Teaching Moments

Angst over GST seems to be rising, or at least being more deliberately aired. I’m feeling like a broken record (for those under the age of 40, this is what that phrase means).

First up (except):

On Bruce Gale’s Najibnomics
By TK Chua

…The author wrote as if 1MDB, FGV and the controversial Arab donation are trivial matters. Are these not matters closely related to the poor governance, malfeasance and lack of confidence that the country is facing now? How else is the management of an economy perceived to be in good hands if not through the manner in which public finance is managed?

The author talked about “inherited” problems, such as public debt, which is strictly not the fault of the current administration. It was due to a single year’s pump priming in 2009 when the present prime minister first assumed office.

Perhaps it is time for the author to look further afield – at off budget agencies, public enterprises and GLCs, the massive loans of which are guaranteed by the federal government. Perhaps he should also look at new loans to be disbursed soon on new mega projects such as the ECRL and other gateways, the viability of which are deemed doubtful by many….

The (Un)affordability of Housing

I’ve been planning on posting this for a while now, but came across this article this past weekend, which provides the perfect entree (excerpt):

Property market bubble set to burst, says think tank

PETALING JAYA: The property bubble in Malaysia is set to burst, but the government must resist the temptation to intervene and allow market forces to coordinate supply and demand, says a think tank.

In an interview with FMT, the Institute for Democracy and Economic Affairs’ (IDEAS) senior fellow, Carmelo Ferlito explained the two “economic dynamics” which have resulted in the current property situation in the country, where the prices of homes are beyond the reach of most and the oversupply of such homes, has led to many being left unsold.

Figures from the National Property Information Centre (Napic) have indicated that as of the first quarter of 2017, some RM10.08 billion worth of residential units are unsold in Malaysia. This figure does not include serviced apartments, which have since 2015, been classified as commercial properties.

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’.

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%

Reinhart and Rogoff Were Wrong

I’ve always been somewhat leery of the notion that high public debt results in slower economic growth. Piketty’s “Capital in the Twenty-First Century” for example (which I’m in the process of reading), examines the historical record of the UK and France and generally finds this not to be true.

Here’s a more generalised result, using the very same data from the seminal Reinhart and Rogoff study that sparked off austerity-mania in the Western world (excerpt; emphasis added):

Determinants of the growth and sovereign debt correlation
Matthijs Lof, Tuomas Malinen

Since the outbreak of the financial crisis, the relationship between debt and growth has been an issue of heated debate among both academics and policymakers. Reinhart and Rogoff (2010a) showed a negative correlation between sovereign debt and economic growth, and argued that countries could be confronted with a considerable decline in their growth potential after the debt-to-GDP ratio exceeds 90%.

While the research by Reinhart and Rogoff had a substantial influence in policy circles, their results are controversial….

Household Debt: One Small Victory At A Time

In both financial and economic theory, debt repayment is most effective when the highest cost debt is tackled first, i.e. pay off the debt that has the highest interest rate. That’s the rational solution, as it reduces the burden of debt the fastest.

But this abstracts from the very human desire and motivation to reduce debt. From that perspective, reducing the smallest debt burdens is actually the most effective strategy. And here’s the proof (abstract):

Small Victories: Creating Intrinsic Motivation in Savings and Debt Reduction
Alexander L. Brown, Joanna N. Lahey

Saving when faced with the immediate option to spend is an unpleasant but not conceptually difficult task. One popular approach contradicts traditional economic theory by suggesting that people in debt should pay off their debts from smallest size to largest regardless of interest rate, to realize quick motivational gains from eliminating debts. We more broadly define this idea as “small victories” and discuss, model, and empirically examine alternative behavioral theories that might explain it. Using a laboratory computer task, we test the validity of these predictions by breaking down this approach into component parts and examining their efficacy. Consistent with the idea of small victories, we find that when a mildly unpleasant task is broken down into parts of unequal size, subjects complete these parts faster when they are arranged in ascending order (i.e, from smallest to largest) rather than descending order (i.e., from largest to smallest). Yet when subjects are given the choice over three different orderings, subjects choose the ascending ordering least often. Given the magnitude of our results, we briefly discuss the possible efficacy of these alternative methods in actual debt repayment scenarios.

Quick wins, low-hanging fruit, small victories – whatever way you want to call it, making progress however small is a necessary part of any process. At the risk of over-generalising, breaking up difficult tasks into small, achievable segments increases the rate of success. Taking it even further, any success however minor should be celebrated, because these are just milestones to greater achievement.

The human mind works in wonderfully strange and mysterious ways.

Technical Notes

Alexander L. Brown, Joanna N. Lahey, "Small Victories: Creating Intrinsic Motivation in Savings and Debt Reduction", NBER Working Paper No. 20125, May 2014

Regulation And Ratings

There’s a fascinating new working paper at the NBER that examines how the confluence of ratings and regulation conspired to help create the 2008-2009 global financial crisis (abstract):

Rating Agencies
Harold Cole, Thomas F. Cooley

For decades credit rating agencies were viewed as trusted arbiters of creditworthiness and their ratings as important tools for managing risk. The common narrative is that the value of ratings was compromised by the evolution of the industry to a form where issuers pay for ratings. In this paper we show how credit ratings have value in equilibrium and how reputation insures that, in equilibrium, ratings will reflect sound assessments of credit worthiness. There will always be an information distortion because of the fact that purchasers of ratings need not reveal them. We argue that regulatory reliance on ratings and the increasing importance of risk-weighted capital in prudential regulation have more likely contributed to distorted ratings than the matter of who pays for them. In this respect, much of the regulatory obsession with the conflict created by issuers paying for ratings is a distraction.

Skipping over the math, what Cole & Cooley observe is that credit ratings and rating agencies continue to function pretty well, even under the potential conflict of interest arising from the “issuers pay” model, at least for “vanilla” credit securities.

3Q2013 Government Debt Update

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

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…

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?

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.

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

World Debt Clock

I stumbled on this last night going through my RSS feeds:

The global debt clock
Our interactive overview of government debt across the planet

The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock (updated September 2012) shows the global figure for almost all government debts in dollar terms.

Follow the link to view – it’s not just a clock, there’s also an interactive heat map, where you track public debt by totals, as ratios or in terms of growth; from 2001 to EIU forecast data for this year and next. Hovering your mouse over the map on a country prompts a tooltip that shows public debt data for that country in that particular year. There’s even a country comparison tool.

It’s nice toy to play with, if you’ve an interest in public debt, and cross-country comparisons generally

Yes, Minister; No, Minister

I was alerted to this yesterday by a reporter. Sometimes I wonder…do our politicians do any fact checking at all, or do they just pluck figures out of the air?

Our esteemed Deputy Minister of Finance needs some help (excerpt):

Govt to spend on devt, keep debt manageable, says Deputy Finance Minister

KUALA LUMPUR: The government will have to continue spending on development while at the same time keeping national debt at a manageable level, says Deputy Finance Minister Datuk Donald Lim Siang Chai…

…As at December 2011, the ratio of national debt to the gross domestic product (GDP) reached 51.8%.

Talk Boldly And Carry A Small Stick

The ECB has taken out its big guns, but conveniently forgot to take the safeties off (excerpt, emphasis added):

Introductory statement to the press conference
Mario Draghi, President of the ECB,
Vítor Constâncio, Vice-President of the ECB,

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area.

Mythbusting: Government Debt Edition Part II

Well, I’m back from my break and had a lovely time with family and friends – back to regularly blogging again.

Nevertheless, this wouldn’t have been my chosen topic, but with the budget little more than a month away, I suppose its understandable.

In a column yesterday at the Malaysian Insider, Azrul Mohd Khalib repeats all the same old myths about Malaysia’s government debt (excerpt; emphasis added):

Maxing out the national credit card

…Every national Budget over the past few years has had a deficit. When total national expenditure exceeds the revenue collected, a budget deficit then exists. The only way for the government to pay for this deficit is to borrow.

Mythbusting: Government Debt Edition

Teh Chi-Chang of Refsa was on BFM radio the other day promoting his new book:

The Dark Side of Budgets

I sometimes feel like I’m banging my head against a wall.

Why Is Greece Still In The Eurozone?

Why, oh why, is Greece still in the Eurozone? Two stories from the Beeb yesterday:

Eurozone crisis: Greece 'can't take any more cuts'

The Greek people have been pushed to the limit by austerity measures demanded by the EU and IMF, public order minister Christos Papoutsis says.

He said Greeks had made "superhuman" efforts, and "can't take any more"…

…Greece has been told to make deep cuts in return for a huge bailout package.

Athens is negotiating the terms of a 130bn euro ($170bn, £109bn) deal with the EU and IMF.

The Greek parliament approved an austerity package on the weekend, despite violent protests sweeping the country.

But eurozone ministers demanded a further 325m euros of cuts and insisted that all major Greek parties promise to enact the cuts regardless of who wins a general election scheduled for April.

3Q 2011 Government Debt Update

Net government borrowing in 3Q 2011 fell to its lowest level in 3 years (RM millions):

BNM Clampdown

I've just had an accident with my laptop - involving a full mug of tea - so I might be offline for a while until I can resolve the problem.
In the meantime, along with the GDP report last week, BNM made two announcements. The first one deals with regional financial integration (excerpt):

Broadening Regional Financial Collaboration

Bank Negara Malaysia will be expanding the list of eligible collateral following greater regional financial integration. This is aimed at enhancing the liquidity management framework. This is in line with the growing significance of regionally active financial institutions which have intensified the financial inter-linkages between economies, particularly in trade, investment and financial services.

In essence, what it means is that BNM is laying the groundwork for financial settlement of cross-border transactions in anything other than US dollars, to go along with the existing swap line arrangements between the region's central banks. Since this means that intraregional trade need not be denominated in US dollars (which requires US dollar liquidity domestically), it also lessens the necessity for keeping excessive US dollar reserves. Malaysia's direct trade with the US is just 10% of total trade, whereas regional trade ex-Japan is at nearly 60%. Recall that the recession of 2008-2009 in Malaysia wasn't really a factor of a drop in real external demand, but a serious drop in US dollar liquidity from flight to safety and a sharp drop in trust within correspondant banking networks.