Monday, November 29, 2010

Revisiting Vision 2020 (Updated)

This morning I attended a speech by Tun Mahathir on the Vision 2020 that he introduced way back in 1991. The event was organised by the Institute of Marketing Malaysia (freebie plug here) on the subject of Vision 2020 and what progress we’ve made in achieving its goals.

The grand old man of Malaysian politics was in fine fettle, cracking jokes, most of which were at his own expense (like, having to reread the Vision 2020 document because he couldn’t remember what was in it, and making constant references to mega projects).


I want to touch on a few things he mentioned in his speech, some good, some not so much.

October 2010 CPI: The Price Of Sin

Last week’s report on consumer prices showed inflation jumping 1.9% in log terms (log annual and monthly changes; 2000=100):


In a reversal of the usual case, core prices (ex. food and transport) rose faster than the pain index (food and transport prices).

Sunday, November 28, 2010

Malaysian Property: Bubbles AND Gluts?

Via the Malaysian Insider, Dr Dzulkefly Ahmad of opposition PAS talks about the property bubble (emphasis added):

Of Property Overhang and Mounting Household Debt

Property Overhang as reported by Napic (National Property Informational Centre) for the third quarter of last year was supposedly a cause for alarm. Then there was an overhang of 20,286 residential, 5,450 shop and 619 industrial units worth a whopping RM5.3 billion.

Of the 6,401 new residential units launched during the third quarter, which was a far cry from the 14,588 units launched in the previous corresponding quarter, only 20.2% found buyers…

Wednesday, November 24, 2010

Monetary Policy Explained For The Layman

Courtesy of the Federal Reserve (click on pic for the link):


Capital Controls For Malaysia? Not Yet

Charles Santiago of the DAP is calling for capital controls:

Govt urged to consider capital controls

KUALA LUMPUR: An Opposition MP has urged the Government to view capital controls as a protective policy to insulate the local economy from destabilisation.

Charles Santiago (DAP-Klang) said China, Indonesia, Thailand, Brazil, South Korea and other developing countries had recently adopted such a policy.

"Capital controls should be viewed as a policy response to regulate speculative capital, in order to protect the domestic economy from volatile capital flows.

Tuesday, November 23, 2010

3Q 2010 GDP: Disappointing

So much for optimism. Yesterday’s report from DOS had 3Q real GDP (RM141.9b) right on the number predicted by the IPI (RM141.8b), which means the economy actually shrank. Not as bad as Singapore’s, but still…

The growth numbers weren’t quite as bad as I forecasted (though still way below the consensus estimate of 5.7%) with the GDP up 5.3% on the year and –2.6% on the quarter, but that’s because of something negative not positive, as 2Q 2010 real GDP was also revised downwards by RM30 million.

So, what happened? Softening external demand is of course part of the story, but believe it or not, on the demand side the second biggest marginal contributor to the drop in GDP is…public spending!

Monday, November 22, 2010

Can You Borrow Your Way Out Of A Recession?

As a matter of fact, it’s the economic orthodoxy. The insight that eludes critics of debt-financed government spending as a policy tool, is that they fall into the trap of the fallacy of composition – just because saving is good for an individual in times of uncertainty, doesn’t mean it’s good for society in aggregate.

Similarly, if individuals and companies are averse to spending, doesn’t mean it’s good for the economy if the government doesn’t do it too. Of course, making sure that government spending is effective and supports nominal spending and economic recovery remains a thorny issue, as is the level of sustainable debt that a country can bear over the long term. On that basis, a reliance on monetary policy is generally preferred – but that’s hard to do near the zero interest rate boundary.

But often, the debate shouldn’t even have to go that far – I’ve always been of the opinion that it’s relative debt (relative to income and wealth), and not absolute debt that matters. And you really shouldn’t talk about debt without talking about its inverse, wealth and income.

So this article just about pushes all the wrong buttons for me:

All those IOUs stashed under America’s carpet
Andy Mukherjee

NOV 22 — The most accurate depiction of the way United States policy makers have dealt with the unsustainable, unserviceable debt that caused the financial crisis of 2008 has to be this: “Bury that putrid stuff under a carpet of cash and hope that no one notices.” …

Sept 2010 Economic Indicators

I’m still waiting on the GDP announcement that’s supposed to be due today, but the economic indicators report from DOS this morning underlines the case that economic growth will be marginal (at least on a q-o-q basis):


Sept 2010 Employment Report

Just as I thought might happen, the Census’ effect on employment (from temporary employment caused by Census 2010) has finally died away in September, though you won’t really see it in the unemployment rate:


Friday, November 19, 2010

3Q GDP Estimates: All Over The Place

Apparently the consensus is that there is no consensus:

Economists’ M'sia Q3 GDP growth estimates vary widely

KUALA LUMPUR: Uncertainty over how the economy performed in the third quarter has resulted in a wide disparity in economists' estimates ahead of the official announcement on Monday.

Economists have projected that the gross domestic product (GDP) for the third quarter could come in at between 3.5% and 7.8%, while the forecast in a poll of 11 economists by Bloomberg averaged 5.7%…

The announcement is due on Monday.

I did a simple regression model to forecast 3Q 2010 GDP based on the Aug-Sept IPI, which yielded a point forecast of RM141.7 billion, which amounts to 5.2% growth y-o-y and –3.1% growth q-o-q (saar). Note that anything under about 5.7% (ironically, the average forecast) implies that the economy actually shrank in 3Q 2010 on a seasonally adjusted basis.

I’m thinking (hoping rather), that BNM’s confidence that domestic demand is holding up might push growth beyond that implied by manufacturing alone. If that’s the case, I’ll need a better specified forecast model – but that would be a nice problem to have.

Wednesday, November 17, 2010

Selamat Hari Raya Eid-al Adha

Wishing all a safe and happy day, and a prayer for the safe return of pilgrims from the Holy land.

Monday, November 15, 2010

Currency Wars Part VIII: The Currency Rap

Ryan Avent sends us to Next Media Animation, to explain global trade and currency imbalances:


If you didn’t understand the Econbrowser post, this is the hip-hop version!

Econbrowser On The G20 Meeting

Menzie Chinn explains, in theoretical terms, about QE2, currency wars and capital controls:

Losing the Battle, Winning the War?

…I have also been thinking about the anger with which the policymakers and economists in the rest-of-the-world (as well as certain US politicians [5]) have greeted QE2 with. In some ways, the fact that they are angry speaks volumes about the effectiveness or ineffectiveness of QE2. (In other words, to criticize QE2 as having no effect, and then to be angry that it is being undertaken, are internally inconsistent views.)

My view is that anger at the US position is currently being driven by an understanding that QE2 has been surprisingly effective at depreciating the dollar, and that the rest-of-the-world has limited scope in countering that depreciation. In a game theoretic context, we usually think of competitive devaluation as a form of the prisoner’s dilemma, where the devalue option dominates the no-devalue option, and both parties end up with a devalued currency, but no net improvement because countries cannot all devalue against each other…

…However, because of the radically different post-recession economic conditions facing the US and China, the payoff matrix has changed. The US gains by allowing the currency to depreciate against the rest-of-the-world, but the Chinese (and to a lesser extent the other BRICs) have competing goals of maintaining rapid growth, high exports, and stable inflation. This point has become apparent as inflation has surged in China. [6] The conflicting goals Chinese policymakers face can be illustrated by reference to the Mundell-Fleming model. (See this post for detail)…

If you want to suss out the policy options that are facing the major economies right now, you could do worse than to read this.

3Q 2010 Exchange Rates Review

This is about a week late but as they say, better late than never.

One of the funny things about the commentary about the Ringgit’s movements is that the focus is almost exclusively on the USD exchange rate. But with total trade with the US averaging just 10% of Malaysia’s total trade over the past year, that gives an incomplete and highly misleading picture of the Malaysia’s trade competitiveness.

To wit (effective exchange rate indexes; 2000=100):01_eer

Friday, November 12, 2010

BNM Stays On Hold

As expected, BNM stayed pat on the OPR at 2.75% for another meeting. The language of the press statement is about as unenlightening as…well, as a typical economist’s statement (excerpt; hit the link for the full statement):

Monetary Policy Statement

…The MPC considers the current level of OPR as appropriate and consistent with the latest assessment of the economic growth and inflation prospects. The stance of monetary policy continues to remain accommodative and supportive of economic growth. While domestic financial conditions remain orderly, greater vigilance will be accorded to the potential risks arising from large and volatile capital flows.

Malaysia To World Bank: Help!

As far as I know, this hasn’t been reported locally:

Malaysia Seeks World Bank Help to Cut Spending, Trim Deficit

Nov. 12 (Bloomberg) -- Malaysia will ask the World Bank to help in the country’s efforts to cut government spending as Prime Minister Najib Razak seeks to reduce the budget deficit from a 22-year high.

The nation is asking the Washington-based lender to review all areas of government expenditure, including how state contracts are awarded, to prevent waste from inefficiency, Second Finance Minister Ahmad Husni Hanadzlah said in an interview in Kuala Lumpur yesterday. Malaysia hopes the study will bolster the government’s credibility, he said.

“We just want a third party as a check and balance,” said Ahmad Husni, 58. An annual audit of spending at state agencies has shown “some negative findings and we hope that with the involvement of the World Bank, in the future we can see a clean sheet,” he said.

Waiting On The MPC Meeting? Don’t Bother.

Today marks the last meeting for the Monetary Policy Committee in 2010 (the announcement is due at 6.00pm local, about 10.00am GMT)). Virtually nobody is expecting a further interest rate hike at this juncture as there’s simply no call for it.

Monetary conditions over the past few months have been pretty stable, with maybe a slight concern over heightened loan growth – and even that’s not too far off the reservation. The external outlook continues remains uncertain, even as the Fed prepares for another QE blitz that may result in further cash heading to emerging markets. I’m expecting growth in 3Q GDP to flatline, so further monetary tightening (pace loan growth) isn’t warranted.

So I think this meeting will really be a non-event in terms of the current stance of monetary policy. The only thing of interest this evening is BNM’s take on the future trajectory of monetary policy, particularly what BNM plans to do if portfolio inflows exceeds the bounds BNM is prepared to accept.

As the pace of Ringgit appreciation has slowed down over the past two months, helped along by some judicious intervention, there are less worries that the Ringgit will outrun Malaysia’s economic fundamentals. But it would be interesting to see if there will be any mention of currency intervention or alternative measures that BNM might take, in the event that the Ringgit and Malaysian asset prices continue to rise at an accelerated pace.

Just don’t expect an interest rate increase to be on the menu just yet.

Stiglitz Calling For Capital Controls

As a Nobel prize winner, Joseph Stiglitz’s views have some weight. Now he considers capital controls a legitimate policy option for emerging markets:

Stiglitz Sees Bubble Risk in Emerging Markets as Fed Expands U.S. Stimulus

The U.S. Federal Reserve’s plan to expand stimulus will fuel potential asset bubbles in emerging countries with strong growth that don’t have capital control measures, Nobel Prize laureate Joseph Stiglitz said.

“I do have worries on countries like India,” Stiglitz, a Columbia University economics professor, said today at a conference in Hong Kong. “The strong economies that don’t yet have capital control become the focal point for all this money.”

Corruption: Real or Perceived?

Corruption remains a sore point among Malaysians, to the point where it was actually included as a national KRA under the Government’s GTP program. PEMANDU is claiming that progress on this issue is on track:

Corruption NKRA on track

TRANSPARENCY International's corruption perception index on Malay­sia may have shown a slight reduction from 4.5 in 2009 to 4.4 this year but some of the component surveys of the CPI have been indicating improvements in 2010…

…While Pemandu acknowledges that if one were to look only at Transparency International's Corruption Perception Index, there is a slight reduction, it means that "a lot more work has to be done".

Wednesday, November 10, 2010

Sept 2010 Industrial Production: Up By A Whisker

Today’s industrial production report was a mixed bag. On the month, the unadjusted series fell 0.8% in log terms (up 5.4% y-o-y), but taking into account the Ramadhan effect, the IPI rose – just barely – for the first time in four months (log annual and monthly changes; seasonally adjusted):


Perak Catches The Gold Disease

I didn’t catch the original announcement, but here’s the follow-up:

Dinar not for trading

IPOH: The gold dinar and silver dirham currency to be introduced by the Perak state government is not meant to be used for trading but only for investment purposes, said Mentri Besar Datuk Seri Dr Zambry Abdul Kadir.

“The plan to introduce the dinar and dirham was made because many people prefer to keep the currency as they feel the value will increase.

“That is the basis of introducing the dinar and dirham,” he told reporters after chairing the state exco meeting here yesterday.

He added that Perak would have no problem cooperating with Kelantan, which was attempting to use the gold dinar and silver dirham in all its transactions, including for paying civil servants’ salaries.

At least they have the sense not to try to use it as a medium of exchange.

Tuesday, November 9, 2010

The World Bank’s Malaysia Economic Monitor: Talking About Income Inequality

From the World Bank’s blog (emphasis added):

Why Updating Malaysia’s Inclusiveness Strategies is Key

Compare South Korea and Malaysia in 1970 and compare them again in 2009. South Korea was a third poorer back then and is now three times richer. Even more remarkable has been South Korea’s ability to widely share the benefits of this spectacular feat across broad segments of society. South Korea’s strong focus on broad-based human capital development allowed the country to transform itself into a high-income economy, while at the same time reducing income inequality and improving social outcomes.

Malaysia’s inclusiveness strategies have produced some remarkable successes as well. Malaysia dramatically reduced poverty and has all but eliminated hardcore poverty. But the country has been far less than successful in reducing income inequality which, since 1970, steadily fell for two decades but has stagnated at high levels ever since…For Malaysia to remain competitive, it became clear that it needs to compete on value, not cost, and this requires a refocusing on getting the incentives right for innovation, creativity and entrepreneurship.

World Bank President Calling For A New Gold Standard? Say It Ain’t So!

Oh, to be a fly on the wall in the World Bank’s press office:

Call to bring back gold standard

World Bank says it can serve as an anchor to guide global currency movements

SINGAPORE: World Bank president Robert Zoellick has called on bickering G-20 nations to bring gold back into the global monetary system as an anchor to guide currency movements.

Ahead of a G-20 summit this week in Seoul, Zoellick wrote in yesterday’s Financial Times that an updated gold standard could contribute to retooling the world economy at a time of tensions over currencies and US monetary policy.

Monday, November 8, 2010

QE2: Confusion And Chaos Reigns

I’m struck by the extent of the divisiveness of opinions that the Fed’s announcement last week about a further US$600 billion in asset purchases has raised. And then there’s the fact that the FOMC’s vote on the matter was not unanimous.

But to illustrate the chasm between opinions on the Fed’s “quantitative easing” (aka printing money) program, have a look at these two articles in Bloomberg:

Bernanke Can’t Use ‘Poison as the Cure,’ Burry Says

Nov. 5 (Bloomberg) -- Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said Federal Reserve Chairman Ben S. Bernanke is trying to use “poison as the cure” by pumping more cash into the economy to spur growth.

Bernanke’s Fed pledged this week to use $600 billion in additional Treasury purchases to help lower a 9.6 percent unemployment rate, close to a 26-year high, and to avert deflation.

The attempt to bolster growth is reminiscent of Alan Greenspan’s actions to revive the economy after 2001, Burry said in a telephone interview from Cupertino, California. The former Fed chairman helped create an unsustainable boom in U.S. property prices with his policies, leading to the worst global financial crisis since the Great Depression, he said.

Boosting the economy “was the point of inflating the housing bubble,” Burry said yesterday. “It was the intent that the house would become the ATM machine, and help us through those rough times, post-dot-com, -Enron, -WorldCom, -Iraq and - 9/11. That’s why I say they’re using the poison as the cure.” …

Sunday, November 7, 2010

Currency Wars Part VII: Jim Rogers Gets It Wrong Again

Well-known economist, academician, theorist, investor and author Jim Rogers says Ben Bernanke doesn’t know what he’s doing:

Bernanke ‘Doesn’t Understand’ Economics, Rogers Says

Nov. 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke’s decision to pump a further $600 billion into the economy shows his grasp of economics is weak, said investor Jim Rogers, chairman of Rogers Holdings.

“Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers, 68, said in a lecture at Oxford University’s Balliol College yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

Friday, November 5, 2010

October 2010 International Reserves

The latest reserves position shows a RM2 billion increase over the last two weeks, indicating the pace of intervention has slowed compared to the first half of October:


As you can see from the MYR-USD exchange rate, there’s no obvious correlation between changes in reserves and the USD exchange rate after the capital flight episode in late 2008:


Bottom-line: BNM has a soft line in the sand at about 3.08 which says “do not cross…for now”. I’d expect that line to be crossed by the end of the year.

Happy Hari Deepavali

To all my Hindu readers, Happy Deepavali!

Please remember to drive safely if you’re travelling.

Thursday, November 4, 2010

Thank You

When I first started this blog a year and a half ago, I never expected much to come out of it. My goal was just to have a forum for airing my views and a way to formalise and discipline my thoughts on the economy. I never expected to get the readership that I have now, or to be involved as I am in the online Malaysian community.

Just a few minutes ago, reports that since 1 April 2009, Economics Malaysia has hit the 100,000 page views milestone. That’s a heck of a lot of traffic for a specialist blog like this.

So for all my visitors and followers, thank you. I hope you’ve derived some benefit from my doodlings – I’ve certainly enjoyed the process.

I’m especially grateful for those who have put my blog on their blogroll, particularly Rocky, Dato’ Sak, Dali, de Minimis, etheorist and SatD. Couldn’t have done it without you.

And to my wife, thanks for the encouragement and for not complaining too much about the time I spend on line. Love you, babe.

September 2010 External Trade

It’s hard to find anything positive to say about yesterday’s release of September trade numbers. There’s no longer the excuse of a short working month due to Ramadhan (log annual and monthly changes):


BNM Announces 70% LTV For 3rd Mortgages

I’ve been travelling this morning, so posts will be running late today.

As rumoured last week, BNM has announced curbs on property lending, but only for people carrying more than two mortgages:

Measures in Promoting a Stable and Sustainable Property Market and Sound Financial and Debt Management of Households

Bank Negara Malaysia wishes to announce with immediate effect the implementation of a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the third house financing facility taken out by a borrower. Financing facilities for purchase of the first and second homes are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LTV level applied by individual banks based on their internal credit policies…

Wednesday, November 3, 2010

Warisan Merdeka, KLFID, And The Demand For Office Space In Kuala Lumpur

Although announced as part of the government’s 2011 budget proposals, neither the RM5 billion Warisan Merdeka (to be developed by Permodalan Nasional Berhad) nor the RM26 billion Kuala Lumpur International Financial District (to be jointly developed by 1Malaysia Development Berhad and Abu Dhabi’s Mubadala Group) are strictly speaking government projects, although the latter skirts a very fine line on that issue.

There’s a lot of opposition to both projects, but funnily enough, it’s Warisan Merdeka that has attracted the most vitriol despite being less in scope and risk, and despite PNB not being directly owned by the government. I guess its the inclusion of a 100 story office tower that has raised people’s hackles, and the prospect of a 5-10 year development in one of the worst traffic areas of the city.

But the real issue here is the viability and feasibility of both projects – will there be enough demand to absorb the inclusion of so much additional office and commercial space?

Tuesday, November 2, 2010

There He Goes Again…

Tun Dr Mahathir on free markets, regulation and gold:

Dr M: Banking, finance need to be regulated

…Former prime minister Tun Dr Mahathir Mohamad said governments must continue to oversee the regulation of banks and financial institutions.

“Unless the Government oversees and limits the ability for the market to abuse (the banking systems) then, of course, we are going to have this kind of (global economic) crisis…

…“This idea of a free market has become almost like a religion. You cannot question it, even when it fails,” he said…

…“And the abuses became rampant because of the idea that governments must not interfere with the financial market. (That) the market it seems would regulate itself,” he explained.

He urged for the gold dinar to be institutionalised as the standard against which all currencies were measured for the sake of stability.

“It’s something tangible and something that has value anywhere in the world,” he said.

However, he said the gold dinar system, if implemented, should only be used for settlements of international trade…

…“The US dollar has got no value whatsoever. It’s got no backing, no reserve. But we accept it as if it has some value and because we accept it, it has value,” he said.

RON97 Petrol Up 5 sen From Today

Unlike the subsidised price of RON95 petrol, RON97 is apparently priced according to a “automatic pricing mechanism”:

RON 97 price up 5 sen and reflects global petrol market price

KUALA LUMPUR: The price of RON 97 is up 5 sen to RM2.15 per litre from Tuesday and reflects the price of petrol in the global market, said Deputy Domestic Trade, Co-operative and Consumerim Minister Datuk Rohani Abdul Karim.

The price of the more widely used RON 95 remains at RM1.85 per litre.

"It was announced on July 16 that the price of Ron 97 will be subjected to a managed float,'' she said this in her reply to Dr Dzulkefly Ahmad (PAS - Kuala Selangor) during Question Time.

A market oriented mechanism is superior to price controls. But even this isn’t sufficient to offset the negative externalities (pollution, congestion, etc) arising from the use of fossil fuels.

Please, tax the stuff.

Sept 2010 Monetary Conditions Update

Monetary conditions were more or less stable over the past few months, but with narrow money falling as BNM took in old notes and coins in the aftermath of Ramadhan (log annual and monthly changes; seasonally adjusted):


Monday, November 1, 2010

Wealth, Income and Education

I’m swamped with work today, so this will be a filler post to tide you guys over until I can get into meatier things.

I’ve been advocating more attention be paid to the early years of education, rather than focusing primarily on tertiary education, as I believe its a more effective way to create a more productive Malaysian workforce.

Here’s some supporting evidence (abstract):

How Does Your Kindergarten Classroom Affect Your Earnings? Evidence From Project STAR
Raj Chetty, John N. Friedman, Nathaniel Hilger, Emmanuel Saez, Diane Whitmore Schanzenbach, Danny Yagan