Trump’s Federal Reserve Nominee Chairman–Jerome Powell


November 3, 2017

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Trump’s Federal Reserve Nominee Chairman–Jerome Powell

by Kenneth Rogoff*

https://www.project-syndicate.org/commentary/jerome-powell-fed-chair-pick-by-kenneth-rogoff

Jerome Powell, US President Donald Trump’s pick to succeed Janet Yellen as Fed Chair, will face some extraordinary challenges at the outset of his five-year term. But the greatest challenge of all will be to stay out of Trump’s shadow and uphold the Fed’s independence.

Image result for Jerome PowellFederal Reserve Chairman Designate Jerome Powell with President Donald J. Trump.

Jerome Powell “is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy.”–Kenneth Rogoff

 

CAMBRIDGE – With the appointment of Jerome Powell as the next Chair of the United States Federal Reserve Board, Donald Trump has made perhaps the most important single decision of his presidency. It is a sane and sober choice that heralds short-term continuity in Fed interest-rate policy, and perhaps a simpler and cleaner approach to regulatory policy.

Although Powell is not a PhD economist like current Fed Chair Janet Yellen and her predecessor, Ben Bernanke, he has used his years as an “ordinary” governor at the Fed to gain a deep knowledge of the key issues he will face. But make no mistake: the institution Powell will now head rules the global financial system. All other central bankers, finance ministers, and even presidents run a distant second.

If that seems hyperbolic, it is only because most of us don’t really pay attention to the Fed on a day-to-day basis. When the Fed gets it right, price stability reigns, unemployment remains low, and output hums along. But “getting it right” is not always easy, and when the Fed gets it wrong, the results can be pretty ugly.

Famously, the Fed’s efforts to tame a stock-market bubble in the late 1920s sparked the Great Depression of the 1930s. (Fortunately, of the candidates Trump was considering for the Fed post, Powell is the one least likely to repeat this mistake.) And when the Fed printed mountains of money in the 1970s to try to dull the pain of that decade’s oil shocks, it triggered an inflationary surge that took more than a decade to tame.

At times, the rest of the world seems to care more about Fed policy than Americans do. Little wonder: perhaps more than ever, the US dollar lies at the heart of the global financial system. This is partly because much of world trade and finance is indexed to the dollar, leading many countries to try to mimic Fed policies to stabilize their exchange rates.

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Thank You, Dr. Janet Yellen for Your Service to the International Financial Community

Powell will face some extraordinary challenges at the outset of his five-year term. By some measures, stock markets look even frothier today than they did in the 1920s. With today’s extraordinarily low interest rates, investors seem ever more willing to assume greater risk in search of return.

At the same time, despite a strongly growing US and global economy, inflation remains mystifyingly low. This has made it extremely difficult for the Fed to normalize policy interest rates (still only 1%) so that it has room to cut them when the next recession hits, which it inevitably will. (The odds of a recession hitting in any given year are around 17%, and that seems like a good guess now.)

If Powell and the Fed cannot normalize interest rates before the next recession, what will they do? Yellen insists that there is nothing to worry about; the Fed has everything under control, because it can turn to alternative instruments. But many economists have come to believe that much of this is smoke and mirrors.

For example, so-called quantitative easing involves having the Fed issue short-term debt to buy up long-term government debt. But the US Treasury owns the Fed, and can carry out such debt purchases perfectly well by itself.

Some argue for “helicopter money,” whereby the Fed prints money and hands it out. But this, too, is smoke and mirrors. The Fed has neither the legal authority nor the political mandate to run fiscal policy; if it tries to do so, it runs the risk of forever losing its independence.

Given that monetary policy is the first and best line of defense against a recession, an urgent task for the new chair is to develop a better approach. Fortunately, good ideas exist, and one can only hope that Powell will quickly move to create a committee to study long-term fixes.

One idea is to raise the Fed’s inflation target. But this would be problematic, not least because it would breach a decades-long promise to keep inflation around 2%. Moreover, higher inflation would induce greater indexation, ultimately undermining the effectiveness of monetary policy. Paving the way for effective negative-interest-rate policy is a more radical – but by far the more elegant – solution.

Bank regulation is also part of the Fed’s mandate. The 2010 Dodd-Frank financial-reform legislation, which has spawned 30,000 pages of rules, has been a boon for lawyers. But the massive compliance costs ultimately fall on small and medium-size businesses. It would be far better simply to require banks to raise much more of their resources in equity markets instead of through bonds. That way, shareholders, not taxpayers, would take the big hit in a crisis.

I have not mentioned the elephant in the room: the threat to the Fed’s independence posed by a president seemingly intent on challenging all institutional norms. When President Richard Nixon was intent on being re-elected in 1972, he put heavy pressure on then-Fed Chair Arthur Burns to “juice” the economy. Nixon was re-elected, but inflation soared and growth collapsed. No one should be wishing for a replay – even if Nixon eventually was impeached.

*Dr. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University and recipient of the 2011 Deutsche Bank Prize in Financial Economics, was the chief economist of the International Monetary Fund from 2001 to 2003. The co-author of This Time is Different: Eight Centuries of Financial Folly, his new book, The Curse of Cash, was released in August 2016.

 

The Demise of Dollar Diplomacy


October 17, 2017

The Demise of Dollar Diplomacy

by Barry Eichengreen*

http://www.project-syndicate.org

Pundits have been saying last rites for the dollar’s global dominance since the 1960s – that is, for more than half a century now. But the pundits may finally be right, because the greenback’s dominance has been sustained by geopolitical alliances that are now fraying badly.

WASHINGTON, DC – Mark Twain never actually said “Reports of my death have been greatly exaggerated.” But the misquote is too delicious to die a natural death of its own. And nowhere is the idea behind it more relevant than in discussions of the dollar’s international role.

Pundits have been saying last rites for the dollar’s global dominance since the 1960s – that is, for more than a half-century now. The point can be shown by occurrences of the phrase “demise of the dollar” in all English-language publications catalogued by Google.

The frequency of such mentions, adjusted for the number of printed pages per year, first jumped in 1969, following the collapse of the London Gold Pool, an arrangement in which eight central banks cooperated to support the dollar’s peg to gold. Use of the phrase soared in the 1970s, following the collapse of the Bretton Woods system, of which the dollar was the linchpin, and in response to the high inflation that accompanied the presidencies of Richard Nixon, Gerald Ford, and Jimmy Carter in the 1970s.

But even that spike was dwarfed by the increase in mentions and corresponding worries about the dollar starting in 2001, reflecting the shock of the terrorist attacks that September, the mushrooming growth of the US trade deficit, and then the global financial crisis of 2008.

Yet through all of this, the dollar’s international role has endured. As my coauthors and I show in a new book, the share of dollars in the foreign-currency reserves held by central banks and governments worldwide hardly budged in the face of these events. The greenback remains the dominant currency traded in foreign-exchange markets. It is still the unit in which petroleum is priced and traded worldwide, Venezuelan leaders’ complaints about the “tyranny of the dollar” notwithstanding.

To the consternation of many currency traders, the value of the dollar fluctuates widely, as its rise, fall, and recovery in the course of the last year have shown. But this does little to erode the attractiveness of the dollar in international markets.

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America First–Then What is Future of the US Dollar in the Trumpian Era?

Central banks still hold US Treasury bonds because the market for them is the single most liquid financial market in the world. And Treasury bonds are secure: the federal government has not fallen into arrears on its debt since the disastrous War of 1812.

In addition, US diplomatic and military links encourage America’s allies to hold dollars. States with their own nuclear weapons hold fewer dollars than countries that depend on the US for their security needs. Being in a military alliance with a reserve-currency-issuing country boosts the share of the partner’s foreign-exchange reserves held in that currency by roughly 30 percentage points. The evidence thus suggests that the share of reserves held in dollars would fall appreciably in the absence of this effect.

This under-appreciated link between geopolitical alliances and international currency choice reflects a combination of factors. Governments have reason to be confident that the reserve-currency country will make servicing debt held by its allies a high priority. In return, those allies, by holding its liabilities, can help to lower the issuer’s borrowing costs.

Here, then, and not in another imbroglio over the federal debt ceiling this coming December, is where the real threat to the dollar’s international dominance lies. As one anonymous US State Department official put it, President Donald Trump “does not seem to care about alliances and therefore does not care about diplomacy.”

South Korea and Japan are thought to hold about 80% of their international reserves in dollars. One can imagine that the financial behavior of these and other countries would change dramatically, with adverse implications for the dollar’s exchange rate and US borrowing costs, were America’s close military alliances with its allies to fray.

Nor is it hard to imagine how this fraying could come about. President Donald Trump has painted himself into a strategic corner: he needs a concession from North Korea on the nuclear-weapons issue in order to save face with his base, not to mention with the global community. And, for all of Trump’s aggressive rhetoric and posturing, the only feasible way to secure such a concession is through negotiation. Ironically, the most plausible outcome of that process is an inspections regime not unlike the one negotiated by Barack Obama’s administration with Iran.

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Visualizing the Size of the U.S. National Debt

How big is the U.S. National Debt?

The best way to understand these large numbers? We believe it is to represent them visually, by plotting the data with comparable numbers that are easier to grasp.

Today’s data visualization plots the U.S. National Debt against everything from the assets managed by the world’s largest money managers, to the annual value of gold production.

1. The U.S. national debt is larger than the 500 largest public companies in America.
The S&P 500 is a stock market index that tracks the value of the 500 largest U.S. companies by market capitalization. It includes giant companies like Apple, Exxon Mobil, Microsoft, Alphabet, Facebook, Johnson & Johnson, and many others. In summer of 2016, the value of all of these 500 companies together added to $19.1 trillion – just short of the debt total.

2. The U.S. national debt is larger than all assets managed by the world’s top seven money managers.
The world’s largest money managers – companies like Blackrock, Vanguard, or Fidelity – manage trillions of investor assets in stocks, bonds, mutual funds, ETFs, and more. However, if we take the top seven of these companies and add all of their assets under management (AUM) together, it adds up to only $18.9 trillion.

3. The U.S. national debt is 25x larger than all global oil exports in 2015.
Yes, countries such as Saudi Arabia, Kuwait, and Russia make a killing off of selling their oil around the world. However, the numbers behind these exports are paltry in comparison to the debt. For example, you’d need the Saudis to donate the next 146 years of revenue from their oil exports to fully pay down the debt.

4. The U.S. national debt is 155x larger than all gold mined globally in a year.
Gold has symbolized money and wealth for a long time – but even the world’s annual production of roughly 3,000 tonnes (96 million oz) of the yellow metal barely puts a dent in the debt total. At market prices today, you’d need to somehow mine 155 years worth of gold at today’s rate to equal the debt.

5. In fact, the national debt is larger than all of the world’s physical currency, gold, silver, and bitcoin combined.

That’s right, if you rounded up every single dollar, euro, yen, pound, yuan, and any other global physical currency note or coin in existence, it only amounts to a measly $5 trillion. Adding the world’s physical gold ($7.7 trillion), silver ($20 billion), and cryptocurrencies ($11 billion) on top of that, you get to a total of $12.73 trillion. That’s equal to about 65% of the U.S. national debt.

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To get there, Trump’s administration will have to offer something in return. The most obvious bargaining chip that could be offered to make the North Korean regime feel more secure is a reduction in US troop levels on the Korean Peninsula and in Asia in general, With that, the US security guarantee for Asia will weaken, in turn providing China an opportunity to step into the geopolitical breach.

And where China leads geopolitically, its currency, the renminbi, is likely to follow.

*Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors:The Great Depression, the Great Recession, and the Uses – and Misuses – of History.

Trump appeases an authoritarian Malaysian Prime Minister to The White House


September 13, 2017

Trump appeases an authoritarian Malaysian Prime Minister to the White House

By Editorial Board, The Washington Post

The Post’s View

Opinion

 

Malaysian PM Najib Razak reviews an honour guard at The White House. Romeo Ranoco/Reuters

PRESIDENT TRUMP has made a habit of embracing authoritarian rulers he regards as friendly, without regard for their subversion of democratic norms or gross human rights violations. Yet his meeting with Malaysian Prime Minister Najib Razak at the White House on Tuesday sets a new low. Not only is Mr. Najib known for imprisoning peaceful opponents, silencing critical media and reversing Malaysia’s progress toward democracy. He also is a subject of the largest foreign kleptocracy investigation ever launched by the U.S. Justice Department.

U.S. investigators have charged that Mr. Najib and close associates diverted $4.5 billion from a Malaysian government investment fund for their own uses, including $730 million that ended up in accounts controlled by the Prime Minister. Justice first filed civil suits seeking the freezing of some $1.7 billion in assets in the United States, including real estate, artworks and stakes in Hollywood movies; more recently, the department asked that those actions be put on hold while it pursues a criminal investigation. Mr. Najib has not been charged with a crime and denies wrongdoing, but the U.S. investigation prompted speculation in Malaysia that he could be arrested if he set foot on American soil — not good PR for a leader who is obligated to call an election sometime in the next few months.

[Here’s what President Trump should tell Malaysia’s prime minister]

With his White House invitation, Mr. Trump has neatly gotten Mr. Najib off that hook and provided him with what the regime will portray as a tacit pre-election endorsement. Despite his repression, Mr. Najib could use that sort of help: In the last election, in 2013, his party lost the popular vote and retained power only because of the gerrymandering of election districts.

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President Trump and other top American officials, left, met at the White House with Prime Minister Najib Razak of Malaysia and his delegation, right .The Post’s Editorial states: “The best way for the United States to build a stronger alliance with Malaysia and bolster its independence from China is to encourage those in the country who support liberal democratic values — while holding Mr. Najib accountable for his human rights violations, as well as any financial crimes he may have committed in the United States”.

If the White House received anything in exchange for that huge political favor, it’s not evident. That’s particularly unfortunate because Mr. Najib’s regime is not only a conspicuous violator of human rights but a relative friend to North Korea. The regime of Kim Jong Un has exported workers to Malaysia to earn hard currency. Kim Jong Un’s estranged half brother was murdered in Kuala Lumpur’s international airport — so far with no consequences for Pyongyang.

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Mr. Trump isn’t the only  U.S. President to pursue a policy of appeasement toward Mr. Najib. Barack Obama was the first appeaser who played golf with and visited the Malaysian Prime Minister in Malaysia.

Mr. Trump isn’t the first U.S. President to pursue a policy of appeasement toward Mr. Najib. President Barack Obama golfed with the Prime Minister and flattered him with the first visit by a U.S. President to Malaysia in nearly half a century. Like Mr. Obama, Mr. Trump may imagine that courting Mr. Najib is a necessary counter to China, which has hosted him twice in the past year and wooed him with promises of about $100 billion in investments. Yet Mr. Najib’s corruption and disregard for democratic norms mean he will inevitably prefer the values-free patronage of Beijing over alliance with Washington.

The best way for the United States to build a stronger alliance with Malaysia and bolster its independence from China is to encourage those in the country who support liberal democratic values — while holding Mr. Najib accountable for his human rights violations, as well as any financial crimes he may have committed in the United States. If Mr. Trump makes a start at that on Tuesday, he could begin to mitigate the error of inviting Mr. Najib to the White House.

https://www.washingtonpost.com/opinions/global-opinions/trump-welcomes-an-authoritarian-to-the-white-house/2017/09/11/9d19f51c-9707-11e7-b569-3360011663b4_story.html?utm_term=.e59f606520a0

Mr. Trump’s 10-Second Convictions–Oh Lord, this guy is pure blabber


April 16, 2017

Mr. Trump’s 10-Second Convictions–Oh Lord, this guy is pure blabber

 

The Age of Trump


January 2, 2017

The Age of Trump

by Joseph E. Stiglitz

http://www.straitstimes.com/opinion/the-age-of-trump

NEW YORK • On January 20, Mr Donald Trump will be inaugurated as the 45th President of the United States. I would hate to say “I told you so”, but his election should not have come as a surprise.

Image result for joseph e. stiglitz globalization and its discontents

As I explained in my 2002 book, Globalization And Its Discontents, the policies we have used to manage globalisation have sown the seeds of widespread disaffection. Ironically, a candidate from the same party that has pushed the hardest for international financial and trade integration won by promising to undo both.

Of course, there is no going back. China and India are now integrated into the global economy, and technological innovation is reducing the number of manufacturing jobs worldwide. Mr Trump cannot re-create the well-paying manufacturing jobs of past decades; he can push only for advanced manufacturing, which requires higher skill sets and employs fewer people.

Rising inequality, meanwhile, will continue to contribute to widespread despair, especially among the white voters in Middle America who handed Mr Trump his victory. As economists Anne Case and Angus Deaton showed in their study published in December 2015, life expectancy among middle-aged white Americans is declining, as rates of suicides, drug use and alcoholism increase. A year later, the National Centre for Health Statistics reported that life expectancy for the US as a whole has declined for the first time in more than 20 years.

In the first three years of the so-called recovery after the 2008 financial crisis, 91 per cent of the gains went to the top 1 per cent of earners. While Wall Street banks were bailed out with billions of dollars in taxpayer money, home owners received only a pittance. President Barack Obama saved not only the banks, but also the bankers, shareholders and bond holders. His economic policy team of Wall Street insiders broke the rules of capitalism to save the elite, confirming millions of Americans’ suspicion that the system is, as Mr Trump would say, “rigged”.

Though Mr Trump ran on a pro-growth platform, the economic agenda he has professed could be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America's commitments to reduce greenhouse gas emissions, sa
Though Mr Trump ran on a pro-growth platform, the economic agenda he has professed could be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America’s commitments to reduce greenhouse gas emissions, says Prof Stiglitz. PHOTO: AGENCE FRANCE-PRESSE

Though wealthy, Mr Trump is clearly not a member of the traditional elite, which lent credence to his promise of “real” change. And yet it will be business as usual under Mr Trump, who will adhere to Republican orthodoxy on taxation and, by appointing lobbyists and industry insiders to his administration, has already broken his promise to “drain the swamp”.

Mr Obama brought “change you can believe in” on certain issues, such as climate policy; but with respect to the economy, he bolstered the status quo – the 30-year experiment with neoliberalism, which promised that the benefits of globalisation and liberalisation would “trickle down” to everyone. Instead, the benefits trickled up, partly owing to a political system that now seems to be based on the principle of “one dollar, one vote”, rather than “one person, one vote”.

Rising inequality, an unfair political system and a government that spoke as if it was working for the people while acting for the elites created ideal conditions for a candidate like Mr Trump to exploit. Though wealthy, Mr Trump is clearly not a member of the traditional elite, which lent credence to his promise of “real” change. And yet it will be business as usual under Mr Trump, who will adhere to Republican orthodoxy on taxation and, by appointing lobbyists and industry insiders to his administration, has already broken his promise to “drain the swamp” in Washington, DC.

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The rest of Mr Trump’s economic agenda will depend largely on whether House Speaker Paul Ryan is a true fiscal conservative. Mr Trump has proposed that large tax cuts for the rich be combined with massive infrastructure spending programmes, which would boost gross domestic product and improve the government’s fiscal position somewhat, though not nearly as much as advocates of supply-side economics hope. If Mr Ryan is not as concerned about the deficit as he says he is, he will rubberstamp Mr Trump’s agenda and the economy will receive the Keynesian fiscal stimulus that it has long needed.

Another uncertainty relates to monetary policy. Mr Trump has already spoken out against low interest rates, and there are two vacancies on the US Federal Reserve’s Board of Governors. Add to that the large numbers of Fed officials itching to normalise rates, and it is a fair bet that they will do so – perhaps more than offsetting Mr Trump’s Keynesian stimulus.

Mr Trump’s pro-growth policies will also be undermined if he exacerbates inequality through his tax proposals, starts a trade war or abandons America’s commitments to reduce greenhouse gas emissions (especially if others retaliate with a cross-border tax). Now that Republicans control the White House and both houses of Congress, they will be relatively free to weaken workers’ bargaining power, deregulate Wall Street and other industries and turn a blind eye to existing antitrust laws – all of which will create more inequality.

If Mr Trump follows through on his campaign threat to impose tariffs on Chinese imports, America’s economy would probably suffer more damage than China’s. Under the existing World Trade Organisation (WTO) framework, for every “illegal” tariff that the US imposes, China can retaliate anywhere it chooses, such as by using trade restrictions to target jobs in the congressional districts of those who support US tariffs.

To be sure, measures against China permitted under the WTO framework, such as anti-dumping tariffs, may be justified in some areas. But Mr Trump has enunciated no guiding principles for trade policy, and the US – which directly subsidises its automobile and aircraft industries and indirectly subsidises its banks through ultra-low interest rates – would be throwing stones from a glass house. And once this tit-for-tat game begins, it could very well end in the destruction of the open international order created since World War II.

Similarly, the international rule of law, which is enforced primarily through economic sanctions, could fare poorly under Mr Trump. How will the new president respond if Russian-aligned troops escalate the conflict in eastern Ukraine? America’s real power has always derived from its standing as an inclusive democracy. But people around the world have now lost confidence in democratic processes. Indeed, throughout Africa, I have heard remarks such as “Trump makes our dictators look good”. As American soft power continues to erode, the future of the international order will become more uncertain.

Meanwhile, the Democratic Party will surely be conducting an election post-mortem. Mrs Hillary Clinton undeniably lost because she failed to offer voters a convincing vision that was markedly different from the neoliberal agenda that her husband Bill Clinton embraced in the 1990s. Having pursued a political strategy of “triangulation” – adopting versions of its opponents’ policies – for more than a generation, the party of the left could no longer present itself as a credible alternative to the party of the right.

The Democrats will have a future only if they reject neoliberalism and adopt the progressive policies proposed by leaders such as Mrs Elizabeth Warren, Mr Bernie Sanders and Mr Sherrod Brown. This will put them in a strong position against the Republicans, who will have to figure out how to manage a coalition of evangelical Christians, corporate executives, nativists, populists and isolationists.

With the arrival of Mr Trump, and with both major parties now redefining themselves, the coming year may well be remembered as a turning point in US and world history. PROJECT SYNDICATE

• Joseph E. Stiglitz, a Nobel laureate in economics, is university professor at Columbia University and chief economist at the Roosevelt Institute. His most recent book is The Euro: How A Common Currency Threatens The Future Of Europe.

A version of this article appeared in the print edition of The Straits Times on January 02, 2017, with the headline ‘The age of Trump’. Print Edition

 

The Ringgit screwed by Fed’s Decision to raise interest rates


December 16, 2016

The Ringgit screwed by Fed’s Decision to raise interest rates–Wake Up Finance Minister Najib Razak

by Bernama

The ringgit opened lower for the last trading day of the week, dampened by external sentiment, a dealer said.

At 9am, the ringgit was traded at 4.4660/4690 versus the US dollar from 4.4440/4480 at yesterday’s closing.

The strengthening of the US dollar due to the recent announcement by the Federal Reserve on interest rates has affected Asian currencies as well as emerging market currencies, and Malaysia is not excluded.

FXTM Research Analyst Lukman Otunuga said from a technical standpoint, the dollar is heavily bullish on the daily timeframe with yesterday’s hawkish surprise sending the US Dollar Index to fresh 14-year highs above 102.50.

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“The dollar’s strength could become a key theme in 2017 as the improving sentiment towards the US entices bullish investors to propel the greenback higher,” he said in a statement.

Against a basket of major currencies, the ringgit traded higher. Vis-a-vis the Singapore dollar, the ringgit rose to 3.0945/0983 from 3.1049/1096 and versus the yen, it improved to 3.7758/7796 from 3.7846/7894 yesterday.

Against the British pound, the local currency appreciated to 5.5320/5380 from 5.5873/5949, while against the euro it rose to 4.6518/6563 from 4.6851/6921.

– Bernama