Playing Malaysia’s Number Game

March 13, 2017

Manjit Bhatia’s article’s article is on my blog.

https://dinmerican.wordpress.com/2017/03/08/najibs-criminal-state-of-mind/

The Malaysian Treasury is all but full

What follows is my friend Nurhisham Hussein’s response.

My own reaction is that I do not trust Malaysian government statistics since they are subject to manipulation by politicians in power. I do respect Nurhisham’s views and commend him for attempting to defend  “economic data from Malaysia”.

The sad truth is that there is so much fake news from Najib Razak and his cohorts in recent years that I have difficulty in knowing what is fact and what is fiction. It is something I experienced in attempting to figure out Donald Trump. But when it comes to Malaysia it is pretty straight forward since in the Malaysian context, fiction is fact.

By the way, what China has to do with the issues raised in Manjit’s article. This statement which I quote from Nurhisham’s article –“One of the key tests to determine whether economic data is falsified is internal consistency and statistical irregularity. China, for example, fails on both counts”–is irrelevant.

Allow me to quote a comment from Greg Balkin who regards Nurhisham’s article as: “A very strong rebuttal to Manjit Bhatia’s shoddy arguments.

Unlike MB who simply fights against the wind and even with his own shadow, at least Nurhisham Hussein provided actual facts and statistics for readers to contemplate on and question if necessary.

As a long-time Southeast Asia watcher, I have been very concerned about Malaysia which is increasingly beset with contradictory developments. Economically, it continues to grow faster than some neighbouring countries such as Thailand and Cambodia (That is bull Greg, check your facts on Cambodia from the Asian Development Bank before making your comment. In its most recent assessment,the Bank described Cambodia as an emerging tiger economy), yet it is mired in a series of financial scandals over the past three years, not to mention the worrying political scene.

The problem is many Malaysians have lost faith in the Najib Administration to the extent that any article that chastises Putrajaya is welcome even if it is not backed up with facts and statistics. One can read many of them on Malaysiakini or Free Malaysia Today. But it does not help Malaysians to develop a more critical mind when it comes to holding the powers-that-be to account.

This explains why many opposition leaders, blinded by popular support and swayed by populist sentiment, simply make one unsubstantiated allegation after another, only to find their position untenable and forced to retract thereafter.

No worries, for they have the people behind them whose negative perceptions of the government are already cast in stone and it matters not if these allegations hold water. If this vicious circle persists, I would not surprise to see Malaysia vote out UMNO and replace it with another set of arrogant politicians armed with half-baked policies to administer the country.

But it is a politician’s job to make sensational yet unsubstantiated claims, and an economist’s one to right them. Precisely why MB’s latest article is not only a huge letdown, but one that is unbecoming of his credentials, if any.”

Let me present an alternative reaction to Nurhisham’s article. It is from someone who calls himself Bumiputera Graduate as follows:

“I am unsure if Nurhisham is trying to shore up confidence in the Malaysian economy or defend the credibility of social and economic data produced in Malaysia.

I think Nurhisham is an expert at  the sleight of hand.  He has shifted the focus in the article from the main points that Manjit is making to those where Manjit is inaccurate.

Among the inaccuracies Nurhisham pointed out is that Malaysia does publish its labour force participation numbers, and that its budget deficit is going down. But Nurhisham doesn’t deny that perceived inflation figures are higher than reported figures; he only says it’s also the case with the US, which is not an answer at all.

He doesn’t touch on Manjit’s point on Bank Negara Malaysia manipulating the currency. Is Manjit right? Or is he wrong? Nurhisham says that his friends and associates at IMF and the World Bank have full confidence in Malaysia’s statistics.

Who knows if Manjit’s friends at the Fund and the Bank don’t have any confidence in Malaysia’s statistics. Hardly an argument worth a pinch of salt coming from the general manager, economics and capital markets of a government agency – the Employers Provident Fund – whose investment decisions are themselves questionable.

Again, when there are conservative estimates of 2 million undocumented migrant workers, with what confidence will you say that the minimum wage is implemented?

The labour market, going by his 3.6% indicator, may be at full employment, but he’s sweeping away the big problem of graduate unemployment (predominantly a Malay problem), the huge migrant labour problem, and the low productivity.

But if Manjit does a bit more of research and does a full article on the Malaysian economy, he may come up with a longer menu of issues that plague the economy than Nurhisham will be able to defend.

Manjit Bhatia, the byline says, is with a risk analysis company. If people like Manjit have views like this, that says a lot for the confidence that foreign analysts have in the Malaysian economy.

I think Nurhisham fails miserably in trying to shore up optimism in the economy, if that was his intention, even as he defends the credibility of data coming from Malaysia. With rebuttals such as his, what little confidence the public has, will further slide down.”

I leave you, my blog readers, to decide between the two views (Greg Balkin and Bumiputera Graduate). As far as I am concerned, and if I have surplus cash to invest, I will stay out the Malaysian stock exchange, the bond market and the Malaysian ringgit for a while, since I have no confidence in the Najib Administration’s management of the Malaysian economy. –Din Merican

 Playing Malaysia’s number game

by Nurhisham Hussein

http://www.newmandala.org/questioning-credibility-institutions/

Nurhisham Hussein outlines why it’s disingenuous and dangerous to dismiss economic data from Malaysia.

I read with some interest a recent article on New Mandala by Manjit Bhatia on the effect of the assassination of Kim Jong-nam on the political fortunes of Malaysian PM Najib Razak. That the assassination has distracted attention from Malaysia’s domestic political scene is not in doubt. However, the author makes some strong allegations regarding the veracity of Malaysian economic statistics, as well as making some misleading and outright untrue statements on the state of the Malaysian economy.

Let me deal with each of the statements I found problematic in turn.The article makes the bold claim that, “Most credible economists, even the market type, know Malaysia’s official numbers are as rubbery as North Korea’s or China’s.”

In my role as Chief Economist of the Employees Provident Fund (EPF), I meet nearly every market economist who covers Malaysia, as well as those in policy circles such as from the World Bank and IMF. I don’t know of any who have hesitated to take Malaysia’s official statistics at face value. One of the key tests to determine whether economic data is falsified is internal consistency and statistical irregularity. China, for example, fails on both counts. Malaysia does not.

The article further states that there is no data for the job participation rate in Malaysia. This is rather unconventional classification, as everyone else uses the term labour force participation rate (LFPR) instead. In any case, the article is completely mistaken. The LFPR for Malaysia has been available at monthly frequencies since 2009, quarterly since 1998, and annual frequencies going back to 1982. The annual numbers are further broken down by age, gender, education, and ethnic background. The data shows, far from a decline in labour market conditions, a steeply rising LFPR from 62.6 per cent in 2009, to a near record high of 67.6 per cent in 2016 (with a long term average of 65 per cent). It should also be noted that Malaysia’s long term average unemployment rate is just under 4 per cent. At the current rate of 3.6 per cent, the labour market would still be considered to be at full employment.

Between Idris Jala and Najib Razak–A Deformed Malaysia

The article goes on to say that Malaysia’s minimum wage is scarcely enforced. On the contrary, data from the EPF, to which all salaried workers are required to contribute, show a massive shift in Malaysia’s salary distribution when the minimum wage was introduced in 2013. Fully 10 per cent of the workforce shifted from below the minimum wage to above it, and the wage effect was evident across the entire bottom half of the distribution.

Fourth, the article claims that, “In Kuala Lumpur alone, credible estimates put inflation at least twice the ‘official’ number”, and “inflation hits close to double-digits, in real terms, according to some investment banks’ research.” The second statement is nonsensical – there is no such thing as inflation in “real” terms, because in economics real prices of goods refer to inflation-adjusted prices. But the larger point – that inflation is perceived to be higher than official statistics – is actually well known. Well known because the same discrepancy has been documented nearly everywhere.

A recent Federal Reserve research note explicitly addressing this issue, found that US citizens perceptions of inflation were consistently twice as high as the official statistics. Why that is so is an interesting question in itself and would take far too long to explore, but the larger point is that differences between perception and official statistics cannot be taken as prima facie evidence that those statistics are false. There is plenty of evidence that the opposite is true, for example via MIT’s Billion Prices Project, that it is perceptions that are mistaken and not the statistics. Furthermore, research into the methodology and mechanics of constructing consumer price indices conclude that if anything, the CPI tends to overstate inflation, not understate it.

Fifth, the article claims Malaysia’s fiscal deficit and national debt are “ballooning”. In fact, the deficit has been halved since 2009, to just 3.1 per cent for 2016, while the debt to GDP ratio has been kept under the 55 per cent limit the government imposed on itself. Manufacturing, far from being routed, has continued to thrive, with sales breaching an all time high of ringgit 60 billion a month over the past few months. Moreover, Malaysia has been one of the very few countries in the region to record positive trade growth over the past two years.

In the Age of Trump, democratic institutions are under attack everywhere. Trust in public institutions has declined, not just in Malaysia, but globally. Globalisation itself is in retreat, and schisms and conflicts that we thought were gone, have arisen anew. Be that as it may, undermining confidence in public institutions without substantive evidence reinforces these troubling trends, and works against the very foundations of a democratic society. Without them, the very thing that Manjit Bhatia appears to be arguing for, becomes further from reality.

Nurhisham Hussein is General Manager, Economics and Capital Markets at Employees Provident Fund, Malaysia.

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.

Making 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.

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.

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.

Minister Rahman Dahlan –A Financial Ignoramus

November 17, 2016

by TK Chua

http://www.freemamalaysia.com

As an “economics minister”, we expect more comprehensive and professional answers from Rahman. Many can become politicians, but only very few can be economics ministers.–TK Chua

I was not a fan of Dr Mahathir Mohamad when he was Prime Minister. But a major part of my working life was under his premiership. I was resentful of Mahathir when I saw that many of the things he did was in favour of big time business people. He had his blue-eyed boys who often turned out to be disastrous. He too embarked on projects that did not turn out well. But hindsight is always perfect. Everything is relative.

When we assess the performance of a government or its leadership, rarely do we do so based on a single factor. More often than not, it is a combination of failures from which a tipping point is reached.

When Mahathir criticised the “China deal” and the East Coast Rail Line (ECRL) project, it was just one of the many issues confronting Malaysia today. How the people look at the government is not solely determined by this single criticism alone. Hence, even if Minister Abdul Rahman Dahlan has successfully rebutted Mahathir’s criticism, the view of the people may not have altered much. There are still numerous other unanswered issues that have remained protracted and controversial.

But even within the confines of the China deal and the ECRL project, there are numerous other questions that we could have asked.  First, when Rahman claimed China’s “soft” loan was favourable to Malaysia, he must have assumed China was a simpleton we could take advantage of. It is nice to eat something soft, but be careful of the bones embedded in it. It is almost a cliché when I say there is no free lunch in this world.

Second, the Minister claimed that the soft loan was denominated in the ringgit and so it posed no foreign exchange risk. But what about repatriation of interest charges and profits by Chinese companies? The loan may be denominated in the ringgit, but repatriation of profits and interests may drain our reserves since the rail project has no forex earning capacity.

Third, why the urgency to embark on the ECRL project when government finances are less than conducive? When we borrow, more so from external sources, for an infrastructure project, the justification must be respectable. Does the east coast region suffer from transportation capacity problems right now? Even the existing highways are half empty there.

Fourth, the minister claimed “transfer of technology” when the ECRL project is implemented. I think herein lies our problem – when we are incapable of doing anything worthwhile, what we need is to go on talking about it. Seriously, if Malaysia needs transfer of technology to lay the rail track, we know that this term has been overused and abused.

As an “economics minister”, we expect more comprehensive and professional answers from Rahman. Many can become politicians, but only very few can be economics ministers.

TK Chua is an FMT reader.

 

Bank Negara gets a new Governor from May 1, 2016

April 27, 2016

by Reuters/www.malaysiakini.com

Congratulations and Good Luck

Putrajaya has appointed Dato’ Muhammad Ibrahim as the new governor of Bank Negara Malaysia, after months of market speculation and uncertainty ahead of the retirement of longstanding head Zeti Akhtar Aziz.

Muhammad, 56, who is currently a Deputy Governor, would take over effective May 1, according to a statement from the Prime Minister’s Office.

“I am confident that under Muhammad’s leadership, Bank Negara Malaysia can continue its service in helping the government, providing advice and views for catalysing the country’s economic growth, as well as administer monetary policy and overseeing the country’s financial industry, including continuing Bank Negara’s efforts to grow the financial industry,” Prime Minister Najib Abdul Razak said in the statement.

“On behalf of the governemnt, I would like to express gratitude and appreciation to (Tan Sri Dr) Zeti Akhtar Aziz for her excellent contributions during her tenure as the seventh governor of the central bank,” Najib added.

Muhammad is a member of the central bank’s monetary policy committee and sits as an independent director on the board of national oil firm Petronas. The ringgit turned firmer after the announcement.

Muhammad has a tough task ahead, with slumping oil and commodity prices dragging on the economy and a simmering political scandal at home that has worried global investors.He will chair his first policy meeting on May 19. His first public appearance will be when first quarter growth figures are announced on May 13.

Steady hand

After Zeti’s steady hand on the tiller for 16 years, businesses and investors will be looking for policy continuity and assurances about the central bank’s independence.

So far this year, Malaysia’s currency and bond markets have enjoyed a degree of calm after being battered in 2015 by worries about the impact of tumbling energy prices on the government’s finances and political uncertainty.

The ringgit lost nearly 19 percent against the US dollar last year.Zeti, 68, who steps down on April 30, was named as one of the world’s best central bank chiefs by Global Finance magazine in 2009.

Muhammad was seen as one of the favourites to take over from Zeti, having been one of her deputies since 2010. During a career spanning 32 years with the central bank, Muhammad held a key role during the Asian Financial Crisis as Managing Director of Danamodal Nasional Berhad, a bank recapitalisation agency.

The new governor is a member of the central bank’s monetary policy committee and is an independent director on the board of national oil firm Petronas.

A chartered accountant and University of Malaya graduate, he holds a master’s degree from Harvard University and a postgraduate diploma in Islamic banking and finance from the International Islamic University Malaysia.

South-East Asia’s third-largest economy grew five percent in 2015, slowing from six percent in 2014. In January, Najib revised the 2016 budget to reflect sharply lower oil prices and cut this year’s GDP forecast to 4.0-4.5 percent from 4.0-5.0 percent.

– Reuters

 

On US Interest Rates

December 11, 2015

by Anatole Kaletsky

READ THIS:  http://www.project-syndicate.org/commentary/no-fear-of-fed-interest-rate-increase-by-anatole-kaletsky-2015-11

http://www.projectsyndicate.org

The Federal Reserve is almost certain to raise US interest rates at its next policy meeting, on December 15 and 16. The first US rate increase since June 2006 will be a pivotal moment for the global economy, launching what Mohamed El-Erian calls the “great policy divergence,” with repercussions in every region and financial market. The impact will be particularly powerful in emerging countries, where currencies are vulnerable to a rising dollar and tightening liquidity conditions in the US. Project Syndicate’s commentators – some of the world’s preeminent economists and policymakers – have examined the issue from four broad angles.

What is the immediate and longer-term outlook for US monetary policy?

The Fed’s leaders have repeatedly said that they plan to raise interest rates much more slowly than in previous periods of monetary tightening. Such assurances from central bankers cannot always be trusted, but Fed Chair Janet Yellen’s promises to move more gradually than in the past are credible, because the Fed is genuinely determined to push inflation higher and to ensure that it never again falls much below 2%.

Nobel laureate Joseph Stiglitz provides further grounds for discounting the likelihood of faster tightening. Instead of trying to control inflation, according to Stiglitz, the Fed’s main concern now is to reduce unemployment and counteract inequality. To do this, the Fed must continue to stimulate the US economy with easy money. Even the quarter-point rate hike expected at the Fed’s upcoming policy meeting is, in Stiglitz’s view, dangerous and premature.

Moreover, while the Fed’s official responsibility is to manage the US economy, its leadership fully understands the international impact of Fed decisions. Thus, Harvard’s Carmen Reinhart, an authority on global debt crises, believes the Fed will “favor gradualism” to avoid wreaking havoc in emerging economies that are overloaded with dollar debts. In a related argument, Barry Eichengreen, the Berkeley economic historian, suggests that US monetary policy is now effectively “Made in China,” because China’s efforts to stabilize the renminbi have already tightened US monetary conditions by the equivalent of the quarter-point rate hike expected on December 16.

Is gradualism the right approach?

Like Stiglitz, UNCTAD’s Richard Kozul-Wright argues that a rate hike in December would be premature and opposes any tightening at all: If the Fed “follows through on raising interest rates,” this could cause serious trouble for the global economy, and especially emerging markets, because of “the enormous tsunami of debt bearing down on households, businesses, banks, and governments.”

But many economists who focus on risks to financial stability believe that the Fed should have tightened rates earlier and now needs to move faster than planned. Gita Gopinath of Harvard University objects to what she calls the Fed’s “dollar distraction,” whereby US policymakers have deviated from their inflation-fighting mandate because of unnecessary concern about the dollar’s strength. In a similar vein, Stephen S. Roach, former chief economist of Morgan Stanley, argues that the Fed has already made a “fatal mistake” by keeping interest rates so low for so long, thereby transforming monetary policy “from an agent of price stability into an engine of financial instability.”

Howard Davies, former Deputy Governor of the Bank of England, points out that it is “justifiable to increase interest rates in response to a credit boom, even though the inflation rate might still be below target.” And Nobel laureate Robert Shiller agrees, warning that excessively low interest rates have created “overheated asset markets – real estate, equities, and long-term bonds – [which] could lead to a major correction and another economic crisis.”

On balance, considering that the Fed is under fire from both directions, perhaps the expected timing of a modest tightening of monetary policy is about right, says former IMF chief economist Kenneth Rogoff. He points out that US interest rates will remain low even after several quarter-point increases. The real risk of monetary tightening, he suggests, is political: “If the Fed starts hiking, it will be blamed for absolutely every bad thing that happens in the economy for the next six months to a year, which will happen to coincide with the heart of a US presidential election campaign.”

I agree with Rogoff. The coming rate move is now so universally expected that it will have little financial or economic impact. The sense that monetary policy is starting to normalize will help to reassure investors and businesses, thereby dispelling lingering memories of the 2008 financial crisis.

Winners and losers

Economists are almost unanimous that the main effects of the Fed rate hike will be felt outside the US. Harvard’s Jeffrey Frankel fears a “possible repeat of previous episodes, notably in 1982 and 1994, when the Fed’s policy tightening helped precipitate financial crises in developing countries.”

The key problem, says Jose Antonio Ocampo, former UN Under-Secretary for Economic Affairs, is the dollar’s dominant reserve-currency status, which means that monetary policy in emerging economies is overly influenced by the US. In the future, however, this vulnerability will be lessened by the Chinese renminbi’s inclusion in the basket of reserve currencies that the International Monetary Fund uses to set the value of its Special Drawing Right (SDR), says Yu Yongding, Director of Global Economics at the Chinese Academy of Social Science.

Even in the short term, admission to the SDR could help by convincing markets that China’s currency adjustment in August was not the start of a big devaluation. That would relieve downward pressure on other emerging-market currencies, especially in Asia, according to Lee Jong-Wha, director of Korea University’s Institute of Asia Research. Nouriel Roubini, who famously forecast the 2008 financial crisis, agrees that “a correction has already occurred in emerging markets, limiting the need for further adjustment when the Fed moves.”

Turning to the US and Europe, most Project Syndicate commentators, with the notable exception of Stiglitz, believe that the first US rate hike will have limited impact on economic activity directly. Although Shiller and Roach express serious concerns about the buildup of debt and high asset prices in developed countries, both Roubini and Berkeley’s Brad DeLong downplay concerns about financial instability, because interest rates will remain low by historic standards for many years, even after Fed tightening begins.

The lessons of zero interest rates

Stiglitz criticizes the Fed for neglecting its legal mandate to promote “maximum employment” in favor of a narrow focus on inflation that is no longer relevant. By contrast, I believe that the Fed has effectively abandoned inflation targeting and thereby “buried monetarism,” implying a welcome return to the Keynesian emphasis on minimizing unemployment, even if that means higher inflation.

DeLong, however, contends that five years of zero interest rates have failed to end stagnation and believes that the only thing the Fed has effectively abandoned is hope of accelerating economic growth. Instead of giving serious consideration to unfounded theories speculating that excessively low interest rates could, under certain conditions, discourage growth and investment, the Fed should have committed itself even more decisively to zero or even negative rates.

Adair Turner, Chairman of the Institute for New Economic Thinking, agrees that more radical policies are needed. To overcome stagnation government should run bigger deficits, financed directly by printing money. To avert financial crises, credit creation by banks needs to be controlled directly or even eliminated altogether, in favor of direct lending to businesses by savers through capital markets.

Almost all of these commentators agree that monetary policy should focus on economic growth, not financial stability (tougher regulation is needed to achieve that). Davies disagrees, as do Shiller and Roach, but they fail to explain how growth can be accelerated if monetary policy is tightened to avoid credit bubbles.

Meanwhile, economists who believe that further monetary loosening is required to pull the world out of stagnation must look elsewhere. They can pin their hopes on China, where monetary policy will become more expansionary, according to Fudan University’s Zhang Jun, or on Europe, where the European Central Bank is providing increasingly powerful stimulus as monetary union evolves into a “deeper political union,” according to ECB President Mario Draghi.

The final bastion of radical monetary-policy experimentation is Japan. Koichi Hamada, chief economic adviser to Prime Minister Shinzo Abe, provides a reminder that seems all the more relevant as the US experiment comes to a close: “The belief that monetary policy does not matter is the most dangerous idea in economic history.”

 

Budget 2016–What to watch out for, apart from Prime Minister Najib Razak.

October 24, 2015

by Ong Kian Ming

http://www.themalaysianinsider.com

Need to worrry about what is hidden in our national debt figures

To the man on the street, he would be looking out for how the budget affects his pocket directly, whether it is through the income tax rate, the GST rate or how much BR1M is being paid out and at what income levels. This is only natural.

However, for policy makers, lawmakers and analysts, the budget is a more holistic document that has larger implications on the economy beyond the direct impact to one’s pocketbook.

Here are some of the things I will be looking out for in today’s budget and budget-related documents which will be tabled in Parliament.

1) Where will the expenditure cuts and increases be?

During every budget session, the Finance Ministry provides a thick book entitled “Anggaran Perbelanjaan Persekutuan” or “Estimated Federal Expenditure” which provides a breakdown of the estimated operating and development expenditure for the items under each ministry for the current fiscal year and for the upcoming fiscal year.[1]

Except for budget junkies, most members of the public would not have seen the contents of this book before. But it is an important book in that it tells us exactly where the expenditure cuts and increases will take place.

For example, total government expenditure was expected to increase from RM264 billion in 2014 to RM274 billion in 2015. But this increase in expenditure is not distributed evenly. The Prime Minister’s Department saw its estimated budget increase from RM16.5 billion in 2014 to RM19 billion in 2015, an increase of RM2.5 billion while the Transport Ministry saw its estimated budget decrease from RM5.2 billion in 2014 to RM4.6 billion, a decrease of RM0.6 billion.

This document tells us where the government’s spending priorities lie, moving forward and points to possible areas of less than transparency discretionary spending.

For example, most of the RM2.5 billion increase in the budget of the Prime Minister’s Department was in development expenditure which includes RM1.5 billion for PR1MA housing, RM1.9 billion for spending on the 5 development corridors and a shocking RM1.6 billion for “special projects” (details not listed). At the same time, the operating expenditure for the public universities was cut by an estimated RM1.1 billion from RM8.5 billion in 2014 to RM7.4 billion in 2015.

There are many interesting items which are revealed in this document, ranging from the small – RM20 million in 2015 for the ANGKASA space programme – to the large – an estimated RM2.2 billion in 2015 for various paddy related subsidies.

But How to bringing down the Budget Deficit?

As they say, the devil is in the detail, and the details which are listed in this document have real economic and social implications which warrant closer scrutiny.

2) Changes in off-budget items

During each budget session, the Finance Ministry and the Accountant General’s Department of Malaysia publishes a document entitled “Federal Government Financial Statements” or “Penyata Kewangan Kerajaan Persekutuan”.

It provides details of the actual government expenditure for the previous budgetary year. It also provides a list of outstanding government loans, a list of government investments and a list of government guarantee loans by GLCs and government owned companies.

Why are these lists important? Firstly, the list of outstanding government loans tells us exactly how much some of these companies owe to the federal government.

For example, it tells us that, as of 2013, the Port Klang Authority (PKA) still owed the government RM3.7 billion as a result of a “bail-out” soft loan provided by the government to save PKA from the PKFZ scandal.

It also tells us that the Indah Water Konsortium (IWK) and the National Feedlot Corporation (NFC) owed the federal government RM2 billion and RM225 million respectively as of 2013.

While these loans are listed as government assets, the fact that many of them are given to companies that are not in a position to service these loans means a high probability that the government has to write some of them off as bad debts. Which means that ultimately, the taxpayer would have to foot the bill.

Secondly, the list of government investments tells us the exact shareholdings of the government in various listed and non-public listed companies.

This list tells us which companies the government has effective control over. And, with a bit of digging, it may also reveal to us some of the ways in which the government “hides” its debts.

For example, two of the companies featured in this list – Pembinaan BLT Sdn Bhd and Pembinaan PFI Sdn Bhd – are actually special purpose vehicles set up to finance various development projects which do not appear in the official development expenditure budget.

Pembinaan PFI’s debts, for example, stood at RM26.5 billion as of FY2014 and it has no independently generated revenue which means that the interest payments on its debts will have to come from federal government sources.

Will there be any more Pembinaan PFI’s and BLT’s in this list? We will see after today’s budget announcement when the government’s financial statement for 2014 is released.

Thirdly, the list of government guarantees shows us how much the government has to spend to “bail out” companies on this list if they ever declare bankruptcy.

RM5.8 billion of 1MDB’s debts are government guaranteed as of 2013 as are RM29.2 billion of PTPTN’s debts. Total government guarantees (otherwise known as “contingent liabilities”) stood at RM157.5 billion as of 2013. If these guarantees were added to government debt, then our debt to GDP ratio would exceed the 55% government limit.

Of course, some of the companies featured in this list such as TNB and Khazanah are of sound financial standing and would probably not require a government bailout in the near future. But at the same time, the government’s exposure to companies such as 1MDB is much more than the listed RM5.8 billion of government guarantees. How much more has the government’s exposure increased?

We will know after perusing the latest financial statements of the federal government.

3) Auditor-general’s report on the financial status and management of the federal government

The auditor-general also releases its yearly report on the financial status and management of the federal government and the individual ministries during the year end budget parliamentary session.

It is not a very well-perused document but it contains important information such as the quality of financial management by the individual ministries, the companies which have problems servicing their government loans and the expenditure status of certain trust accounts.

It was in this document that I discovered that Pembinaan PFI had spent close to RM30 billion in development expenditure-related projects and it was also here that I found out that companies such as Cyberview Sdn Bhd had accumulated RM571 million in payment arrears to the federal government.

So while the attention is being paid to some of the headline grabbing items in the budget, I will be carefully scrutinising some of these “hidden” items in the budget and budget-related documents that may contain other interesting and perhaps even more important information pertaining to the financial situation of our country.

* Dr Ong Kian Ming is Serdang MP.