BNM Watch: OPR Unchanged, But Not For Long

Last week’s Monetary Policy Committee statement made very clear that policy tightening of some sort or another is on the way (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.

Global growth moderated in the first quarter with several key economies affected by weather-related and policy-induced factors. Looking ahead, the global economy is expected to remain on a path of gradual recovery….

…For Malaysia, latest indicators suggest that the domestic economy continued to register favourable performance in the first quarter. Going forward, growth will remain anchored by domestic demand with additional support from the improved external environment….

…Inflation has stabilised in recent months amid the more favourable weather conditions and as the impact of the price adjustments for utilities and energy moderate. Going forward, inflation is, however, expected to remain above its long-run average due to the higher domestic cost factors.

Amid the firm growth prospects and inflation remaining above its long-run average, there are signs of the continued build-up of financial imbalances. While the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances. Going forward, the degree of monetary accommodation may need to be adjusted to ensure that the risks arising from the accumulation of these imbalances would not undermine the growth prospects of the Malaysian economy.

The key paragraph is the last one, with its ominous warning of “degree of monetary accommodation may need to be adjusted”. That’s about as clear a signal as can be given.

March 2014 External Trade

Yesterday’s trade report was a mix of good and bad (log annual and monthly changes; seasonally adjusted):

Export growth was pretty good, at 8.4% in log terms on an annual basis. On a monthly comparison however, exports dropped 4.7%. Import growth was near zero on a yearly basis, and contracted on a monthly basis.

March 2014 Monetary Conditions

Monetary conditions in March appear to have tightened (log annual and monthly changes; seasonally adjusted):

M2 growth fell to 6.0% yoy, which is more than a little worrying – as a rule of thumb, you want to see money growth approximate real growth plus inflation. Having said that, real indicators have been pretty strong, and loan applications (demand) and especially approvals (supply) look decent; these imply that much of the drop off in money growth is coming from other components of M2.

February 2014 Employment

The February numbers aren’t appealing: employment growth is crashing (‘000):

Job creation has been negative in four out of the last five months – a cumulative reduction of about 400k jobs. That’s a serious divergence between the labour force numbers, and the growth of the economy as a whole.

Natural Resources and the Terms of Trade

I stumbled on this while looking for something else – the Singer-Prebisch thesis. What Singer and Prebisch found (separately and concurrently) is that the terms of trade between primary commodities and manufactures was declining over time. If true, this empirical observation has profound implications for economic development.

Let me explain that in English.

The terms of trade, put simply, is the amount of imports you can “buy” with one unit of exports. In other words, it measures the purchasing power of exports.

If your terms of trade are declining over time, you have to keep producing more and more just to be able to afford the same quantity and value of imports. But commodity production is subject to inelastic supply – it’s extremely difficult to continually ramp up production.

Spare The Float, Ruin The Economy

I respect TDM a great deal for many of things he’s done. His macro policy recommendations need a lot of work though (excerpt):

Peg ringgit to create environment of certainty in market -- Dr M

KUALA LUMPUR: The ringgit should be pegged at RM2.80 to the US dollar in order to create an environment of certainty in the market, said former Prime Minister Tun Dr Mahathir Mohamad.

Dr Mahathir said the peg would also help businesses manage the rising costs of doing business.

"If the exchange rate is fixed at one rate, it will help businesses plan their budgets for the year, knowing exactly that there the value of the ringgit will not change," he said….

March 2014 Consumer Prices

March is the first month that we can see the impact on inflation from all those subsidy cuts and rate hikes in the last six months. It’s also the first month where we’re completely clear from the seasonal effect of CNY. The prognosis – nuthin’ much going on (log annual and monthly changes; 2000=100):

While the headline rate is still elevated on a y-o-y basis, price increases have fallen back to “normal” levels. Core inflation is a little higher than the average for the last 5 years, but food and energy prices barely budged.

Prices Versus Rationing

Give credit where its due. Good policy is good policy, never mind the politics or election promises (excerpt):

Penang to go ahead with water tariff hike despite criticism

The Penang government is standing by its decision to increase water tariffs despite coming under fire over the move.

Chief Minister Lim Guan Eng (pic) said the state is willing to bite the bullet and raise water tariffs in view of climate change and the worsening drought.

He assured that Penang would still enjoy the lowest water tariffs in the country.

"We are facing a climate crisis and water consumption in Penang is the highest in the nation at 311 litres per capita per day. The national average is only 212 litres.

"Such high water consumption is not sustainable and if left unchecked, Penang will have no choice but to resort to water rationing in the future.

"We have to be a responsible government. We will bite the bullet and do this (raise the tariffs). We are willing to face the criticism," he told reporters today.

February 2014 Industrial Production

Last week’s IPI numbers gave me a headache – it’s part of another rebasing exercise, this time to 2010, which required a bit of work to splice – but things are looking up (log annual and monthly changes; seasonally adjusted; 2000=100):

February 2014 Monetary Conditions

I was really concerned when I first heard the news last week. After having a peek at the data, I’m don’t feel much better (log annual and monthly changes):

M2 growth is pretty weak at a tad over 6%, even after taking into account CNY effects. Overall, money supply growth has been below 8% for the last eight months. That’s uncomfortably low – lower than I’d like it to be. It implies either slower growth, or disinflationary pressure.

The Broadening Scope Of Economic Jobs

It used to be that being an economist, you’d end up working for the government, in academia, or in the financial sector. Nowadays, the market for an economist is much, much wider.

Take for example the following:

1. Google and Youtube are looking for quants, to help analyse “large, complex datasets”;
2. Amazon is looking for economists to, “apply the frontier of economic thinking to market design, pricing, forecasting, online advertising and other areas.”
3. Twitter is looking for help to, “analyze data and answer complex questions related to users, advertisers, and revenue.”
4. Qualcomm, who’s processors are at the heart of many smartphones today, are looking for someone to join their intellectual property team, to help advise on IP policy issues.

It’s a much wider job market than it used to be, and there’s never been a better time to be armed with an economics degree.

However, there are a couple of common threads running through all these “uncommon” jobs – a statistics/econometrics background is absolutely required, and a Masters degree is the minimum entry level qualification (PhD preferred).

Time to start hitting those books again, guys and gals.

Structural Break In Monetary And Financial Data

BNM is making my life, and the lives of every economist in town, a bit more complicated (excerpt, emphasis added):

Adoption of International Financial Reporting Standards for monetary and banking data in the Monthly Statistical Bulletin (Latest Updates: 28 February 2014)

Bank Negara Malaysia is pleased to inform that starting with the December 2013 issue of the Monthly Statistical Bulletin (MSB), the set of Monetary and Banking data pertaining to the balance sheets of financial institutions (excluding tables related to loans/financing) has been revised from 2007 onwards….

...Nevertheless, users should recognise that there is a break in the historical trend between December 2012 and January 2013, especially when studying components at a more granular level.

For Monetary Aggregates (Tables 1.3, 1.3.1 and 1.3.2), data items where possible, have been aligned to meet the existing conceptual definitions. Starting January 2014, the compilation uses data collected based on the new taxonomy, which will result in a break in the historical series. In order to facilitate trend analysis, a one year back series data consistent with January 2014 has been published in the MSB.

The data revisions are all to the good, especially since it will help with cross-country comparisons.

but some of these changes will give me big headaches, especially the change in reporting from a gross to a net basis for bank balance sheets. It looks minor at a 2%-3%, but you’re fastidious about the data you use, stuff like this can drive you up the wall. There’s a half percent difference in monetary aggregates (between RM4-9b) between the old series and the new one as well. No wonder the reported growth rates looked a bit funny this month.

Oh well, there’s no stopping progress…