Wednesday, March 31, 2010

Parsing the New Economic Model

First, for what is essentially a strategy paper, the New Economic Model is a hefty read. Not so much for the length (it runs to 209 pages), but the density – there are a lot of proposed changes, with some uncontroversial while others pretty incendiary. The next three months are going to be very interesting, as what we have now is just the strategy framework, with details on the implementation due in June/July to coincide with the unveiling of the 11th Malaysia Plan.

To be honest, some of the proposed policies are rehashed from the 8th and 9th Malaysia Plans, which indirectly points to the failure to actually realise these development goals. More than a few are actually covered by other policy documents such as the National Innovation Model and the National Higher Education Plan. But a few of course are a completely radical departure from business as usual, that give this document the right to carry the title “New”.

I find the language of the document itself pretty refreshing. If you’ve ever read through any of Malaysia’s Economic Reports or BNM Annual Reports, you’ll now what I mean – the NEM doesn’t pull many punches. A few examples:

...The difficulty of starting businesses, enforcing contracts, and dealing with construction permits — as just specific examples — bear testimony to a sluggish bureaucracy no longer fit for purpose in a fast-moving world.

...Some have suggested that a formal minimum wage might be helpful to cushion workers against such shocks or downturns. The NEAC strongly believes this would be a wrong approach and in fact could exacerbate the situation by reducing competitiveness and reducing employment opportunities.

...Resistance is likely to come from the business community including protected industries, employers of foreign labour, licence holders, beneficiaries of subsidies, and experts at doing business the old way. Some segments of the rakyat who no longer qualify for government subsidies and grants might react strongly, and those that have enjoyed secure jobs and a stable lifestyle from protected firms may feel threatened. Both these groups might then turn to their political representatives and politicians may then attempt to lobby and water down the needed measures. The resistance from these vested interest groups must be dealt with fairly and transparently, following genuine consultation.

There’s enough here to make virtually every special interest group unhappy. The unions won’t like the proposed changes to make hiring and (more importantly) firing easier, nor with strong dismissal of the minimum wage idea. Employers are already unhappy about the restrictions on hiring foreign employees, and the new pension schemes – they’re going to be even less happy with the proposal to put foreign workers on equal legal footing with domestic workers. Staff at GLCs must be wondering what the future will hold for them.

And more than a few are going to be up in arms over the roll back of affirmative action.

This is the biggie, and the true litmus test for the success of this administration. If Najib can pull this off, he may be remembered as the greatest PM in Malaysia’s history…or its most vilified (fingers crossed, I hope this doesn’t descend into violence). I have to say, the delays in announcing the NEM and hints dropped by other ministers had me wondering if this wouldn’t be watered down in some way – but the NEM was unequivocal about this issue.

It went even further than I thought it would, with means-testing instead of a race-based policy. I thought the former was very likely and more desirable from a social welfare perspective, but I didn’t suspect dropping the latter. Ironically, this places the NEM as the direct spiritual descendent of the 1970 New Economic Policy, a back to basics move so to speak. While the NEP is often used as justification for Bumiputera preferment and ended up being used that way, the original intent was for poverty eradication irrespective of race. It just so happened that most Bumiputeras were below the poverty line in 1970, hence the blanket race-based approach. I haven’t outlined my thoughts on the NEP in this blog, but you can find most of my thinking in the comments of this post on SatD’s blog.

As far as the targets go, I don’t think them too demanding:


We’re looking at 8.8% nominal GDP growth over the next decade, which funnily enough isn’t actually much different from what we did over the last decade. I continue to believe that it’s more important to focus on the type of country and economy we want to be, rather than on getting to high income status. We’ll get to the latter soon enough, as much from demographic factors as anything else.

I don’t know if I want to get into more specifics of the NEM just now, especially since we’re still looking at debating the merits of each proposal over the next three months. Nor am I yet going to comment on any of the announcements made during the PM’s speech relating to EPF, Khazanah or Petronas. There will be ample space and time for debate on these issues as they arise in the public sphere.

On a personal note, I’m chuffed to find an ex-colleague in the NEAC office – and my Masters supervisor on the Advisory Group. It’s a small world.

Technical Notes:

  1. Prime Minster’s Speech at Invest Malaysia (pdf link)
  2. New Economic Model for Malaysia, National Economic Advisory Council

Tuesday, March 30, 2010

The New Economic Model – Get It While Its Hot

The PM has delivered his speech at Invest Malaysia, and the NEM report (part I) (pdf link) is available on the NEAC website. The goal is USD15,000-20,000 in per capita income by 2020, which neatly brackets my point estimate of USD16,975.

More to come!

Friday, March 26, 2010

Bank Negara Annual Report 2009

Apart from a revised forecast for 2010 GDP (4.5%-5.5%), there really wasn’t anything unexpected from Wednesday’s release of BNM’s Annual Report – but then there almost never is. Given the niceties of central bank signaling on interest rates and the economy, you will never hear anything surprising in the press release, the annual report itself, or in the face-to-face analysts briefing.

I’ve been to a few of the latter over the years (though not this year), and it’s almost always more a chance to catch up with your peers in the industry, and snag a complimentary copy of the annual report, than anything else. The only other thing of value is that BNM will sometimes show off their data (like household debt numbers) that never appears in published form. That’s changed this year, as the presentation slides are now available for download.

But you will never get the Governor or her staff to commit to anything about future policy direction, no matter how hard you try – as I remember one young man tried to do a few years back. Hence there’s almost never any questions from the “old hands”, because they know they won’t get any answers. You still have to read the tea leaves to get a sense of where the central bank is going.

Technical Notes:

  1. Annual Report press release (pdf link) – contains a summary of BNM’s forecasts and views on the economy. This contains most of the relevant info.
  2. BNM 2009 Annual Report
  3. Annual Report Presentation Slides
  4. Financial Stability and Payment Systems pres  release (pdf link)
  5. BNM 2009 Financial Stability and Payment Systems Report

Thursday, March 25, 2010

Exchange Rate Valuation

Menzie Chinn (Professor of Public Affairs and Economics at the University of Wisconsin, Madison) has a nice roundup of exchange rate valuation approaches, with the pros and cons of each. Worth a read if you’re interested in the subject (as I am).

Chiang Mai

No, I’m not on holiday ;)

The Chiang Mai Initiative Multilateralization (CMIM) came into effect yesterday. This is a pretty momentous occasion, if you’re a believer in regional economic integration a’la the European Union. The original Chiang Mai Initiative was a set of bilateral swap agreements between ASEAN and Japan, China (including Hong Kong), and South Korea that was intended as protection against the kind of speculative currency attacks that levelled the region in 1997-98.

CMIM takes this a step further by pooling the swap arrangements into one big fund, with an initial size of US$120 billion. The way it works is that each country commits to a certain level of US dollars to the fund, which can then be utilized by any of the members in exchange for local currency, up to a predetermined supply. That means that the ASEAN+3 grouping have a collective pool of reserves that can be used in the event of an external liquidity or solvency crisis, effectively raising the international reserves of each member. This is above and beyond the liquidity support available through the IMF or direct from the Federal Reserve – but without the strings attached.

Given the level of reserve accumulation in East Asia in the past decade (an estimated US$4 trillion at the end of 2009) CMIM is more of an insurance policy, but you can never have too much insurance, right? In Malaysia’s case, the amount is US$11.925 billion, or little above 10% of our current reserves.

What’s interesting is that this could be a precursor for a true Asian Monetary Fund along the lines of the IMF, and just like that being currently mooted in Europe to support some of their weaker members. We’ve already taken another step towards monetary integration with the Asian Bond Markets Initiative (ABMI) and the Asian Bond Fund I and II (here and here). Europe’s economic integration was never premeditated – it was a slow evolving process spanning decades that began with an agreement on steel, and then morphed into the Common Market and a Europe-wide monetary system.

East Asia is travelling the same road, though we’ll probably never achieve the level of integration found in Europe. The economic, cultural and political differences, more heterogeneous than in Europe, makes this a much tougher proposition. But travel it we will, and what the destination will be like would be interesting to see.

Woot! Monthly Unemployment Statistics

I didn’t see any press releases about this, but DOS is issuing monthly unemployment reports. I can cross this off the wish list now.

The data has been backdated to the beginning of 2009, and it’s interesting to see that it confirms that the recession reached a bottom around Feb-Mar 2009, with unemployment peaking at 4.0%-4.1% before dropping to 3.2% in June. January 2010’s actually higher at 3.6%.

Other nuggets:

  1. The variability in the unemployment rate is surprising, and seems to be driven as much by changes in the labour force as it is by employment.
  2. The foreign workforce is one-third of the total labour force, and obviously isn’t counted in the unemployment ratio.
  3. Labour force participation rate is just over 60% – do I need to bring up the lack of female participation again?

Technical Notes:

January 2010 unemployment report from Department of Statistics

Tuesday, March 23, 2010

Bernama Does It Again…

A professor speaks:

Analyst: Consumption led-growth vital for re-engineering M'sian economy

KUALA LUMPUR, March 22 (Bernama) -- Consumption led-growth is vital in re-engineering the Malaysian economy, according to senior economic analysts.

Senior Advisor to the Asian Institute of Finance, Professor Datuk Dr Sudin Haron said basically, there are four main components that drive the economy of a particular country - consumption, investment, government spending and net export.

"Therefore, if the government wants to expand the economy, it has to introduce a policy that increases consumption and investment, spend more money for developmental projects and produce more products for export purposes," he told Bernama on Monday.

He said the consumption figure is the main factor that contributes to the gross domestic product (GDP) and, it is represented by both private or consumer consumption and business consumptions.

An incredibly shallow analysis by someone purported to be a “senior economics analyst”, and more what one would expect from a 1st year undergraduate…except Prof Sudin Haron isn’t an economist, but a respected Professor in banking (particularly Islamic Banking).


Monday, March 22, 2010

Want To Know How Singapore Manages Monetary Policy Differently From Everybody Else?

Get a load of this analysis from Morgan Stanley (Excerpts):

To Tighten or Not to Tighten?

Market conditions are not forcing the MAS's hand in tightening the currency policy either. Based on our model, the S$NEER has been tracking in the upper half of the bandwidth since the last monetary policy review in Oct-09 - but not pushing against the upper band as yet. Indeed, the S$NEER has been quite range-bound, broadly moving sideways since Oct-09 before trending down in Dec-09, then trending up again from the second week of Feb-10. It now stands marginally below the levels seen at the Oct-09 review, at roughly 1% above the midpoint of the bandwidth. From a balance-of-payments perspective, the appreciation pressures on S$NEER seem to have abated somewhat. Foreign reserves in Feb-10 have fallen slightly to US$187.8 billion from a peak of US$189.6 billion in Jan-10. Indeed, the monthly trailing accretion rate in the past three months has been somewhat patchy compared to the three months prior.

Separately, our conversations with our currency traders also suggest that the MAS's action in the currency market recently has been mainly smoothing operations rather than aggressive intervention or leaning-against-the-wind.

As a side note, one possible way in which the MAS could curb inflation pressures, so far primarily external cost push-related, without compromising on growth would be to re-center the midpoint of the bandwidth higher to the prevailing level of S$NEER but still retain the zero appreciation slope. This is possible but not probable, in our view.

Recall that during the boom years of 2004-07 when the economy showed signs of overheating, the MAS ran a gradual and modest appreciation stance and only increased the S$NEER slope in Oct-07 when inflation went above 2%. This time round, trailing inflation is still low and together with the poor growth visibility, we doubt that the MAS will take action to curb import-led inflation, given the low starting point on inflation at this stage.

Singapore adjusts the monetary policy stance wholly through changes in the exchange rate, unlike the more common interest rate/inflation rate-based targeting used virtually everywhere else. It works for them simply because the scale of trade is so much bigger in relation to their economy, and because they have virtually no natural resources of their own.

One consequence is that because the exchange rate functions as the policy instrument, both interest rates and money supply are fully market determined, and hence also highly volatile. It’s a case of picking your poison, but it works for them (and not necessarily for anybody else).

Feb 2010 CPI: Still Running Below Trend

One would generally expect increases in the price level to slow after major festivals. Last week’s February 2010 inflation report shows that this year has so far been no exception:



Month on month, growth was completely flat. Given that CPI growth has been below the medium term trend for pretty much the past year, there’s still very little price pressure in the economy yet.

The core measure shows even less price pressure:



If BNM does raise the OPR at the next MPC meeting in May, it won’t be because of incipient inflation. The IMF thinks that BNM was being too accommodative even last year, so setting higher interest rates won’t necessarily be a tightening move – more a case of getting back to neutral.

Technical Notes

February 2010 CPI report from Department of Statistics

Thursday, March 18, 2010

Goldman Sachs Thinks The Yuan Is Overvalued. Wow.

"Goldman Sachs Says Buy ‘Overvalued’ BRIC Currencies"

This is completely against the grain – but from the brief description that was given, it appears Goldman is using a long-term valuation model. And when I say long term, I mean it in the strictest academic sense – a pure equilibrium stock model (no flows).

Tuesday, March 16, 2010

Innovation and R&D: Hurdles Galore

Just how bad is the situation with respect to R&D in Malaysia? Even considering our demographic profile, it’s really, really poor. The latest report available on actual expenditure paints a gloomy picture (click on the pic for the larger version; source: MASTIC):


Not pretty is it? All’s not quite lost however, as a lot of the foundation for a growth spurt in innovation and R&D intensity is already in place:

  1. The legal framework is in place, from laws governing patents and trademarks to intellectual property rights, though enforcement is still a bit of an adventure.
  2. Malaysia acceded to the international Patent Cooperation Treaty in 2006, which greatly speeds up the granting of international patents.
  3. A little more than half of total R&D spending is done by industries rather than government.
  4. Universities have mostly gotten their act together and are starting to really push for industrial collaboration to commercialise patents, and to offer research consultancy services.
  5. We have a numbers of science parks operational such as Technology Park Malaysia, Kulim High-Tech, and Cyberjaya with more on the way. These developments can create the potential (I won’t say actual realisation) for cooperative R&D between academia and industry, as well as serve as an incubator for start-ups and joint ventures.
  6. Various tax incentives and the IRPA grants provide financial motivation for both public and private sector R&D.

There has been in fact some progress since 2006 in fostering innovation (patents applied for and granted; source:MYIPO):


Nevertheless, just looking at the chart, there’s still a long way to go before we catch up with our regional peers or even domestic based foreign R&D. Some of the issues I see (my opinions, not necessarily the facts):

  1. Issue number 1 is that Malaysian companies just aren’t interested in spending on R&D, with most of the private sector contribution coming from MNCs and other foreign owned firms – that has to change. Local companies that do engage in R&D collaboration with universities run into a culture clash mainly because business and academic incentives for R&D aren’t aligned.
  2. Issue number 2 is universities aren’t always doing research that can be commercially applied, and aren’t terribly good at communicating their discoveries when they do. As a result, existing patents aren’t picked up on by the private sector and bought or licensed to be commercialised.
  3. Issue number 3 is that IP laws aren’t fully grasped yet, which results in disputes and delays in getting products to market.
  4. Issue number 4 is that outside of the science parks, we have a problem getting R&D going in SMEs as they lack the scale and resources to conduct R&D on their own, even if it’s just market research.
  5. Issue number 5 is quite simply capacity and capability. We just don’t have enough people doing research or the facilities to support them.
  6. Issue number 6 is that tax incentives and government research grants are too narrowly based. While there’s a good argument for prioritising limited resources, when you talk about a new economic model based on innovation and creativity, putting your money on just hard sciences isn’t exactly going to get you far.

Technical Notes:

  1. Report excerpt from Mosti Pocket Book 2008 (warning: pdf link), Malaysia Science and Technology Information Centre (MASTIC)
  2. Patent statistics from the Intellectual Property Corporation of Malaysia

Media Mischief Or Ministerial Boo-Boo: The Minimum Wage Blog

Did the media get it wrong, or did the Yang Berhormat Minister get confused? It was reported in the papers that the Ministry of Human Resources would open a blog in a couple of weeks to get feedback from the public on the introduction of a minimum wage (I commented on this a week ago). Turns out the blog has been up for over a month now:


“Kata Aluan dari Y.B Menteri

Tuan/Puan yang dihormati,

Salam 1Malaysia.

Selaras dengan konsep “1Malaysia: Rakyat Didahulukan, Pencapaian Diutamakan”, Kerajaan melalui Kementerian Sumber Manusia sedang mengkaji kemungkinan pelaksanaan gaji minimum kebangsaan untuk pekerja sektor swasta di Malaysia. Kajian ini juga selaras dengan hala tuju Kerajaan untuk merealisasikan model baru ekonomi yang berteraskan ekonomi berpendapatan tinggi dan usaha mempertingkatkan taraf hidup isirumah berpendapatan rendah.

Tidak dinafikan, masih terdapat segelintir rakyat yang hidup di bawah paras Pendapatan Garis Kemiskinan (PLI), malahan ada yang memperoleh pendapatan kurang daripada RM500 sebulan. Peningkatan kos sara hidup terutamanya harga barang keperluan harian yang semakin meningkat, golongan berpendapatan rendah ini menghadapi kesulitan untuk memenuhi keperluan hidup mereka terutamanya di kawasan bandar. Cadangan penetapan gaji minimum kebangsaan sekurang-kurangnya akan dapat mengurangkan permasalahan ini.

Namun demikian, sesetengah pihak berpendapat penetapan gaji minimum kebangsaan akan membawa kepada implikasi negatif kerana ia boleh menjejaskan kuasa pasaran (distort market forces). Pelaksanaan gaji minimum juga boleh menyebabkan ‘kehilangan’ beberapa kategori pekerjaan di peringkat rendah yang masih ada permintaan terutamanya untuk golongan yang mudah terjejas (vulnerable groups) khususnya mereka yang bekerja di luar bandar dan secara tidak langsung akan meningkatkan kadar pengangguran negara.

Sehubungan itu, Kementerian Sumber Manusia amat mengalu-alukan sebarang pandangan, pendapat, idea, cadangan dan komen yang boleh disalurkan melalui blog ini atau menerusi e-mail: bagi membantu Kerajaan dalam menggubal dasar dan strategi mengenai gaji minimum.

Kerjasama tuan/ puan amat saya hargai dan didahului dengan berbanyak-banyak ucapan terima kasih.

Datuk Dr. S. Subramaniam

Menteri Sumber Manusia”

Go ahead and drop by. I’ll be giving my feedback as soon as I get my guns. Just kidding…I think.

Monday, March 15, 2010

Quis Custodiet Ipsos Custodes

I’ve always had mixed feelings about criticising news report and editorials. On the one hand, I realise that it could take away the focus of this blog from the purpose I intended for it, which is to cover developments in the Malaysian economy. I ‘m also fairly sure that such posts could make me come off as petty (I plead not guilty) or intellectually arrogant (maybe guilty as charged).

Against that, there’s the role of the press in reporting and commenting on national policies (which has an impact on political accountability), and its role as opinion leaders. If there are mistakes in this arena, whether by omission or commission, then there is some value in pointing those out even if I don’t have the reach that they have.

Of course, whether you consider a particular viewpoint a “mistake” really depends on one’s point of view and educational background.

I think I’ll continue to have ambivalent feelings about this issue, but will proceed nonetheless.

BTW, if it seems I pick on The Star too much, it’s because out of the major English dailies I find that, right or wrong, they actually do have something to say about the economy. The News Straits Times appears to be interested only in human interest stories and sports. Ok, that was exaggeration, but justified exaggeration IMHO.

To round up some the articles that caught my interest this weekend:

  1. Managing Editor P Gunasegaram thinks marketing Bursa Malaysia is putting the cart before the horse, and we should put our economic house in order first. For once, I fully agree with him.
  2. Raymond Roy Tiruchelvam asks to consider purchasing power parity when comparing incomes in other countries, if you’re considering immigrating. I only ask that you don’t try using it for comparing the level of exchange rates unless you want another scathing editorial on this blog! BTW, instead of using the Big Mac Index (what, again?), I would use the World Bank’s International Comparison Program, or the Penn World Tables. Either would give a better multi-product idea of the differences in the price levels.
  3. Angie Ng talks about normalising the costs of borrowing and investing in property. But she makes the odd statement that, “Normalising the interest rates by allowing it to be decided by actual market forces of demand and supply is certainly more healthy.”  Sorry to break this to you Ms Ng, but whether BNM sets the OPR at 0% or 10%, interest rates are market determined. All the OPR does is set a 50bp band to the overnight rate, everything else is determined by the demand and supply of money. Of course with the OPR target, BNM has its hand on the scales so to speak in terms of the money supply, but demand is entirely free to vary. There’s also in the article the meme that low nominal rates disadvantage deposit savers, which is not necessarily true – it’s real rates that matter, and those generally rise during a downturn unless the central bank cuts the nominal rate. Had to point that out, sorry.
  4. Jagdev Singh Sidhu rounds up opinions from various research houses on the strength of the economy given the great numbers we’ve seen the past couple of months. The consensus is that the recovery is credible, but we should see better evidence on its sustainability in the second half of the year. It was pointed out by a few analysts that exports and industrial production are off their peaks of 2008. Way to go guys! But if you consider 2008 as a bubble year (which I do), then the recovery is over – we’re now back to the growth phase, and growth sustainability is a much harder question to answer. Again everyone seems hooked on analysing growth statistics (even if they note the base effect), and most are not bothering about the actual levels. And no one noted that poor capital goods imports are a direct result of the excess capacity that already existed before the recession started. Don’t look for high capital goods imports this year, it just ain’t coming. Nor will the lack of it say anything at all about manufacturers’ plans, intentions or prospects.

Friday, March 12, 2010

Jan 2010 Industrial Production: Up, Up And Away

Yesterday’s IPI report from the Department of Statistics shows a gratifyingly strong growth spurt (log annual changes; seasonally adjusted; 2000=100):


Even better, monthly growth is showing up as pretty strong as well (log monthly changes; seasonally adjusted; 2000=100):


I’m a little cautious about whether this will continue into February because CNY will bring output down quite a bit, and the January numbers may just be a reflection of a hurry-up-so-we-can-go-on-holiday effort on the part of manufacturers. You can also bet that the heat wave of the last couple of months played a part in boosting electricity output (and consumption).

Apart from that, I find this encouraging, though it should be noted that the manufacturing index is still well below its peak in 2007-2008, and we have to factor in that there was considerable slack in capacity even before we fell into the recession.

Technical Notes:

Industrial Production Index Report from the Department of Statistics

Thursday, March 11, 2010

Random Musings

There were a couple of articles in the papers today that I thought were worth commenting on but didn't deserve their own post. So I’m rounding out my impressions of both in one.

First up, the results of a survey conducted by the National Population and Family Development Board shows that Malaysians are marrying later and having fewer babies:

More getting married later or not at all

”A recent survey by the National Population and Family Development Board on trends between 2000 and 2007 indicated that the average marriage age of marrying Malaysians would increase to 33 years by 2015 or they may choose not to get married at all.

Universiti Malaya’s Associate Professor Tey Nai Peng said the average age at first marriage for men and women had increased from 25.5 and 22.0 years respectively in 1970 to 28.6 and 25.1 years in 2000.

Also, the number of those who had never been married between the ages of 25 and 29 years had more than doubled for women from 13% to 29%, and rose from 32% to 54% among men, he added.“

This all of a piece with the demographic transition that Malaysia is undergoing (detail in this post). It will only become a problem if fertility drops below the replacement level, and we are a long way (as in, at least a couple of generations) from even having to think about that issue. The only concern here is really the potential breakdown in the family institution, for which I'm not competent to comment on.

Second, our Higher Education Minister thinks giving budding professors more pay and less work equals Nobel prizes:

Pay rise will help lecturers focus on R&D

"The pay rise for lecturers at public universities without them having to hold administrative posts will reduce politicking. Higher Education Minister Datuk Seri Mohamed Khaled Nordin said this meant that they would not have to fight for posts in the varsities, but could instead focus on their fields of study through research and development.

'It will help create more Nobel laureates, because the professors will not be bogged down with administrative work,' he said yesterday."

If I'm not mistaken (feel free to correct me), most Nobel prize winners won on the basis of work they developed before gaining their professorship. In which case, giving more time to professors for research won't necessarily create more and better research output. And how many Nobel Prize winners does Malaysia have anyway? None?

I've also been doing a bit of research (for completely unrelated reasons) into the question of Malaysian academia's contribution to innovation, and strengthening linkages between universities and industry. The global research literature on these issues is enormous, but numerous studies indicate incentive and cultural problems in fostering innovation through collaboration and commercialisation of university research output.

The basic issue is that the primary purpose of universities is teaching and research – they are judged on quality of graduates and on publication of research. On the other side, what industry is interested in is new ideas and solutions they can turn into products and services, with maybe a sideline in overcoming industry problems and obstacles. Success is judged by the top-line (sales) and the bottom-line (profits).

In a nutshell, the R&D problem we have is that universities are interested in the ‘R’ while industry are interested in the ‘D’. Put in another way, universities are good at starting things but poor at finishing, while industry is the other way around. Failure to bridge that fundamental culture gap is one big reason why university-industry collaboration has failed to produce big results in Malaysia.

Wednesday, March 10, 2010

Fiscal Stimulus Exit Strategy

Now that monetary policy is on the way back to “normal”, whatever that is, it’s perhaps time to talk about fiscal consolidation; or to be more precise, whether it’s already begun.

I’ve outlined my suspicions in a previous post, but we won’t know for sure until the 4Q fiscal expenditure and revenue numbers are actually published. But from the trajectory of government spending and borrowing for the second half of 2009, consolidation has already begun.

That’s all to the good, because the flip side of Keynes’ prescription to spend during bad times, is to save during the good times. Something which all too many governments seem keen to forget, and something we have been guilty of in the past.

The facts as they are is that we are looking at a total fiscal deficit of  7.4% in 2009 and a projected 5.6% of GDP in 2010. Neither number is particularly controversial given the circumstances; but what is important now is less the spending that occurred during the recession (whether you believe it was effective or not), but rather how we now resolve the accumulated debt.

I’m not a balanced budget fundamentalist – to me the level of the budget surplus/deficit in any given year is far less important to fiscal stability and credibility than the ratio of debt to income (as measured by the ratio of debt to GDP). The former affects yields on short term government securities, but the latter affects interest rates over a longer horizon. And since corporate debt is benchmarked over MGS, that affects long term borrowing costs and thus private investment. There’s no evidence so far of any such crowding out of private investment – you don’t expect much during a downturn – but higher borrowing costs will be a factor going forward.

It’s interesting to note that bulk of MGS issuance over the past year has been in 3-5 year maturities, which is contrary to the government’s usual practice of issuing 5-10 year MGS maturities. It seems to me that right from the start, someone has been thinking of the possible repercussions down the road, and had the unwinding of the additional government debt already built-in. Either that or someone’s really dumb, because rolling over the short-term debt on maturity is going to cost the government plenty with interest rates projected to rise over the next couple of years. If the government was planning to keep the debt on the books, it would have been better to lock-in over a longer maturity the low yields of the past year.

Beyond these technical issues, there are two ways to reduce the debt/GDP ratio – either grow faster, which increase the denominator; or allow higher inflation which reduces the real burden of debt. The former effect is likely, as recovery is already beginning, but the impact will be slow. The latter is essentially an unwritten levy on investors and taxpayers, as debt is denominated in nominal historical terms, but the government revenue and interest payments are in current ringgit (you can read a historical perspective on the US here).

There’s a raging debate going on right now in the economics profession on whether a higher inflation rate might be desirable, not just for fiscal consolidation reasons, but also to increase the latitude of monetary policy in combating crises like the one just past (the IMF is floating the idea, but Paul Volcker among others is calling it nonsense).

But whichever way you look at it, having a clearly communicated, transparent and credible exit policy can have its benefits. This article on VoxEU makes the case that doing so actually increases the effectiveness of current fiscal stimulus (excerpts):

After the stimulus, the big retrenchment

“Demand for private consumption is always higher in the case of the spending reversal than in the pure tax-finance case. The stronger private consumption profile in turn raises aggregate (public plus private) demand for several quarters. Correspondingly, the equilibrium paths of inflation and the policy rate are also higher in the early periods.

The tax burden faced by consumers obviously differs in the two scenarios depicted in Figure 2. Taxes increase in the first scenario, but not in the second. Yet, this “wealth effect" is of little consequence for the dynamics of private consumption, as households’ permanent income falls very little in the case of temporary fiscal stimulus. Instead, the difference across the two scenarios is chiefly driven by the distinct behaviour of interest rates. Demand is higher with spending reversals because long-term real interest rates are lower, triggering strong intertemporal substitution effects.

The effectiveness of short-run fiscal stimulus depends not only on the specific fiscal measures taken today, but also the on medium-term fiscal outlook, notably the government’s expected strategy for fiscal consolidation.

We find that anticipated spending cuts generally enhance the expansionary effect of current fiscal stimulus. This result still holds when monetary policy is constrained by the zero lower bound on policy rates. In this situation, however, the spending reversal must not come too early on the recovery path, or at least must be suitably gradual.”

Note that they’re talking about expenditure cuts, not tax increases. On that basis, in my view the Malaysian government appears to be a little ahead of the curve. The problem is that the “stealth” approach being taken right now, if the results of the paper quoted are true, may actually be counterproductive. You won’t get the stronger consumption and investment effects down the road that can really bolster a recovery.

I think it’s time for the government to get out of the closet and start talking up consolidation rather talking about spending, political brownie points notwithstanding.

Changing The Statutory Reserve Ratio: Why It Doesn’t Really Matter

I thought I’d go over this because there seems to be a lot of confusion, particularly from people who should know better. Malaysia is not China (which has raised theirs to crazy-high levels), nor is it Taiwan (currently contemplating a rise in lieu of an interest rate hike).

First, a refresher.

We have to recognise that the modern banking is based on a fractional reserve system, in other words banks are able to lend out money and cash because they know that at any given time, their depositors will only need or demand a small fraction of the deposits the banks are holding on their behalf.

So a reserve ratio of 1% (as it is now in Malaysia) means that banks could in theory lend out 100 times their holdings of cash (read this post for a fuller discussion). Reserve requirements are therefore a prudential measure to ensure that banks have enough cash on hand to meet customer demand – loans are of course illiquid and cannot be used for this purpose, so you have to have some cash or cash equivalents (like NIDs/NCDs).

In a modern financial system, bank reserves are kept at the central bank, where they earn nothing. From a monetary policy perspective, a central bank could therefore theoretically control the amount of credit granted by the financial system through varying the reserve ratio – an increase in the reserve ratio reduces the amount a bank could potentially lend, and vice versa. For instance, going from 1% to 2% effectively reduces the ability of banks to lend from 100x to just 50x their cash holdings. Note that all this happens on the asset side of a bank’s balance sheet.

That’s the economics narrative anyway, the one taught in textbooks.

The problem is, if you have anything like a fair-sized debt securities market (which Malaysia does – the biggest in the region) and an active interbank market, changing the reserve requirement doesn’t really affect lending much. What a change in the reserve requirement will do however is change the composition of banks’ other assets and crimp their interest margins, but not necessarily the growth in their loan book. To see this, let’s have a look at the asset side of Malaysian commercial banks’ aggregate balance sheet (unaudited December 2009 data):


RM billions



Stat Reserve


Deposits placed and Reverse Repos


Amounts due from within Malaysia


Amounts due from outside Malaysia


Negotiable Instruments of Deposits (NIDs)


Malaysian securities


Loans and Advances


Fixed Assets


Other Assets


Total Assets


Note that loans and advances account for just 57% of total assets – you can immediately see the problem relative to the stylised narrative I’ve described above. Since over a third of banks’ aggregate balance sheet consists of liquid or semi-liquid assets, banks won’t have a problem meeting any putative rise in the reserve requirement without compromising their ability to lend.

A hike in the SRR from 1% to 2% will take approximately RM5.7 billion from the banks by my calculations, based on the December numbers. To meet that requirement, banks can draw down their interbank deposits (captured under amounts due in Malaysia) of which there’s about RM30 billion – the rest of it is mainly taken up by BNM repos.

Given some advance warning they can also liquidate some NIDs, or sell down some of their holdings of Malaysian securities, the bulk of which is illiquid private debt securities, but which also include some RM54 billion in MGS for which there is a ready market. But any or all these actions will likely cause interbank rates to start rising relative to the OPR as liquidity gets tighter, which BNM is likely to counteract by pumping in liquidity – which makes the whole exercise moot.

Raising the SRR might raise the cost of funds (from which the Base Lending Rate is calculated), and thus the cost of borrowing – but not by very much, perhaps 1-2 bp per 1% increase from memory. The SRR will only become even marginally effective as it starts getting higher – much higher than even the 4% level that prevailed before the Great Recession started.

The historical high was reached in June 1996, when the SRR was raised to 13.5%, but even then it didn’t put much of a dent on runaway lending as loan growth averaged over 20% in log terms between 1995-97. The same reasons applied back then too, with loans around just 60% of total assets.

I’ve noticed that China hasn’t been very successful in reining in lending using higher reserve requirements. Don’t look for it to be a big factor in Malaysia either.

Tuesday, March 9, 2010

Currencies and Current Account Adjustments Part II

I did a post about six months ago on an article in VoxEU (link) that evaluated exchange rate imbalances between the USD and Asian currencies, which suggested that the MYR was as much as 1/3 too low against the USD. I criticised the paper on both methodological and procedural grounds.

Now another article on VoxEU is also basically challenging the findings of that article (excerpts):

On the renminbi and economic convergence

“Many economists agree that the build-up and maintenance of international imbalances, with their accompanying capital flows, contributed to the overleveraging of finance and underpricing of risk. How to rebalance then? Many observers are increasingly emphasising that China should let its exchange rate appreciate.

For example, Cline and Williamson (2009) have recently estimated “fundamental equilibrium exchange rates” compatible with moderating external imbalances. They estimate that the required renminbi appreciation is more than 20% in real effective terms and 40% relative to the dollar. Ferguson and Schularick (2009) point to the manufacturing wage unit-costs to estimate the degree of undervaluation of the renminbi relative to the dollar and come up with the figure of 30% and 50%. Finally, the Bank of China’s continuous intervention in the foreign exchange market also suggests that the renminbi would appreciate significantly if let loose; this intervention has accumulated $2.3 trillion of foreign exchange reserves.

To be sure, poor-country currencies are normally undervalued in terms of purchasing power parity with rich countries. In fact, poorer countries do have undervalued exchange rates (due to the Balassa-Samuelson effect), and convergence will imply considerable correction of that undervaluation. Services (and wages) are cheap in poor countries and expensive in rich countries, while prices for internationally traded goods are roughly equalised in a common currency. When the productivity in traded goods rises (while productivity growth for haircuts and other services are very limited), more income is generated and spent on services. The price ratio of non-traded to traded goods will rise. In other words, the real exchange rate will appreciate. Hence, part of the undervaluation ascribed to China’s and other currencies results from market forces that make non-traded goods relatively cheap in poor countries, rather than from deliberate currency manipulation by China’s authorities.

While growing and converging fast, China is still poor. Its per capita income in 2008 was 6.2% of the US’s at market rates and 12.8% at PPP-adjusted rates, according to World Development Indicator data. Figure 1 relates the log of real per capita GDP as a fraction of the US level and the deviations of current market exchange rates per US dollar from PPP rates for the year 2008. It shows strong support for the Balassa-Samuelson effect and suggests a well-determined elasticity (0.2) by which the undervaluation of the currency will be eroded during the catch-up toward the US per capita income level. Real exchange rates can thus be expected to appreciate as economies grow, approaching PPP exchange rates as economies converge with US living standards, as posited by the Balassa-Samuelson effect.

Figure 1. Income convergence and exchange rates appreciation


To gauge a converging country’s degree of undervaluation, the appropriate yardstick cannot be purchasing power parity; it should rather be the regression (over 145 countries) that provides the best fit for the Balassa-Samuelson effect. While the renminbi was undervalued by 60% in PPP terms, it was merely undervalued by 12%, if the regression fitted value for China’s per capita income level is compared to the current value in 2008. Note that India and South Africa (which had a current account deficit) were more undervalued than China by that Balassa-Samuelson benchmark, by 16% and 20%, respectively, in 2008. The currencies of Brazil and Russia were appropriately valued, i.e. close to the regression line.”

My kind of guy! Have a read through - there's some interesting policy conclusions as well.

Productivity and Technology

There’s an interesting piece in the Star today by Prof Nazari Ismail of University Malaya:

Is productivity, superior technology the panacea for economic ills?

"MALAYSIA’S current economic problems have spurred arguments both by experts and non-experts alike on how best the country could overcome these challenges in the years ahead. One of the most common arguments revolves around the need to enhance the country’s productivity and competitiveness.

Solutions on how productivity and competitiveness could be enhanced range from revamping the nation’s educational system at all levels to harnessing the latest technologies and upgrading workers’ skills both in the public and private sectors. At a glance, these solutions appear to be the ultimate panacea to the country’s economic woes. However, nothing can be further from the truth.

It is unfortunate that policymakers and economic advisers continue to turn to Japan as the economic model for recovery. While it is true that Japan has a highly productive, skilled, and disciplined workforce supported by a technologically advanced manufacturing sector, these factors have not offered it immunity from rising unemployment, soaring debts and a deteriorating fiscal health.

According to a recent article on Japan by The Economist, the coming decade is going to be worse for the younger generations of Japanese compared with their predecessors in the previous two decades. The question is how could such a technologically advanced and productive nation sink into such an economic misery?

The answer is deceptively simple. It is the system. To be more precise, it is the finance industry, which encourages massive amount of loans be given out to Japanese firms and individuals. The lenders, which are the Japanese financial institutions, had massive amounts of money to lend due to Japan’s export successes during the previous two decades.

I think he is wrong on a few points. Were there policy missteps? Oh my, yes, big ones. But he is ignoring a few structural factors that really underlie the Japan story and colour its prospects for the future.

First is that we probably have true crowding out in the Japanese financial system, as 20 years of misdirected and ineffective fiscal stimulus has the banks awash with government securities. In 1990, holdings of govt securities were just 6.7% of the level of total loans. In 2009, that ratio had risen to 28.0%, while the amount of total loans actually fell in the interim.

Note that Japan bit the bullet in 2001-02 and recapitalised the banks, so there isn’t much of an issue with bad corporate loans anymore. And I’ve never heard of a lending-supported consumption bubble in Japan – on the contrary, the Japanese have if anything been known for over-saving.

Second and more important is the demographic story. Japan has a shrinking, ageing population who are fearful for their savings, and prefer risk free investment instruments – i.e. government bonds – to fund their retirement.


Neither of these factors are an issue (yet) in Malaysia. And the second explains how a country with a highly productive work force and superior technology can fail to progress – a shrinking work force means less bodies adding value, which means less ability to generate growth. That does not mean their business practices, systems and work culture are not worthy of examination or emulation.

I’ll add one more – countries on the edge of the growth envelope will tend to grow slower, because increasing amounts of investment are required for capital replacement; because they probably already have the optimum level of capital relative to their work force; and because as technology leaders they depend on the development of new technology, rather than playing catch-up like the rest of us.

Blaming everything on a financial system gone wild is the kind of argument I would expect of a politician, not a respected academic.

Minimum Wage Blog

The Human Resource Minister needs help in making up his mind:

Blogspot being set up to gather views on minimum wages

“KUALA LUMPUR: The Human Resource Ministry is expected to set up a blogspot in two weeks, to gather views and opinion from the public on the minimum wage implementation mechanism…Its Minister Datuk Dr. S. Subramaniam said it was necessary to collect various views, opinions and suggestions for the minimum wages proposal since there is two versions of request - (a) to have a standard minimum wage scale, (b) to allow market forces to decide.”

My thoughts on the minimum wage have evolved over the past year. My original thinking was based on established research that showed that a minimum wage slightly above the market clearing wage has a negligible impact on employment, while at the same time helps redress asymmetries in the wage bargaining process. Now, I'm less convinced that such a thing can be successfully administered, in the absence of information on what the "market-clearing" wage actually is. There's also the risk of setting the wage floor too high, in which case the ones to suffer are exactly the ones the minimum wage is supposedly there to help – the poor and the young. And then there’s the problem of accounting for regional and industry differences.

If and when this blog actually appears, I think I’ll be dropping by.

Monday, March 8, 2010

Oil Royalties and the Resource Curse

I don’t usually comment on political issues, but I came across an interesting research paper that ties in directly to the issue at hand. Lost in all the sturm und drang over the payment of oil royalties to Kelantan, is the question of whether these royalties will benefit the Kelantanese people as opposed to the Kelantanese government. This paper on VoxEU rather wryly suggests not (excerpts, emphasis mine):

Oil windfalls and living standards: New evidence from Brazil

“Yet economists are increasingly sceptical and many of them openly entertain the seemingly paradoxical notion that resources and windfalls may actually be bad news. In fact, some go so far as to speak of the "curse of natural resources" (see Bhattacharyya and Hodler 2009)...

Before dismissing this as yet another instance of the economics profession’s disconnection from the real world, consider the following list: Angola, Congo, Nigeria, Venezuela and the Middle East. What these places have in common is an abundance of natural resources coupled with varying degrees of abject poverty, state failure, civil war, rampant corruption and political repression...

Our research attempts to bypass these difficulties in interpreting cross-country comparisons by looking at Brazilian municipalities. Oil endowments, and hence oil production, vary widely across municipalities, and we show that oil output is not correlated (conditional on a few geographical controls) with other municipal characteristics…

The results paint a complex picture, with no apparent changes in some areas, small improvements in others, and a small worsening in yet others. On balance, however, the data appear to suggest that the actual flow of goods, services, and transfers to the population is not quite commensurate with the reported spending increases stemming from the windfall. This shortfall we dub "missing money"...

Our finding that oil windfalls translate into little improvement in the provision of public goods or the population’s living standards raises a key question – where are the oil revenues going? As a way of addressing this question, we put together a few pieces of tentative evidence:

  • First, oil revenues increase the size of municipal workers’ houses (but not the size of other residents’ houses).
  • Second, Brazil’s news agency is more likely to carry news items mentioning corruption and the mayor in municipalities with very high levels of oil output (on an absolute, though not per capita, basis).
  • Third, federal police operations are more likely to occur in municipalities with very high levels of oil output (again in absolute terms).
  • And finally, we document anecdotal evidence of scandals involving mayors in several of the largest oil-producing municipalities, some of which involve large sums of money…

This may be because citizens themselves are more tolerant of corruption when the money does not come from tax revenues. Or it may be because they have less accurate information on the amounts flowing to the government in the form of oil royalties. We are unable to explore these possibilities with our data…

But our findings do suggest that it may be somewhat unwise to channel revenues from oil operations directly to local governments, at least if the officials are not properly monitored and accountable. For Brazil, this may be an especially important consideration as the system of property rights and royalties will probably be overhauled in response to the recent discovery of huge new offshore fields.”

I will forbear from mentioning the obvious comparisons between oil revenues and other state governments, or federal for that matter – you can draw your own conclusions.

Saturday, March 6, 2010

Jan 2010 Trade: Sustaining Momentum

Ignore the headlines. January 2009’s trade numbers were cover-your-eyes awful, so the y-o-y growth spike we’re seeing for this January’s numbers should come as no surprise – the base effect rears it’s ugly head again (log annual and monthly changes; seasonally adjusted):


Over 30% in percentage terms, and 31% (exports) and 27% (imports) in log terms. Note that month-on-month, seasonally adjusted or not, export growth actually fell. Nevertheless, exports are now back to their long term-trend, while imports have reached 2007 averages:


The numbers also beat my forecasts from last month, although still within the forecast confidence intervals. Looking at the breakdowns, it’s primarily crude oil and related products driving the moderation in growth. I don’t expect the February numbers to be as good, given the shut down due to Chinese New Year and the slowing of intermediate imports. February’s forecasts:

Seasonally adjusted model
Point forecast:RM51249.52m, Range forecast:RM57636.51m-44862.52m

Seasonal difference model
Point forecast:RM44717.01m, Range forecast:RM51009.54m-38424.47m

Both models are suggesting a pullback in the level of exports, although given that February 2009’s numbers were even worse than January’s, we’re still going to get some pretty spectacular growth numbers.

Technical Notes:

Trade data from MATRADE.

Friday, March 5, 2010

Reactions…What’s Normal Again?

From the Star:

RAM Holdings Bhd chief economist Dr Yeah Kim Leng described the hike both as a signal of the central bank’s confidence that the local economy recovery was on track and as a “gradual normalisation” of the historically low rates.

Bank Negara had earlier also indicated the need for the normalisation of rates, adding that any increase should be viewed as “normalisation” and not “tightening”, which is normally implemented to slow consumer demand in an overheated economy with high inflation.

According to Yeah, a “normal” level for the OPR is between 3.25% to 3.5%. He expects an increase of between 75 basis points to 100 basis points this year backed by improving economic conditions.

From NST:

HSBC expects BNM to lift the OPR by another 75 basis points this year.

The central bank chief has stressed that the process is to return the economy to normal conditions and not to choke economic activity.

"During the recession, BNM cut rates by 150 basis points and it could be argued therefore that a 3.5 per cent rate would be 'normal'," said Robert Prior-Wandesforde, senior Asian economist of HSBC.

The 2006 hike to 3.5% was in response to the boom in commodity prices, as demand from China started putting pressure on supplies. To suggest 3.25%-3.50% as “normal” means that these guys are expecting a return to the push-inflation conditions of those years (interbank overnight, averages, sample: 1997:1-2010:1) :


With external demand still iffy and China in a monetary-tightening mood, thinking 3.50% is premature. Realistically, we’re probably looking at 2.75%-2.80%, which was the rate that prevailed in the first half of the decade. Bear in mind that historically BNM has always erred on the side of growth.

Any appreciation in the MYR (already happening) will also put a cap on inflation – both core and headline measures are behaving nicely at the moment (log monthly changes):



Loan growth has just begun to pick up as well, so there’s no reason to push the panic button just yet (log annual and monthly changes, seasonally adjusted):



Domestic demand growth wasn’t terribly strong in the last quarter, so there’s a good argument for moderating any interest rate rises – I wouldn’t look for another hike until July.

Thursday, March 4, 2010

OPR Up 25BP: No Surprise

They did it.

What’s the proximate effect of this rise? Not much really – while there’s a statistically significant relationship between real interest rates and loan growth at the margin, it’s only with the core inflation measure and even that comes with pretty high standard errors. Unless of course you want to try specifying a full scale model with multiple lags (not up to that today).

Banks’ net margins will be compressed for a month or two as they adjust their lending rates, but the effect on profits should be negligible. Yields on debt instruments o the other hand have already risen the past couple of months – I think the market’s more than half-expecting a rate hike anyway, so the secondary market is already covered.

In fact, the market might be perverse and rally a bit (i.e. yields drop). As they say: buy on rumour, sell on fact – which is actually just another way of saying rational expectations.

Cheap Labour and Capital Outflows

In the Star today:

"Malaysia, the world’s No. 2 palm oil producer, will miss its output target of 18.1 million tonnes because of a shortage of foreign labour even as yields recover, according to a top industry official.

Industry regulator Malaysian Palm Oil Board (MPOB) chairman Sabri Ahmad said yesterday Indonesian plantation workers made better pay at home as more palm oil estates started up there while employers in Malaysia had trouble hiring because of a stricter work-permit process."

I find this more than a little ironic. No doubt this will raise the hackles of those who think the reliance on cheap foreign labour is holding back Malaysia from progressing. What makes the irony even richer is the fact that these low-wage workers can now earn more in their own native country – Malaysia is even losing out to less-developed Indonesia in terms of labour earnings.

Be that as it may, what tickled my funny bone was this: as late as 2007-2008 (IIRC), Malaysia was the world’s largest producer of crude palm oil, but we’ve now been overtaken by Indonesia. Here’s the rub – Indonesia’s rapid development as a crude palm oil producer has been fully supported by Malaysian companies using Malaysian capital. Most of our biggest palm oil producers have a significant presence in Indonesia, with up to 50% of their total production coming from there.

So our cheap foreign labour “shortage” in estates is being indirectly caused by the very same companies who are complaining about it. Funny how the world works, innit?

Wednesday, March 3, 2010

GDP Target for 2010: A Numbers Game

The government is targeting 6% real growth this year – how realistically achievable is this? The forecasting community thinks its within reach. I think it’s probably easier than many think.

Beyond discussing a substantive recovery in private consumption and investment, and a sustained recovery in trade, consider this:

  1. The economy shrank 1.7% in 2009. Actual real output at 2000 prices reached RM519.2 billion
  2. To achieve 6% growth in real GDP for 2010, we need RM550.4 billion in output value.
  3. But that figure is just 4.2% above 2008 output, and just 9.0% over 2007 output.
  4. The shape of the recovery (at least for Malaysia) is closer to a Freidman recession pattern (click here for a discussion on different recession types), though this is subject to how we actually do this year.
  5. If we are in a Freidman recession/recovery then we should return to the economy’s previous growth path. A full recovery in trade, which appears to be in the offing, will certainly put a floor to 2010 output.
  6. Therefore we only need a below average growth year to record a 6% increase in real GDP. If we do get an average growth year, look for even higher growth (7%+).QED.

Tuesday, March 2, 2010

Jan 2010 Monetary Policy Update

The big news on the economic front this week is of course this Thursday’s Monetary Policy Committee meeting, where I think there’s a 50-50 chance of a 25bp rise in the Official Policy Rate. There’s also some speculation over a rise in the statutory reserve requirement, but I don’t think a hike in the SRR will have much impact – I expect BNM in that event to simply pump the equivalent amount of liquidity back into the interbank market. This isn’t China – we don’t have the excessive loan growth the PBOC has to contend with. An SRR hike will be more of an administrative move, rather than a shift towards real tightening.

Nor are we dealing with excessive money supply growth – in fact just the opposite (log annual and monthly changes; seasonally adjusted M1 & M2):

01_msThere is a tendency for  money supply growth to moderate after the year-end binge, but outright contractions are relatively rare - bear in mind though that these are seasonally adjusted figures. In any event, the money supply situation hasn’t affected loan growth (log monthly changes, seasonally adjusted):

01_loansCredit quality looks good, with non-performing loan ratios at the lowest I’ve ever seen them – 1.8% at the 3 month classification and 1.3% at 6 months.

On the interest rate front, yields on BNM bills and T-bills fell marginally in January but have gone up about 20bp since. MGS yields on the other hand have continued to steepen at the short end, although we don’t have the big jump that we had in December:


The latest indicative yields (end-Feb) indicative a further steepening in the 3-year benchmark maturities, but some softening at the long end. Unlike in the past, the government’s primarily borrowing at 3yr and 5yr maturities to fund the deficit – the actual bulk of outstanding debt is at 5yr and 10yr maturities. Either we’re looking at stricter fiscal consolidation over the short term, or they’re simply taking advantage of the lower rates at the short end.

Interbank rates haven’t and won’t move much of course, until BNM actually changes the OPR…for which we await Thursday’s announcement with bated breath.

Technical Notes:

Data from Bank Negara’s Jan 2010 Monthly Statistical Bulletin

Stimulus? What Stimulus?

Look what arrived in my inbox last night (from the abstract):

"This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean. We discuss the implications of limitations on states' ability to run deficits for the design of fiscal stimulus at the federal level. We devote particular attention to intertemporal moral hazard concerns in a federal fiscal system, and ways to address these concerns."

A nearly US$800 billion stimulus package, which had the effect of raising total US government spending by virtually nothing. Keynes would be rolling in his grave.

And what I wouldn’t give to see timely quarterly data on consolidated Malaysian government expenditure and revenue (we only get annual data through the Economic Report).

Technical Notes:

"On the ease of overstating the fiscal stimulus in the US, 2008-9", Aizenman, Joshua & Gurnain Kaur Pasricha, NBER Working Paper No. 15784


There’s a shorter version of the paper over at VoxEU.

Monday, March 1, 2010

Fiscal Stimulus Vs Fiscal Consolidation

The Finance Minister II speaks:

"Malaysia's recovery from the global economic crisis were fuelled by positive growth registered by various sectors and not solely due to the accelerated implementation of the RM67 billion economic stimulus package, says Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah…He said the Opposition claims that Malaysia's 2009 "better than expected" fourth quarter economic performance was the direct result of the whopping RM67 billion stimulus package was totally baseless."

Depending on your ideological point of view, he’s fortunately or unfortunately right. If you recall my 4Q2009 GDP post, there’s a difference in the public sector contribution depending on how you calculate growth.

Based on Malaysia’s usual year-on-year method, there was positive growth in public consumption and investment. But looking at the international standard of quarter-on-quarter, seasonally adjusted data, then public consumption was negative. There’s no breakdown yet of public and private investment, but on balance I suspect that the total government contribution to growth was only mildly positive.

Whichever way you look at it, there’s no question that GDP growth on the demand side in 4Q2009 was primarily driven by the external sector (log annual changes and seasonally adjusted annualised log monthly changes; 2000=100):


What happened to the New Economic Model?

I’ve been waiting for this for over a month now – the first reports said the NEM would be announced in February. Then it was mid to late-February. Now it’s end of March?

"Any suggestion for beefing up the country's new economic model should be sent in as fast as possible to the National Economic Advisory Council (NEAC) before its announcement by Prime Minister Datuk Seri Najib Tun Razak end of this March...Deputy International Trade and Industry Minister Datuk Mukhriz Mahathir said the government, through the NEAC, remained opened to feedback from all parties."

Talk about moving the goalpost.

If they get further substantive feedback, are we going to have to wait until the 10th Malaysia Plan before we get a look at this?


somebody get Bernama a calculator (or a better voice recorder)! Odds are a Human Resource Minister wouldn’t make this kind of mistake:

"Some 36,000 Malaysians were unemployed between October 2008 and December last year or 3.6 per cent of the total population, Deputy Human Resources Minister Datuk Maznah Mazlan said."

We've suddenly and mysteriously lost over 60% of population otherwise.