Thursday, December 26, 2013

Debt, Deficits, and Government Assets

I’ve been asked by a number of people to comment on this (excerpt):

Laporan Bank Dunia: Kerajaan BN Jual Aset Negara Untuk Capai Sasaran Defisit

Pentadbiran Dato’ Seri Najib Tun Razak terus mengumumkan angka-angka untuk meyakinkan orang ramai dan institusi kewangan bahawa beliau serius untuk mengekang tahap keberhutangan negara. Sasaran yang diletakkan ialah untuk menurunkan defisit ke paras 4% dari jumlah Keluaran Dalam Negara Kasar (KDNK)…

…Lebih memeranjatkan, Dato’ Seri Najib Tun Razak dilaporkan akan mengambil jalan menjual aset negara dan menerbitkan lebih banyak sekuriti hutang dari aset-aset negara semata-mata untuk menutup kegagalan pentadbiran ekonomi beliau mencapai sasaran defisit yang beliau sendiri tetapkan.

Tuesday, December 24, 2013

Monday, December 23, 2013

Containing Housing Price Appreciation: Assessing The Options

There’s a growing body of work examining the effect of macroprudential policies on asset prices. This one offers a fairly comprehensive assessment (abstract):

Can Non-Interest Rate Policies Stabilize Housing Markets? Evidence from a Panel of 57 Economies
Kenneth N. Kuttner, Ilhyock Shim

Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilizing house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy tool with a discernible impact on house price appreciation.

Friday, December 20, 2013

November 2013 Consumer Prices

Consumer prices in November (released last Wednesday) has continued to accelerate (log annual and monthly changes; 2000=100):


Friday, December 13, 2013

October 2013 Industrial Production

Industrial output appears to be moderating a little (log annual and monthly changes; seasonally adjusted):



Wednesday, December 11, 2013

The Minimum Wage In South Africa

From a recent post on the World Bank’s Future Development Blog (excerpt):

A Tale of Two Impacts: Minimum Wage Outcomes in South Africa
Haroon Bhorat

…The evidence for South Africa, some twenty years after the demise of apartheid, is equally compelling. In a two-part study, my co-authors and I find an intriguing set of contrasting economic outcomes, from the imposition of a series of sectoral minimum wage laws….Currently, the economy has in place 11 such sectoral minimum wage laws in sectors ranging from Agriculture and Domestic Work, to Retail and Private Security….

Tuesday, December 10, 2013

Skewed Incentives In Academic Research

I think this will sound troublingly familiar to most Malaysian academics, and not just within the economics community (excerpt; emphasis added):

Our uneconomic methods of measuring economic research
Stan Liebowitz

Academic economists – especially in the US – are continuously evaluated, with salaries and promotions hanging on outcomes. This column argues that the methods – identified from a survey of economics department chairs – are likely to reduce the amount of research created, perpetuate inefficiently sized research teams, promote false authorship, and penalise honest researchers. They also provide departments with excessive leeway to engage in potentially capricious behaviour.

Trade And IP Protection

From the East Asia Forum (excerpt):

Trade held hostage to IP — it’s anti-development
Philippa Dee, ANU

Now that the intellectual property chapter of the Trans-Pacific Partnership has been leaked, our worst fears are confirmed — IP in TPP is OTT.

This would be bad enough on its own. What is less well recognised is that the trade liberalisation agenda is being held hostage to the IP agenda, and the result is inimical to development.

Monday, December 9, 2013

Minimum Wage Portal

The Ministry of Human Resources has launched a portal for the Malaysia’s Minimum Wage, providing FAQs and info for employers and employees. You can access it here.

Friday, December 6, 2013

October 2013 External Trade

Recovery on the trade front seems firmly entrenched, based on the latest numbers (log annual and monthly changes; seasonally adjusted):


3Q2013 Government Debt Update

As outlined in the previous post, debt growth has slowed this year (log annual and quarterly changes):


3Q2013 Government Finance

The latest data on government finance is now available (RM millions):


Wednesday, December 4, 2013

GLCs And The Public-Private Nexus

I got a call from a reporter the other day asking about this, so I’m going to set my thoughts down on paper (figuratively speaking, of course).

There’s this idea that government and government linked companies (GLCs) dominate Malaysia’s corporate landscape – Maybank, CIMB, Sime Darby, Tenaga, Telekom, and the like. These companies are either virtual monopolies, or dominate their respective industries, possibly crowding out competition and investment.

Friday, November 29, 2013

Minimum Wage: Preliminary Impact Assessment (Warning: another long and wonkish post)

It’s been nearly a year since Malaysia’s minimum wage law came into effect. Although enforcement has been held off until next year from the loads of companies applying for a postponement, most have already complied.

So here’s my crack at trying to figure out what the minimum wage’s impact on Malaysian employment, unemployment and incomes. Most of this material is taken from a presentation I gave at UTAR earlier this week.

Tapering And What To Do About It

As always in such matters, the answer is: it depends (excerpt; emphasis added):

Should Policy Makers in Emerging Markets be Concerned about “Tapering”?

The US and European economies are showing some signs of recovery from the global financial crisis that began in 2008. As a result, the US Federal Reserve Bank is considering phasing out, or “tapering”, the extraordinary monetary policy measures through which it responded to the crisis…The World Bank's East Asia and Pacific regional update estimated that in East Asia alone $24 billion was withdrawn from equities and $35.2 billion from bonds...Financial markets largely recovered once the Fed decided to postpone tapering in September, but there is still nervousness….

Monday, November 25, 2013

October 2013 Consumer Prices

October consumer prices accelerated slightly in October (log annual and monthly changes; 2000=100):


The Basics Of Forecasting

I did a series of posts along these lines ages ago, but as an overall summary, the following post from David Giles covers much the same ground and then some (excerpt):

Forecasting from a Regression Model

There are several reasons why we estimate regression models, one of them being to generate forecasts of the dependent variable. I'm certainly not saying that this is the most important or the most interesting use of such models. Personally, I don't think this is the case.

So, why is this post about forecasting? Well, a few comments and questions that I've had from readers of this blog suggest to me that not all students of econometrics are completely clear about certain issues when it comes to using regression models for forecasting.

Let's see if we can clarify some terms that are used in this context, and in the process clear up any misunderstandings…

There are a couple of concepts in this post that I never got around to covering (cointegration and order of integration), and I prefer as a rule to use lags anyway, but this is a pretty good primer on the mechanics of forecasting.

Friday, November 22, 2013

The Wisdom Of The Crowds

My friend Lars tried an experiment last week:

The Crowd: “Lars, you are fat!”

On Friday I was doing a presentation on the global economy (yes, yes mainly on global monetary policy) for 40-50 colleagues who are working as investment advisors in the Danske Bank group.

As I was about to start my presentation somebody said “The audience have been kind of quiet today”. I thought that was a challenge so I immediately so I jumped on top of a table. That woke up the crowd.

I asked the audience to guess my weight. They all wrote their guesses on a piece of paper. All the guesses were collected and an average guess – the “consensus forecast” – was calculated, while I continued my presentation…

I’ve done something of the same sort in some of the classes I used to run. It’s a great way to get audience participation, and to illustrate abstract economic concepts in real world settings. But Lars’ attempt was a lot funnier than mine. While I won’t hold this as proof positive that the efficient market hypothesis is valid under all circumstances, there is more than a grain of truth in it.

3Q2013 National Accounts

Well, it’s a week late, but better late than never.

GDP growth in 3Q2013 rose 5% on the year (log annual changes; 2005=100):


Thursday, November 21, 2013

September 2013 Employment

There’s been a dearth of posts on this blog for the past couple of weeks, mainly for two reasons: first, I had some deadlines to meet last week, and second, I took my year end holiday a little early – four days exploring the Forbidden City and climbing the Great Wall of China, among other things. No email, no twitter, no calls from the office…bliss.

Now its back to covering the Malaysian economy, though things will be a little slow as I catch up on data releases, news developments and the backlog of messages and posted comments. My view of 3Q2013 GDP should be out tomorrow (it was released last Friday), but first up is something a little easier to look at.

Monday, November 11, 2013

September 2013 Industrial Production

The September numbers aren’t nearly as pretty as the improvement in external trade (log annual and monthly changes; seasonally adjusted; 2000=100):


Friday, November 8, 2013

September 2013 External Trade

The momentum established from August has so far been kept up, which I hadn’t expected. There’s usually a lull after major holidays, so count this one as another pleasant surprise (log annual and monthly changes; seasonally adjusted):


Beating out August’s sharply higher numbers was never on the cards, so a pullback in growth was more or less what I thought might happen. But 4.7% in log terms was more than I hoped for.

Breaking it down:


Electrical and electronics shipments continued to grow, while there was a slight fall back in other exports, largely due to weaker refined petroleum products and metal manufactures. Crude oil jumped by nearly RM1 billion though.

Imports stayed – in my eyes anyway – more or less flat (RM millions):


October’s usually the boom month, where shipments go up to cater for the year end holidays in advanced economies, so if we’re seeing a true recovery in global trade, I’d expect to see even better growth for October.

Technical Notes:

September 2013 External Trade report from MATRADE

BNM Watch: No Change

The outcome of yesterday’s Monetary Policy Committee was as predictable as the day – which is of course, a good thing. If things were actually interesting, something bad would have been happening (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global economy continues to improve at a moderate pace…Looking ahead, there remain considerable risks that could affect the pace of the global recovery.

In the Malaysian economy, the expansion in domestic activity was supported by improvements in exports…Going forward, the growth momentum will benefit from the expected improvement in the external sector amid some moderation in domestic demand. Domestic investment activity will however continue, led by private sector capital spending and the ongoing implementation of infrastructure projects. Domestic demand is expected to moderate, reflecting the public sector consolidation and some moderation in private consumption. Uncertainties in the global environment may also affect the overall growth momentum.

Thursday, November 7, 2013

Inomics Economics Job Market Report 2013

For those who are interested in the rather refined job market for economists, this is a must read. From the email that announced the report:

New Report shows Job Market Trends for Economics & Finance Professionals

European Economists earn 30% less than Americans, worldwide even greater discrepancies.

INOMICS, an economics and finance recruitment network, on Wednesday, November 6, 2013 releases a worldwide overview of the economics job market. The Report is based on a survey between April and June 2013, in which 2,380 professionals and recruiters in the academic job market for economists answered questions about salaries, international professional mobility, the value of different levels of academic degree, and other issues related to economics and finance careers.

Monday, November 4, 2013

Investment Abroad Isn’t A Negative

It turns out direct investment abroad isn’t exactly a zero sum game (excerpt):

Do multinationals that expand abroad invest less at home?
Theodore H. Moran, Lindsay Oldenski, 31 October 2013

There is a long history of politicians accusing US MNCs of “shipping jobs overseas” when they invest outside the US…This line of attack implicitly assumes that expansion abroad by US firms substitutes for domestic expansion, harming US workers. It is equally possible that foreign expansion increases the productivity and market share of firms in a way that benefits US workers….

What Explains House Price Booms

Keeping to the theme from last week, there’s a new paper on house price booms in the latest NBER working paper roundup (abstract):

What Explains House Price Booms?: History and Empirical Evidence
Michael D. Bordo, John Landon-Lane

In this paper we investigate the relationship between loose monetary policy, low inflation, and easy bank credit with house price booms. Using a panel of 11 OECD countries from 1920 to 2011 we estimate a panel VAR in order to identify shocks that can be interpreted as loose monetary policy shocks, low inflation shocks, bank credit shocks and house price shocks. We show that loose monetary policy played an important role in housing booms along with the other shocks. We show that during boom periods there is a heightened impact of all three “policy” shocks with the bank credit shock playing an important role. However, when we look at individual house price boom episodes the cause of the price boom is not so clear. The evidence suggests that the house price boom that occurred in the US during the 1990s and 2000s was not due to easy bank credit. Loose monetary policy (as well as low inflation) played some role but the residual which may be picking up other factors such as financial innovation and the shadow banking system is the most important shock. This result is robust to many alternative specifications.

Friday, November 1, 2013

The Trouble With Bubbles (Warning: Wonkish Post)

How can you tell you’re in an asset bubble? How can anyone not look at this graph and say that we’re not (index numbers; 2000=100):


But I couldn’t and still can’t, at least not by any objective measure. Here’s a look at why.

Wednesday, October 30, 2013

Teaching Economics: More Diversity Please

Students at Manchester University want more than dogma (excerpt):

Economics students aim to tear up free-market syllabus
Undergraduates at Manchester University propose overhaul of orthodox teachings to embrace alternative theories

Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins.

Why RPGT Won’t Make Much Difference

One of the measures taken in Budget 2014 is a hike in RPGT, effective January 1, 2014:

Disposal Current Companies Individuals Non_citizens
Within 2 years 15%      
Within 3 years 10% 30% 30% 30%
in the 4th year 10% 20% 20% 30%
in the 5th year 10% 15% 15% 30%
in the 6th and subsequent years 0% 5% 0% 5%

The idea is to limit speculative activity by imposing an additional charge on profits made on disposal of property assets.

Tuesday, October 29, 2013

Budget 2014: Highlights and Lowlights

Well, its in the books now – metaphorically speaking that is, because it technically still has to pass Parliament.

First a look at the headline figures:

  1. Growth is expected to be between 4.5%-5.0% this year, and 5.0%-5.5% next year.
  2. Government operating expenditure is slated to increase 0.7% to RM217.6b, while development expenditure is expected to rise/fall to RM46.5b/RM44.5b depending on whether you believe the speech or the 2013-2014 Economic Report.
  3. Government revenue is forecast to increase 1.7% to RM224.1b

Monday, October 28, 2013

September 2013 Consumer Prices

I’m going to be late with my 2014 Budget assessment because of work deadlines on other things. Even this post will be a bare bones look at September’s increase on consumer prices, as interesting as it is (log annual and monthly changes; 2000=100):


Friday, October 25, 2013

Live Blogging Budget 2014 [UPDATED]

As usual, I’m going to try live-blogging the budget announcement, commenting on things as and when they are announced. The PM is scheduled to start his speech at 4.00pm, so I’ll begin around then.

[Refresh the page for updates]

  1. PM is in the House, and we’re off in a few minutes
  2. Wasting time til markets close, as usual
  3. I don’t think the KLCI hitting an all time high really proves anything
  4. Forecast 2014 GNI per capita RM34k
  5. Forecast 2020 GNI per capita to beat USD15k target (told ya so)
  6. RM217.6 billion for opex, RM44.5 billion for development – pretty flat over 2013
  7. Budget deficit forecast for next year at 3.5%, right on track
  8. GDP forecast for 2014 is 5%-5.5% – not ambitious
  9. Talking about rail and oil & gas investment – looks like no postponement of RAPID
  10. Logistics masterplan – given our trade openness, this probably should have been done much earlier. Still we’re 29th in the world
  11. Tourist development fund offering subsidised interest rates
  12. RM1.8b for high speed broadband
  13. 10% matching government contribution for voluntary EPF contributions – good move
  14. Private retirement scheme – RM500 one-off incentive for those between 20-30
  15. 12 minutes to market close, and the bigger news items
  16. RM2.4 billion in subsidy and incentive for padi beras and fisheries
  17. Further incentives for agriculture R&D through Biotech Corp
  18. New plan for entrepreneur development to be developed by new dept under MoF
  19. Malaysian Global and Innovation Centre (MAGIC) to boost R&D and innovation (one-step centre) with seed capital of RM50 million
  20. Dunno about that – why would this be more effective than what we’ve done before?
  21. RM120 million for SME development
  22. Here it comes
  23. Committee to investigate government waste identified in the A-G report
  24. Government to switch to outcome based budgeting (I think this has been part of the GTP targets)
  25. MoF, MITI and Health Ministries to be pioneers
  26. No need to file tax return if salary deductions are enough to cover tax liability
  27. Subsidies to be restructured and better targeted
  28. Comprehensive database covering welfare
  29. SST to be abolished (haha)
  30. GST is here!!!!!
  31. Low inflation is the best time for implementation (that makes sense)
  32. GST to be effective April 1 2015
  33. GST rate at 6%
  34. Public goods and services exempted
  35. So is property
  36. One-off RM300 for BR1M recipeints
  37. 1%-3% income tax cut; RM4k households will no longer pay income tax
  38. Income tax bands to be adjusted. Maximum tax rate only applies for incomes over RM400k, instead of RM100k  as now (effective 2015)
  39. For companies; 1% cut in corporate tax (effective 2016)
  40. Income tax for cooperatives also cut
  41. ICT accelerated allowance from 2015
  42. GST related investment, GST related training and others to be given tax relief
  43. Enforcement of profiteering act to be raised
  44. Markets are going to be REALLY happy
  45. After all that, everything else is going to be a bit of an anticlimax
  46. Details of GST will be available eventually through Customs – bookmark this link
  47. Flexible work arrangement to be introduced for women
  48. RM100 school assistance program to be continued
  49. Book vouchers also to continue (RM250)
  50. Lots of investment to ensure LRT, MRT, and Komuter are easier to use
  51. RM4.1b for rural development
  52. Nothing much on housing so far
  53. Lots of smaller allocations now – health, crime, flood mitigation etc
  54. 2.6 million Malaysians above age of 30 have diabetes – sugar subsidy to be cut. Yes!!!
  55. I still think we should tax sugar…and petrol.
  56. RM2.2 billion for women’s development
  57. This is the last time I try following TV, Twitter, and Whatsapp while blogging!
  58. RM441 million for the assisting the disabled
  59. Indian community to be assisted with RM100 million for education, mainly for pre-school; RM50 million for Indian entrepreneurs (Not nearly enough I think)
  60. Now for housing
  61. RPGT to be reviewed. RPGT raised to 30% for 1-3 years, 20% for 4 years, 15% for 5 years
  62. Floor for foreigners raised from RM500k to RM1 million
  63. DIBS is banned!!
  64. 200k new affordable houses to be built in 2014
  65. Incentives for private sector developers to build affordable houses (RM30k per house)
  66. Standards being given for low cost and medium cost houses
  67. Lots of other smaller measures for housing
  68. For middle income taxpayers – tax savings up to RM480
  69. Wrapping up now…finally
  70. One thing more…for the civil service, salary scales to be adjusted?
  71. And one more thing…BR1M goes to 3.0, increased from RM500 to RM650
  72. For single person households, RM250 to RM300
  73. BR1M insurance scheme to be extended to all households members who qualify (worth RM50-100)
  74. RM3000-4000, BR1M will be given RM450, plus RM50 insurance coverage
  75. Allocation of RM4.4 billion for BR1M 3.0 all told
  76. Pensioners to receive RM250
  77. Civil servants to receive half month bonus, with minimum of RM500
  78. All over bar the shouting now

And that’s a wrap. I’ll be looking more closely at the aggregate figures later tonight, hopefully with something coherent to say about it.

Thursday, October 24, 2013

How To Spin With Statistics: Compare And Contrast

From Jesse Colombo to the Dallas Fed (excerpt):

Asia Recalls 1997 Crisis as Investors Await Fed Tapering

The 2007–09 global financial crisis triggered unprecedented central bank policy intervention in the U.S. and elsewhere. The Federal Reserve, after cutting short-term interest rates to near zero, embarked upon three rounds of unconventional monetary policy known as quantitative easing, or QE. These measures involve the purchase of long-term securities and aim to stimulate the economy by lowering long-term borrowing costs…

2014 Alternative Budget

It’s now out, you can download it here.

Quick impressions:

  1. It’s taken them a while, but this is a much better produced document, with considerably less annoying political rhetoric. I confess, last year’s alternative budget document read so much like the Communist Manifesto that it took a bit of effort to be objective about it.
  2. The numbers are much more realistic – the revenue forecast for instance properly takes into account economic growth, and expenditure savings look reasonable given the proposed savings measures. Not that I necessarily agree with the cuts, but the estimates are reasonable. There’s unfortunately no breakdown of expenditure, but that means less chances of needlessly tripping up over messy details (yes, I’m the charitable type). I can’t imagine civil servants would be terribly happy though, especially over the proposed caps on household debt.
  3. Most of the measures also look pretty reasonable (e.g. a graduated increase in the minimum wage, no more demands for a big jump immediately), though implementation and especially effectiveness will always be an issue. To be fair, that would be true for the government as well.

Shiller On Debt

Newly minted Nobel Laureate Robert Shiller is on Project Syndicate talking about the debt to GDP ratio (excerpt):

Debt and Delusion

NEW HAVEN – Economists like to talk about thresholds that, if crossed, spell trouble. Usually there is an element of truth in what they say. But the public often overreacts to such talk.

Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States…Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?

Big Macs, Price Differentials, and Single Currency Areas

I fortuitously came across this while looking at something else:

What does the Big Mac say about Euro Area adjustment?

The Big Mac Index offers some quick insights into the state of currencies around the globe by comparing the price of Big Macs across countries. Of course, the Big Mac index was never intended as a precise gauge of currency misalignment, as the Economist has just reminded us in its latest update. According to them, it is just about making PPP and other difficult exchange rate concepts more digestible.

Well, in the euro area, we have the euro to be able to simply compare prices across the euro area. So how have Burger prices moved recently? Are prices in the euro area adjusting? Should we be pessimists or optimists on the adjustment challenge in the euro area? Since July 2011, the Economist has also been collecting the individual prices of Big Macs in major euro area countries...

Wednesday, October 23, 2013


Quoting David Beckworth quoting Barry Ritholtz (excerpt):

Why Counterfactual Thinking Is Important

I recently made the case that many observers are not thinking properly about the Fed's Quantitative Easing (QE) programs. Using the analogy of George Bailey's life in the film It's a Wonderful Life, I argued that the critics who question the efficacy of the QE programs are doing the wrong counterfactual. Today, Barry Ritholtz makes the same point:

August 2013 Employment

Employment in August rose by 173k (‘000):


Some of the increase was due to a lot more people looking for work and finding it (log annual changes):


Monday, October 21, 2013

An FTA Is Always Good For Trade

Hafiz Noor Shams on FTAs, external trade, and the TPPA (excerpt):

[2713] Is Bantah TPPA right about FTA causing trade balance to deteriorate?

One claim made by Bantah belong to the latter categories is that free trade agreements will hurt a country’s trade balance. This is based on their assumption that free traders claim that FTA will increase trade balance.

But, “free trade” itself says nothing about trade balance. “Free trade” has an agnostic a priori assumption on trade balance. In fact, if one trades, somebody has to have a surplus and somebody has to have deficit at any particular point of time. To say free trade/FTA increases trade balance ignores the fact there are at least two sides trading. “Free trade” does not make that argument that Bantah opposes. Bantah is opposing a straw man here.

The traditional argument is that free trade increases total trade (not trade balance). That means the sum of exports and imports for a country increases (not the net of the two, which is net exports). Bantah misunderstands this.

My thots? What he said…

I have no qualms over TPPA with respect to trade. The whole issue in my mind revolves around the non-trade provisions. Even for many of those, I can find economic or cost-benefit justifications that make sense for all parties.

Some however, are indefensible, and those are the real stumbling blocks.  But trade isn’t one of them.

Thursday, October 17, 2013

How To Spin With Statistics

Here’s a model article for all budding analysts and pundits out there (excerpt):

Malaise Is Ahead For Malaysia's Bubble Economy

I recently wrote about how Indonesia’s economy has devolved into a classic credit and asset bubble-driven growth story, and its neighbor Malaysia is on the same path along with most other Southeast Asian economies, which are part of the overall emerging markets bubble that I have been warning about in the last couple of years.

Forex Fallacy

[This post is loooong. For those without patience, you can skip to the end without missing too much]

Tong Kooi Ong talks forex policy and promptly makes a meal of it:

How the middle class is subsidizing the Corporate Elites and why it has to stop

There is a feeling that Malaysia’s middle class are generally not a happy lot. Many moan about the rising cost of living, education and healthcare, their relatively low wages and rising debt as they borrow more to buy homes and cars…

…A major problem lies in the weak ringgit, which results in different purchasing power for the two “middle classes”…

Friday, October 11, 2013

August 2013 Industrial Production

Too good to last? The IPI has come back down to earth (log annual and monthly changes; seasonally adjusted):



Thursday, October 10, 2013

Emigration And Affirmative Action [UPDATED]

Everyone knows that reporting in the mainstream media is biased. Unfortunately, they’re not the only ones (excerpt):

Malaysia’s got talent, but they’re being driven away, mostly to Singapore – world economic report

The huge presence of foreign workers in Malaysia has led to static wages, according to the WEF report.

Affirmative action policies and an overreliance on cheap foreign labour have led to Malaysia's best and brightest leaving to find greener pastures, particularly in Singapore, according to a new report released by the World Economic Forum.

Wednesday, October 9, 2013

Capital Gains Tax As An Alternative To GST

I’d really like to see a capital gains tax (CGT) in Malaysia. But as much as I support such a tax, CGT is simply not a good alternative for GST.

Here’s why (USD millions):


Tuesday, October 8, 2013

My Dreams Have Come True

Financial literacy is finally making it into the official school curriculum (excerpt):

Financial education to be introduced in school soon

KUALA LUMPUR: Financial education will be incorporated into the school curriculum in stages from next year.

Bank Negara assistant governor Abu Hassan Alshari Yahaya said the central bank, in a collaboration with the Education Ministry, would introduce it to Year 3 students next year and secondary school students from 2017.

“Part of the financial education elements have been introduced this year in Bahasa Malaysia and Maths subjects, ahead of the targeted date,” he said during the launch of the Financial Literacy Month yesterday.

Abu Hassan said financial education needed to be inculcated continuously from a young age to adulthood to help instill discipline and increase their financial management skills.

He said the curriculum would cover money management, planning, savings and investments, credit and debt management and insurance.

Abu Hassan said that parents should not rely only on the school curriculum for their children to be prudent with their finances as they should share the responsibility...

I have hardly anything to add to what he said, save to note that adult financial literacy skills are on average pretty abysmal the world over. I don’t know of any other country that has made this move (sound off in the comments if you know any), so Malaysia might actually be one of the first.

Family Planning And High Income Households

When it comes to investing in children, quality and quantity matter (abstract):

Fifty Years of Family Planning: New Evidence on the Long-Run Effects of Increasing Access to Contraception
Martha J. Bailey

This paper assembles new evidence on some of the longer-term consequences of U.S. family planning policies, defined in this paper as those increasing legal or financial access to modern contraceptives. The analysis leverages two large policy changes that occurred during the 1960s and 1970s: first, the interaction of the birth control pill’s introduction with Comstock-era restrictions on the sale of contraceptives and the repeal of these laws after Griswold v. Connecticut in 1965; and second, the expansion of federal funding for local family planning programs from 1964 to 1973. Building on previous research that demonstrates both policies’ effects on fertility rates, I find suggestive evidence that individuals’ access to contraceptives increased their children’s college completion, labor force participation, wages, and family incomes decades later.

One of the lesser known characteristics of the Asian Tiger economies is that they generally started supporting family planning policies in the 1970s. Malaysia by contrast went the other way – after complete neglect of the link between family size and economic welfare until the 1980s, we ended up implementing a policy to increase the population to 70 million.

Monday, October 7, 2013

The Network Costs Of Affordable Housing

A friend told me a story the other day, about how his son when first starting out in working life lived in a shoebox apartment and his kids had to study under park lamps, because the apartment complex was too noisy from all the neighbours watching TV.

Just because you can afford to own a home, doesn’t make it a suitable place for bringing up children…or for addressing urban poverty or multi-generational inequality (excerpt):

Housing versus Habitat

...Consider low-income housing. Most developing countries, and many rich ones, define their housing deficit according to the number of families living in units deemed socially unacceptable…

Friday, October 4, 2013

August 2013 External Trade

Well, well, well…(log annual and monthly changes; seasonally adjusted):


For what’s seems like the first time in the longest time, the external trade picture looks bullish. Exports climbed 11.7% in log terms for August, while imports 13.6%. Just as significantly, monthly growth stayed positive as well.

Thursday, October 3, 2013

A Tale Of Three Rs [UPDATED]

[I’ve changed the notation to make sure there’s no confusion between the expectations operator and the exchange rate. Reminder to self: Stop making tyro mistakes. Thanks to Prof Wong for pointing this out]

I must admit I was wrong about this. I thought that of the three Rs – Ringgit, Rupiah, & Rupee – the Ringgit was fairly safe. It turns out that this isn’t precisely the case. But I’m getting ahead of myself.

One of the issues coming from the potential tapering of the Federal Reserve’s QE3 program is the outflow of capital from emerging markets, helped by concerns over growth and economic fundamentals. Markets that are seen as vulnerable, i.e. featuring budget and current account deficits, would suffer the most. In addition, countries with high foreign liabilities such as ownership in corporate securities like stocks and bonds, are also seen as potential candidates for a damaging “sudden-stop” outflow episode, a’la the 1997-98 Asian Financial Crisis.

Wednesday, October 2, 2013

Public Waste And Public Choice

These are cover your eyes awful:

  1. RM2 billion in dubious security services
  2. RM3,800 wall clocks
  3. RM600,000 in unused footwear
  4. RM550,000 in unverifiable claims
  5. Lost cars!
  6. RM8 million in double subsidies
  7. RM16 million in uncollected performance bonds

Not much can paper over the amount of waste that goes on in government. The only one that I can understand is item 2, which was part of a lowest bid contract awarded by open tender. That’s fairly typical of tenders conducted even in the private sector – contractors hide their profit margins any way they can. But the rest look more like cases of inefficiency, incompetence and outright corruption.

Making Money

I love this – the modern history of money in 315 words:

“…On a desert island gold is worthless. Food gets you through times of no gold much better than gold gets you through times of no food. If it comes to that, gold is worthless in a goldmine, too. The medium of exchange in a gold mine is the pickax.

Hmm. Moist stared at the bill. What does it need to make it worth ten thousand dollars? The seal and signature of Cosmo, that’s what. Everyone knows he’s good for it. Good for nothing but money, the bastard.

Friday, September 27, 2013

Malaysia The Most Corrupt Nation?

Actually, that’s not what EY said. I wonder if the person writing the following actually read the report (excerpt):

Malaysia one of the most corrupt nations, survey shows

Malaysia has been ranked as one of the most corrupt nations and listed as a country which is most likely to take shortcuts to meet targets when economic times are tough, according to a recent survey by Ernst & Young, signalling that the government's Performance Management and Delivery Unit (Pemandu) has failed in its role to transform the economy.

Malaysia, along with China, has the highest levels of bribery and corruption anywhere in the world, according to the latest report, Asia-Pacific Fraud Survey Report Series 2013.

Wednesday, September 25, 2013

Competition And Private Sector Waste

A fascinating blog post from Antonio Fatas, and having worked in the private sector for many years, one I fully agree with (excerpt):

Does competition get rid of waste in the private sector?

It is very common to hear comments about the waste of resources when referring to governments and the public sector…In fact, we all have our list of anecdotes on how governments waste resources, build bridges to nowhere and how politicians are driven by their own interest, their ambitions or even worse pure corruption. If only we could bring the private sector to manage these services!

Tuesday, September 24, 2013

July 2013 Employment

The July employment numbers depict a healthy economy, quite at odds with the growth numbers (‘000):


Friday, September 20, 2013

August 2013 Consumer Prices

Consumer price inflation for August was released a couple of days ago (log annual and monthly changes):


Thursday, September 19, 2013

Who’s Doing The Saving?

This recent paper from the World Bank confirms something I’ve suspected and been concerned about for a long time (abstract):

What are the causes of the growing trend of excess savings of the corporate sector in developed countries ? an empirical analysis of three hypotheses
Leandro Brufman, Lisana Martinez & Rodrigo Perez Artica

Summary: This paper analyzes annual accounting data for a sample of 5,000 publicly traded manufacturing firms from Germany, France, Italy, Japan, and the United Kingdom. The analysis uses data from 1997 to 2011 and finds an increasing trend of excess savings (defined as the difference between gross saving and capital formation) and a gradual decline of gross capital formation. This trend is accompanied by a steady deleveraging process and a decrease in the share of operating assets in total assets. This process is more acute among the more credit constrained, the more volatile, and the less dynamic firms.

Why Spending RM160 Billion On Rail Isn’t Completely Bonkers

It’s last week’s news, but still relevant (excerpt):

Najib: An additional RM160bil to be invested in rail projects by 2020

KUALA LUMPUR: The Government is expected to spend an estimated RM160bil more on rail-related projects until 2020, said Datuk Seri Najib Tun Razak.

The Prime Minister said the railroad industry had seen "massive expansion" in Asia and was becoming an increasingly significant mode in Malaysia's efforts to improve public transportation...

Wednesday, September 18, 2013

Talking To Your Kids: Inequality And The Parenting Gap

As a follow up to my previous post, anybody interested in income inequality, social mobility and equality of opportunity needs to read this (excerpt, emphasis added):

The Parenting Gap

High-income parents talk with their school-aged children for three hours more per week than low-income parents, according to research by Meredith Phillips of UCLA.They also provide around four-and-a-half extra hours per week of time in novel or stimulating places, such as parks or churches, for their infants and toddlers.

The Bumi Agenda: The Importance Of Evidence Based Policy

Saturday’s announcement by the Prime Minister of measures to rekindle the Bumi Agenda, if I can call it that, has taken its share of brickbats and support (more of the former rather than the latter, by the commentary on social media).

Here’s my take: I think the Bumi problem is real and shouldn’t be sidelined. But, I also think that these new measures don’t go far enough, or go too far in the wrong direction, to be truly meaningful in addressing the situation.

Friday, September 13, 2013

July 2013 Industrial Production

Something is in the wind. US Purchasing Managers Indexes zoomed up in June, and lo and behold, Malaysia’s IPI is following suit (log annual and monthly changes; seasonally adjusted):


Wednesday, September 11, 2013

Documenting Income Inequality: 2012 Update

I posted the data on household income over a year ago, but the 2012 household income survey summary results have since been released, and I’ve had quite a few queries about this issue lately.

[As always, you can click on any of the graphs to view a larger version. Note that all the data presented here is inflation adjusted (2000=100); please refer to the sources linked to at the bottom of this post for the raw data]

Tuesday, September 10, 2013

Breaking The Poverty Trap: Financial Services Edition

The Governor is on Project Syndicate, talking about financial inclusion (excerpt):

Financial Inclusion Now

KUALA LUMPUR – Making the financial system accessible to the world’s poorest people can unlock their economic potential, improve their lives, and benefit the wider economy. So it is no surprise that financial inclusion of the poor has become an important component of public policymaking. Central banks and regulators worldwide are taking the lead in making financial inclusion a priority, in addition to their traditional mandates of maintaining monetary and financial stability.

Breaking The Poverty Trap

From my point of view, one of the biggest problems with the whole ideological debate about equal outcomes (“affirmative action”) versus equal opportunity (“meritocracy”) is that it’s really a false dichotomy.

In many ways, you can’t have one without the other. A meritocracy that truly rewards merit only works if you assume everyone starts off equally. If you want to be wonkish about it, it’s a one-generation, equal-endowment model of lifetime income.

Monday, September 9, 2013

Middle Income Pain? Try High Income

From the Edge Daily (excerpt; emphasis added):

Highlight - Middle-class pain

KUALA LUMPUR: Salary earners in the “sandwiched” middle-income group will soon find themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and RM7,000.

This group forms 40% of the country’s workforce. The middle-income earners are mostly taxpayers and are the vast majority who drive consumer spending — a main growth engine for the domestic economy...

Erm...slight problem here. By all accounts, less than 20% of the workforce is eligible to pay tax and about 10% actually does, which is totally at odds with the numbers quoted here. And it turns out the problem is the definition – the text shouldn’t read individuals, it should read households.

The data compiled by DOS show the mean monthly household income level for the middle 40% is just RM4573 in 2012, or approximately RM2570 per income earner. A single person earning that amount who only deducts EPF contributions pays zero tax, and I don’t think they’re the ones referred to as, "The middle-income patrons of gourmet coffee outlets will have to either cut down their visits or opt for cheaper alternatives."

Sorry, if you can afford to drink gourmet coffee in Malaysia, chances are you’re not middle income. It doesn’t detract from the main point of the article, but it should’ve been made clearer who exactly we’re talking about.

Ringgit Getting You Down? Don’t Panic

The stock market is losing ground, the Ringgit is being hammered, interest rates are slowly rising, inflation is increasing, and growth is anaemic. Not a whole lot of good news lately.

Don’t Panic.

The market selldown is general; it’s happening across the region and pretty much affecting most emerging markets. Malaysia is one of many, and we’re not being singled out. Just as expansionary monetary policy in advanced economies and greater global liquidity helped support emerging markets in 2010-2011, we’re seeing a pullback as the Fed begins signalling its willingness to reverse course.

Don’t Panic.

July 2013 External Trade

Friday’s trade report was a pleasant surprise (log annual and monthly changes; seasonally adjusted):


[Note: I’m still using my old seasonally adjusted figures, even though DOS now issues there own. I’ll be shifting over to the official figures as and when I manage to find time to transfer the data in. The differences between the adjusted series does not substantively change the following analysis]

Friday, September 6, 2013

BNM Watch: No Change In OPR

Don’t think anybody expected anything more (excerpt)

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent.

The global economy continues to experience modest growth...Although global monetary conditions remain highly accommodative, market uncertainties on the direction of policy have resulted in substantial volatility in global financial markets. The reversal of capital flows from the emerging economies following a prolonged period of strong inflows has resulted in the depreciation of emerging market currencies.

In the Malaysian economy, domestic demand has continued to support growth amid the weaknesses in external demand. Going forward, economic growth is expected to be underpinned by the continued expansion in domestic activity...The impact of subsidy adjustments on consumption spending is expected to be contained by targeted financial assistance. Domestic investment activity which has been robust will continue to be led by capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects. Overall growth prospects, however, could be affected by risks in the global economy and international financial markets...

...Going forward, inflation is expected to increase in the remainder of the year and into 2014 resulting from domestic cost factors, including subsidy adjustments...

...In the MPC’s assessment, there are increased uncertainties to the balance of risks surrounding the outlook for domestic growth and inflation...

Nominal GDP growth has been poor, but there’s a potential for a turnaround with higher oil prices, which could boost prices all around. We’re also seeing slower growth in credit and in the money supply. If anything, the bias to policy should still be on the downside – I don’t think the MPC is going to be panicked into doing something silly like trying to “defend” the currency. Currency weakness in fact plays into BNM’s hands, by lowering relative prices and a de facto loosening of monetary policy, even if the primary policy instrument is not adjusted.

GST And Tax Evasion

One of the main advantages of a GST/VAT system, at least from the point of view of the tax collector, is that it provides an incentive for businesses to comply. The ability to claim offsets against GST/VAT paid on inputs (which businesses have to pay for anyway), brings them into the tax collection net. That widens the scope of coverage and increases the number of goods and services that are taxed. Higher compliance = higher tax yield, relative to alternatives such as Malaysia’s existing single-stage sales and service taxes (SST).

I’m not going to discuss what this does to consumers and prices.

The other advantage here is that in theory, due to higher compliance, the probability of tax evasion (though not necessarily fraud) should fall. This is especially important for developing countries, as the size of the economy outside the formal sector is much larger and the capability of tax authorities to audit transactions is comparatively poorer.

This NBER working paper outlines an experiment to see if GST/VAT does indeed reduce tax evasion in the real world (abstract):

No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax
Dina Pomeranz

Tax evasion generates billions of dollars of losses in government revenue and creates large distortions, especially in developing countries. Claims that the VAT facilitates tax enforcement by generating paper trails on transactions between firms have contributed to widespread VAT adoption worldwide, but there is little empirical evidence about this mechanism. This paper analyzes the role of third party information for VAT enforcement through two randomized experiments among over 400,000 Chilean firms. Announcing additional monitoring has less impact on transactions that are subject to a paper trail, indicating the paper trail's preventive deterrence effect. Tax enforcement leads to strong spillovers up the VAT chain, increasing compliance by firms' suppliers. These findings confirm that when evasion is taken into account, significant differences emerge between otherwise equivalent forms of taxation.

All I can say is:

Technical Notes

Dina Pomeranz, "No Taxation without Information: Deterrence and Self-Enforcement in the Value Added Tax", NBER Working Paper No. 19199, July 2013

Thursday, September 5, 2013

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

Are Entrepreneurs Born Or Made?

A new NBER working paper explores this and many other questions (abstract; emphasis added):

Smart and Illicit: Who Becomes an Entrepreneur and Does it Pay?
Ross Levine, Yona Rubinstein

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. The incorporated self-employed have a distinct combination of cognitive, noncognitive, and family traits. Besides coming from higher-income families with better-educated mothers, the incorporated—as teenagers—scored higher on learning aptitude tests, had greater self-esteem, and engaged in more aggressive, illicit, risk-taking activities. The combination of “smarts” and “aggressive/illicit/risk-taking” tendencies as a youth accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to a large literature, we also find that entrepreneurs earn much more per hour than their salaried counterparts.

Twitter, Finally

Yes, I finally took the plunge. And I’m half regretting it already, as it looks like a great way to waste time. FWIW, you can follow me (the link is on the right hand column of the page), but I make no promises to be too actively involved tweeting.

Wednesday, September 4, 2013

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly.

If only we could harness our reserves of oil and gas and minerals effectively and efficiently…

If only we had invested in and boosted the productivity of our agricultural sector…

If only we managed our forests and bio-diversity for sustainable development…

If only natural resource extraction wasn’t subject to leakages and corruption…

If only, if only…

But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing.

The Role Of Credit Ratings: No Replacement On The Horizon

Credit rating agencies aren’t perfect – in fact, far from it. Ratings can sometimes (often?) be inaccurate guides to the potential for debt defaults, and the consistency and integrity of ratings can and have been questioned. The business model used by most credit rating agencies globally, where debt issuers pay for ratings on their own debt, is subject to potentially considerable conflicts of interest.

Unfortunately, attempts to find a replacement have come up with alternatives that are even worse (abstract):

Replacing Ratings
Bo Becker, Marcus Opp

Since the financial crisis, replacing ratings has been a key item on the regulatory agenda. We examine a unique change in how capital requirements are assigned to insurance holdings of mortgage-backed securities. The change replaced credit ratings with regulator-paid risk assessments by Pimco and BlackRock. We find no evidence for exploitation of the new system for trading purposes by the providers of the credit risk measure. However, replacing ratings has led to significant reductions in aggregate capital requirements: By 2012, equity capital requirements for structured securities were at $3.73bn compared to of $19.36bn if the old system had been maintained. These savings reflect the new measures of risk, and new rules allowing companies to economize on capital charges if assets are held below par. These book-value adjustments dilute the predictive power of the underlying risk measures, Our results are consistent with a regulatory change being largely driven by industry interests rather than maintaining financial stability.

Somehow, getting fund managers and private equity firms to do portfolio risk assessments strikes me as a little bit like putting the fox in charge of the hen house.

Driven by “industry interests”, indeed.

Technical Notes

Bo Becker, Marcus Opp, "Replacing Ratings", NBER Working Paper No. 19257, July 2013

Tuesday, September 3, 2013

Waiting For GST

There’s a famous play by Samuel Beckett called “Waiting for Godot”, where two characters hang around, talking and interacting, waiting for someone who never turns up. Malaysia’s GST saga, by turns tragic and comedic, definitely falls into the same mould.

Now it seems that at long last, Godot might actually arrive (excerpt):

GST implementation a must

KUALA LUMPUR: The implementation of a goods and services tax (GST) is a must and not an option.

Secretary-General of Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah said at the half-year Economic Transformation Programme (ETP) update that the Government was trying its best to include it in Budget 2014 if everyone was agreeable to it.

Dr Mohd Irwan added that it would only be in place in 2015 if the Government announced it in the coming budget as it would take 14 months for the GST to be implemented.

Subsidy Rationalisation Rebooted

It’s about time (excerpt):

RON95 goes up by 20 sen

PUTRAJAYA: The price of RON95 petrol and diesel has been increased by 20 sen, as one of the measures to rationalise subsidies by the Government to reduce the country’s fiscal deficit.

Prime Minister Datuk Seri Najib Tun Razak announced the decision, saying that it would save the Government RM1.1bil from September to December this year and RM3.3bil annually.

Before the revision, the price for RON95 was RM1.90 per litre and RM1.80 for diesel. The [sic} price increase for RON95 was in 2010.

Monday, September 2, 2013

2012 International Investment Position

I won’t touch too much on the 2Q2013 balance of payments which came out with GDP to weeks ago, but I thought it might be better to concentrate on something more pertinent, and quite a bit easier to understand. For all the potential for the current account to turn negative (with all the attendant consequences), it’s still only one part of a bigger picture that is the international investment position of the country.

The 2012 IIP report came out at the same time as the BOP, and shows a negative position for Malaysia, for the first time since 2007 (RM millions):


Monday, August 26, 2013

June 2013 Employment

Released along with the report on the July CPI was the employment report for June, and it’s certainly at odds with the prevailing market sentiment (‘000):


July 2013 Consumer Prices

Overshadowed by last week’s release of GDP data were five (count’em, five) other important data releases, one of which was the report on July consumer prices. Needless to say, the report showed accelerating price increases (log annual and monthly changes; 2000=100):


Thursday, August 22, 2013

2Q2013 National Accounts

Yesterday’s GDP release showed the Malaysian economy continuing to expand, but well below expectations (log annual changes, 2005=100):


Wednesday, August 21, 2013

Corruption Is Higher Than Perceived

From a recent World Bank policy research working paper (abstract):

Misunderestimating corruption
Kraay, Aart; Kraay, Aart; Murrell, Peter

Summary: Estimates of the extent of corruption rely largely on self-reports of individuals, business managers, and government officials. Yet it is well known that survey respondents are reticent to tell the truth about activities to which social and legal stigma are attached, implying a downward bias in survey-based estimates of corruption. This paper develops a method to estimate the prevalence of reticent behavior, in order to isolate rates of corruption that fully reflect respondent reticence in answering sensitive questions. The method is based on a statistical model of how respondents behave when answering a combination of conventional and random-response survey questions. The responses to these different types of questions reflect three probabilities -- that the respondent has done the sensitive act in question, that the respondent exhibits reticence in answering sensitive questions, and that a reticent respondent is not candid in answering any specific sensitive question. These probabilities can be estimated using a method-of-moments estimator. Evidence from the 2010 World Bank Enterprise survey in Peru suggests reticence-adjusted estimates of corruption that are roughly twice as large as indicated by responses to standard questions. Reticence-adjusted estimates of corruption are also substantially higher in a set of ten Asian countries covered in the Gallup World Poll.

Thursday, August 15, 2013

Contingent Liabilities: You Ain’t Seen Nuthin’ Yet

One of my favourite econs bloggers, James Hamilton, has a new working paper (abstract; emphasis added):

Off-Balance-Sheet Federal Liabilities
James D. Hamilton

Much attention has been given to the recent growth of the U.S. federal debt. This paper examines the growth of federal liabilities that are not included in the officially reported numbers. These take the form of implicit or explicit government guarantees and commitments. The five major categories surveyed include support for housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds. The total dollar value of notional off-balance-sheet commitments came to $70 trillion as of 2012, or 6 times the size of the reported on-balance-sheet debt. The paper reviews the potential costs and benefits of these off-balance-sheet commitments and their role in precipitating or mitigating the financial crisis of 2008.

And people are complaining when Malaysian government contingent liabilities hit 15% of GDP. Makes you wonder, dunnit?

Of course, it’s not a totally fair comparison. The Malaysian number only encompasses government guaranteed debt, not the full extent of explicit and implicit contingent liabilities as Prof Hamilton has tabulated for the US.

Nevertheless, the US numbers are staggering – it’s the equivalent of about 500% of US GDP. While the bulk is made up of "safe” contingencies through the Federal Reserve and the iffier actuarially estimated future liabilities of the US social security and medical assistance programs, guarantees for housing and student debt take up 50% of GDP, or more than three times Malaysia’s total government guarantees. US Federal deposit insurance takes up another 50% of GDP, compared to approximately 30%-40% of GDP for Malaysia (based on PIDM figures).

Any comparable exercise for Malaysia would show piddling numbers by comparison.

Technical Notes

James D. Hamilton, "Off-Balance-Sheet Federal Liabilities", NBER Working Paper No. 19253, July 2013

Wednesday, August 14, 2013

The Fitch Rating Downgrade: Much Ado About Nothing

Right off the bat, I should say that the timing of the release of the report – just before Hari Raya – was purely coincidental, and not in any way due to hidden motives. It just so happens that Fitch’s annual rating review of Malaysia’s sovereign rating occurs about this time every year.

Nobody pays much attention when ratings are affirmed, but up or down movements are much more visible from a news-worthy perspective, and bad news trumps goods news every time. And yes, the good news/bad news phenomenon has actually got pretty solid research behind it.

Tuesday, August 13, 2013

A Belated Eid Mubarak; And I’m Back

I’ve been offline for more than a week now, but I’m back at work, refreshed and recharged. To all a happy holidays and Eid Mubarak to all muslimin and muslimah.

There’s quite a few topics that have come up over the past few weeks that I’ll have something to say on over the coming days, not least of which is the TPPA and Malaysia’s sovereign ratings. I’ve had quite a few emails asking about the former, plus attending MITI’s open day, so I’ll be writing what I think once I get my thoughts organised.

Monday, July 15, 2013

BNM Watch: Interest Rates On Hold But Liquidity Support Increasing

Last Thursday’s Monetary Policy Committee meeting resulted in another anti-climax (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.00 percent…

…For the Malaysian economy, domestic demand has continued to support growth amid the continued moderation in external demand. The sustained weakness in the external sector may, however, affect the overall growth momentum. Going forward, private consumption is expected to remain steady underpinned by income growth and stable labour market conditions. Capital spending in the domestic-oriented industries and the ongoing implementation of infrastructure projects will also support investment activity…

…The MPC considers the current stance of monetary policy to be appropriate given the outlook for inflation and growth. In addition to domestic conditions, the MPC will continue to carefully assess the global economic and financial developments and their implications on the overall outlook for inflation and growth of the Malaysian economy.

Monday, July 8, 2013

The Hammer Falls

BNM isn’t wasting much time (excerpt, emphasis added):

Measures to Further Promote a Sound and Sustainable Household Sector

Bank Negara Malaysia announces today, the implementation of a set of measures aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers. These measures, which take effect immediately, complements the earlier measures introduced since 2010 to promote a sound and sustainable household sector. The measures are:

  1. Maximum tenure of 10 years for financing extended for personal use;
  2. Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties;
  3. Prohibition on the offering of pre-approved personal financing products.

The limits on financing tenure will not affect applications made before today...

...These measures are issued pursuant to section 31(1)(a) of the Central Bank of Malaysia Act 2009 and apply to all financial institutions regulated by Bank Negara Malaysia, credit cooperatives regulated by the Suruhanjaya Koperasi Malaysia, Malaysia Building Society Berhad and AEON Credit Service (M) Berhad. This is to ensure consistency in the financing practices across all the key credit providers.

Not before time. This action was long overdue, and only needed the legislative authority to allow BNM to enforce it effectively outside of the banking system.

About the only other thing I can think of to add to this would be if the government tightened its own limits on salary deductions allowed to civil servants. But that’s obviously not within BNM’s purview.

May 2013 External Trade

So much for expecting a bounce. May’s trade numbers offer little room for optimism (log annual and monthly changes; seasonally adjusted):


Friday, July 5, 2013

The Strange And Mysterious Workings Of Singapore’s Monetary Policy

Singapore is a pretty unique economy, what with being a very open island trading nation, and with its political and social history.

Its approach to monetary policy is just as unique. Unlike the vast majority of central banks, Singapore’s Monetary Authority (MAS) uses the exchange rate as its primary monetary policy instrument. While this in itself is not too radical, unlike exchange rate regimes in the past the application of this policy is not through targeting a level of the exchange rate, but the slope and breadth of its appreciation.

This makes economic sense, as inflation is an appreciation in the general price level, not the price level itself. If the goal of monetary policy is stable prices (and/or economic growth), then a policy of exchange rate appreciation to regulate an increase in prices is appropriate.

People First?

I read this article last week, but something about it really bothered me. It was like an itch I couldn’t scratch. I only figured out what was wrong yesterday (excerpt; emphasis added):

Time govt lived up to its slogans, says MIER chief

KUALA LUMPUR (June 28): Malaysia's economic policies need to be implemented in line with the government's slogan of 'People First,' which means the people should be the ones benefitting "firstly and mostly," the chief of the Malaysian Institute of Economic Research (MIER) said.

Unfortunately, this is not the case, pointed out Dr Zakariah Abdul Rashid, who is executive director of the think tank.

In an exclusive interview with, Zakariah touched on various issues, including the importance of interpreting economic indicators carefully, the widening gap between the rich and poor, doing away with race-based assistance and the importance of being competitive in choosing our leaders...

Thursday, July 4, 2013

Efficient Markets and Perfect Information

Robert Skidelsky on the efficient markets hypothesis and  New Classical economics generally:

Every general crisis involves self deception as well as the deception of others. In Donald Rumsfeld’s immortal phrase, it is the “unknown unknowns” which trip us up. If only one person were perfectly informed, there could never be a general crisis.

But the only perfectly informed person is God, and He does not play the stock market.

[Skidelsky, Robert, “Keynes: The Return of the Master”, Audible Inc, 2009]

Wednesday, July 3, 2013

What’s Malaysia’s Full Employment Rate?

I honestly don’t know, but our new EPU head thinks its 4% (excerpt):

Parliament: 20 years of full employment, says Abdul Wahid

KUALA LUMPUR: The country's sustainable economic growth over the past 20 years has kept the unemployment rate at below 4 percent, which based on economic definition, is considered as full employment, Dewan Rakyat heard.

Minister in the Prime Minister's Department Datuk Seri Abdul Wahid Omar said the good economic growth since 2011, from 5.1 percent to 5.6 per cent last year saw the creation of 438,800 jobs in 2012, compared to 385,000 previously.