Category: Our blogs!

Ed’s note: The year of the Rabbit is ending soon, so check out the predictions here against what has happened in the past 12 months.

(Printed in the Edge Malaysia on January 23rd, 2023)

No, this is not a horoscope prediction; every time I try to read my horoscope it sounds more like a horror-scope! It’s a simple projection of what has been going on in 2022 extended into 2023 that, barring unforeseen circumstances and/ or events, should hold for the year.

Well, it is a new year, 2023 is, as is the Lunar Year of the Rabbit. It is not your usual year for economists and financiers, rather it is a troubling year in which major inflections are likely to happen and converge into one unified direction. Judging by what has been happening in 2022, economists and major capital market players like those in America are braced for an F5-like tornado to hit the world’s economies, starting with the Western ones, but not exclusive to.

Yet, the governments of ASEAN (Association of South-East Asian Nations) countries appear optimistic, as their economies have not had to be protected by what’s happening in the US and Europe… yet(?). 

The economic policy battle for 2022 was a stark, divergent battle; pretty much a battle on two fronts that went in opposite directions, which, at its end, pointed in one direction where it remains today. 

At the start of 2022, the world was emerging out of its pandemic-induced lockdowns. This necessitated economic stimulus packages to restart the economic engines. However, buried into the economic being of nations then was the huge amount of relief spending doled out to help individuals and companies affected by the lockdowns. Billions were shoveled out. 

The spending came on the tail of another huge spend by the Western economies, principally the US in their trying to forestall economic collapse due to the financial crisis caused by Mortgage Debt Securities in 2007 and 2008. Hardly had the central banks started pulling out the excess liquidity in their “tapering” exercise that the CoVid-19 pandemic hit, bringing lockdowns and another potential economic collapse with it.

How large an amount of money was put out? For the US, the epicenter of the 2007 and 2008 crisis, the best measure of “new” money put out would be looking at the M1. From December 2006 to November 2022, according to the St. Louis Federal Reserve Bank, the M1 grew from US$1,368 billion to US$19,933.2 billion, i.e., a growth rate of 1,357.11% for the 16 years, or a compounded 18.2% a year. That the M1 is almost at parity with the US GDP (Gross Domestic Product) of US$22,966 billion in 2021 would have alarmed every financial macroeconomist in the world. It would be akin to injecting a patient with his body weight of adrenalin to stimulate him; surely it could kill him instead?

Such massive amounts of money floating around typically means high inflation is coming. And so, it came to be. US inflation shot up to almost 10%, as did the EU countries, with the UK going over 10%. US and EU interest rates were raised multiple times to stifle and slow down inflation. “The war is on!” seemed to be the battle cry ay the US Fed and the ECB (European Central Bank). Others followed, but don’t let the speed fool you; many countries’ interest rates were at the “Zero Lower Bound” to begin with, to use a financial macroeconomic term that meant they were at or near zero. The raised rates aren’t even “high” by any standards; the US Fed Fund Rate is now at 4.25 to 4.5%, saying that there is more upside for it. As Fed Chairman Powell has implied, it’s a long battle and inflation is stubborn.

How long a battle? As we had pointed out in our article in The Edge of October 10^th, 2022, “What happened to Malaysia when stagflation hit the US?”, elevated levels of the CPI (i.e., >3%) and Fed Funds Rate (i.e., >5%) lasted for 16 years from 1972 to 1987.

The inflation picture was made worse when Russia unwarrantedly attacked Ukraine. Ukraine is a major supplier of wheat, corn, and sunflower oil in the world. Indeed, food prices have shot up, and even in faraway Malaysia was hit when chicken prices shot upwards, as corn-feed which Malaysia is totally import dependent upon, was hit by both the Ukrainian situation and the years-long drought in South America. Now there is a shortage of eggs, and no turkeys for Christmas.

All this will have an impact on economic growth for all countries. As the International Monetary Fund (IMF) has pointed out in their October 2022 World Economic Outlook, downward revisions for growth in the world’s economies have increased since last April’s report. For the ASEAN region for 2023, the downward forecast is a steep -0.9% to 4.7% growth. The weakening has begun. Malaysia too, must play the long game. 

So, there it is, the real issues that Malaysia will have to contend with in 2023 and Rabbit Year will be centered around higher prices and higher interest rates. Thankfully, corporate Malaysia is not highly leveraged, but households are. This means less disposable income as interest payments creep up. This will also hurt diets, as a substantial portion of Malaysian food is imported (around a third at last count). 

Will price controls help? Not really, as, if controlled prices are lower than the cost of furnishing goods for sale, traders would lose money at every sale and would stop. Shortages would appear. 

Would subsidies help? Yes, it is better than price controls, but targeted subsidies are impossible to properly do (too many leakages would occur), and it all depends on the timing of the subsidy payments to the sellers. Overly long payment periods would risk the retailer going bankrupt for the lack of timely cash in hand. 

Both measures are at best a temporary salve that might not work too well.

Hence, a higher global interest rate environment is likely to trigger price increases domestically, and that will make its way to the Malaysian dinner table. It will also deplete demand and disposable income becomes less and less. 

Surely, you say that we can withhold raising our interest rate. Maybe, but we may be forced to. The key mechanism is worth reiterating here. As other countries raise their interest rates, their currencies rise in strength as depositors buy that currency to enjoy their higher interest rate. In this scenario, where the rising interest rate is not matched by another country, then the latter country’s currency will fall relative to the former country’s.

This then raises the cost for imports, i.e., for all goods. Along with smaller disposable incomes and goods priced out of reach, misery levels will ratchet up. That is probably why nations big and small keep up with the US Dollar’s interest rate movements; it is the most used currency in the world, after all.

Well, that to us is the story for 2023 and the Year of the Rabbit. Time for prudence and belt tightening. Good that we are already on a diet. All the best!

(Printed in The Edge on November 7th. 2022)

Malaysia’s traditional reading of the proposed 2023 Budget was brought forward earlier to October 7^th, 2022, and the surprising announcement of the dissolution of Parliament happened literally the next day, sending many economists and financiers into a tizzy. “What happens to the Budget just read?” was one of the big questions on everyone’s mind. The vague answer from the Government was that it may be the same Budget or a different one was not reassuring. 

Mind you, the proposed 2023 Budget has not been approved by Parliament and the current Prime Minister (PM) stated it would be presented again after the 15^th. General Elections.

As it is, Malaysia’s government is an unprecedented patchwork one. After 61 straight years in power, the ruling Barisan Nasional (BN) coalition lost to the Pakatan Harapan (PH) one in the 14^th General Elections. However, barely two years after the historic win, the PM then resigned and pulled his party, Bersatu, out of the PH coalition, collapsing the Government. This was in the teeth of the highly dangerous CoVid-19 pandemic, then just starting. Unable to hold a General Elections at that time without endangering millions of people, His Majesty the King with the full support of Their Majesties the Rulers’ Council (Malaysia has 9 Sultans, each taking 5-year turns at being the King of the country), asked every Member of Parliament who they would support as Prime Minister. The majority declared for the new leader of Bersatu, a veteran politician himself, and so a new coalition of formerly opposition parties of mainly BN and Bersatu joining together to form one government, called Perikatan Nasional (PN). Dogged by uncertainty as to whether Bersatu’s chief did actually have the majority of Parliamentarians behind him (all this during a raging pandemic, no less), he resigned and passed the PM-ship to one of his Deputy PMs, a capable man from BN. A year or so later, after the CoVid-19 lockdowns were lifted nation-wide, Parliament was dissolved.

With three different lead parties forming the government, one must ask, what kind of a Budget would come to Malaysia for 2023 given, for the first time ever, Malaysia had three different parties leading the Government? In just about every other country in the world, a political party has its own distinctive foci on the economy; hence, who is in charge pretty much has a different Budget compared to another party who was in charge earlier.

So, let us look at the 3 major spending categories for the Budget in Chart 1 and the 5 major Sector categories in Chart 2 below to see if there were indeed major changes applied by each of the 3 governments, first by BN in 2017, then by PH in 2018 and 2019, then Bersatu in 2020 and 2021, and then back to BN in 2022. Here we define it by which party the sitting PM is from, rather than the coalition per se. We arbitrarily define a “major change” as changing the proportion of the Budget assigned to it by at least 10 percentage points, e.g. if the Economic Sector’s allocation moved from 8% to 18%.

Table 1 Division of Expenditure by Federal Malaysian Government by Use

Year	Percent of Annual Budget
	2017	2018	2019	2020	2021	2022
Supply	60.2	61.3	61.5	57.9	53.4	50.3
Obligations	21.5	21.7	20.6	22.7	23.5	24.8
Development	18.3	17.0	17.9	19.4	23.1	24.9

Source: Respective Treasury Budget Reports

It is rather obvious from Table 1 that there was no major change on a year-to-year or administration-to-administration basis. However, for the “Supply” category, there was a significant change from 2017 to 2022, i.e., over 6 years. The peak was during PH’s term in 2018 and 2019 at 61+% of the national Budget, before the PN government (led both by Bersatu and BN respectively) brought down “Supply” spending, most probably to spend on the CoVid-19 fight and aid to those worst affected by what turned out to be a 2-year national lockdown. We investigated the veracity of this assumption and display the results below.

Table 2 Operational Expenditure by Sector

Year	Percent of Annual Budget
	2017	2018	2019	2020	2021	2022
Economy	7.7	8.7	6.0	7.1	7.2	8.1
Social	40.0	38.4	35.3	40.5	41.0	41.1
Security	11.4	11.2	9.0	11.2	10.9	10.8
Administration	5.3	6.9	6.1	7.8	8.2	5.3
Others	35.6	34.8	43.6	33.4	32.7	34.7

Source: Respective Treasury Annual Reports

It appears there is one major change, between 2019 and 2020, where the “Others” was reduced from 43.6% to 33.4% but it was done by the same Bersatu government, and hence, isn’t a reflection of economic philosophy of the party.

Otherwise, the structure of the Budget appears rigid and relatively inflexible year-to-year.

A review of the 2020, 2021, and 2022 Budget papers at the Treasury website does not reveal how the aid spending for the pandemic was accounted for. Indeed, many of the Ministerial accounts were not even posted for 2021 and 2022. Given the lack of clarity, we can only conclude that these drops did happen but the why is unknown.

Hence, one must come to the conclusion that throughout basically 3 different parties leading the government since 2018, no imprint was made on the Budget for the country that would show their respective distinctive economic strategies. This means that, for 2023, the Budget that Malaysia is going to get is the same old, same old.

The problem is that in Budget 2023, there was no visible economic strategy other than handing out money to the less fortunate and most vulnerable. One is reminded of the saying, “Give a man a fish and he eats a meal, teach him how to fish and he eats for a lifetime”. The real danger is to generate dependency, and this would be a heavy burden to carry forward. Missing rather visibly is what has happened to the steps on the continuous journey towards Malaysia becoming a Developed Nation? Or has that been abandoned already, defeated are we by the Middle-Income Trap?

Here’s the tough part: the IMF (International Monetary Fund) recommends that post-pandemic fiscal budgets be as flexible as possible, to meet any unforeseeable contingencies, like war (look at what happened to Ukraine) or natural disasters. Can Malaysia cope without such flexibility? It is too easy to resort to additional borrowing; those have its limits and Malaysia is awfully close to them. Disaster awaits beyond the rim….

(Printed in The Edge, November 7th, 2022)

Malaysia’s traditional reading of the proposed 2023 Budget was brought forward earlier to October 7^th, 2022, and the surprising announcement of the dissolution of Parliament happened literally the next day, sending many economists and financiers into a tizzy. “What happens to the Budget just read?” was one of the big questions on everyone’s mind. The vague answer from the Government was that it may be the same Budget or a different one was not reassuring. 

Mind you, the proposed 2023 Budget has not been approved by Parliament and the current Prime Minister (PM) stated it would be presented again after the 15^th. General Elections.

As it is, Malaysia’s government is an unprecedented patchwork one. After 61 straight years in power, the ruling Barisan Nasional (BN) coalition lost to the Pakatan Harapan (PH) one in the 14^th General Elections. However, barely two years after the historic win, the PM then resigned and pulled his party, Bersatu, out of the PH coalition, collapsing the Government. This was in the teeth of the highly dangerous CoVid-19 pandemic, then just starting. Unable to hold a General Elections at that time without endangering millions of people, His Majesty the King with the full support of Their Majesties the Rulers’ Council (Malaysia has 9 Sultans, each taking 5-year turns at being the King of the country), asked every Member of Parliament who they would support as Prime Minister. The majority declared for the new leader of Bersatu, a veteran politician himself, and so a new coalition of formerly opposition parties of mainly BN and Bersatu joining together to form one government, called Perikatan Nasional (PN). Dogged by uncertainty as to whether Bersatu’s chief did actually have the majority of Parliamentarians behind him (all this during a raging pandemic, no less), he resigned and passed the PM-ship to one of his Deputy PMs, a capable man from BN. A year or so later, after the CoVid-19 lockdowns were lifted nation-wide, Parliament was dissolved.

With three different lead parties forming the government, one must ask, what kind of a Budget would come to Malaysia for 2023 given, for the first time ever, Malaysia had three different parties leading the Government? In just about every other country in the world, a political party has its own distinctive foci on the economy; hence, who is in charge pretty much has a different Budget compared to another party who was in charge earlier.

So, let us look at the 3 major spending categories for the Budget in Chart 1 and the 5 major Sector categories in Chart 2 below to see if there were indeed major changes applied by each of the 3 governments, first by BN in 2017, then by PH in 2018 and 2019, then Bersatu in 2020 and 2021, and then back to BN in 2022. Here we define it by which party the sitting PM is from, rather than the coalition per se. We arbitrarily define a “major change” as changing the proportion of the Budget assigned to it by at least 10 percentage points, e.g. if the Economic Sector’s allocation moved from 8% to 18%.

Table 1 Division of Expenditure by Federal Malaysian Government by Use

Year	Percent of Annual Budget
	2017	2018	2019	2020	2021	2022
Supply	60.2	61.3	61.5	57.9	53.4	50.3
Obligations	21.5	21.7	20.6	22.7	23.5	24.8
Development	18.3	17.0	17.9	19.4	23.1	24.9

Source: Respective Treasury Budget Reports

It is rather obvious from Table 1 that there was no major change on a year-to-year or administration-to-administration basis. However, for the “Supply” category, there was a significant change from 2017 to 2022, i.e., over 6 years. The peak was during PH’s term in 2018 and 2019 at 61+% of the national Budget, before the PN government (led both by Bersatu and BN respectively) brought down “Supply” spending, most probably to spend on the CoVid-19 fight and aid to those worst affected by what turned out to be a 2-year national lockdown. We investigated the veracity of this assumption and display the results below.

Table 2 Operational Expenditure by Sector

Year	Percent of Annual Budget
	2017	2018	2019	2020	2021	2022
Economy	7.7	8.7	6.0	7.1	7.2	8.1
Social	40.0	38.4	35.3	40.5	41.0	41.1
Security	11.4	11.2	9.0	11.2	10.9	10.8
Administration	5.3	6.9	6.1	7.8	8.2	5.3
Others	35.6	34.8	43.6	33.4	32.7	34.7

Source: Respective Treasury Annual Reports

It appears there is one major change, between 2019 and 2020, where the “Others” was reduced from 43.6% to 33.4% but it was done by the same Bersatu government, and hence, isn’t a reflection of economic philosophy of the party.

Otherwise, the structure of the Budget appears rigid and relatively inflexible year-to-year.

A review of the 2020, 2021, and 2022 Budget papers at the Treasury website does not reveal how the aid spending for the pandemic was accounted for. Indeed, many of the Ministerial accounts were not even posted for 2021 and 2022. Given the lack of clarity, we can only conclude that these drops did happen but the why is unknown.

Hence, one must come to the conclusion that throughout basically 3 different parties leading the government since 2018, no imprint was made on the Budget for the country that would show their respective distinctive economic strategies. This means that, for 2023, the Budget that Malaysia is going to get is the same old, same old.

The problem is that in Budget 2023, there was no visible economic strategy other than handing out money to the less fortunate and most vulnerable. One is reminded of the saying, “Give a man a fish and he eats a meal, teach him how to fish and he eats for a lifetime”. The real danger is to generate dependency, and this would be a heavy burden to carry forward. Missing rather visibly is what has happened to the steps on the continuous journey towards Malaysia becoming a Developed Nation? Or has that been abandoned already, defeated are we by the Middle-Income Trap?

Here’s the tough part: the IMF (International Monetary Fund) recommends that post-pandemic fiscal budgets be as flexible as possible, to meet any unforeseeable contingencies, like war (look at what happened to Ukraine) or natural disasters. Can Malaysia cope without such flexibility? It is too easy to resort to additional borrowing; those have its limits and Malaysia is awfully close to them. Disaster awaits beyond the rim….

(Published in The Edge, October 10th, 2022)

US Fed Chairman Jerome Powell recently hiked the US Fed Funds Rate by 75 basis points to between 3.00 to 3.25%, and signalled that by the end of the year, they were targeting an interest rate of 4.5%. This means that another 125 basis points of interest rate hikes are in the offing. He went on to say that their final target is to bring inflation down to 2%, from August 2022’s 8.3% year-on-year. That presages some very vigorous movements for the US Dollar (USD), and some rather bleak outlooks for other currencies that do not act to preserve the value of their currencies.

The current downswings of the Malaysian Ringgit against the USD have many worried how long it would last and how much their lives would change. Thoughts of whether they would be shoved into poverty, hunger, or hopelessness have popped up foremost in their minds.

Why would a currency like the USD have so much sway in Malaysian’s lives? Based on the European Central Bank (ECB) in 2021, the USD is the currency in roughly 40% of all trade invoices globally. Former Malaysian Prime Minister Muhyiddin was recently quoted as saying the food import bill for last year was RM63 billion. One can do the math easily and find that upward changes in USD would lead to higher costs of food in Tanah Airku. This was evidenced recently by the crisis in the price of chicken in Malaysia (sparked by the cost of its feed which is 100% imported into the country) and of broad-based food inflation. What’s worse is that, it is not a one-off event: Russia’s unwarranted aggression against Ukraine has pushed wheat and corn prices stratospherically, and oil & gas prices teeter on the brink of another atmospheric flight with the Northern Hemisphere’s winter coming up and Russian supply sanctioned. This is on top of a four-year drought in South America, big exporters of grains and feeds to the world.

With all this doom rolling in like a killer tsunami, thoughts and actions must now turn towards defending theRakyat. In our last article in The Edge we pointed out that BNM (Malaysia’s Central Bank) has done well in managing forex (foreign exchange) risks for itself, but now we must ask whether we have the experience to handle what is happening in the US economy as the consequences hit the Rakyat. 

What is happening to the US economy is a major fight against stagflation. In the 1970s and 1980s, they had a major battle against it that is eerily similar to what it is today. In that episode, lasting 16 years, the US had emerged from the Vietnam War and the huge amount of wartime spending that was needed was in their economy, they were forced to abandon the Gold Standard, and the Oil Crisis happened, sending inflation zooming upwards and GDP (Gross Domestic Product) skidding downwards.

Chart 1 

 The data range we chose was from 1972, a year before the Oil Crisis, to 1987, when the US stock market crashed on Black Monday, changing economic fundamentals substantially. Some datapoints popped out:

1. The US CPI went from 3.27% in 1972 to a high of 13.55% in 1980, before going down to below 2% a year before the 1987 crash, and
2. US interest rates, using Fed Fund Rates, started at 5.33% in 1972 before going as high as 18.9% in 1980 and thereafter falling to 6.77% in 1987.

Chart 2

This entire stagflation episode took 16 years to fight. This was not a sprint but an ultra-marathon. The current one looks likely to be another long battle, too.

How did Malaysia do during this period?

Quixotically, Malaysia started the period already at high interest rate levels and kept them high throughout the period, with a peak of 12.4% in 1982. This seems to say we were fighting two different crises, one before the period and one during. Further, inflation started at 3.2% in 1972, hit a high of  17.3% in 1974, and ended at 0.3% in 1987 which indicated an overkill, as Malaysia’s GDP dropped from 7.8% in 1984 to a -1% recession in 1985, kicked along by severe drops in rubber and tin prices, two commodities forming a large bulk of Malaysia’s export earnings then.

Chart 3

As one can see in the chart above, Malaysia’s interest rates were in double digits from 1980 to 1987 (and skirting around 10% in the years before) while from 1982, the US’ trended downwards from under 10% to 6.77% in 1987.

Despite the higher interest rates’ posture by Malaysia, the Ringgit actually fell against the USD in the period of 1980 to 1987:

Chart 4

This seems to say that if another country’s economy doesn’t recover as fast or policy action meant for another purpose is lagging in ending or even implementation as the case may be, then that country’s currency (herein Ringgit) will lose value against another’s (herein USD).

However, this chart added mystery to the whole thing:

Chart 5

Basically what it says is that the US and Malaysian economies were countercyclical to each other but given what happened, counter-intuitively, Malaysia was not immune to what was happening in the US and the transmission of higher inflation through its causes did happen and Malaysia was hit as well.

Nowadays, as we had argued several times before, things have changed. Due to Malaysia pegging the Ringgit to the USD in 1998, our economy is pro-cyclical with the US’ as this chart shows:

Chart 6

Does this mean this time, Malaysia will be hit worse?

(Printed in The Edge October 10th, 2022)

US Fed Chairman Jerome Powell recently hiked the US Fed Funds Rate by 75 basis points to between 3.00 to 3.25%, and signalled that by the end of the year, they were targeting an interest rate of 4.5%. This means that another 125 basis points of interest rate hikes are in the offing. He went on to say that their final target is to bring inflation down to 2%, from August 2022’s 8.3% year-on-year. That presages some very vigorous movements for the US Dollar (USD), and some rather bleak outlooks for other currencies that do not act to preserve the value of their currencies.

The current downswings of the Malaysian Ringgit against the USD have many worried how long it would last and how much their lives would change. Thoughts of whether they would be shoved into poverty, hunger, or hopelessness have popped up foremost in their minds.

Why would a currency like the USD have so much sway in Malaysian’s lives? Based on the European Central Bank (ECB) in 2021, the USD is the currency in roughly 40% of all trade invoices globally. Former Malaysian Prime Minister Muhyiddin was recently quoted as saying the food import bill for last year was RM63 billion. One can do the math easily and find that upward changes in USD would lead to higher costs of food in Tanah Airku. This was evidenced recently by the crisis in the price of chicken in Malaysia (sparked by the cost of its feed which is 100% imported into the country) and of broad-based food inflation. What’s worse is that, it is not a one-off event: Russia’s unwarranted aggression against Ukraine has pushed wheat and corn prices stratospherically, and oil & gas prices teeter on the brink of another atmospheric flight with the Northern Hemisphere’s winter coming up and Russian supply sanctioned. This is on top of a four-year drought in South America, big exporters of grains and feeds to the world.

With all this doom rolling in like a killer tsunami, thoughts and actions must now turn towards defending theRakyat. In our last article in The Edge we pointed out that BNM (Malaysia’s Central Bank) has done well in managing forex (foreign exchange) risks for itself, but now we must ask whether we have the experience to handle what is happening in the US economy as the consequences hit the Rakyat. 

What is happening to the US economy is a major fight against stagflation. In the 1970s and 1980s, they had a major battle against it that is eerily similar to what it is today. In that episode, lasting 16 years, the US had emerged from the Vietnam War and the huge amount of wartime spending that was needed was in their economy, they were forced to abandon the Gold Standard, and the Oil Crisis happened, sending inflation zooming upwards and GDP (Gross Domestic Product) skidding downwards.

Chart 1 

 The data range we chose was from 1972, a year before the Oil Crisis, to 1987, when the US stock market crashed on Black Monday, changing economic fundamentals substantially. Some datapoints popped out:

1. The US CPI went from 3.27% in 1972 to a high of 13.55% in 1980, before going down to below 2% a year before the 1987 crash, and
2. US interest rates, using Fed Fund Rates, started at 5.33% in 1972 before going as high as 18.9% in 1980 and thereafter falling to 6.77% in 1987.

Chart 2

This entire stagflation episode took 16 years to fight. This was not a sprint but an ultra-marathon. The current one looks likely to be another long battle, too.

How did Malaysia do during this period?

Quixotically, Malaysia started the period already at high interest rate levels and kept them high throughout the period, with a peak of 12.4% in 1982. This seems to say we were fighting two different crises, one before the period and one during. Further, inflation started at 3.2% in 1972, hit a high of  17.3% in 1974, and ended at 0.3% in 1987 which indicated an overkill, as Malaysia’s GDP dropped from 7.8% in 1984 to a -1% recession in 1985, kicked along by severe drops in rubber and tin prices, two commodities forming a large bulk of Malaysia’s export earnings then.

Chart 3

As one can see in the chart above, Malaysia’s interest rates were in double digits from 1980 to 1987 (and skirting around 10% in the years before) while from 1982, the US’ trended downwards from under 10% to 6.77% in 1987.

Despite the higher interest rates’ posture by Malaysia, the Ringgit actually fell against the USD in the period of 1980 to 1987:

Chart 4

This seems to say that if another country’s economy doesn’t recover as fast or policy action meant for another purpose is lagging in ending or even implementation as the case may be, then that country’s currency (herein Ringgit) will lose value against another’s (herein USD).

However, this chart added mystery to the whole thing:

Chart 5

Basically what it says is that the US and Malaysian economies were countercyclical to each other but given what happened, counter-intuitively, Malaysia was not immune to what was happening in the US and the transmission of higher inflation through its causes did happen and Malaysia was hit as well.

Nowadays, as we had argued several times before, things have changed. Due to Malaysia pegging the Ringgit to the USD in 1998, our economy is pro-cyclical with the US’ as this chart shows:

Chart 6

Does this mean this time, Malaysia will be hit worse?

(Published in The Edge in September 2022)

The recent fall of the Ringgit (RM) against the US Dollar (USD) has had many in the country voicing their concerns as to imported inflation and even forwarding suggestions that the RM should be re-pegged against the USD to avoid such volatility. Indeed, the RM has fallen, at the time of writing, by around 7.2% for the year to date. That is a huge movement. Quixotically, other currencies against the RM have remained more or less where they are, even though many have had their interest rates raised markedly. Hence, some have asked, is it just a matter of time before the RM falls against them too?

There is another matter that needs to be examined that swirl around the same issue: whether the falls of the RM presage losses at Bank Negara Malaysia (BNM) as they fight to moderate the movement of the RM.

The past many years, since the 1990s, have thrummed with rumors of forex (foreign exchange) losses at BNM, once accused of such to the tune of RM31.5 billion during the years 1988 to 1994, that was investigated by a Royal Commission of Inquiry (RCI). The report was completed, and matters extended for further investigation. It has since been categorized by the Royal Malaysian Police as requiring “No Further Action” due to the lack of evidence to pursue investigations.

As avid readers, we sometimes wander over to the esoteric and as a financial economist, it means going as deep and as wide as needed to find the answers to burning questions. It is always a joy to find a book written by a non-mainstream writer, and the fresh perspectives brought about by M.A. Akinkunmi in “Central Bank Balance Sheet and Real Business Cycles” was eye-opening. The shocking revelation in that was that book claimed that central banks did not have to follow accounting rules. This set us off in investigating whether some questions we have always had could have been answered by this.

We were happy to find that as far back as the 2012 BNM Annual Report stated that the accounts have been prepared in accordance with the Central Bank Act of 2009 and the applicable Malaysian Financial Reporting Standards (MFRS), and that it (the central bank) will comply as closely as possible to the requirements of the MFRS and their Act. Then, of course, we have the Jabatan Audit Negara (National Audit Department) to keep things on the straight and narrow.

In so checking, we came across a note to the category Risk Reserves in the accounts, that noted it was,

“Used to account for unrealized revaluation gains or losses arising from changes in exchange rates and market prices and to absorb any potential future losses resulting from unfavorable circumstances not within the control of the Bank. The Exchange Rate Fluctuation Reserves, Revaluation Reserve, and Contingency Reserve, which was presented in previous years as “Other Reserves” have been consolidated and renamed as “Risk Reserves”.

That Annual Report also states that for “Market Risk”, it is defined as,

“Market Risk is the exposure of the Bank’s investments to adverse movements in market prices such as foreign exchange rates, interest rates, and equity prices. Market risk is monitored on a daily basis and all of the investments and instruments will have a marked to market value. Investments are guided by a benchmark policy approved by the Board of Directors which reflects the long-term investment objectives and acceptable risk-return profile. “Active Risk” may be taken through investments and instruments that can be different from the benchmark though must be within approved investment guidelines. The degree of “active risk” is measured and controlled through using limits that must be adhered to. Sensitivity analysis and stress testing are undertaken to assess potential marked-to-market losses from adverse movements and volatility in the market”.

The 2021 Annual Report said basically the same thing, hence it is obvious that if there are forex losses, one will find it within this category, specifically an entry called “Movements During The Year” which are nowadays specifically stated.

Thus, how has BNM been performing? We look at the year 2013 to 2016:

Category (RM million)	2013	2014	2015	2016
Risk Reserves At Year Start	13,966	39,947	52,827	112,716
Transfer From P&L	3,900	3,350	4,700	3,900
Movement In The Year	22,081	9,530	56,539	9,325
Risk Reserves At Year End	39,947	52,827	112,716	126,741

All seemed quite well, and then we turn towards 2017 to 2021:

Category (RM million)	2017	2018	2019	2020	2021
Risk Reserves At Year Start	126,741	118,657	113,477	131,436	144,746
Transfer From P&L	4,900	5,000	5,400	0	0
Movement In The Year	-12,984	-10,180	12,959	13,310	7,437
Risk Reserves At Year End	118,657	113,477	131,436	139,346	152,183

There were two years of losses (i.e., negative values in the year’s movements), 2017 and 2018, both absorbed by the amount of Risk Reserves already there plus a small “Transfer from the Profit & Loss” side of things. Hence, all appears well.

Checking the Movements in the Year against the changes of the RM against the USD for 2013 to 2017, to see how sensitive the financials are against forex movements of the RM versus the biggest use currency in the world, we find:

Category	2013	2014	2015	2016	2017
Risk Reserves At Year Start	13,966	39,947	52,827	112,716	126,741
Transfer From P&L	3,900	3,350	4,700	3,900	4,900
Movement In The Year	22,081	9,530	56,539	9,325	-12,984
Risk Reserves At Year End	39,947	52,827	112,716	126,741	118,657
Change in RM/ USD (%)	-6.6	-6.2	-18.5	-4.3	10.9

For the years 2017 to 2020, they are:

Category	2018	2019	2020	2021
Risk Reserves At Year Start	118,657	113,477	131,436	144,746
Transfer From P&L	5,000	5,400	0	0
Movement In The Year	-10,180	12,959	13,310	7,437
Risk Reserves At Year End	113,477	131,436	139,346	152,183
Change in RM/ USD (%)	-2.1	0.9	1.8	-3.8

It appears that the linkage between RM/ USD’s movements are random and poorly correlated to BNM’s “Movement In The Year” (i.e., the forex gains or losses) as it were. This, of course, can be due to proper management practices such as diversifying the assets under BNM to avoid concentration risk, and minimal operational intervention in the currency markets. The large Risk Reserves amount held ensures that losses can be absorbed. Congratulations to BNM. There seems little to worry about the possibility of large forex losses for BNM currently. 

Nonetheless, as we had pointed out in our recent paper, “How Low Can the Malaysian Ringgit Go?”, there is a need to tame the volatility of the Malaysian Ringgit, and there are two ways to do that, either through direct intervention, or through deepening the Malaysian Ringgit market. The first option, of course, means that forex losses could be visibly large at the central bank.

Malaysia, of course, does not need that.

Fresh article, never before published.

Whenever I mention the seating of a Prime Minister (PM) or a President, inevitably, after surprised look on faces of whomever I am talking to, they usually ask things like, “He cannot sit himself down, aaa?” or “Why, what’s wrong with his chair now? Too keras (hard), is it?”, and even, “Aiyo! Lazy fella! Ask him to sit himself down, lah!”

Seating a PM has hardly anything to do with a chair, sofa, or bangku (stool). No, the choice of a cushion or kayu (wood) doesn’t come into it, no matter how one feels about the person to be seated. 

Seating a PM or a President is a program of initiatives that the newly elected leader will begin his first 100 days with. The 100 days program started on US President Theodore Roosevelt’s own initiative, but few have emulated him, either for probably fear of failure or having no concrete ideas of what to do. The exception is current US President Joe Biden. 

Biden’s first 100 days was by all accounts a roaring success and now, two years on, huge gains have been made by his Administration. The commercial equivalent is the “First 90 Days” in which CEOs and Chairpersons outline their policies and directions, plus the targets they want to achieve in the first 3 months of their being in charge. This works to solidify their grip in leadership of the organization or country. Foundation setting, in other words. 

Michael Watkins, in his best-selling book, “The First 90 Days”, noted this,

“The actions you take during your first three months in a new job will largely determine whether you succeed or fail. Transitions are periods of opportunity, a chance to start afresh and to make needed changes in an organization. But they are also periods of acute vulnerability because you lack established working relationships and a detailed understanding of your new role. If you fail to build momentum during your transition, you will face an uphill battle from that point forward.”

Let us take the US President Biden’s first 100 days as an example. He was inaugurated on January 21^st, 2021, and on that day, he was facing, in his words, 

“…the worst pandemic in a century (referring to CoVid-19). The worst economic crisis since the Great Depression. The worst attack on democracy since the Civil War (referring obviously to the Capitol riots on January 6^th, 2021),” 

to quote his 99^th day speech to the US Congress on April 29^th, 2021.

Those three items were his strategic issues, namely, a pandemic, an economic crisis, and civil disturbance that threatened the US. While the first two could be planned by his team beforehand, and thus, “seating” him, the last was something he had to handle on the fly. He could, arguably, handle it in such a way because he already had plans for implementation for the first two strategic issues, and had time and resources for that one unplanned strategic threat. That last issue, tock much time and attention to resolve, as one can see but it did not stop President Biden from moving his country forward, because there already was a plan, i.e., his 100-day plan.

He launched the American Rescue Plan, as part of his 100 days initiatives. This is what it achieved in 100 days:

1. A promise of getting 100 million shots of vaccines into peoples’ arms. He got 220 million shots in, compared to the US population of 337 million (and we know how vaccine-averse Americans are), thereby releasing Americans from its immobility due to the fear of infection,
2. Sending US$1,400 “rescue” checks to 85% of the American households, hence allowing them to begin spending again, and thus kickstarting the economy,
3. Providing food and rental assistance to millions of poor Americans,
4. An additional 800,000 Americans enrolled in the Affordable Care Act,
5. Improving health care for Veterans, addressing the opioid crisis, and being on track to cutting child poverty to half by the end of the year, and
6. Creating 1,300,000 new jobs in the first 100 days.

He also launched the American Jobs Plan, a huge investment to upgrade US transportation infrastructure, modernizing US roads, bridges, highways, building and rebuilding ports and airports, rail corridors, and transit lines. Among its targets and achievements:

1. Replacing all of America’s lead pipes and service lines so everyone can have clean water,
2. Connecting all of America with high-speed Internet, including the 51% of rural US that isn’t connected,
3. Installing 500,000 charging stations along roads so electric vehicles can be used widely,
4. “Buy American” goods and services when implementing economic plans, thus impacting American manufactories positively, 
5. Raising the US Minimum Wage to US$15 an hour,
6. Raising the nondefense research funding to raise technological level of the country, and
7. Proposing equal pay among the sexes.

He topped off this list with the words of warning, 

“But the rest of the world is not waiting for us. I just want to be clear: From my perspective, doing nothing is not an option.”

He further announced the America Families Plan that day, on his 99^th day in charge. It tackles four strategic challenges:

1. Access to good education. He coupled it with an additional 4 years of free education with pre-school and Community College (2 years each), on top of the 12 years already available,
2. Access to quality, affordable healthcare,
3. Up to 12 weeks of paid and medical leave a year, and
4. Tax credit for each child; with two kids, it’ll be an annual total of US$7,200 a year.

The momentum that he built in his first 100 days was so strong that it reverberated into the next two years. Recently, at his two-year anniversary, he announced the following achievements:

Item	2021	2022
Total jobs created by President Biden	5 Million	10.3 Million
Manufacturing jobs added under President Biden	282,000	738,000
Unemployment rate	4.6%	3.7%
Deficit reduction	US$350 Billion	US$1.4 Billion

There were a further 24 or so other achievements that were announced, the key ones were the US re-joining the Paris Agreement (an international agreement on climate change), rallying the world against the Russian invasion of Ukraine, and the historic confirmation of Mdm. Ketanji Brown Jackson, the first woman African-American to Supreme Court Justice.

That is the value of a 100-day plan. It turns adversity against you upside down and springs your country to greater heights.

Malaysia recently had a new Prime Minister and Unity government appointed. The Rakyat awaits their 100-day Plan. A strong platform to spring Malaysia upwards economically would be just the ticket now.

Printed in The Edge, 27th. June 2022

The strengthening of the US Dollar (USD) against the Ringgit earlier this year had all parts of the Malaysian economy up in arms. It wasn’t anything new. The same level was reached in 2020 as the chart below shows but for different reasons:

Chart 1 Malaysian Ringgit vs. US Dollar

Source: US Federal Reserve

The volatility of the Ringgit caused former two-time Prime Minister Tun Dr. Mahathir to advocate pegging the Ringgit again, presumably against the USD like it was done from 1998 to 2005 during his first tenure. The central bank, Bank Negara Malaysia (BNM) responded by saying it was not in the country’s best interest.

How true is this? Given that inflation in the US is unabated at the time of writing, and the Federal Reserve is almost certain to combat inflation with raising its interest rates, this will likely see the Ringgit continually fall unless BNM raises rates in lockstep. It is worth relooking at this issue. Over the next two articles, we examine whether fixed exchange rates (pegging it to another currency) or free-floating exchange rates are (which many believe is what Malaysia is on) are best for the country. But wait! There is a third option, managed float regimes. Would this be the best? 

As we begin, it is worth remembering that economics is a game of perspectives and relativity; that an interpretation can often be biased towards the interpreter’s own background knowledge and purpose of writing. Whether the person interpreting the facts for a developed, developing or even a less-developed country’s perspective, for example, is a question that must be answered. This isn’t even going into the different schools of thought like Keynesianism, Neo-Keynesianism, Monetarist, Classical, Neo-Classical, Marxian, Austrian School, and so on. It would be quite extraordinary to find an economist who knows, never mind, understands the nuances of all these schools of thought.

Yet, much of economics is read as if it is in absolute terms, i.e., applicable to all. A clear example are the writings of Adam and Keynes, being done at a time when Britain was already the most developed nation on earth, and hence their writings and advice have had limited use and impact for developing and less-developed nations. It gets very confusing and obfuscating. Many things simply slip through the cracks. In the words of HM Queen Elizabeth of Great Britain when asking about the failure to predict 2007 and 2008 Great Financial Crisis, 

“Why did nobody notice it?”

The startled silence that followed is legendary.

Only recently have theorists given thought to these distinctions and impacts as to different levels of development of countries; the Mundell-Fleming model, for example, makes differences for how its model works, for example, for small, open economies as compared to large, developed economies.

Malaysia is indeed such an economy, open to trade to a fault and yes, it is small. In financial macroeconomics terms, nonetheless, “small, open economies” means, inter alia, that the economy has no ability to influence world interest rates.

To be blunt, small, open economies like Malaysia are buffeted by capital flows, be they caused by trade or by portfolio (aka “hot money”) flows. This then tends to cause the Ringgit to fluctuate, particularly against the world’s highest use currency, the USD (see the previous chart above). Fluctuations of the Ringgit caused by trade flows are easily visible, via its Current Account Balance

Chart 2 Malaysia Current Account Balance

Source: IMF WEO April 2022

Not so easy to see are hot money flows, as data on it is not collected by governments by and large. Perhaps they should.

Why would any of this be so important to the ordinary Malaysian? Two reasons: one is inflation. This chart below says it all; as the Ringgit falls, the CPI (Consumer Price Index) goes up (and vice versa). Goods, especially imported ones and even domestic final products with substantial imported components just gets more expensive (“cost push inflation” as economists call it). Chicken is an example, with its feed, corn, fully imported. Data scientists might note the 2 years or so lag between the Ringgit and inflation, most probably due to the inventory replacement cycle. Also note that the major outlier event in 2019 to early 2021 is, of course, the lockdowns caused by CoVid-19 when Malaysia went through a deflationary period. The 2007-8 CPI spike was during the Global Financial Crisis, and the one in 1997-8 was due to the Asian Financial Crisis.

Chart 3 Ringgit/ US Dollar exchange rate and Malaysian CPI 

Source: IMF WEO April 2022 and US Federal Reserve

The other source of concern for Malaysians are interest rates. The key strategy to combat inflation is to raise interest rates, making it more expensive for borrowers. While Malaysian corporates are renowned for having low gearing ratios (a 0.22 times debt to equity ratio based on BNM numbers recently), Malaysian households are highly geared, hence rising interest rates would add to their misery.

A free-floating currency regime simply means that the central bank of a country would allow its currency’s exchange rate to be determined by the market without intervention. This would essentially absolve the central bank of any responsibility for the exchange rate at any point. However, in reality it isn’t an absolute thing; no central bank will stand by and do nothing while its own currency collapses and wealth destruction razes the economy to the ground.

One of the key requirements for having a free-floating currency is that the country has a deep enough market for currency exchange such that the open market can absorb any transactions to be done, without substantially skewing the exchange rate in so doing. Otherwise, to maintain currency stability, the central bank has to step in. This is usually the province of developed countries. This explains why the United Kingdom, for example, the sixth largest economy in the world, has a measly forex (foreign exchange) reserve of US$31 billion at the end of March 2022, for a country whose GDP (Gross Domestic Product) is US$3.32 trillion in 2021. It is a forex reserve over GDP ratio of less than 0.01 times.

Without a deep currency market, the currency would fall to high volatility and be subject to predatory attacks, at the country’s expense.

For developing and less-developed countries to seek to have a free-floating currency regime might be very dangerous wishful thinking indeed. In the next article, we examine the fixed exchange rate and managed float regimes, as well as the results of statistical studies on which stands out best on volatility, inflation, and economic growth.

Printed in The Edge, May 16th 2022

China’s mercurial economic rise is seen as a modern miracle. It is now the world’s second largest economy and is expected to overtake the top world economy, the USA, in the not-so-distant future.

Many believe that the accelerating GDP (Gross Domestic Product) numbers are mainly due to the huge population. However, on a per capita basis, it is not a poor country as many think it is. 

The economics world uses GNI (Gross National Income) per capita as a measure of a country’s well-being. The World Bank has defined Middle Income Countries as economies with a GNI per capita of between US$1,036 and US$12,535. China’s stood at US$10,550 in 2020 based on World Bank’s data. On a PPP (Purchasing Power Parity) basis, it is an even more stunning number at US$17,2000 PPP Dollars.

 China’s GNI per capita is skyrocketing as this chart from World Bank shows:

It is quite obvious that they will pop through the top of the Middle-Income level soon, and in right smart fashion, too.

Here’s the thing: they are a hair’s breadth away from overtaking Malaysia, whose GNI per capita was US$10,570 in 2020. A glance at the chart of Malaysia’s GNI per capita shows that it has been stuck in the Middle-Income level for quite a while, since at least 2014. In other words, it is in the Middle-Income Trap.

Why is that?

There are many angles to approach answering this vexing question but let us start from the top: how each country does its economic planning.

Like Malaysia, China has their own 5-year development plans and Industrial Master Plans. The current 5-year plan for China is the 14^th, while Malaysia’s is the 12^th. All China’s 5-year plans have a Vision Statement of realizing the ‘China Dream of Rejuvenating the Nation’. That it has remained the same for many years provides stability in planning and execution thereof for the nation. 

It is the 13^th 5-year plan that is of interest for us in this question. The main target for this plan period is to build a ‘Moderately Prosperous Society in All Respects’. Importantly, realizing perhaps that they are in a transition period from being an FDI-led (Foreign Direct Investments) economy and part of the Global Supply Chain (GSC) towards being one that is turning mainly to local brands and final products, fueled by local consumption, they have a specific target NOT to fall into the Middle-Income Trap.

Embedded in China’s 11^th 5-year plan are 3 key requirements to guide the thinking (especially important during implementation), a 4-pronged comprehensive strategy and 6 principles to abide by. It has also 3 strong safeguards for itself. It has 6 key targets for the plan, most of which are social in nature (China being, of course, a socialist country). As we have further detailed in our paper “Malaysia’s 5-year Development Plan – How Does It Compare to China’s?”, the plan is for Supply Side reform, broadly meaning to improve its own final products and brand names. This is well within their powers and shows their practical nature. The plan objectives are cascaded down via 165 initiatives and programs organized into 23 areas. They are implemented by local governments, rather than Ministries.

Working hand in glove with the 5-year plans are the Industrial Master Plans. The current one is the “Made in China 2025” plan, popularly known as “MC2025”. When it was launched, MC2025 shocked the world. The two items that sent traumatic jolts were these:

1. To gain access to China’s domestic markets, foreign companies must surrender their technology as required, and
2. The key targets amounted to an import substitution strategy, squeezing out imported goods markedly.

As we had pointed out in our paper “China’s Industrialization – Are They Doing the Stepladder Sequence?”, the domestic market share targets drew gasps of disbelief from the world:

Clearly, China intends to launch its own Second Industrial Revolution via the hi-tech field. 

A clear distinction exists between its 5-year plans and their industrial plans: the industrial plans focuses on whichever segment of industry that had the plan’s spotlight on it (e.g., in MC2025, it was the hi-tech field), whereas the 5-year plans outlined the major construction plans, sectorial distribution, and the government’s strategy policy priorities over a multi-year time horizon, and sets targets and directions for national economic development.

China has enough local producers making final products and brands that they are powering ahead in national wealth generation. Brand names like Huawei, Lenovo, Geely, Haier, HiSense, TenCent, AliBaba, MouTai, MeiTuan, Xiaomi, Bank of China, and so on are now global household names. 

According to Statista, China’s share of global production by industry in 2018 is:

The United Nations Statistics Division noted that in 2019, China’s share of global manufacturing output was 28.7%, far higher than second placed US at 16.8%.

This then shows how China is powering its way to high-income levels: industrialization with local brands and final products.

By comparison, of Malaysia’s 5-year plans, called Malaysia Plans or ”MP”, the 11^th would be synchronous with the two China plans mentioned above. They leave a lot to be desired. It follows the nation’s Vision Statement, but changes in government meant that the Vision Statement changes, putting the MP out of synchronicity. During the MP11 period, there was a change in government.

The MP11 had 6 strategic thrusts when it was first written in 2016, with 6 “Game Changers”. Midway through, though, the government changed, and the 6 strategic thrusts disappeared, to be replaced by 6 policy pillars that had 19 priority areas and 66 strategies. Any planner will tell you that changing targets midway is a sure-fire way of ensuring non-success. 

Sadly, there were no strategic level target in either MP11 versions.

Malaysia’s MP11 sub-targets are then cascaded down to Federal Ministries to implement, rather than local governments like China’s. China’s practice would pull the entire nation along with their plan, but Malaysia’s causes disconnect between the Rakyat and the plan. Such fragmentation can only cause less than optimal achievements. 

Malaysia’s 3^rd Industrial Master Plan expired in 2020, and after more than a year, the new one is still not on the horizon.

Malaysia’s current industrial structure is built primarily on the FDI/ GSC components with intermediate goods value-add. That, we believe, has maxed out its benefits to the country. It’s hard to easily name Malaysian global brands.

Time to reindustrialize Malaysia and focus on local final goods and brand names.

Hi! We were a bit surprised yesterday when a local major institution contacted us, saying that they wanted to buy our papers on http://www.ingeniumadvisors.org but did not have a PayPal account. Could they charge it to their credit card instead?

The answer is yes!

All you have to do is when you have clicked on the PayPal button is to select the pay by credit card option, and it takes just a few seconds for you to have your copy of the paper you selected!

Happy buying!

#economics #finance #Fed #BNM #business #capital #wealth #money #banking #investments #currencies #markets #ECB #EBRD #IMF #SAFE #BoJ #Bundesbank #worldbankgroup #funds #manufacturing #industry #trade