Johnny Come Lately

*Sigh* You would think that a ministry dedicated to fostering higher education – in fact, set up recently to provide better more focused guidance to the sector – would have thought of doing this from the get-go (excerpt):

Study on total universities required

PUTRAJAYA (Sept 6, 2011): The government is conducting a study to find out the total number of universities – public and private – needed by the country in order to produce the desired number of graduates.

Higher Education Minister Datuk Seri Khaled Nordin said the purpose of the study is to maintain the quality of Malaysian universities and strengthen the position of the higher education sector.

At the same time, any decision to build new universities or foreign university branch campuses here should benefit the country in producing human capital and contributing towards economic growth.

BNM Watch: OPR To Stay On Hold

I’ve said what I wanted to say on this subject yesterday, but in case anyone missed it, I agree with the consensus – the Monetary Policy Committee won’t increase interest rates at today’s meeting. Also this time, the Stat Reserve Ratio is likely to stay on hold too, though for a different reason – seasonally adjusted growth in M2 crashed in July on a month on month basis:

A lot may change between now and the next meeting on November 11, but if I had to bet I’d put my money on BNM staying pat in that meeting too.

Dynamics and Economic Analysis

Hands up everyone who thought that the S&P downgrade of the US would raise the Federal government’s borrowing costs. A funny thing happened on the way from theory to reality – the markets aren’t cooperating (excerpt):

Treasury yields plunge as stock markets swoon

WASHINGTON: Fears about the weakness in the U.S. economy and Europe's financial crisis caused Treasury prices to rally on Tuesday, sending long-term interest rates lower. Traders dumped stocks in search of lower-risk investments.

The yield on the 10-year Treasury note traded below 2 percent, near the lowest point on record, as strong demand for U.S. government debt boosted Treasury prices...

...Treasurys were plenty attractive on Tuesday as global stock markets fell. The Dow Jones industrial average lost as many as 307 points in morning trading, but recouped much of those losses and closed down 100 points. European markets had plunged on Monday, sending the Stoxx 600 index 4.1 percent lower. U.S. markets were closed Monday for the Labor Day holiday...

...The yield on the 10-year note was 1.97 percent at 4:30 p.m. EST, compared with 2 percent late Friday. Its price rose 12.5 cents for every $100 invested.

The yield fell as low as 1.91 percent late Monday, the lowest yield on record since the Federal Reserve Bank of St. Louis began keeping daily records in 1962.

July 2011 Consumer Price Index Report

Again late, though this time there’s more meat to get into. The July numbers don’t make comfortable viewing (log annual and monthly changes):

Quantitative Easing, ECB Style

From yesterday’s The Star (excerpt):

ECB spent US$18.8 billion on bond buys last week

FRANKFURT, Germany (AP) - The European Central Bank stepped up its emergency bond purchases last week to keep the eurozone debt crisis from infecting Italy and Spain. The move, however, was accompanied by a warning to governments that the support is temporary.

The 13.3 billion ($18.7 billion) purchases announced on the bank's Twitter feed Monday were double the 6.65 billion spent the previous week.

The bank has been buying Italian and Spanish government bonds since Aug. 8. The purchases hold down the interest yields on the bonds, and have kept bond market turmoil from pushing those countries over the edge while European political leaders struggle to come up with more permanent fixes…

If you’re not clear what this means here’s a primer. In essence, the ECB is printing money – “temporarily” to use their term – to provide short term support to Euro area countries having trouble refinancing their government debt. The ECB is also claiming that they’re “sterilising” their bond purchases, indicating that they’re also issuing their own debt to pull back the implied liquidity injection from the bond purchases into the Euro banking system. In short, if you net off the transactions, the ECB is providing it’s own more credible debt in exchange for the troubled debt of the PIGS.

June 2011 Employment Report

This report came out near two weeks ago, but I haven’t covered it yet. Not that we’re missing very much – hardly any “real” changes have occurred since May:

Back From Break…

I’ve been taking it reeaalll easy the last two weeks, so much so that I haven’t even touched my laptop (or even a newspaper) since before the holidays started. Not intentionally mind you…it just happened that way, and I’ve had a heck of a good and enjoyable break.

Beginning today, I’ll be in catch-up mode, so expect posts to accelerate from now on. There’s quite a bit of data to post on, which will have to be slotted in along with my “official” work, but hopefully from now until the end of the year holidays, I’ll be posting more regularly.

Stay tuned…

2Q 2011 GDP: Better Than Expected

While disappointing, the results weren’t totally unexpected. In fact, the y-o-y number of 4.0% came in somewhat higher than the consensus estimate of around 3.6% (and well above that implied by net trade or industrial production output).

In point of fact, apart from the external side, the numbers don’t look half bad (log quarterly changes; seasonally adjusted; annualised):

The Myth of Malaysia’s Middle Income Trap

It’s a stylised fact and almost universally accepted that Malaysia is caught in a middle income trap. But a funny thing happened when I went looking for the evidence – it’ incredibly hard to find. And thinking about the issue made me more convinced that the whole idea is about as real as Hogwarts.

Taken at face value was does the term mean? Simply that a middle-income country stays a middle income country, and doesn’t make the leap into high income status. There’s also the notion of a poverty trap for countries; that low-income countries are unable or unwilling to make the necessary structural changes to achieve a growth “take-off” and start on the long road of development.

US Ratings Downgrade: The End Of The World Is Nigh! Again

I hadn’t touched a computer since last Friday, so I only heard the news Monday morning. While S&P’s move was a bit of a surprise, coming as it did on the heels of the agreement last week on the US debt ceiling, it wasn’t an absolute shocker. The magnitude of the US national debt – and more importantly, who’s holding it – suggests that the risk was always there.

Fundamentally though, nothing has really changed since last week or last month. I can’t help feeling that the ratings agencies are bolting the stable door after the horses have fled. They were roundly criticised and partly blamed for the CDO mess that caused the liquidity crunch in 2007-2008 – both in rating structured products at AAA grades as well as for failing to downgrade fast enough when it became clear that most of the stuff was junk. This is perhaps S&P’s way of saying never again, as the downgrade is a bit of a paper tiger.

What makes this all ironical is that because US government borrowing is all denominated in US dollars, the risk of default is effectively zero. Hence, I don’t know if there’s going to be any real impact on US debt issuance or investor appetite for US treasuries. Even as equities worldwide faced a sell-off, when I checked just now – as I suspected would happen – US treasury yields were down, not up as you would expect on a ratings downgrade. The news just provided investors an excuse to act on their fears over global growth, as equities have looked overbought to me and many others since early this year.

But flight to safety leads directly back to US sovereign debt. So you’ll have this paradoxical situation of the debt downgrade leading to higher demand for the very debt that supposed to be less credit worthy (and incidentally, higher demand for the USD). Go figure.

And before anyone starts blaming the Fed for treasury price movements, let’s note that QE2 ended last month and hasn’t been extended (yet). I’ll also note in passing that the ECB took the opportunity today to quietly expand their QE program, adding in Spain and Italy to the existing support they’ve extended towards Greek, Irish and Portuguese debt.

We’re truly living in interesting times.

June 2011 External Trade

Hard to say whether we’re seeing incipient signs of recovery, but yesterday’s report from Matrade shows that Malaysia’s external trade has levelled out (log annual and monthly changes; seasonally adjusted):

After two straight months of declines, both exports and imports swung up…slightly. After all the disruptions to trade through the first half of the year, though, any positive signs are welcome.

More On Monetary Policy Transmission Through Interest Rates

After a short hiatus for the beginning of fasting month, I’m back…or at least until we come up to Aidil Fitri

As a follow up to my post a couple of weeks back on the monetary transmission mechanism, there’s a new working paper out from the IMF that essentially confirms my findings (abstract):

Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?
Nikoloz Gigineishvili

Summary: Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it.

My calculated elasticities for Malaysia’s policy interest rate pass through falls right on the average for Asia as a whole. So Malaysia's not that far out of line.