suggest that interventions slow the pace of appreciation, but the effects decrease rapidly with the degree of capital account openness. At the same time, interventions are more effective in the context of already ‘overvalued’ exchange rates.

May 2011 Industrial Production: Not Out Of The Woods

Yesterday’s IPI report from underscored the slowdown that occurred in 2Q 2011, despite an upward revision in the data for April (log annual and monthly changes; seasonally adjusted):

BNM Maintains OPR: The World Is Ending!

Ok, not really. But I’m honestly puzzled by this action, especially taking into account the language used in the statement issued by the Monetary Policy Committee (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…

…Going forward, global growth will remain highly uneven across regions, with increased downside risks. For the region, growth is expected to be sustained by robust domestic demand, increased investment activity and intra-regional trade….

…Going forward, growth is expected to improve, underpinned by continued strength in private consumption and private investment. This growth prospect however, could be affected by the heightened external risks…

…Supply factors continue to be the key determinant affecting consumer prices with global commodity and energy prices projected to remain elevated. There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year.

The MPC’s assessment is that the risks to inflation are on the upside. While the outlook for growth remains positive, there are heightened uncertainties arising from global developments that have created higher downside risks to growth. The MPC will assess carefully the evolving economic conditions and to the extent that the growth momentum is sustained, further normalisation of monetary conditions will be considered to safeguard price stability.

BNM Watch: May Was A Strange Month

As I said yesterday, the data for May isn’t behaving nicely. Here’s a closer look at what’s going on.

Recall that BNM began its latest round of tightening in early May. Yet there was little sign that open market operations were required to reduce liquidity in the interbank market and raise the overnight rate to the OPR target (RM millions):

May 2011 External Trade

As forecast, trade in May turned out lower than April’s (log annual and monthly changes; seasonally adjusted):

May 2011 Monetary Conditions

May was an odd month. Looking at the money and interest rate data, it’s hard to get a clear sense for what’s going on, because of the anomalies in the data. Take money supply growth (log annual and monthly changes;m seasonally adjusted):

Even as BNM began another tightening campaign, which appears to have impacted M1, broader money supply growth defied gravity and continued to accelerate. Monthly changes in M2 sustained at a pretty high growth level of close to 2%.

GTP & ETP Update

I spent this morning at the Kuala Lumpur Convention Center listening to Idris Jala talking about progress on the ETP. Beyond admiring his salesmanship skills, there was actually some real substance to the presentation.

Based on what I’ve seen so far, there’s been some pretty impressive progress made even if you see the ETP as a fundamentally flawed exercise. There are obvious gaps and shortcomings in the scope of the ETP, but that would be true of any development plan. What’s clear though is that taken on its own merits, Pemandu has managed to overcome one of the greatest obstacles any strategic plan has to face – implementation and monitoring. On both counts, what’s been done over the last 8 months or so is an incredible achievement.

Graft And The Central Bank

This weekend’s news about the arrest and charging of an ex-assistant governor of BNM is sad news for Malaysia’s institutional development (excerpt):

Ex-BNM assistant governor charged

KUALA LUMPUR: Former Bank Negara assistant governor Datuk Mohamad Daud Dol Moin, 58, has claimed trial at a Sessions Court here to two counts of accepting bribes amounting to RM100,000 from a businessman to help procure a contract from the central bank.

The contract was to print RM5 polymer bank notes by Note Printing Australia Ltd.

Dressed in a dark suit, he calmly pleaded not guilty when the charges were read out to him at about 11am yesterday.

He was accused of receiving two bribes of RM50,000 from Abdul Kayum Syed Ahmad at Dome Restaurant, Bangsar Shopping Centre, on Dec 1, 2004, and Feb 16, 2005.

If convicted under Section 11(a) of the Malaysian Anti-Corruption Commission Act, he can be jailed up to 20 years and fined five times the bribe amount, for each charge.

As I recall, the last time someone that high up in the central bank was charged with abusing his position was the case of former Assistant Governor Datuk Abdul Murad Khalid back in the late 1990s, which turned into a political circus involving Anwar Ibrahim.

Be that as it may, this case is more straightforward and for that very reason more discouraging. We are after all talking about alleged corruption pure and simple. That it involves subsidiaries of the Reserve Bank of Australia, as well as two other regional central banks is beside the point.

About the only saving grace here is that the MACC hasn’t hesitated in charging a senior official, though given that BNM is populated by technocrats rather than politicians and the international dimensions of the case, it isn’t much of one.

A black mark for BNM, and a setback for the credibility of its internal controls.

Is Inflation Really The Problem?

Great article in The Star yesterday which echoes my own thoughts on the Malaysian experience of inflation (excerpt):

Inflation: Myths and perceptions
By PRISCILLA LIM

The general view on the street is that Malaysia suffers from rising inflation. Do the statistics back the claim?

RECENT headlines in the Malaysian media have highlighted the issue of the unholy alliance of rising inflation, stagnant wages and subsidies rationalisation.

It is an “unholy” alliance simply because subsidies rationalisation and imported inflation result in rapidly rising price levels. Coupled with the problem of slow rising wages, it implies that our buying power as consumers is decreasing.

Certain quarters would have us believe that Malaysia is a ship headed for an iceberg and a Titanic-style tragedy could happen any time now. To add salt to the wound, they argue that those at the helm, like the captain on the Titanic, are sleeping and that like the passengers on the Titanic, we will not survive this tragedy. But is this gospel truth or an urban myth?…

The only thing that’s missing from this article is the heterogeneity in the inflation experience between higher and lower income households, but that’s nit-picking. The main point is valid – it’s not really higher inflation per se that’s really affecting Malaysians, but rather slow wage growth that has not kept pace with either inflation or productivity.

Go read it, it’s worth your time.