Policy uncertainty threatens trade growth, says World Bank


February 22, 2017

Policy uncertainty threatens trade growth, says World Bank

Warning on protectionism and threats to trade agreements in Trump era

https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65

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Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president. But the report by World Bank economists, released on Tuesday, highlights the fragile state of one historically important engine of global growth — trade.

To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued. Michele Ruta, World Bank report co-author

The study avoids naming Mr Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president. It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth. To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued Michele Ruta, World Bank report co-author International trade has been growing below historic trends for the past five years. The 1.9 per cent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

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Prime Minister Justin Trudeau meets with U.S. President Donald Trump in the Oval Office at the White House–The Future of NAFTA

The team found that some of the reasons for the anaemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices. But in 2016 the principal change was a surge in uncertainty about economic policy. According to the World Bank’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016. The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017. “To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued,” said Michele Ruta, one of the authors. The World Bank team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 per cent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organisation or no new trade agreements been signed, international trade would have grown at just 4.76 per cent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity. But Mr Trump and his administration have said they want to unwind those international supply chains and bring them home. “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

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According to the World Bank team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth. “Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.

MARA: Stop being an albatross around Malay Entrepreneurs


February 17, 2017

MARA: Stop being an albatross around Malay Entrepreneurs

“…there is something wrong with Mara. From business to education, it seems to be making all the wrong moves. It needs to have more faith in bumiputeras. Bumiputeras cannot flourish or advance themselves in spaces closed off to other races and cultures. Mara must recognise that bumiputeras are not just competing with other Malaysians, but also the citizens of the world. It must lead, not stubbornly cling to the old ways.–Syukri Tahir

Mara is one of the most important and respected institutions in Malaysia. Since its formation in 1966, it has helped countless thousands of bumiputeras succeed in business and industry. But has Mara adapted enough to remain relevant and effective today? Sadly, I don’t think so.

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I say this because Mara seems more interested in protecting bumiputeras from the world than letting them compete in it. This is a recipe for stagnation and backwardness. Take the Mara Digital Mall, for example – it was set up as a bumiputera alternative to Low Yat Plaza. What exactly has it achieved?

Because it was created and promoted as a platform for bumiputera IT traders, non-bumiputera customers have largely stayed away, choosing to shop at Low Yat instead. How are bumiputera traders supposed to survive – let alone thrive – when their customers are only limited to one race?

I recently paid a visit to the Mara Digital Mall in Kuala Lumpur and found the traders to be demoralised. Many shops had stock shortages, confirming what traders told online news portal Free Malaysia Today last December. If you want to buy anything, you will have to pre-order in advance. Rather serve as a vehicle for bumiputera empowerment, the mall may well turn out to be an embarrassment to bumiputera entrepreneurs.

Image result for Minister Ismail Sabri is an idiotMinister Ismail Sabri from Pahang

Mara’s short-sightedness also extends to education. Recently, now suspended Mara chairperson Annuar Musa said that UniKL, which is wholly-owned by Mara, recognises the Chinese-education-based Unified Examinations Certificate (UEC) as an entry qualification. He correctly bases this on long-standing government policy. Because UniKL is a private institution of higher learning rather than a public one, it is allowed to recognise the UEC.

Image result for MARASuspended MARA Chairman

In recognising the UEC, Annuar saw an excellent opportunity to grow UniKL, expand the diversity of its students, and give it an international outlook. Sadly, the rest of Mara disagreed with him, including the minister who oversees the institution – Ismail Sabri Yaakob. Annuar has the right idea, but he got into trouble for speaking it. How can Mara advance the cause of bumiputeras if Mara’s leadership can’t even see or comprehend the bigger picture?

They need to realise a few things. UEC recognition will allow us to keep talented Chinese-educated students in the country instead of having them leave for places like Taiwan and Singapore. Also, it will boost race relations and national unity because campuses will have students of different races and backgrounds.

It would not make sense to reject the UEC when prestigious universities around the world – from Australia to the UK to the United States – recognise it. The UEC is accepted at Harvard, Yale, MIT, Oxford, and Cambridge. If these are considered role models in education, then why shouldn’t UniKL follow in their example?

Furthermore, UEC students will expand the revenue base of UniKL and Mara. After all, Mara only sponsors bumiputera students – non-bumiputeras will have to pay, enhancing Mara’s ability to sponsor even more bumiputera students. In the end, it is bumiputeras who benefit the most from UEC recognition.

But as you can see, there is something wrong with Mara. From business to education, it seems to be making all the wrong moves. It needs to have more faith in bumiputeras. Bumiputeras cannot flourish or advance themselves in spaces closed off to other races and cultures. Mara must recognise that bumiputeras are not just competing with other Malaysians, but also the citizens of the world. It must lead, not stubbornly cling to the old ways.

Fareed Zakaria from Davos, Switzerland


January 25, 2017

Fareed Zakaria from Davos, Switzerland

https://www.washingtonpost.com/opinions/everyone-seems-to-agree-globalization-is-a-sin-theyre-wrong/2017/01/19/49bded68-de8b-11e6-918c-99ede3c8cafa_story.html?utm_term=.2786e5e7a9d7

The World Economic Forum this year feels like an exercise in ritual self-flagellation, which — as with the old Christian practice of fasting and whipping one’s own body — is supposed to purify the sinful nature of man. The sin, of course, is globalization, which everyone now seems to agree has been lopsided, inequitable and dangerous. In fact, most of the flaws attributed to globalization are actually mistakes in national policy that can be corrected.

Image result for Fareed Zakaria in Davos, 2017

It took a Chinese billionaire to speak frankly on this topic. Jack Ma, the founder of the e-commerce giant Alibaba, estimated that over the past three decades the U.S. government spent $14.2 trillion fighting 13 wars. That money could have been invested in America, building infrastructure and creating jobs. “You’re supposed to spend money on your own people,” he said. He pointed out that globalization produced massive profits for the U.S. economy but much of that money ended up on Wall Street. “And what happened? Year 2008. The financial crisis wiped out $19.2 trillion [in the] U.S.A. alone. . . . What if the money [had been] spent on the Midwest of the United States developing the industry there?” he asked. “It’s not [that] the other countries steal jobs from you guys — it is your strategy,” he concluded.

You don’t have to accept Ma’s specifics and statistics to recognize the validity of his general point. Globalization created huge opportunities for growth, many of which were taken by U.S. companies. The global economy is still dominated by large American firms; 134 of Fortune’s Global 500 are American. And if you look at those in cutting-edge industries, the vast majority are American. These companies have benefited enormously by having global supply chains that can source goods and services around the world, either to lower labor costs or to be close to the markets in which they sell. Since 95 percent of the world’s potential consumers live outside the United States, finding ways to sell to them will have to be a core strategy for growth, even for a country with a large domestic economy such as the United States.

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Jack Ma said “It’s not [that] the other countries steal jobs from you guys — it is your strategy”

Obviously globalization has large effects on national economies and societies, and it produces some significant problems. What complex phenomenon does not? But it also generates opportunities, innovation and wealth for nations that they can then use to address these problems through good national strategies. The solutions are easy to state in theory — education, skills-based training and retraining, infrastructure. But they are extremely expensive and hard to execute well.

It is much easier to rail against foreigners and promise to fight them with tariffs and fines. But the cost of addressing these problems at the global level is massive. The Economist reports, in a survey on globalization, that in 2009 the Obama administration punished China with a tariff on its tires. Two years later, the cost to U.S. consumers was $1.1 billion, or $900,000 for every job “saved.” The impact of such tariffs is usually felt disproportionately by the poor and middle class because they spend a larger share of their income on imported goods, such as food and clothing. That same Economist survey points to a study that calculated that, across 40 countries, if transnational trade ended, the wealthiest consumers would lose 28 percent of their purchasing power, but the poorest tenth would lose a staggering 63 percent.

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Keeping pace with technology change–Learn, Unlearn and Relearn

Perhaps most important, the key driver depressing wages and eliminating jobs in the industrialized world is technology, not globalization. For example, between 1990 and 2014, U.S. automotive production increased by 19 percent , but with 240,000 fewer workers.

Even when manufacturing comes back to the United States, it is high-end manufacturing. It’s not just new Intel plants that have few workers anymore. Adidas has set up a new shoe factory in Germany that is run almost entirely by robots. It will open a similar one near Atlanta later this year. And the few workers in these factories tend to be highly skilled technicians and software engineers.

You can’t turn off technological revolutions. Nor is there a quick fix to stop business from going to other countries. Tariffs on China will simply mean that production will come from some other developing country.

The best approach to the world we are living in is not denial but empowerment. Countries should recognize that the global economy and the technological revolution require large, sustained national efforts to equip workers with the skills, capital and infrastructure they need to succeed. Nations should embrace an open world, but only as long as they are properly armed to compete in it. And that requires smart, effective — and very expensive — national policies, not some grand reversal of globalization.

Krugman reacts to Donald J. Trump


January 24, 2017

Krugman reacts to Donald J. Trump— “somehow we’re going to have to survive four years of this temper tantrum”.

If America had a parliamentary system, Donald Trump — who spent his first full day in office having a temper tantrum, railing against accurate reports of small crowds at his inauguration — would already be facing a vote of no confidence. But we don’t; somehow we’re going to have to survive four years of this.

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And how is he going to react to disappointing numbers about things that actually matter?

In his lurid, ghastly Inaugural Address, Mr. Trump portrayed a nation in dire straits — “American carnage.” The real America looks nothing like that; it has plenty of problems, but things could be worse. In fact, it’s likely that they will indeed get worse. How will a man who evidently can’t handle even the smallest blow to his ego deal with it?

Let’s talk about the predictable bad news.

First, the economy. Listening to Mr. Trump, you might have thought America was in the midst of a full-scale depression, with “rusted-out factories scattered like tombstones across the landscape of our nation.” Manufacturing employment is indeed down since 2000; but overall employment is way up, and the unemployment rate is low by historical standards.

And it’s not just one number that looks pretty good: Rising wages and the growing number of Americans confident enough to quit their jobs suggest an economy close to full employment.

What this means is that unemployment probably can’t fall much from here, so that even with good policies and good luck, job creation will be much slower than it was in the Obama years. And since bad stuff does happen, there’s a strong likelihood that unemployment will be higher four years from now than it is today.

Oh, and Trumpist budget deficits will probably widen the trade deficit, so that manufacturing employment in particular is likely to fall, not rise.

A second front on which things will almost surely get worse is health care. Obamacare caused the percentage of Americans without insurance to fall sharply, to the lowest level ever. Repeal would send the numbers right back up — 18 million newly uninsured in just the first year, eventually rising to more than 30 million, according to Congressional Budget Office estimates. And no, Republicans who have spent seven years failing to come up with a real replacement won’t develop one in the next few weeks, or ever.

On a third front, crime, the future direction is unclear. The Trump vision of an urban America ravaged by “the crime and the gangs and the drugs” is a dystopian fantasy: Violent crime is, in fact, way down despite highly publicized recent murder increases in a few cities. Crime could, I suppose, fall further, but it could also rise. What we do know is that the Trump administration can’t pacify America’s urban war zones, because those zones don’t exist.

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So how will Mr. Trump handle the bad news of rising unemployment, plunging health coverage, and little if any crime reduction? That’s obvious: He’ll deny reality, the way he always does when it threatens his narcissism. But will his supporters go along with his fantasy?

They might. After all, they blocked out the good news from the Obama era. Two-thirds of Trump voters believe, falsely, that the unemployment rate rose under Obama. (Three-quarters believe George Soros is paying people to protest Mr. Trump.) Only 17 percent of self-identified Republicans are aware that the number of uninsured is at a historic low. Most people thought crime was rising even when it was falling. So maybe they will block out bad news in the Trump years.

But it probably won’t be that easy. For one thing, people tend to attribute improvements in their personal situation to their own efforts; surely many voters who gained jobs over the past eight years believe that they did it despite, not thanks to, Obama policies. Will they correspondingly blame themselves, not Donald Trump, for lost jobs and health insurance? Unlikely.

On top of that, Mr. Trump made big promises during the campaign, so the risk of disillusionment is especially high.

Will he respond to bad news by accepting responsibility and trying to do better? Will he renounce his fortune and enter a monastery? That seems equally likely.

No, the insecure egomaniac-in-chief will almost surely deny awkward truths, and berate the media for reporting them. And — this is what worries me — it’s very likely that he’ll try to use his power to shoot the messengers.

Seriously, how do you think the man who compared the C.I.A. to Nazis will react when the Bureau of Labor Statistics first reports a significant uptick in unemployment or decline in manufacturing jobs? What’s he going to do when the Centers for Disease Control and the Census Bureau report spiking numbers of uninsured Americans?

You may have thought that last weekend’s temper tantrum was bad. But there’s much, much worse to come.

A version of this op-ed appears in print on January 23, 2017, on Page A23 of the New York edition with the headline: Things Can Only Get Worse.

Malaysian Economy: 2016 uneventful but 2017 is not rosy either


January 20, 2017

Malaysian Economy: 2016 uneventful but 2017 is not rosy either

By Dr. Shankaran Nambiar

2016 has been rather eventful for the Malaysian economy. The growth rate — the one big indicator of macroeconomic health — has crumbled. From a past average of 5 per cent in real GDP growth, 2016 is likely to see something like 4.2 per cent.

Related imageLike Tun Dr. Mahathir Mohamad in 1997, Najib Razak can now blame the Jews for Malaysia’s Economic Woes, instead of his inept economic management

What is of more concern is that growth in the country is mostly fuelled by domestic demand, which grew by 6.3 per cent in the second quarter of the year — picking up from the 3.6 per cent growth of the first quarter. Domestic demand has its limits given the small size of the domestic economy and the short duration that domestic demand can push growth for.

By contrast, external demand has taken a thrashing in the past months. Growth in net exports shrank by 3.8 per cent in 2015, sank to negative 12.4 per cent in the first quarter of 2016, and remained dismal in the second quarter at negative 7 per cent.

External demand is unlikely to rise again soon. The Japanese economy is not showing signs of any major pick-up. The Chinese economy is heading for a (hopefully gentle) slowdown, and Europe is unlikely to provide export demand for Malaysia due to Brexit and the fear of its potential successors. Malaysia will have to look to the improving US economy for help in spurring its export numbers.

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Asking Money from taxpayers

But there is also a flip side to the strengthening US economy. The Trump administration may roll-up the TPP, hurting Malaysian trade and investment — both crucial variables for Malaysia’s economy at this juncture. What’s more, the Federal Reserve’s decision to hike up interest rates in December 2016 was not in Malaysia’s favour. The hint that there may be at least three more rate hikes to come in 2017 is not welcome news and raises the threat of the ringgit sliding further against the US dollar.

It is not surprising, therefore, that export growth was at 2.7 per cent in the first quarter of 2016 and dropped to 1.4 per cent in the second quarter. Average export growth for the first eight months of this year has been a mere 0.9 per cent (it was 6.3 per cent in 2014). If this trend persists, the trade balance will likely shrink.

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Against this rather stark background, the rationale for Malaysia’s 2017 budget becomes understandable. The budget is primarily targeted at increasing domestic demand. Its measures include RM2.6 billion (approximately US$579 million) more financial aid for the 1Malaysia People’s Aid program and various other programs to increase access to housing — particularly for those in the bottom 40 per cent (B40) of income-earners. There are also incentives for public servants as well as RM50 million (approximately US$11 million) to train 20,000 graduates to enhance their employability.

While these efforts will likely increase domestic demand, their appropriateness is questionable. For instance, the intention of extending financial assistance to the B40 runs against the grain of upholding a market-oriented, subsidy-free economy. Once financial aid is provided it will be difficult to withdraw it. As for graduate employability, the problem should be treated as a structural one, rather than ad hoc and directed at only 20,000 graduates. And the policies for improving access to affordable housing are insufficient given the enormity of the problem.

Nevertheless, it is noteworthy that the government is committed to fiscal discipline and also determined to close the fiscal gap. A widening deficit will be detrimental at this point, although if there had been a good record on this score in earlier years it might have been a convenient tool to reach for.

The rapidly slipping value of the ringgit against the US dollar is another flash point. Although most emerging markets have experienced drops in their respective currencies against the dollar, the ringgit has suffered the biggest relative fall in the region. One reason for this is the perceived decline in good governance. Although the Malaysian authorities have cleared 1MDB of any wrong-doing, continued reporting in international media and the US Department of Justice’s interest on the matter may have put off some foreign investors.

In the face of the falling ringgit, Bank Negara Malaysia (BNM) has reminded market players that the ringgit is still not a fully internationalised currency. BNM has requested that non-resident foreign banks don’t engage in non-deliverable forward-related (NDF) transactions. In restricting NDF trade the central bank is only ‘re-enforcing’ existing rules against offshore trading of the ringgit. But foreign traders have been sceptical of the move.

Another measure to curb the falling ringgit has been to impose the requirement that exporters can only retain up to 25 per cent of export proceeds in a foreign currency, while the remainder must be converted into ringgit. Bank Negara Malaysia has stated that exporters are free to convert currency to meet up to six months of loan obligations not denominated in ringgit, stoutly denying claims that these measures are tantamount to capital controls. Nevertheless, they are interventions in the market and disrupt the decision-making process of exporters.

Image result for Quotes from President Kalam on corruption

2017 may not be rosy for the Malaysian economy. Taking a pessimistic view, the growth forecast could slip to the range of 4–4.2 per cent for the next year. We can take solace in the fact that the fuzzy edges of oncoming negative news can be vaguely seen in the distance and it is easy to count on Malaysia’s seasoned and expert policymakers to manage these predictable shocks.

Dr.Shankaran Nambiar is the author of the recently published book Malaysia in Troubled Times. He is also a senior research fellow at the Malaysian Institute of Economic Research. The views expressed in this article are his own.

This article is part of an EAF special feature series on 2016 in review and the year ahead.

Malaysians are concerned with the Economy


January 19, 2017

Donald Trump aside, Malaysians are concerned with the Economy

by Martin Khor@www.thestar.com.my

As the new year gets underway, ordinary citizens are concerned about the rising cost of living, the ringgit’s low level and the outflow of capital.

Image result for Felda Global Ventures a messMaking Malaysia messy is his forte

WHILE Donald Trump’s inauguration as the new United States President will hog the headlines this week, it is the bread-and-butter issues that preoccupy the man and woman in the street as the new year gets into stride.

In Malaysia, a major talking point is the state of the economy. Three issues are worrying the ordinary Malaysian – rising prices, the fall of the ringgit and the outflow of capital. Each is an issue in its own right, but they are also all interlinked.

Inflation has become a hot issue because it is accelerating and will continue to do so. There are one-off factors influencing retail prices, such as the removal of the cooking oil subsidy, the weather affecting vegetable output or the slight recovery of the world oil price.

 But prices across the board are affected by the weakening of the ringgit since this increases the prices of imports.

Malaysia is very dependent on imports for a wide range of products, from food and household utensils to machinery and components for making cars, computers and all kinds of other goods.

As the most recent ringgit plunge started in mid November, prices of products that have high import content may not have fully risen yet because the shops are still clearing stocks bought earlier. But you can expect the new prices to kick in more and more.

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Irwan Siregar —  Fox in the  Malaysian Financial Hen House

The second issue is the ringgit decline itself, which has bad and good effects, with some sectors and people losing and others benefiting. The negative effects include:

  • Consumers having to pay higher prices for imported goods and services.
  • Traders and retail shops getting less business as the demand for the dearer imports goes down.
  •  Manufacturers and construction firms paying higher costs for parts and production inputs, which will translate into higher consumer prices and eventually higher house prices.
  • Parents with children studying abroad must fork out more ringgit even if the fees and hostel rent remain the same.
  • The Government and its enterprises and private companies that took loans in foreign currencies lose significantly as they have to spend more ringgit to service their loans.

Among the good effects:

  • Smallholders and companies exporting palm oil, rubber, petroleum and other commodities will receive more revenue in ringgit terms.
  • Local manufacturers exporting goods such as rubber gloves and furniture become more competitive as they can reduce their prices in foreign currency, or else they receive more in ringgit if they retain their international prices.
  • The tourism and hotel business should thrive since it’s cheaper for foreigners to visit Malaysia. Locals who now can’t afford to travel abroad may also spend their holidays in the country.

On balance, will the gains outweigh the losses? From a public perspective, this is unlikely as the higher cost of living will affect all Malaysians, especially the poor and middle classes, and the higher external debt repayment will affect the public and the economy overall.

The prospect of further depreciation of the ringgit also has a bearing on capital flows, the third issue. Malaysia is one of the countries most vulnerable to the shocks of foreign funds moving out, because so much capital was allowed to move in.

In recent years, a new type of vulnerability emerged when foreign funds were welcomed to invest in government bonds denominated in ringgit.

It was originally thought that foreign loans in ringgit would be safe as the borrower would avoid the foreign exchange risk, as contrasted with loans denominated in US dollars.

This is true but the sheer volume of bonds now owned by foreigners makes the economy vulnerable to large outflows in a short period.

Comparison is usually made between potential capital outflows and the level of foreign reserves. The reserves as at December 30, 2016 were US$94.6bil (RM424bil).

The total foreign debt outstanding was RM865bil at the end of September 2016.

Of this, offshore borrowing (in foreign currency) was RM472bil, and ringgit-denominated government bonds held by non-residents were worth RM211bil, according to Bank Negara data.

Some of the investors have a long-term commitment and not everyone will move in the same direction at the same time, but in recent weeks external conditions such as a rise in US interest rates (and anticipation of more rises in 2017) have prompted capital outflows from emerging economies, including Malaysia.

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The country also has high foreign participation in the stock market (22.6% in November 2016), and in recent months there has also been a net withdrawal of equities by foreigners.

November 2016 was a bad month, as foreigners withdrew from the country RM19.9bil of government securities, and RM4.2bil of equities, according to a report in The Star (January 7, 2017). The potential and probability of more capital outflows in 2017 is a factor weighing on the perception of the ringgit’s prospects.

A high trade surplus has previously acted as a strong buffer against potential large capital outflows. The trade and current account balances are still positive, but the surpluses have been declining.

Government measures could help, such as the requirement that exporters convert 75% of their ex­­port proceeds from foreign currencies to ringgit.

Other measures can be considered if the situation does not improve. For example, companies and funds, starting with government-linked ones, can be discouraged from investing abroad – for the time being at least.

Malaysia has ruled out more drastic measures such as capital controls and pegging of the ringgit.

Developments in these three economic issues will be closely watched, not least by the public whose pockets are affected, as the year progresses.

External events could improve the situation, such as if prices of Malaysia’s export commodities increase, or could worsen it, especially if the US raises its interest rates further and if Trump really pursues protectionist policies.

However, domestic policies to respond to the problems are crucial and there should be a comprehensive plan to tackle these issues, since they may persist as 2017 progresses.

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.