Live Blogging Budget 2016

I’m back at work, and just in time to catch the budget. In case anybody’s wondering where I disappeared to over the past month, I’ve been on a spiritual pilgrimage and only just got back a few days ago. It’s been a bit depressing having to come back to the real world (and the haze), but it was a simultaneously fun and scary break from work, responsibility, and everything else.

As has become traditional, I’ll be live–blogging (and tweeting) on Budget 2016 as the speech is delivered this afternoon, subject to my internet connection holding up. So stay tuned on this page.

• We’re almost live – PM has arrived at Parliament
• Some of the media outlets have jumped the gun already on the numbers
• Oh well, me too:
• 2016 Growth forecast at 4%-5% - no surprise
• Budget deficit at 3.1%, a little lower than this year’s 3.2%
• Revenue and Opex almost unchanged
• Development budget up by RM3b
• Inflation expected to remain between 2%-3%
• GST registration and compliance much better than expected (about twice as much as initially expected)
• Petronas dividend affected by oil prices – oil-related government revenue dropped 1/3 this year to RM44b
• RM21b drop in revenue, if GST had not been implemented
• 7 improvements to GST
• Controlled medicines and some others will be zero-rated (doubling the list)
• Zero-rated list for food also increased
• Decrease in registration threshold
• Approved traders scheme
• Temporary imported goods
• Vocational education
• Rebates given for prepaid telephony
• Income tax raised for the rich? 28% nice
• Investments – Malaysian Vision Valley, Cyber City Centre, Aeropolis, RAPID – doesn’t sound like much of it is actually borne directly by the govt
• Lots of other small projects, mainly rural
• MRT1/LRT extension to be completed next 2016
• Status updates on MRT2/MRT3/HSR/BRT
• RM1.2b for rural broadband
• Extension of income tax relief for tourism
• RM5.3b for agriculture
• Tax relief and exemptions for some agricultural projects – some aren’t new but extensions however
• Also for export-oriented SMEs
• 2016 – Malaysia Commercialisation Year (?)
• Focus on raising labour productivity
• A few small grants for innovation and entrepreneurship
• Taking on KRIS’ idea of industrial building system
• RM41.3b for education
• Cash and book vouchers students from for low income households
• Big money for vocational education
• Women’s corporate participation reiterated, but that’s it
• Bumi agenda – grants to existing agencies
• Sabah & Sarawak – Pan Borneo Highway (RM16.1b and zero toll), domestic air travel GST exempt, RM70m in zero-interest loans for longhouses (RM50k per unit), rice planting fertiliser subsidies, RM115 for special projects, mobile clinics
• B40 assistance
• RM600m for Bumis and Indians via Tekun
• RM60m for SME Bank
• RM200m for AIM
• RM100m for Indian NGOs
• RM90 for Chinese hawkers
• Waiting for BR1M (….)
• RM300m for Orang Asli
• RM852m for Risda and Felcra (for rice and rubber smallholders)
• Affordable Housing – Pr1ma, SPPK etc etc
• RM2b for social safety net
• RM17.3b for defence and security – quite a bit of procurement, including drones
• Civil service pay rise, minimum civil service wage set at RM1200, minimum pension at RM950
• No bonus?
• BR1M
• Under eKasih RM1050
• Under RM3000, up from RM950 to RM1000
• RM3001-4000, up from RM750 to RM800
• Single individuals below RM2000, raised from RM350 to RM400
• Total cost RM5.9b
• For the M40:
• Child Tax relief increased from RM1000 to RM2000
• Tax relief for single earner households raised from RM3000 to RM4000
• Tax relief for university going children, raised by RM2k
• Socso eligibility raised from RM3k to RM4k
• Minimum Wage Raised!!!!
• RM500 gratuity to civil service and RM250 for pensioners

And that’s a wrap.

I’ll post my first impressions here later tonight, so check back tomorrow morning.

Global Value Chains and Exchange Rates

From VoxEU.org (excerpt):

The age of global value chains

João Amador, Filippo di Mauro 09 September 2015

There is an urgent need for policymakers to fully acknowledge the extent to which conventional indicators related to gross trade are severely flawed as policy benchmarks because they fail to take into account the existence of global value chains and their increasing role in shaping the global economy. This column, which introduces a new Vox eBook, urges academics to start proposing workable indicators that are systematically produced and readily available.

Exchange Rates Are Relative Prices

I used this analogy  in a conversation last week, and its too apt not to publish it.

Imagine you’re in the stock market and trying to evaluate two different stocks. Now, fundamental based analysis would look at earnings, book value, gearing, corporate strategy and so on, and come up with a target price for the stocks which reflects what the price of a stock should be.

Market Psychology

The thing that struck me the most about yesterday’s global market selloff, is the sense of déjà vu. The more things change, the more they stay the same:

What To Do About The Ringgit

My advice to BNM and the government, not that they need it, would essentially be the following:

Monetary Policy and the Yuan

In a shock move yesterday, the PBOC announced a sharp downward revision in the Yuan’s reference rate, with another one coming today. This de facto devaluation has had repercussions across the world, with some speculating that it would even put the Fed off from raising interest rates in September. It’s certainly the catalyst for the Ringgit moving past RM4.00 to the USD this morning.

There’s all kinds of speculation as to why (the devaluation I mean). Off hand, I would say the notion of currency war and regaining trade competitiveness is grossly mistaken. With regionally distributed production chains, the impact of FX changes on competitiveness have gradually been disappearing.

Friedman On Pegging

I’ve got the book*, but I’m too lazy to type it all out, so I’m quoting Friedman’s thoughts on this from my friend Lar’s post (excerpt):

Milton Friedman on exchange rates #4

...Despite Milton Friedman typically – and rightly – being labelled as the standard bearer for floating exchange rates, he often stresses that the choice is not easy, and he has repeatedly emphasised that countries have achieved both good and bad results with fixed and floating exchange rates. He points out for example that in 1985 Israel successfully implemented a fixed exchange rate policy against the dollar that helped cut inflation without causing any negative long-term economic repercussions.

Ringgit Fallacies: Imported Inflation and International Reserves

Another week, another multi-year low for the Ringgit. Since BNM appears to have stopped intervening, the Ringgit has continued to weaken against the USD, to what appears to be everyone’s consternation. There is this feeling that BNM should do something, anything, to halt the slide – cue: rumours over another Ringgit peg and capital controls.

To me, this is all a bit silly. Why should BNM lift a finger? Both economic theory and the empirical evidence is very clear – in the wake of a terms of trade shock, the real exchange rate should depreciate, even if it overshoots. NOT doing so would create a situation where the currency would be fundamentally overvalued, and we would therefore be risking another 1997-98 style crisis. Note the direction of causality here – it isn’t the weakening of the exchange rate that gave rise to the crisis, but rather the avoidance of the adjustment.

Pegging the currency under these circumstances would be spectacularly stupid. I’ll have more to say about this in my next post.

Poverty, Corruption and Economic Growth

One of the puzzling things I’ve found in the empirical data is that corruption doesn’t seem to have any impact on economic growth (I found instead that corruption primarily impacts the variance of growth, but not growth itself or the level of development). It appears to matter what type of corruption is involved, and the institutional framework that a country has.

Here’s Ricardo Hausmann on the same subject (exceprt):

Fighting Corruption Won’t End Poverty

CAMBRIDGE – Countries are poor because governments are corrupt. And, unless they ensure that public resources are not stolen, and that public power is not used for private gain, they will remain poor, right?

It certainly is tempting to believe so. Here, after all, is a narrative that neatly aligns the promise of prosperity with the struggle against injustice. As Pope Francis said on his recent trip to Latin America: “corruption is the moth, the gangrene of a people.” The corrupt deserve to be “tied to a rock and cast into the sea.”

Perhaps they do. But that won’t necessarily make their countries more prosperous.

Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth
Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi

Wealth is highly correlated between parents and their children; however, little is known about the extent to which these relationships are genetic or determined by environmental factors. We use administrative data on the net wealth of a large sample of Swedish adoptees merged with similar information for their biological and adoptive parents. Comparing the relationship between the wealth of adopted and biological parents and that of the adopted child, we find that, even prior to any inheritance, there is a substantial role for environment and a much smaller role for genetics. We also examine the role played by bequests and find that, when they are taken into account, the role of adoptive parental wealth becomes much stronger. Our findings suggest that wealth transmission is not primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.

Translation: It's nurture, not nature. If that's the case, meritocracy (in an aggregate sense) without some government intervention would be a sub-optimal growth and development strategy, even in a relatively equal society.

Technical Notes

Black, Sandra E., and Paul J. Devereux, Petter Lundborg, & Kaveh Majlesi, "Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth", NBER Working Paper No. 21409, July 2015

China, Gold and Reserve Currencies

In case you missed it, gold looks to be declining again (USD per troy ounce):

But let’s keep some perspective:

Assessing July

I’m back from my usual Ramadhan blogging break, and my, aren’t there lots of things to comment on. This will be a kind of omnibus blog post, covering some of the developments over the past month.

2Q2015 GDP Growth

A funny thing happened with the change in national accounts base year to 2010 – the economy all of a sudden got a lot harder to forecast. The usual indicators no longer seem to matter as much – for example, MIER’s confidence indices appear to have totally decoupled from GDP – which makes forecasting growth more than a little bit more difficult. IPI and trade remain good predictors, but their standard deviations have doubled and the forecasts are suggesting two completely different pictures of the economy.