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.

IMF Country Report On Malaysia: Reading Between The Lines

The latest Article IV Consultation between the IMF and Malaysia has some rather flattering language (excerpt):

IMF Executive Board Concludes 2012 Article IV Consultation with Malaysia

…Executive Directors commended the authorities for their skillful policies, which have underpinned Malaysia’s strong macroeconomic performance despite a weak external environment…Looking ahead, Directors considered that Malaysia’s medium term prospects are favorable, as the authorities continue to focus on safeguarding financial stability, strengthening fiscal sustainability, and securing high and inclusive growth.

Directors endorsed the current settings for monetary policy and the mildly contractionary fiscal stance in the 2013 budget. They nonetheless encouraged the authorities to further develop their medium­ term [sic] plans to restore a prudent level of federal government debt and rebuild fiscal space…

The IMF On Asia’s Near Term Prospects

Naoyuki Shinohara, the Deputy Managing Director of the IMF on Asia (excerpt; emphasis added)

Will Asia Remain Resilient to Global Economic Headwinds? Near-term Economic Prospects and Risks

As you know, external factors have played a major role in Asia, while domestic demand so far has remained fairly resilient. Spillovers from Europe have caused a marked export slowdown, as well as in a decline in net capital inflows despite their most recent rebound.

However, financial markets stress today is lower compared to about a year ago. In particular, a number of steps have been taken by Euro area officials, and a number of important announcements have been made, that have helped stabilize the situation...

Dissension In The Ranks

Reuters gets the scoop (excerpt, H/T BBC):

IMF economist accuses Fund of suppressing information

WASHINGTON, July 20 (Reuters) - A veteran economist at the International Monetary Fund has accused the global lender of suppressing information on difficulties in dealing with the global financial meltdown and euro zone crisis.

In a resignation letter to the IMF's board and senior staff, dated June 18, Peter Doyle said the IMF's failures in issuing timely warnings for both the 2007-2009 global financial crisis and the euro zone crisis were a "failing in the first order" and "are, if anything, becoming more deeply entrenched."

His letter, a copy of which was seen by Reuters, has brought to light simmering tensions within the IMF over the Fund's credibility, which many worry is threatened by its role in the euro zone crisis.

IMF Upgrades 2012 Global, Malaysia Forecasts

It was just a few short months ago – January to be precise – that the IMF cut the 2012 GDP forecast for Malaysia down to just 4.0%. The latest edition of the World Economic Outlook, released yesterday, is a mite more optimistic.

IMF’s Article IV Consultation With Malaysia: Points To Ponder

This is for policy wonks only! OK, it’s mainly for policy wonks, as there’s some interesting stuff for the layman to look at, if you have the patience to get through some of the jargon.

Starting with the summary page:

Malaysia: Staff Report for the 2011 Article IV Consultation

KEY ISSUES

Near-term outlook. Economic activity is expected to moderate as the weaker external environment tempers exports, private investment and consumption growth. This is expected to lower inflation, but will make the 2012 budget deficit target difficult to achieve. General elections, expected by analysts in early 2012, may add to market volatility.

What The IMF Thinks About Malaysia In 2012

From the transcript of Monday’s press briefing on the World Economic Outlook Update for Asia, with Anoop Singh, Director of the IMF’s Asia and Pacific Department (excerpt):

Transcript of a Press Briefing on the Economic Outlook For Asian Countries

MS. UTSUNOMIYA: Okay. If I may, the last questions from online. What are some of the external risks you foresee for Malaysia for 2012 when the bulk of the government's transportation program projects will be rolled out, which should boost domestic demand?

And also, briefly, shouldn't Japan's rebuilding process, as well as transfer of some of the production basis out of Thailand, provide growth momentum, too?

MR. SINGH: So on Malaysia, I think we should also recall what Governor Zeti said just, I think, a few days ago -- they're clearly watching it closely. The governor was very clear in her assessment that monetary policy is still accommodative and it is widely accepted that growth will likely moderate a bit this year, and also that the current level of interest rates, in her view, are supportive of growth.

Caught With His Pants Down: IMF Chief Suffers Brain Fart

What is it with the heads of the Bretton Wood Institutions? First Paul Wolfowitz of the World Bank got the hook a few years back after abusing his position to arrange a promotion and pay rise for his girlfriend, also working for the World Bank. Now Dominique Strauss-Kahn of the IMF is alleged to have attempted rape on a hotel maid:

IMF Chief Strauss-Kahn Charged With Attempted Rape in New York

May 15 (Bloomberg) -- Dominique Strauss-Kahn, the head of the International Monetary Fund and a potential candidate for the French presidency next year, was charged with attempted rape and a criminal sex act in New York, the police said today.

The charges stem from an incident that allegedly occurred yesterday against a 32-year-old woman at a Sofitel hotel in midtown Manhattan, the New York Police Department said in an e- mailed statement early today. Strauss-Kahn was arrested on an Air France flight at John F. Kennedy airport, the police said. He also has been charged with unlawful imprisonment.

The World Has Turned On Its Axis: Didn’t Notice, Did You?

From this weekend’s G20 meeting comes the news of a realignment in the IMF’s governance structure:

G-20 Ministers Agree ‘Historic’ Reforms in IMF Governance

Ministers of the Group of Twenty (G-20) industrialized and emerging market economies agreed on a proposed raft of reforms of the IMF that will shift country representation at the IMF toward large, dynamic emerging market and developing countries.

A Change Of Governance At The IMF?

From The Economist Free Exchange blog:

Intrigue at the IMF

THINGS are hotting up at the IMF, and it doesn’t have anything to do with bail-outs (or with the heat wave in Washington, DC). Instead, the chatter at the fund is about America’s decision to abstain in a routine vote on the size of the body’s executive board, news of which crept out into the world beyond 19th Street at the end of last week. This may sound arcane (and in a way it is), but it is something that could force the Fund’s members to make a more serious effort to ensure that the long-promised shift in decision-making power at the IMF towards big, fast-growing emerging economies (like China, India and Brazil) materialises.

This has been brewing for a long while, and it took the US siding with emerging economies, ironically, to push the process forward.

IMF Finance & Development Magazine Focuses On Asia

The June issue is worth a read, as it covers many of the broad policy challenges that Malaysia must overcome: from financial sector regulation, to the shift to domestic demand/services-led growth, to national debt reduction.

I was struck by this passage however in the article on the services sector (which, by the way, is highly relevant to Malaysia and our 2020 goal):

“ARCHANA NANANCHERLA attributes India’s economic success to her compatriots’ appetite for hard work. 'We work harder than others . . . it is a trait of Indians,' she declares. But perhaps it is Nanancherla herself and people like her—educated, working in the service sector, with growing disposable income—who are the real secret behind India’s domestic-led growth."

There’s more than an echo here in the first part of the quote above, of the hubris coming out of parts of East Asia (including ourselves) in the mid-1990s – the “East Asian Miracle”, and the superiority of “Asian culture” and “Asian values”. Nor is this an isolated opinion, as I see similar attitudes online, especially among younger Indian and Chinese nationals.

I hope India (and China) never have to go through what we experienced a decade ago, though in India’s case I’m not too optimistic.

It’s The World Bank’s Turn

There’s already evidence that the IMF’s thinking on its approach towards assistance to developing countries has changed, retreating away from the cookie-cutter policies of the Washington Consensus.

Now we have World Bank mulling the same thing. In a new working paper (don’t believe the disclaimer about this not being World Bank thinking or policy), World Bank Chief Economist Justin Lin argues that the mechanisms and timing of structural change and industrial upgrading merit equal attention to technological diffusion. Again, nothing too controversial and just updating the structural school’s approach to development. Here’s the difference though (from the abstract, emphasis mine):

"As strategies for achieving sustainable growth in developing countries are re-examined in light of the financial crisis, it is critical to take into account structural change and its corollary, industrial upgrading. Economic literature has devoted a great deal of attention to the analysis of technological innovation, but not enough to these equally important issues. Te new structural economics outlined in this paper suggests a framework to complement previous approaches in the search for sustainable growth strategies. It takes the following into consideration:

First, an economy’s structure of factor endowments evolves from one stage of development to another. Therefore, the optimal industrial structure of a given economy will be different at different stages of development. Each industrial structure requires corresponding infrastructure (both “hard” and “soft”) to facilitate its operations and transactions.

Second, each stage of economic development is a point along the continuum from a low-income agrarian economy to a high-income industrialized economy, not a dichotomy of two economic development stages (“poor” versus “rich” or “developing” versus “industrialized”). Industrial upgrading and infrastructure improvement targets in developing countries should not necessarily draw from those that exist in high-income countries.

Third, at each given stage of development, the market is the basic mechanism for effective resource allocation. However, economic development as a dynamic process requires industrial upgrading and corresponding improvements in “hard” and “soft” infrastructure at each stage. Such upgrading entails large externalities to firms’ transaction costs and returns to capital investment. Thus, in addition to an effective market mechanism, the government should play an active role in facilitating industrial upgrading and infrastructure improvements."

Could it be that the World Bank is actually advocating industrial policy? If you’re not familiar with the debate, industrial policy (active government intervention in business and investment) used to be a very bad word in mainstream academic circles outside of a few radical thinkers. Heck, Malaysia has gotten enough criticisms on this issue, both inside and outside the country. Now the World Bank is saying, in effect, that it’s ok. Will wonders never cease?

Want An Independent Assessment Of The Malaysian Economy? Try The IMF

I stumbled across the IMF’s latest country report on Malaysia the other day while culling my email. Article IV consultations are conducted with all IMF member states on a regular basis – read this article on the background of IMF surveillance. A summary of the report is available here, if you don’t want to wade through the entire 60-page report.

Interesting reading even if its a bit dated, particularly in the differences in assessing policy between IMF and Malaysian authorities (Treasury and BNM). I’d particular point out pages 15-23, which covers future policy paths (liberalisation, private investment, reducing oil revenue dependency, abolishing subsidies, and fiscal consolidation), and a very interesting box article on page 21 which assesses BNM’s exchange rate intervention post-2005 (summary: it was two-sided, and not intended to force a particular exchange rate level).

Also of interest is a projection of the public sector debt path from pages 3-5 of the Informational Annexe (72% of GDP by 2014).

Not surprisingly, the biggest area of disagreement is on the level of the exchange rate. With the IMF’s three-prong statistical methodology, the Ringgit is considered undervalued though not extremely so, but the policy approach was “broadly appropriate”. Malaysia’s rebuttal is on pages 35-36, which is echoed by the IMF executive director for Malaysia’s statement at the end of the document (pgs 6-7). Here’s an interesting, and highly pertinent, quote from the latter:

“Secondly, while the current account surplus is sizeable, Malaysia is a commodity producer.  Over two-thirds of the current account surplus can be attributed to commodities including oil.  It is fundamentally inappropriate to apply the 3-model CGER estimations when an economy is a significant producer of non-renewable resources.  A Fund working paper by Thomas, Kim and Aslam (2008) estimated that by applying an alternative methodology for assessing the external balance in countries with large stocks of non-renewable resources, the non-oil current account position for Malaysia was in fact in equilibrium, as oil resources can be expected to be depleted in the future.  Our authorities would also welcome accelerated work on the commodity-based CGER approaches that we understand is being undertaken at the Fund. “

Technical Notes:

“Malaysia: 2009 Article IV Consultation - Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Malaysia”, International Monetary Fund, August 2009

Death of the Washington Consensus?

The IMF last week issued a staff position report (warning: pdf link) that represents something of a mea culpa and a retreat from the Washington Consensus. Taken from the conclusion:

“The crisis was not triggered primarily by macroeconomic policy. But it has exposed flaws in the precrisis policy framework, forced policymakers to explore new policies during the crisis, and forces us to think about the architecture of postcrisis macroeconomic policy.

In many ways, the general policy framework should remain the same. The ultimate goals should be to achieve a stable output gap and stable inflation. But the crisis has made clear that policymakers have to watch many targets, including the composition of output, the behavior of asset prices, and the leverage of different agents. It has also made clear that they have potentially many more instruments at their disposal than they used before the crisis. The challenge is to learn how to use these instruments in the best way. The combination of traditional monetary policy and regulation tools, and the design of better automatic stabilizers for fiscal policy, are two promising routes. These need to be explored further.

Finally, the crisis has also reinforced lessons that we were always aware of, but with greater experience now internalize more strongly. Low public debt in good times creates room to act forcefully when needed. Good plumbing, in terms of prudential regulation, and transparent data in the monetary, financial, and fiscal areas are critical to our economic system functioning well. Capitalizing on the experience of the crisis, our job will be not only to come up with creative policy innovations, but also to help make the case with the public at large for the difficult but necessary adjustment and reforms that stem from those lessons.”

Nothing controversial about any of the above, but the devil is in the details. There are some pretty conventional prescriptions that the paper advocates – providing banking system liquidity as needed, fiscal prudence during good times, and strengthening automatic stabilisers aka transfers (tax-rebates, handouts) to the poor; but how about these bombshells:

1.  Should the Inflation Target Be Raised? - “Should policymakers therefore aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? To be concrete, are the net costs of inflation much higher at, say, 4 percent than at 2 percent, the current target range? Is it more difficult to anchor expectations at 4 percent than at 2 percent?”
2. Combining Monetary and Regulatory Policy - “If leverage appears excessive, regulatory capital ratios can be increased; if liquidity appears too low, regulatory liquidity ratios can be introduced and, if needed, increased; to dampen housing prices, loan-to-value ratios can be decreased; to limit stock price increases, margin requirements can be increased.”
3. Inflation Targeting and Foreign Exchange Intervention - “Central banks in small open economies should openly recognize that exchange rate stability is part of their objective function. This does not imply that inflation targeting should be abandoned. Indeed, at least in the short term, imperfect capital mobility endows central banks with a second instrument in the form of reserve accumulation and sterilized intervention. This tool can help control the external target while domestic objectives are left to the policy rate.”

Gosh.

In case you’re not clear about what they’re talking about, in plain English the IMF are calling for:

1. A higher average inflation rate target and by extension, a higher than average policy interest rate as well. The basic goal of central banks worldwide in the last thirty or so years has been price stability, which in real-world terms (taking into account structural issues and a buffer for real money supply growth) has translated into an average inflation goal of around 2%. Higher inflation would have distortive effects on business and personal decisions, such as on investment and savings.
2. Capital controls and market intervention. Can I say, we told you so?
3. Exchange rate intervention. Can I say…oh, I said that already.

In short, this is a retreat from the free market fundamentalism that has characterised IMF and World Bank policy approaches for decades. What a comedown. There’s also the unspoken acknowledgement here that every country is different, and that the one-size-fits-all approach (or in business-school-speak – using “best practices”) to remedial policies is suboptimal, er, won’t work.

I’m not knocking the basic conclusion that free markets are the best method of organising economic activity. But I do think we have to be pragmatic and recognise that real-world markets everywhere are distorted by asymmetric information and differing levels of pricing power between buyers and sellers. It should also be recognised that while the price discovery process through the interaction of supply and demand is the best way to obtain a Pareto-optimal allocation, nothing says that any given equilibrium point is “first-best”.

Technical notes:

1. “Rethinking Macroeconomic Policy”, Blancard, O. and Giovanni Dell’Ariccia and Paolo Mauro, IMF Staff Position Note, SPN/10/03, International Monetary Fund
2. INTERVIEW WITH OLIVIER BLANCHARD, “IMF Explores Contours of Future Macroeconomic Policy”, IMF Survey Magazine

IMF World Economic Outlook Forecasts

No I haven't read it yet (you can find it here), but I did have a look through the accompanying database. Here are the forecasts for advanced nations through to 2014:



Note the relatively rapid recovery expected in the US, the deeper recession in Japan, and the slower recovery in Europe. Not too surprising - the US has done the most in terms of policy response, Europe much less while being more exposed to the external sector, and Japan greatly exposed to global trade shortfalls as well as having less scope for fiscal policy action. What I find interesting is the expected slowdown post-2012 - a side-effect of greater accumulation of public debt leading to higher interest rates is my thinking.

Here are the tiger economies:



Much the same story, although growth stabilises after recovery in 2010-11, with Singapore and Taiwan expected to be the worst affected this year. The BRIC group looks better, although Russia will be badly hit by lower demand for oil and gas:



Last but not least, Malaysia and our two neighbours (sans Singapore above):



I'm thinking that the IMF might be a tad optimistic putting GDP growth at 6% for Malaysia - but I'd be happy if it came true. One request: can anybody tell me why Indonesia is not falling into recession?