Monday, December 21, 2015

Bonds and Stocks

When I read the headline, I thought the article would be about the difficulty of finding a return in the current low yield environment. It turns out its on something completely different (excerpt):
In search of higher yields

THE correlation between yields and stock markets are clear to see. When yields are high, stock markets are down. When yields are down, money pours into the stock market, and hence it goes up (see chart).

From the chart, it is obvious that since the Fed launched quantitative easing in 2009, rates have sunk to all time lows – close to zero. Meanwhile stock markets start rising when money is in search of yield and growth. Thus when yields are low, the stock market moves up. 

An interesting observation from the chart is the huge gap between rates and the stock market from 1985 to 1993. 

In 1985, the US Treasury 5-year notes were offering yields of above 10%. Not surprisingly, investors would gladly take their money out of the markets and put it in treasury notes or bonds, which are almost risk free. 

Now, as the yields started to drop, notice how the stock market starts inching up. This is because investors start to realise that bonds can no longer give them the best yields, and thus they shift their money into the stock market. 

From 1993 to 2006, yields on the 5-year note and the stock market moved almost in tandem. 

Over that period, the yields moved in a band of between 4% to 6%. At this level, bond yields and stock market returns are about equal. So investors are interchanging; when yields go closer to 4%, they shift their assets into the stock market. Then when yields move up again, they shift back out of equity markets and into treasury notes….

Friday, December 11, 2015

Malaysia's National Savings

As a follow up to yesterday’s post, here’s some graphs showing some of the other interesting data from the distribution of income accounts.

First, gross savings across all institutional sectors (RM billions):

Note that the bulk of national savings actually comes from corporations (the first two sectors). Household savings is by comparison pretty small.

Thursday, December 10, 2015

Malaysia’s Household Savings Rate

The question of the household savings rate has come up a few times in the last few weeks, so I thought I might as well set out the data and evidence for it.

At this stage, I have a confession to make. I was under the impression that gross savings excluded net changes in pension assets (contributions less withdrawals from EPF, KWAP, LTAT and the like), but a closer reading of the accounts and the SNA2008 manual showed that this is already captured under the income accounts. For that I have to apologise to everyone whom I told that the household savings rate would be substantially higher if the net pension contributions were taken into account. In fact, the opposite is true and the difference is quite significant, as I’ll demonstrate in a bit.

Thursday, December 3, 2015

Seeing The Forest Through The Trees

Of all the mind-boggling things to suggest (excerpt):

Forex broker proposes raising Malaysia's interest rates

KUALA LUMPUR: Cutting interest rates is not an option for Bank Negara to prevent further weakness in the ringgit, said international forex broker FXTM.

A better option for the central bank would be to raise interest rates, said its chief market analyst Jameel Ahmad….

…He added that interest rates in Malaysia were relatively low, at 3.25%, compared to Indonesia at 7.5%.

“If you cut interest rates, people are not going to be encouraged to keep their capital in Malaysia.

“So, any reduced interest rates will not help the ringgit at all,” he said.

The Natural Resource Curse is Alive and Well

From the latest round of IMF working papers (abstract):

Natural Resource Booms in the Modern Era : Is the curse still alive?
Andrew M. Warner

The global boom in hydrocarbon, metal and mineral prices since the year 2000 created huge economic rents - rents which, once invested, were widely expected to promote productivity growth in other parts of the booming economies, creating a lasting legacy of the boom years. This paper asks whether this has happened. To properly address this question the empirical strategy must look behind the veil of the booming sector because that, by definition, will boom in a boom. So the paper considers new data on GDP per person outside of the resource sector. Despite having vast sums to invest, GDP growth per-capita outside of the booming sectors appears on average to have been no faster during the boom years than before. The paper finds no country in which (non-resource) growth per-person has been statistically significantly higher during the boom years. In some Gulf states, oil rents have financed a migration-facilitated economic expansion with small or negative productivity gains. Overall, there is little evidence the booms have left behind the anticipated productivity transformation in the domestic economies. It appears that current policies are, overall, prooving [sic} insufficient to spur lasting development outside resource intensive sectors.

Wednesday, December 2, 2015

Graeber on Sectoral Balances

I touched on this a few times before, but here’s David Graeber on sectoral balances and flows (excerpt):

Britain is heading for another 2008 crash: here’s why
David Graeber

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics. You can say anything you like about sex nowadays, but the moment the topic turns to fiscal policy, there are endless things that everyone knows, that are even written up in textbooks and scholarly articles, but no one is supposed to talk about in public. It’s a real problem. Because of these taboos, it’s impossible to talk about the real reasons for the 2008 crash, and this makes it almost certain something like it will happen again.

I’d like to talk today about the greatest taboo of all. Let’s call it the Peter-Paul principle: the less the government is in debt, the more everybody else is. I call it this because it’s based on very simple mathematics. Say there are 40 poker chips. Peter holds half, Paul the other. Obviously if Peter gets 10 more, Paul has 10 less. Now look at this: it’s a diagram of the balance between the public and private sectors in our economy:


Friday, November 27, 2015

Pension Adequacy in an Ageing World

[Disclaimer: Since I work for a pension fund, this blog post should be taken as biased and not wholly objective. You have been warned]

From Project Syndicate, Allianz Asset Management on pension adequacy (excerpt):

Rehearsals for Retirement

MUNICH – Over the rest of the twenty-first century, the global human population is expected to keep growing; more important, it will keep growing older. By the year 2100, the United Nations expects there to be more than ten billion of us, up from 7.3 billion today. In the meantime, the number of people older than 60 is expected to double by 2050 and more than triple by the end of the century.

As societies around the world prepare for swelling numbers of retirees, the policy challenge will be to ensure the financial sustainability of pension systems while guaranteeing adequate incomes for those no longer working. Today, according to recent research by Allianz, only four countries appear to have achieved this: Finland, Norway, the Netherlands, and New Zealand....

Wednesday, November 18, 2015

Interest Rate Parity and Exchange Rates

[If you want to skip all the math and theoretical stuff, go ahead and jump down to the conclusion]

Take a bond, any bond.

Actually take two. Make them zero coupon as well, with a one year maturity (for ease of exposition). Bond A is issued in Country A, while Bond B is issued in Country B, both at a discount of 5% to face value i.e. both bonds yield 5% in a single year.

Let’s define the spot exchange rate (S) as the ratio of currency B to currency A, say for example, $4 of country B currency is exchangeable to $1 of country A currency.

Monday, November 16, 2015

3Q 2015 GDP: Flip A Coin

Last week’s GDP report was a mixed bag. On the one hand it paints a picture of an economy slowing down, especially in terms of domestic demand. On the other hand, some of the indicators appear to have bottomed out.

The headline numbers aren’t appealing (log annual and SAAR quarterly changes; 2010=100):


Friday, November 13, 2015

Low Interest Rates: It Isn’t Just QE

We’re nearing Fed “liftoff” with a better than 50% chance that the US Fed Funds Rate will rise above 0%-0.25% for the first time since 2008. But even taking into consideration the extraordinary monetary accommodation conducted by the major advanced economy central banks, interest rates globally have been in secular decline for very nearly 50 years, since the heyday of stagflation in the 1970s.

Money printing doesn’t half explain what’s going on.

Thursday, November 12, 2015

Adventures In Measuring Productivity

Noah Smith has a headache (excerpt):

Big TFP data mystery!

I had been under the impression that over the last three decades or so, the rich countries had all experienced similar rates of TFP growth. My source for that was the OECD's time-series on multifactor productivity (another name for TFP).....

Wednesday, November 11, 2015

September 2015 IPI: Steady Recovery

Monday’s industrial production figures paint a picture of recovery (log annual and monthly changes; seasonally adjusted; 2000=100):



Manufacturing output has been steady for most of the year, but mining output (read: oil & gas) had been on a downtrend. More worrying to me was the sharp drop off in electricity generation – that pointed to underlying weakness in both business and consumer demand. Unless this was a dead cat bounce, September’s figures suggests whatever malaise hitting both sectors is now over.

Monday, November 9, 2015

Budget 2016: Some Thoughts

The best laid plans of mice and men…

I was going to put up an analysis of Budget 2016 the day after the budget, but as luck would have it, I managed to come down with pneumonia and have spent most of the last two weeks trying to recover. So here’s a very belated, quick overview of what I think of the budget.

Or you can take this is as the confused, feverish ramblings of a diseased brain.

Friday, October 23, 2015

Live Blogging Budget 2016

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

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

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

And that’s a wrap.

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

Monday, September 14, 2015

Global Value Chains and Exchange Rates

From (excerpt):

The age of global value chains

João Amador, Filippo di Mauro 09 September 2015

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

Thursday, September 3, 2015

Exchange Rates Are Relative Prices

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

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

Tuesday, August 25, 2015

Market Psychology

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


Thursday, August 13, 2015

What To Do About The Ringgit

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

Wednesday, August 12, 2015

Monetary Policy and the Yuan

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

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

Friedman On Pegging

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

Milton Friedman on exchange rates #4

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

Ringgit Fallacies: Imported Inflation and International Reserves

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

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

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

Monday, August 10, 2015

Poverty, Corruption and Economic Growth

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

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

Fighting Corruption Won’t End Poverty

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

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

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

Friday, August 7, 2015

Inequality: The Important Role of Family and Inheritance

From the NBER (abstract):

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

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

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

Technical Notes

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

Wednesday, July 22, 2015

China, Gold and Reserve Currencies

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


But let’s keep some perspective:


Tuesday, July 21, 2015

Assessing July

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

2Q2015 GDP Growth

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

Tuesday, June 16, 2015

Income Inequality In Perspective

A new IMF staff discussion note takes on global inequality (excerpt):

Causes and Consequences of Income Inequality: A Global Perspective

Widening income inequality is the defining challenge of our time…Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.

First, we show why policymakers need to focus on the poor and the middle class…Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth….

Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class…Our analysis suggests that

  • Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs….
  • Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.
  • There is no one-size-fits-all approach to tackling inequality…More generally, complementarities between growth and income equality objectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.

Pretty self-explanatory I think, though the details are interesting, especially the role of financial market development in skewing the income distribution in developing economies. Something for weekend reading.

Friday, June 12, 2015

The Future Of LNG

Apropos to my previous post, the International Energy Agency has a downloadable report on the future of LNG in Asia. You can get it here.

A Case Of Gas

MISIF wants the government to maintain gas subsidies (excerpt, emphasis added):

Steel makers oppose gas price hike, wants govt to step in

KUALA LUMPUR: Malaysia’s iron and steel makers have opposed the proposed 10% hike in natural gas prices and they want the government to stop Gas Malaysia Bhd from going ahead with it on July 1.

The Malaysian Iron and Steel Industry Federation (MISIF) said on Thursday it was “utterly disappointed and deeply concerned” with the price increase as announced.

Friday, June 5, 2015

Coming Soon To Malaysia: It’s A Woman’s World

The Economist has an essay on one of the biggest social and demographic changes in history (excerpt):

Badly educated men in rich countries have not adapted well to trade, technology or feminism

…Tallulah may be an extreme example, but it is part of a story playing out across America and much of the rest of the rich world. In almost all societies a lot of men enjoy unwarranted advantages simply because of their sex. Much has been done over the past 50 years to put this injustice right; quite a bit still remains to be done.

The dead hand of male domination is a problem for women, for society as a whole—and for men like those of Tallulah. Their ideas of the world and their place in it are shaped by old assumptions about the special role and status due to men in the workplace and in the family, but they live in circumstances where those assumptions no longer apply. And they lack the resources of training, of imagination and of opportunity to adapt to the new demands. As a result, they miss out on a lot, both in economic terms and in personal ones.

Thursday, June 4, 2015

Commodity Prices and the Exchange Rate Again

My friend Lars Christensen has a good post (video here) on oil prices and Middle East currency regimes (excerpt):

Talking to my phone: The Gulf States should peg their FX rates to oil prices

Oops I did it again – this time I talk to my phone about monetary policy in the Gulf States and my suggestion that these countries should peg their currencies to the oil price or a basket of the oil price and the US dollar. This is of course what I have suggested should be termed the Export Price Norm (EPN).

I’m posting this due to a conversation I had yesterday, trying to explain optimal exchange rate policy in the face of a terms of trade shock.

Lars has an older post on the Ringgit as well (here), along with thoughts on monetary policy, price controls and inflation.

Wednesday, June 3, 2015

April 2015 Consumer Prices: GST and Inflation

Again, a couple of weeks late, but this is interesting enough to talk about, even at this late date.

With GST implemented in April, you can see the jump in the price level (log annual and monthly changes; 2000=100):


The key points here are that the drop in petrol prices dampened, but did not fully offset, the overall impact on prices. Year on year growth of the Pain Index was just 0.04% in log terms, after three straight months of declines. Core inflation (ex-food, ex-transport) however, hit 3.5% on the year, and a blistering 1.6% on the month.

Tuesday, June 2, 2015

A Journalist’s Advice To Economists

Lovely, lovely post (excerpt):

3 practical things, and one abstract thing economists could do to improve economic coverage in the media

This was written by CBC Radio's Matthew Lazin-Ryder

1. Pitch better stories

…If we want to move economics coverage towards research, and I believe we should, economists must do more to communicate their research to journalists….

…A solution to this is to skip all the baloney and pitch your research directly to journalists….

2. Help us find better commentators

…Deadlines haunt our lives. We start our day, and the countdown clock starts. You are doing us an enormous favour by saying “no” as firmly and quickly as possible…give us any tiny hint about who might be a better communicator on a subject that you’re not familiar with, or might have time. If you don’t have a name, scale up. A field of study, a department, another university. Anything that could lead to another human with something to say….

3. Be honest about your feelings during an interview

…if you find yourself on the phone with a journalist, and you feel they are pushing you in a direction you’d rather not go, say so….

4. (The abstract one) For god’s sake, be passionate

…I’m surprised, to be completely indelicate, at the number of interviews I’ve seen and heard with economists who don’t sound the slightest bit interested in their own research. I’m not sure if it’s a tradition of academic humility, of not wanting to rock the boat, or of nervousness, but there’s an unsettling absence of public passion in Canadian [sic] economics…..

I’ve been sometimes critical of the media, but there are times when the shoe (or is it the boot?) is on the other foot. There are lessons in here for me to learn, too.

Monday, June 1, 2015

11th Malaysia Plan: Quick Impressions

This was supposed to have come out a couple of weeks ago, but I ran out of time before leaving on a holiday. Just some quick thoughts on the 11MP:
  1. Overall, the 11MP underscores the shift in the government’s strategy. There’s been a gradual but noticeable shift from boosting growth to labour and social issues in the last few years. This means potentially accepting a lower rate of growth to making sure that what growth we do get is more equitably shared.

Thursday, May 21, 2015

1Q2015 GDP: Something Wicked This Way Comes

I haven’t had much of a chance to write this week, with various things on my calendar (I’ll have some thoughts on the 11MP tomorrow, along with the April CPI). But I wanted to very quickly touch on last week’s GDP report.

The published numbers look pretty good (log annual and seasonally adjusted quarterly changes; 2010=100):


Friday, May 8, 2015

An Exorbitant Privilege

One of the big themes over the past year has been the strength of the US Dollar, which has appreciated against currencies and commodities since the middle of last year. That pushed many currencies into “undervalued” territory – exchange rate levels that are below what is suggested by their economic fundamentals. That’s certainly the case here in Malaysia, oil price declining notwithstanding.

But given that its been largely a move by the USD, it would be fair to flip the question on its head: If other currencies are “undervalued”, the opposite must also be true. How “overvalued” is the USD?

BNM Watch: No Change, And Don’t Expect Any

Yesterday’s MPC decision came as no surprise, with the OPR held steady at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent.

The global economic expansion remains moderate, with divergent growth momentum across economies in the first quarter of 2015…Downside risks to this outlook, however, continue to persist. In this environment, the international financial markets will continue to be affected by shifts in global liquidity and investors sentiments.

Wednesday, May 6, 2015

Social Progress

Michael Porter on social progress (excerpt):

Why Social Progress Matters

Economic growth has lifted hundreds of millions of people out of poverty and improved the lives of many more over the last half-century. Yet it is increasingly evident that a model of human development based on economic progress alone is incomplete. A society which fails to address basic human needs, equip citizens to improve their quality of life, protect the environment, and provide opportunity for many of its citizens is not succeeding. Inclusive growth requires both economic and social progress.

Tuesday, May 5, 2015

The Impact of Foreign Labour

It’s no secret that Malaysia plays host to a lot of foreign labour; a lot of cheap foreign labour. Among the criticisms of this happenstance is that it takes away jobs from locals, reduces the wages locals can command, and stunts productivity growth.

Underlying these concerns is a false view of the economy, that labour competition between foreigners and locals are a zero-sum game. The first concern isn’t true – given our ridiculously low unemployment rate, there’s not a lot of evidence that foreigners have taken jobs away from locals. Culling foreign labour from Malaysia would only reduce output, and remove industries that would only exist (or exist as cheaply) from the availability of that foreign labour.

Wednesday, April 29, 2015

Mean Reversion in Commodity Markets

In VoxEU this week (excerpt):

Commodity prices: Over a hundred years of booms and busts
Andrew Powell 28 April 2015

Commodity prices are very persistent. A boom is always followed by a bust, and after a slump, a boom comes along. This column reviews some basic aspects of commodity theory and their role in the last boom. Finally, it presents arguments stating that lower commodity prices are here to stay for a while. We may have to wait many years for the next boom to come along.

Commodity prices are very persistent. During booms we seem to forget that they have always (yes, always) been followed by busts (see Figure 1). And during a slump we forget that a boom is surely going to come along— we just have to wait long enough. What determines such booms and busts? Was the last boom exceptional? Where are prices today relative to long-run trends? And the big question – where are prices likely to go from here?

Great article on the history of commodity prices from the 1900s to the present. If Mr Powell is correct, we're in for a loooooong wait. And this is even without accounting for the relative prices of commodities against manufactured goods.

Tuesday, April 28, 2015

The Facts Of Life: Singapore’s Monetary Policy And The SGD Exchange Rate

Since the Ringgit has recovered (a little) there’s probably less of a need for this post. But given how angst ridden Malaysians are about Singapore and the Singapore Dollar (one commentator described it as humiliating), it’s probably still appropriate.

So here’s my take on this subject, and given how TDM is in the news so much these days, done “che det” style:

1. Once upon a time, the SGDMYR exchange rate was at parity. Now however, SGD1 buys MYR2.67. This is popularly viewed as a barometer of how badly the Malaysian economy has done vis-a-vis Singapore.

2. However, this would only be true if the SGD was a free floating currency. It is not; it is in actuality a policy variable.

Tuesday, April 21, 2015

Increasing the EPF Withdrawal Age

Since I’m hardly an unbiased observer in this instance, I’ll forbear from commenting. However, public feedback on this and on the other three proposed changes to the EPF Act can be given here. You will need to open an i-Akaun, if you don’t have one already.

The four proposals are:

  1. Raising the withdrawal age to 60, with two options given: Either a graduated increase in the withdrawal age (to take place over 15 years); or an immediate switch, with full withdrawal at 55 still available, but new contributions after 55 to be sequestered until age 60.
  2. Streamlining EPF contributions to the minimum wage i.e. those paid below the minimum wage will now be required to contribute as if they were paid the minimum wage, to apply to both employees and employers.
  3. Raising the dividend payout period from 75 to 100.
  4. Giving members a choice for a Shariah compliant portfolio.

Wednesday, April 15, 2015

Gender Pay Inequality

This is for the US, but the pay gaps are similar though smaller in Malaysia (excerpt):

Gender Wage Gap in Eight Charts

Most women will never earn as much as men in their lifetimes.

In Wyoming, it will take 144 years for equal pay, according to a recent report from the Institute for Women’s Policy Research that looked at trends in women’s employment and earnings. Other states with particularly high disparities included Louisiana, North Dakota and Utah. The state with the shortest wage gap, Florida, was still 23 years. And Washington, D.C. marks the best place for women’s employment and earnings, the report found, perhaps because it is small and urban. Still, the pay imbalance won’t close until 2055.

Tuesday marks national Equal Pay Day, an event from the National Committee on Pay Equity, a nonprofit advocacy group. The date represents how long into 2015 it would take a woman to earn what a man did in 2014.

Government Debt and FX Reserves

From Bloomberg via The Edge (excerpt):

Malaysia raising $2 billion as worst Asia currency saps reserves

SINGAPORE/KUALA LUMPUR (Apr 14): Malaysia is tapping the U.S. dollar bond market for the first time in four years as it burns through foreign-exchange reserves defending Asia’s worst currency.

The government is poised to sell as much as $2 billion of Islamic notes this week, one month after state-owned Petroliam Nasional Bhd. issued a record $5 billion of sukuk and conventional debt in the U.S. currency. Malaysia’s foreign currency holdings fell 9.4 percent this year, the steepest first-quarter loss since the 1997 Asian financial crisis. The ringgit dropped 5.4 percent, compared with a 4.6 percent slump in the Indonesian rupiah.

Tuesday, April 14, 2015

Health and Inequality

From Bloomberg (excerpt):

More Proof That the Richer You Are, the Healthier You'll Be
At every step along the income ladder, higher income means lower prevalence of disease

No matter how much you earn, people who earn more than you are likelier to be healthier and live longer. That's the takeaway from a new report by researchers at the Urban Institute and Virginia Commonwealth University examining the complex links between health, wealth, and income.

It shouldn't surprise anyone that poverty is often associated with poor health. Less obvious: Health and income improve together all the way up the economic pyramid. The wealthiest have fewer illnesses than the upper-middle class, who are in better shape than the lower-middle class, and so on.

The Urban report analyzed a dozen health problems for which the Centers for Disease Control (CDC) has recorded prevalence by family income. In every case, the rich are better off. With just a few exceptions, there's a steady improvement in health as you climb the income scale...

Just sayin'

Monday, April 6, 2015

More On The Role Of Parenting In Inequality

From The Economist magazine (excerpt):

Minding the nurture gap
Social mobility depends on what happens in the first years of life

Our Kids: The American Dream in Crisis. By Robert Putnam. Simon & Schuster; 386 pages; $28 and £18.99.

THE most important divide in America today is class, not race, and the place where it matters most is in the home. Conservatives have been banging on about family breakdown for decades. Now one of the nation’s most prominent liberal scholars has joined the chorus.

Robert Putnam is a former dean of Harvard’s Kennedy School of Government and the author of “Bowling Alone” (2000), an influential work that lamented the decline of social capital in America. In his new book, “Our Kids”, he describes the growing gulf between how the rich and the poor raise their children….

Living Beyond One’s Means

Overspending is fairly straightforward when it comes to households. It’s a little more nuanced with corporates, but its a lot more convoluted when it comes to governments and nation states.

Here’s a quick rule of thumb, when it comes to governments:

  1. A country is living beyond its means when its running a current account deficit
  2. A country is living within its means when its running a current account surplus

How does this relate to governments? It doesn’t.

A country can be running a surplus or a deficit irrespective of whether the government is running a surplus or deficit. It’s really about the balance in the flow of funds between the different sectors in an economy – governments, households and corporations. Just because a government runs a deficit says nothing about whether the country as a whole is living beyond its means.

Wednesday, April 1, 2015

First Day Of GST

…and the world hasn’t ended. Car prices have even come down, as predicted (so will furniture, and quite a few imported manufactured goods). There will no doubt be teething troubles along the way, but Malaysia’s most significant tax reform in a generation is now established.

But confusion abounds. Take this article from yesterday:

Students claim GST in university fees and services despite exemption

KUALA LUMPUR, March 31 — University students have complained that they will be charged the goods and services tax (GST) on their fees despite Putrajaya insisting that education is exempted from the tax.

Tuesday, March 31, 2015

Comparing Malaysia With Singapore

I probably shouldn’t bother, but from TMI (excerpt):

When the success of one nation casts shadows on the failures of another

...That Malaysia, with her bounty of natural and human resources, has failed miserably to keep up with Singapore is a sad reflection of the policies we’ve undertaken in the last 50 years. Where one has chosen unwavering pragmatism and a merit-based administrative policy to push its nation forward, the other is still proclaiming the supposed inherent superiority of one race over others.

Singapore is able now to move beyond focusing entirely on economic policy, to addressing problems such as social mobility and a rapidly ageing society to further better the quality of life of its citizens. Malaysia seems to be obsessed with proposing-debating-and-proposing-again the implementation of hudud, instead of fighting the deeply-rooted disease of corruption and inefficiency which leads to the billions of ringgit that slip out of our country’s coffers every year.

I hate repeating myself, but:

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....

...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....

…In Malaysia’s case, it’s probably more pertinent – and accurate – to wonder not why we aren’t rich when we have abundant natural resources, but rather how Malaysia has managed to grow so far and so fast despite the handicap of having abundant natural resources.

In addition, three links on my series on corruption and growth (here, here and here), or if you want the whole series, you can start from here. From Part III of the series (excerpt):

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

The difference in growth between Singapore and Malaysia really boils down to volatile commodity prices before Malaysia’s economy was fully diversified beginning in the 1990s. There are a few other things, which I won’t get into right now.

Natural resources are not a blessing. Anybody who watched oil prices plunge last year can certainly attest to that. Long term, any country relying on natural resources is not on a path to prosperity.

The statement that Malaysia is “…staggering behind most of her Asian peers,” is sheer hyperbole. Since 1965, the only countries to have overtaken Malaysia in real GDP per capita in East Asia is Korea and Taiwan – despite the fact that both had had institutionalised corruption during their highest growth phases. This also ignores that we have been making steady gains on both, as well as against developed country standards, in the last decade.

Lastly, on the (de)merits of pure meritocracy, try here, here and here.

Thinking Like An Economist: GST Edition

[UPDATE: Changed comment on petrol prices]

I was at Giant supermarket this weekend, doing my usual grocery shopping. Of course, there was a massive crowd stocking up on everything from flour to diapers, as this article aptly describes.

Some of the purchases are warranted; some are not. Personally, I only bought what my family needed this week and no more. It wasn’t worth the time and effort for me to get more. The point I want to make here today is that calculating the cost-benefit of stocking up isn’t as simple as calculating the money savings one might have relative to after GST comes in.

For high-ticket items, the logic is pretty clear – it’s worth the trouble…mostly. Buying a new smartphone now for instance – say one costing RM1k – one would save about RM60. For the vast majority of the population, such savings are worth it.

The cost-benefit for groceries is not nearly as simple.

Tuesday, March 24, 2015

Wages and The CE/GDP Ratio

I’ve come across the same dilemma myself, but a box article in BNM’s 2014 Annual Report outlines the latest data (excerpt; emphasis added):

Trends in Malaysia’s Gross Domestic Product by Income

…In terms of share, capital income forms the largest component of GDPI (Chart 3). However, with the growth of labour income outpacing the growth of capital income, the share of labour income to GDP has risen steadily from 29.5% in 2005 to 33.6% in 2013. By definition, however, the labour income component in GDPI excludes income earned by self-employed individuals…With such adjustments, the share of labour income for Malaysia is higher, on average, by 8.0 ppt. throughout the period (Chart 4)….

Monday, March 23, 2015

Tears For Singapore

Condolences to the people of Singapore, for the passing of Lee Kuan Yew. Love him or hate him, nobody can deny his achievements or what he has meant for Singaporeans.

The sad thing is that Singapore is now at an economic crossroads, and probably needs LKY’s brand of pragmatism more than ever. Whether this next generation of leaders will be able to steer the country through the challenges it faces now remains to be seen.

Thursday, March 19, 2015

Economic Efficiency and GST

We’re less than two weeks away from GST going live, so it might be appropriate to look at the economic arguments in favour of it.

On the WCI blog, Frances Woolley reviews the textbook arguments (excerpt):

The case for taxing basic groceries

Economists frequently argue that taxing basic groceries is a good idea - for example, see these papers/posts making the case for taxing food in the US, Canada, and New Zealand.

The equity argument for taxing groceries is straightforward. Suppose everyone spends $500 a month on groceries. If groceries were taxed at 10 percent, everyone would pay about $50 in tax (or slightly less, if people cut back on their food expenditures when the tax is introduced). If part of the revenue raised by taxing groceries was used to give every low income individual a $60 tax credit, the tax on groceries would actually increase the well-being of the worst off members of society. Any additional revenues raised could be used either to decrease other taxes, leading to greater economic efficiency, or to provide needed social or infrastructure programs, further enhancing efficiency and/or equity.

Income Traps: It’s All About Convergence

A couple of recent papers have come out on “middle income traps”. First up from the World Bank (abstract):

Transitioning from low-income growth to high-income growth : is there a middle income trap?

Is there a "middle income trap"? Theory suggests that the determinants of growth at low and high income levels may be different. If countries struggle to transition from growth strategies that are effective at low income levels to growth strategies that are effective at high income levels, they may stagnate at some middle income level; this phenomenon can be thought of as a "middle income trap." This paper does not find evidence for (unusual) stagnation at any particular middle income level. However, it does find evidence that the determinants of growth at low and high income levels differ. These findings suggest a mixed conclusion: middle-income countries may need to change growth strategies to transition smoothly to high-income growth strategies, but this can be done smoothly and does not imply the existence of a middle income trap.

Translation: No, there’s no such thing as a middle income trap.

Wednesday, March 18, 2015

GST Price Guides

These were supposed to come out a couple of months ago based on the original planned timeline, but I remember some concerns being raised that releasing them too soon might render them inaccurate enough that people might not trust them.

In any case, here they are:

  1. Northern Zone
  2. Eastern Zone
  3. Central Zone
  4. Southern Zone
  5. Sarawak
  6. Sabah

Complaints about retail pricing or price gouging can be addressed to the 1Malaysia One Call Centre (1 800 886 800)

Government Debt: Revisionism

Tengku Razaleigh made a speech in Parliament yesterday that made some waves.

I thought I might have a look back at the fiscal metrics during Ku Li’s time as finance minister (fiscal deficit and government debt as ratios to GDP; shaded area):



The truth is, fiscal management is and can be event specific. Ku Li had to deal with the biggest and sharpest collapse in global commodity prices in modern history. This government on the other hand had to deal with the longest and most severe global recession since the Great Depression.

Just sayin’.

Tuesday, March 17, 2015

Why Fuel Subsidies Had To Go

All explained in two slides from last week’s BNM Annual Report Briefing:



You can find the box article these were taken from here.

Thursday, March 12, 2015

Explaining External Debt

Yesterday, the media (social, online, offline) were agog at Malaysia’s external debt numbers. They shouldn’t have been – the inflated numbers were due to a redefinition of external debt made last year (see here, especially the last four pages), which was announced, though nobody appeared to have caught on.

So what’s the deal?

Hafiz Noor Shams has a nice graph showing the difference between the old definition and the new one. I agree with him, the reporting on this has been deplorable, and not just from the local media (sorry guys, it has been pretty bad), but from the foreign media as well. One joker speculated that with external debt so high, Malaysia might have trouble “servicing” it, because the foreign exchange reserve cover was low. Hah!

Friday, March 6, 2015

Ringgit Depreciation In Perspective

This is from June 2014 to December 2014, and to February 2015 (% appreciation of USD; sorted based on the latter date; click on the image for a larger version):


The Ringgit is in the top half of the list, but just barely. Most of the bottom half are currencies pegged to the USD (i.e. from Honduras down to Saudi Arabia), while most of the top half are mostly European and pegged to the Euro. Not all currencies are on the list, but these exceptions are also mostly pegged currencies (most of the Caribbean and Africa for example).

Some people have been calling on the Governor to resign due to the deterioration in the USD value of the Ringgit. I don’t think Tan Sri Zeti is worse than the Governor of the Central Bank of Sudan. It’s clear from here that the sell down of the Ringgit is at worse only partially due to local factors, and much more to do with a strong global rotation towards the USD.

So much for “worse performing currency” and “foreign investors leaving due to lack of confidence in the economy”.

Technical Notes:

FX price data from the Pacific Exchange Rate Service

BNM Watch: Saying Nothing At All

As expected, the Monetary Policy Committee meeting yesterday left the Overnight Policy Rate unchanged at 3.25% (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….

…the downside risks to the global economic outlook remain given the weak growth momentum in a number of major economies. The uncertainties in the policy environment are also contributing to the shift in sentiments in the international financial markets.

While the Malaysian financial markets have been affected by these global developments, there remains ample liquidity in the domestic financial system with continued orderly functioning of the financial markets….

…Going forward, domestic demand will remain as a key driver of growth…household spending will continue to be supported by the steady increase in income and employment.…The prospects are therefore for the Malaysian economy to still remain on a steady growth path….

…For the rest of the year, headline inflation is expected to trend higher, but to be below its historical average….

…At the current level of the OPR, the stance of monetary policy remains accommodative and supportive of economic activity….The MPC will also continue to monitor the risks of destabilising financial imbalances to ensure the sustainability of the overall growth prospects.

Thursday, March 5, 2015

2014 IMF Article IV Report on Malaysia

It’s out, and available here. The summary is per the link below (excerpt):

Favorable Prospects for Malaysia’s Diversified Economy

  • Growth likely to remain healthy in 2015, despite lower energy prices
  • End of fuel subsidies and start of Goods and Services tax is timely, and good for efficiency, equity, and the environment
  • Exchange rate flexibility will help non-energy exports

After a year of very strong growth of 6 percent, lower energy export prices in 2015 will likely contribute to growth moderating to a still impressive rate of close to 5 percent, say IMF economists.

In their annual report on the health of the Malaysian economy, the report’s authors say growth is expected to moderate to about 4¾ percent this year while headline inflation will likely increase slightly to about 3¼ percent in 2015 as a result of an end to fuel subsidies, the introduction of a Goods and Services Tax (GST), and exchange rate depreciation.

The Facts of Life: Monetary Policy Edition

[Rant Mode On]

Lim Sue Goan on the economy and the Ringgit (excerpt):

Bleak economic outlook for the Year of the Sheep – Lim Sue Goan

...The PM should put more focus on economy instead, in view of the plummeting international oil prices and a significantly weakened ringgit....

...Thirdly, the government should support the ringgit. The continuous fall of ringgit has brought up operating costs for many businesses resulting in import inflation. In the long run, the depreciating ringgit will harm the country's economic fundamentals.

Tuesday, March 3, 2015

BNM Watch: Wishin’ I Was Lucky

The Monetary Policy Committee will be meeting this Thursday and the consensus opinion is that there won’t be any change. I don’t think so either, but pressure will be mounting.

BNM won’t be the only central bank deciding on monetary policy this week. Also on the clock are Australia, Canada, Brazil, Poland, Albania, the UK and the ECB. I expect no change from the latter two  with the ECB having already pre-announced the start of Euro-area QE beginning this month and the BOE likely to stay the course. Brazil was the odd man out, with a 50bp hike in January.

Monday, March 2, 2015

Data For Free

Big data is gaining traction. The IMF is offering all its databases free of charge from the beginning of this year:

IMF Offers Free Access to Its Online Economic Data

From the start of 2015, the IMF has made its online economic data available to everyone free of charge. Users have access to a wealth of

macroeconomic data covering all economic sectors of a large part of the IMF’s member countries.

This includes the International Financial Statistics (IFS), Balance of Payment Statistics (BOP/IIP), Government Finance Statistics (GFS), and Direction of Trade Statistics (DOTS) databases. These were all previously only available via subscription.

If you’re interested in Singapore, Singstat has also put its data online (warning: pdf link):

Free Access to More Data on the SingStat Website from 1 March 2015

Data users can look forward to free access to some 12,000 statistical data series on the SingStat website. The data series span across multiple topics within two broad themes, namely population and economy.

So what’s the big deal? It’s not so much that the data is free and online, but that its also readily accessible via visualisation and data downloads of historical time series.

DOS, here’s your next big project.

Wednesday, February 25, 2015

Queuing For Petrol

If you’re the type to queue up for petrol before prices are hiked, make a note to fill up this Saturday:


Since hitting bottom in the second week of January, Brent crude oil has rebounded to around the USD60-USD55 per barrel range (about 20% higher), compared to the USD47.80 average for January.

While Malaysia’s APM pricing is based on MOPS, not Brent, there’s an obvious correlation involved (MOPS includes refinery costs). February’s average Brent prices are pretty close to December’s (the difference is just USD1-USD2 per barrel), so we’re likely to see petrol and diesel prices close to those prevailing in January – RM1.91 for RON95 and RM1.93 for Diesel.

I’m expecting CPI inflation to now hit 0.3% in February, before rising to 1.1%-1.2% in March.

January 2015 Currency Update

I’ve left this off the blog for a very long time, but with so much interest know on the exchange rate, it’s time to revive this particular zombie.

We all know the Ringgit has depreciated significantly against the US dollar in the past half year:


One Ringgit now buys US 29 cents, compared to 33 cents a year ago.

Monday, February 23, 2015

Travel Advice

More expensive holidays overseas? Say it ain’t so (excerpt):

Little respite for the ringgit

PETALING JAYA: Cheap airfare is a boon for holidaymakers going overseas, but Malaysians can’t help but feel a little short-changed after a trip to money changers.

Take the Thai baht, which had advanced 13.2% over the past six months. At 8.93 last week, the baht is at its most expensive against the ringgit since 2007.

Notes On Oil Part II

These are some short notes taken from a presentation I gave last week:

Supply side issues

  1. Global oversupply is only likely to ease by the end of this year. Peak oversupply will be in 2Q2015;
  2. Despite the various contributions of Iraq, Libya and other countries, about 60% of the oversupply is coming from the US;
  3. Just four countries commercially produce shale oil, and the vast majority of it is from the US;
  4. But this production is expected to peak by 2020;
  5. Bottom line: global oversupply is really a US story, and it will persist for the next half decade.

January 2015 Consumer Prices

I’m back from my CNY break, and I hope everyone is back home safe and sound at this beginning of the Year of the Goat.

Last week’s inflation report was a huge surprise, not so much because inflation was down, but the magnitude far exceeded expectations (log annual and monthly changes; 2000=100):


Monday, February 16, 2015

4Q2014 National Accounts: Smokin’ Hot

From last week’s 4Q2014 GDP report, it looks like the IPI was more than just a harbinger, it was spot on (log annual and quarterly SAAR changes; 2005=100):


Thursday, February 12, 2015

Dec 2014 Industrial Production: Smokin’

Back in 2011, I remember the budget coming out and the complete disbelief at the government’s 2012 growth forecast. From economists to the man on the street, nobody thought growth would be anywhere near 5%, much less exceed it (this was right after the Greek bailout). Hell, I was wrong too – I thought 5% was achievable, but a little on the optimistic side. In the end, the economy hit 5.6% GDP growth for 2012, almost right in the middle of the government’s initial forecast.

Deja Vu.

Thursday, February 5, 2015

To Peg Or Not To Peg Part II: FX Intervention Under A Floating Rate Regime

FX intervention is de rigueur under a fixed exchange rate regime – it’s a basic requirement to maintain exchange rate parity.

But there’s also, for various reasons, FX intervention in floating rate regimes. Leaving aside soft pegs, crawling pegs, snakes and the like, how effective is FX intervention under a largely free float?

I don’t think it’s very effective at all.

Monday, February 2, 2015

Currency Manipulation and Economic Sabotage

This started circulating on blogs and social media sometime late last week:

How Tong Kooi Ong is attempting to break Bank Negara and crash the RM

An owner of a prominent news media empire is casting undue influence on the financial and political state of Malaysia for his own personal monetary gain.

Sources within Bank Negara Malaysia (BNM) revealed that Tong Kooi Ong, the owner of the Edge Group and The Malaysian Insider has taken a USD1.4 billion short position on the Ringgit through a proxy. The first transaction took place in August 2014 and subsequent short positions have been taken leading up to January 2015….

Thursday, January 29, 2015

To Peg Or Not To Peg

This question has been coming out a bit lately, so let me try heading off any more of this nonsense before it gets any more steam.

With the Ringgit declining, some of the those with long enough memories remember what happened in 1997-1998. In September 1998, Malaysia imposed “drastic measures” – we fixed the value of the Ringgit at RM3.80 to the USD and instituted capital controls. That halted the downward spiral of the Ringgit, and allowed BNM to regain control of domestic monetary policy. So people wonder, why not peg again?

Here’s the problem with that narrative.

BNM Watch: OPR Stays At 3.25%

Yesterday’s MPC statement came in more hawkish than expected (excerpt):

Monetary Policy Statement

At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to maintain the Overnight Policy Rate (OPR) at 3.25 percent….

…Volatility in the international financial markets has increased amid shifts in global liquidity and heightened uncertainty particularly with regard to global growth prospects and the decline in commodity prices….

Wednesday, January 28, 2015

The Latest, But Not The Last, Domino To Fall

In a surprise move, MAS has just eased their policy target (excerpt; emphasis added):

MAS Monetary Policy Statement

1. Since the last Monetary Policy Statement in October, developments in the global and domestic inflation environment have led to a significant shift in Singapore’s CPI inflation outlook for 2015. As part of its ongoing economic surveillance, MAS has assessed that it is appropriate to adjust the prevailing monetary policy stance.

2. In October 2014, MAS maintained a modest and gradual appreciation path of the S$NEER (Singapore dollar nominal effective exchange rate) policy band, with no change to its slope, width, and the level at which it was centred. This policy stance, which has been in place since April 2012, was assessed to be appropriate for containing domestic and imported sources of inflation and for anchoring inflation expectations.

Tuesday, January 27, 2015

Minimum Wage Review

It’s been two years since the implementation of Malaysia’s minimum wage policy, and it’s now up for review (excerpt):

Review on minimum wage policy

THE minimum wage policy is up for a scheduled review this year and the trade unions are asking the Government to increase the current floor of RM900 a month by 30% to RM1,200….

…Minister in the Prime Minister’s De­p­artment Datuk Seri Abdul Wahid Omar said in September last year that the Government is loooking at gradually increasing the ratio of wages to gross domestic product (GDP) from 33.6% in 2013 to 40% in the long term.

Monday, January 26, 2015

Policy Analysis Isn’t For The Faint Of Heart

I read what I considered really bizarre articles in the Star last Saturday.

First, from Tan Sri Lin See Yan on the current turmoil in the currency and commodity markets. After noting the similarities with the 1990s and the divergent moves by central banks trying to restart growth, he says (excerpt; emphasis added):

A dismal world where oil and currencies are causing havoc

...Still, currency markets remain in turmoil. The recent abrupt move by Switzerland to remove the cap on its franc peg to the euro sent global markets reeling. This prompted the Wall Street Journal’s leader: “Murder in Zurich.” The Swiss franc had since revalued 20% against the euro.

Pressure is now on the Danish krone peg. It signals an end to stable money and a setback for growth. It blew a hole in Japan’s quantative easing (QE) strategy by undermining the credibility of central banks. So, the Swiss National Bank had to move or get run over. Currency market tumult harms. How will China respond to the challenge posed by a much weaker euro, yen and won? If Beijing caves-in and adopts the already in vogue beggar-thy-neighbour stance, ripples can become tidal waves. As I see it, the world has little choice but to go for a globally managed exchange regime.

Friday, January 23, 2015

Car Prices and GST: Bogus Arguments

Datuk Aishah of MAA on the impact of GST on car prices (excerpt):

MAA unclear of GST implications to car prices

PETALING JAYA: The Malaysian Automotive Association (MAA), which has projected a total industry volume (TIV) forecast of 680,000 units for 2015, is in doubt whether the implementation of the Goods and Services Tax (GST) would actually lower car prices.

Its president Datuk Aishah Ahmad said one of the issues is that for current stock held by distributors and dealers, Customs regulations denote that car companies cannot claim back the entire sales and service tax of 10%, but only 2%, meaning that the remaining 8% has to be borne by the company or be passed on to customers.

Dec 2014 Consumer Prices

With the (slight) fall in petrol prices, the aggregate price level moved a little lower in December (log annual and monthly changes):


Hey Fitch, What’s Up With This?

Just a follow up from yesterday evening’s post. To refresh your memory, here’s the data I posted:

  GDP growth (2014e) Gross Debt to GDP Fiscal Balance Current Account to GDP
Australia 2.80% 30.60% -3.30% -3.60%
Canada 2.30% 88.10% -2.60% -2.60%
Malaysia 5.90% 56.60% -3.60% 4.30%

Thursday, January 22, 2015

A Lesson In Macro Policy Choices

The Bank of Canada yesterday surprised everyone by cutting its policy rate by 25bps (excerpt):

Bank of Canada lowers overnight rate target to 3/4 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada….

…Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

Tuesday, January 20, 2015

2015 Budget Revisions

It’s neither as good as I hoped, nor as bad as I expected (you can read the speech here).

The government expects revenue to drop by RM13.8b in oil & gas related revenue, with some uptick from other sources. There will be cuts in operating expenditure along with the savings from the abolishment of petrol and diesel subsidies. Development expenditure will be held constant, based on the original budget estimates.

Monday, January 19, 2015

Living In The Past

As we say in BM, “mamat ni ketinggalan zaman” (excerpt):

‘Time to slash projects involving usage of foreign reserves’

Malaysia is expected to experience two to three years of slower growth rate due to the current stifling economic conditions, says independent analyst Prof Dr Hoo Ke Ping.

Pointing out that Malaysia’s current foreign reserves had depleted significantly since the 2015 Budget was tabled, the government and its people must be prepared for the worst case scenario.

Friday, January 16, 2015

2015 Budget “Restructuring”

A quick note on this (excerpt):

Budget 2015 review

PETALING JAYA: Budget 2015 is to be re-examined, with spending cuts likely to be made in the face of plummeting global oil prices.

Prime Minister Datuk Seri Najib Razak said there was a possibility that the budget tabled last Oct 10 would be restructured.

Tuesday, January 13, 2015

Dato’ Charon on the State of Malaysian Households

Khazanah Research Institute is a new policy think tank that just started up last year. Here's their MD on their first publication, "The State of Households" in Malaysia:

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You can download the report here, and the Executive Summary here.

There's really no big surprises in the report (at least for me), but the KRIS report does a great job of showcasing the data in a very impactful way, for example showing the differences in access to public goods between rich states and poor states. I absolutely love two of the charts they came up with - household expenditure by income strata and category (pg 18) and GDP per capita comparing both states and cities internationally (pg 8). KL for instance, has a GDP per capita equivalent to Korea's and within striking distance of Seoul, but is nearly 2.5x the Malaysian average and almost 7x that of Kelantan. The Klang Valley is almost literally a different country from the rest of Malaysia.