Finally, A Sensible Cost Of Living Study - An Important Posting

This is a reposting from October 2009 of what is still quite a relevant piece. Enjoy.

(click on image to enlarge)

There have been many cost of living studies which somehow does not get it quite right. In many cases, it is skewed towards the expatriate lifestyle. The flamboyant CLSA has come up with a highly interesting piece on Asian living standards, with comparisons as well to US, UK and Australia. The basket of 27 items were well selected as reflective of a middle class lifestyle maintenance. It also looked into the currency effects, which will give a true purchasing power parity comparison.

The items selected:
1) Nokia 3600
2) Mobile phone monthly bill
3) Monthly broadband bill
4) Apple iPod
5) Acer laptop Aspire
6) Levis jeans
7) Louis Vuitton handbag
8) TV- 37" Sharp Aquos
9) Sony Playstation PSP
10) DVD (err...)
11)Movie ticket price
12) Coca-cola
13) Canned beer
14) Champagne
15) Marlboro Lights
16) Chicken
17) Rice
18) Eggs
19) English Newspaper
20) Economist magazine
21) KFC meal
22) Lowest price for new car
23) Toyota Camry 2.4
24) Petrol
25) Taxi flag down rate
26) Private doctor consultation
27) Private school fees per month

Taking the US living cost as the 1.00 benchmark, then one can assess the relative disparity. The table showed that India is at 0.59. Relatively speaking, one can buy the same items 41% cheaper in India and so on. Followed by Indonesia at 0.60, China at 0.69 and then Malaysia at 0.72... surprisingly on par with Taiwan at 0.72. It is more expensive in Thailand, coming in at 0.79. HK is there but at a surprisingly mild 0.93. It is more expensive/costly to be living in Australia, UK, Singapore and Japan, coming in at 1.14, 1.14, 1.15 and 1.57 respectively.

The fun part is here, dissecting the report and data. Interesting facts, if buying an iPod, best to go to the US, HK or Indonesia where is is less than $150. In the Philippines and Thailand, its double that. Same for the laptop, the Acer Aspire 10 inch screen cost$330 while its $400-500 in Asia, and a stupid $785 in the UK. The Sharp Aquos TV sells for $500 in the US, Malaysia, Singapore and Thailand but is double that in China, Japan, Korea and Taiwan. Its even more than double in Australia and the Philippines.

The usual 20 Marlboro Lights cost $1-$2 in most of Asia, but is $8 in Singapore and most other Western countries. Guess what, as governments try to alleviate the health care cost side, the $1-$2 will gravitate towards $5 within 5 years.

The figures on its own are meaningless in PPP UNLESS you divide it by the annual median income. One would not mind so much living in Singapore compared to Malaysia (the PPP being 1.14 vs 0.72 if one's pay reflects that disparity - e.g. if you earn $30,000 in Malaysia a year, you should be equally well of earning $47,500 in Singapore. (1.14 /0.72 x 30,000).

Basket Shortfall: The basket of items missed out on a few critical items. If you are going to reflect on PPP vs median income, a proper Cost of Living study must include rental/mortgage costing as that should easily be the #1 cost item in most households. Another is, owning a car is one thing, maintaining, running, parking, tolls are another - people in HK and Singapore can tell that those are major considerations. The other would be the tax considerations. It is not clear but one should take the net disposable median income for a more meaningful analysis.

A better measure: I am surprised CLSA did not do this. One should just take the cost of purchase for the basket of items and divide them by the annual median income for each country. That would yield a better value add measure. It is no point if you are living in India with the lowest cost factor at 0.59 if your income is way lower than everybody. So, I have taken the median annual income and divided by the cost of living for each country. The higher the figure the better as that is basically how many multiples of the annual expense of the basket of items:
1) US 4.9x
2) Australia 2.9x
3) Japan 2.5x
4) UK 2.2x
5) Korea 2.0x
6)Taiwan 1.5x
7) Singapore 1.47x
8) HK 1.3x
9) India 0.9x
10) Malaysia 0.8x
11) China 0.3x
12) Indonesia 0.2
13) Thailand 0.15x
14) Philippines 0.11x

From the table above, despite being more expensive, one is still much better off living and working in Singapore, the UK, the US and Australia, and even Japan. Of course some caveats, the annual median income is skewed if your population is predominantly labour intensive or have a large proportion of rural folks. Hence if you are living and working in executive positions in countries such as Indonesia, Malaysia, India or China, your income should be a lot higher than your country's median income, thus making them quite liveable and actually higher in the rankings.

The Malaysia Problem: The PPP can act as a basic argument on overvaluation and under valuation of the local currencies vis-a-vis the USD. For instance, the Sing dollar is technically 14% overvalued while the ringgit and renminbi are 28% undervalued. But of course there are other more pertinent factors as to why some currencies will stay undervalued substantially vs the USD for the longest time: one is reliance on cheap currency for export competitiveness; two, cheap currency to make it an attractive destination for foreign direct long term investment; three, a high subsidy mentality towards essential goods and services; four, how "open" is the central bank in allowing the free flow of the currency in circulation; five, global acceptance and unencumbered circulation of currency; six, political risk ... etc.

It can be said that countries such as Taiwan, China, Malaysia are all registering strong surpluses and have a more than adequate foreign reserves. Why then are the governments there not allowing their currencies to appreciate - my thesis is that these currencies are NOT ALLOWED to appreciate by their own governments and central banks, rather than the global markets stopping these currencies from rising - they are more concerned with making sure their industries stay competitive, preserve jobs. Singapore can allow their currency to appreciate because they are not tied to exports, they have made services as their major economy cornerstone and thus brought in expertise and high value added industries to their economy. You need to continually move up the industry value chain. Granted, Singapore is also a financial center, something Malaysia cannot easily aspire to become, but we must be aware of these gaps and at least narrow the gaps. You cannot and should not use the cheap currency as the driving force of your economy as that will put things on the backfoot and forever end up with industries that are either sunsetting, labour intensive or low value add. That will forever lock us in low pay, low value add, low income environment.

The problem will be cyclical as well when your currency is cheap and your industries are low value add and labour intensive as that will bring forth the need to maintain relatively low wages but also a lot of subsidy on essential goods in order to maintain the equilibrium. Why do you think Malaysia has over 2m legal foreign workers and probably another 2m illegal ones - its to keep the wages low. It may not be a deliberate policy but one that is brought on by our low cost environment. In the end, our subsidy on essential goods and services will come to a highly significant amount that we no longer can tolerate.

Have a masterplan to dismantle the subsidy, have a schedule. Eventually that will mean that only companies and industries that are globally competitive (without subsidies) can survive, with the exception of a few critical sectors. For example, why are petrol, gas and electricity the same for companies and the public? Why are we subsidising the companies as well? If there are certain industries that cannot compete once we remove the indirect subsidies, then we will be better off. We do not need steel plants or cement plants if we can buy them cheaper elsewhere.

We can still play this game as we are a resource rich country, but we all know that those resources are being depleted rapidly. Petronas provides a huge chunk of our country's spending budget. Imagine if Petronas can only give half of what they have been giving for the past few years - we cannot even pay for the civil service.

Malaysia's Middle Income Trap (or is it "Trapped")

A timely, but another "here we go again" charade, my comments at the end.

http://www.chinalawblog.com/2010/08/china_malaysia_korea_and_the_middle_income_trap.html

... a post by Michael Schuman on Time Magazine's Curious Capitalist blog, entitled, "Escaping the middle-income trap." The post focuses on how Malaysia's economic growth has been so consistently strong since World War II, yet has been slowing over the last few years and of how Malaysia just cannot seem to break into the league of developed nations. Schuman defines this "trap," as follows:

I returned a few days ago from Kuala Lumpur, the capital of Malaysia, where the talk of the town – well, at least among economists -- is the “middle-income trap.” What's that, you ask? A developing nation gets “trapped” when it reaches a certain, relatively comfortable level of income but can't seem to take that next big jump into the true big leagues of the world economy, with per capita wealth to match. Every go-go economy in Asia has confronted this “trap,” or is dealing with it now. Breaking out of it, however, is extremely difficult. The reason is that escaping the “trap” requires an entire overhaul of the economic growth model most often used by emerging economies.

The concept behind the “middle-income trap” is quite simple: It's easier to rise from a low-income to a middle-income economy than it is to jump from a middle-income to a high-income economy. That's because when you're really poor, you can use your poverty to your advantage. Cheap wages makes a low-income economy competitive in labor-intensive manufacturing (apparel, shoes and toys, for example). Factories sprout up, creating jobs and increasing incomes. Every rapid-growth economy in Asia jumpstarted its famed gains in human welfare in this way, including Malaysia.

However, that growth model eventually runs out of steam. As incomes increase, so do costs, undermining the competitiveness of the old, low-tech manufacturing industries. Countries (like Malaysia) then move “up the value chain,” into exports of more technologically advanced products, like electronics. But even that's not enough to avoid the “trap.”

To get to that next level – that high-income level – an economy needs to do more than just make stuff by throwing people and money into factories. The economy has to innovate and use labor and capital more productively. That requires an entirely different way of doing business. Instead of just assembling products designed by others, with imported technology, companies must invest more heavily in R&D on their own and employ highly educated and skilled workers to turn those investments into new products and profits. It is a very, very hard shift to achieve. Thus the “trap.”

Schuman sees South Korea as "probably the best current example of a developing economy making the leap into the realm of the most advanced." Schuman sees Malaysia as a long way from making that same leap:

Malaysia, though, is quite far from where it wants to be. That's a bit surprising based on its remarkable recent history. Malaysia has been among the best performing economies in the world since World War II, one of only 13 to record an average growth rate of 7% over at least a 25-year period. The country has an amazing record of improving human welfare. In 1970, some 50% of Malaysians lived in absolute poverty; now less than 4% do. Yet Malaysians also feel that they've become somewhat stuck where they are. GDP growth has slowed up, from an annual average of 9.1% between 1990 and 1997 to 5.5% from 2000 and 2008. Meanwhile, other Asian economies have zipped by Malaysia.

According to the World Bank, the per capita gross national income (GNI) of South Korea in 1970 was below that of Malaysia ($260 versus $380), but by 2009, South Korea's was almost three times larger than Malaysia's ($21,530 versus $6,760). Malaysia is getting “trapped” as a relatively prosperous but still middle-income nation.

Schuman does not see Malaysia making the leap. Its companies are not innovating. Its private investment is declining and it spends almost nothing on R&D. "If Malaysia is going to break the “trap,” it has to reverse all of these trends."

So what has made Korea so different from Malaysia?

Why has Korea jumped so far ahead? I think the reason is embedded in the different methods the two countries used to spur rapid growth.

Both countries relied exports to create rapid gains in income, but they did so differently. South Korea, from its earliest days of export-led development in the mid-1960s, had been determined to create homegrown, internationally competitive industries. Though Korean firms supplied big multinationals with components or even entire products, that was never enough – Korea wanted to manufacture its own products under its own brands. The effort was often a painful one – remember Hyundai's first disastrous foray into the U.S. car market in the late 1980s and early 1990s – but Korea is where it is today because its private companies have been working on getting there for a very long time, backed in full by the financial sector and the government.

Malaysia, on the other hand, relied much, much more on foreign investment to drive industrialization. That's not a bad thing – multinational companies provide an instant shot of capital, jobs, expertise and technology into a poor country. MNCs, however, aren't going to develop Malaysian products; that has to take place in the labs and offices of Malaysia's private businesses. But those businessmen have been content to squeeze profits from serving MNCs and maintaining their original, assembly-based business models.

Korea was at one time the second poorest country in the world, second only to Niger. Now, Seoul is more dynamic than Tokyo and Korea just continues to grow both economically and in terms of its political freedoms. Why is that? And why are countries like Malaysia and Thailand stuck in the middle ground? And what about China and Vietnam, will they be able to make "the leap?

Japan and Korea are important because they have spending power. Vietnam and Cambodia are important because they have very low wages. China is the most interesting because just three or four years ago, companies were going to China because of its low wages, but now, companies are going there to make money (mostly on the Coast) and going there to make things (more and more inland).

Where do Malaysia or Thailand fit into all this?

Malaysia and Thailand remind me a bit of the mid-size law firm. I can understand hiring the big firm for the big deal or the big case requiring a massive number of associates or legions of highly specialized partners. And I can understand hiring a highly efficient and focused small firm. But I rarely understand hiring the mid-sized firm, which usually tries to price itself along the same lines as the big firms, but without the corresponding depth or expertise. Why bother? And nothing against either Malaysia or Thailand, but I think many businesses have asked themselves this very question.

-------------------

My Views: The way I see it, we always tend to blame corruption as the main bane to why Malaysia is trapped in the middle income trap. While that has some merit, it is not the pervading critical factor - Korea and Taiwan also have to deal with corruption, and at various times corruption was more ingrained and pervasive in Korea and Taiwan, maybe not to Malaysia's extent, but there are quite a lot of similarity, even today. Indonesia, whose corruption problem is much bigger than Malaysia, has surpassed Malaysia's per capita income measure as of last year - what gives?

Malaysia's strategy relied very heavily on import substitution while South Korea's revolved around creating export industries. Import substitution does nothing to bring in foreign exchange; it only stops outflows. To be fair, Malaysia does not have critical mass while South Korea and even Taiwan to a lesser extent can claim that. Having critical mass means a product will reach profitability much swifter, and will attract more capital to grow it for export markets later. Having ASEAN is supposed to help all countries get to critical mass faster, but all duties and related taxes have to be abolished to achieve that ~ no mollycoddling of any industries ~ if we are not effective competitor in producing cars, cement or steel bars, let someone else do it.

I see the main reason being our big picture strategy does not correspond to our actions or policies enacted or actions taken. We have wonderful big picture plans, we want to move away from mid-income to high income per capita ... but we still religiously allow millions of foreign workers in?????????????????????????????? Not to mention the additional millions of illegals unaccounted for - having a shadow workforce of 4m-5m when your actual local workforce is around 10m-12m will have immense repercussions. We know the solutions but we lacked the political to implement them.

The low paying jobs will all go to foreign workers who are happier to work in those jobs. But that reinforces the "low cost, labour intensive" mindset, causing businesses to continue to invest in those areas. Imagine if we have ZERO foreign workers = plantations cost will rise, well almost everything will rise as well ~ businesses will have to shut sunset industries and capital will have to find ways to get into higher value add businesses to stay afloat. There are plenty of ramifications on just that one issue which may explain a lot of things, but you can figure them out.

Another example of when big picture strategy or 1Malaysia does not gel with the actions taken: over subsidised local industries ~ we just never know when to stop with the breast feeding, do we??!! Take Proton, why are we Malaysians, and barely making the top 10 in Asia alone,... happens to be THE SECOND MOST EXPENSIVE PLACE ON EARTH to buy cars??????????????????????????????????? Talk about middle income, well a good chunk of it was taken to subsidise Proton.




Maknanya harga Persona kat Saudi = RM33,934 aje
Maknanya harga Proton Gen2 kat Saudi = RM32,256 aje
Maknanya harga Waja kat Saudi = RM35,673 aje

Is our per capita income higher than Saudi??? Why are Malaysians paying double the price ... after 30 years??? I mean if you cannot compete after we Malaysians have been dumping profits onto Proton for 10 years, 20 years, doesn't that tell you something?

I am all in agreement with subsidising large industries for a country to get traction, but OMG 30 years ... South Korea did the same thing but these industries were weaned off government subsidy much much earlier, and today they are the Samsungs, Hyundais, LGs etc... Mark my words, if we just talk cock all the time, 10 years from now Malaysia will still be the second most expensive place to buy cars, and its because we are still subsiding Proton, and Cambodia and Vietnam's per capita income would have probably surpassed us as well.

These sort of things, you don't need a brilliant person to tell you why we are stuck in middle-income ... we all know the answers, most Malaysians are smart as we do supply very smart graduates to work in Singapore, Taiwan, HK, US, UK, Australia and Indonesia anyway. Big picture - easy, strategy and war cries - easy, actual action ~~~~ ooohhh, susah la... vested interests, not now la, maybe another 3 years, this one cannot la... belongs to so-and-so, that one cannot give open tender la, that project already given .... lower price also kenot... actual contract $35m, final price after adjustment $95m ... how la.

Then add cultural and business factors. Koreans believe very strongly in education. That's partly because it really is a path to success there. Degrees really do get you promoted, unlike most of the rest of the world. Koreans make being educated into a really big deal. Here in Malaysia, yes, getting a good education is important ... but its not the end of the road if you don't ... you can still get plenty rich by knowing the right people. Do we even dare to eradicate that "cultural issue"??!!

Comments from a foreign observer: "Malaysia isn't really a mid-sized firm at all. More like a lethargic government operation with mediocre status quo as the prevailing mantra. There's no efficiency or any notable skill, there's also no scale or depth. There's zero marketing acumen.

It seems more concerned with internal cultural problems than growing commerce (divisions between locals/chinese, islamic issues and so on). There's also a culture of IP theft which is pretty prevalent You open a software co there, they'll be selling burned copies of your stuff for $5 a cd at the local mall before the end of the week. They largely strike me as free riders, not leaders. It very much feels like a small town / strip mall kind of economy, with bootlegging thrown in.

Even if you imported capital, equipment, innovation and good leadership, I don't think they are culturally interested in commerce enough to suffer hardships to prevail. They don't strike me as goal-oriented team players in the way Koreans do."

The last para was hard to take for me, as a Malaysian ... how about you? Its not just in finance but the entire misalignment is evident in our justice system, or regard with respect to human dignity and personal rights ~ the government is supposed to do what is good for the country, if there is sufficient anger, the people will act, sooner or later.

Anthems, war cries, sloganeering .... all emblematic of our problems, and yet thats where we excel in??!! Maybe we can supply those as exports to other emerging countries??? I cringe whenever I hear Malaysia Boleh ... boleh what??? ...

(Whistling and singing): ... When will they ever learn, when will we ever learn ....

In The News

Sometimes its OK to just cut and paste, no additional commentary needed. Read along the lines and between the lines.

Malaysia Needs Fiscal Reforms: Fitch

KUALA LUMPUR, March 23 (Bernama) -- Malaysia needs to implement structural fiscal reforms like a goods and services tax in order to improve its credit rating, said Fitch Ratings.

Its Asia sovereign ratings director, Andrew Colquhoun, said structural reforms to raise government revenue as a percentage of gross domestic product (GDP) in a sustainable way and a broader structural economic reforms to increase the investment rate to give longer term growth prospects were needed.

The rating agency last June cut Malaysia's local currency ratings to "A" from "A+" due to concerns over the country's growing budget deficit which hit 7.4 per cent of GDP in 2008. He said the government planned to narrow the fiscal deficit to 5.6 per cent of GDP this year but has shied away from measures to reduce fuel subsidies and introduce new taxes.

"Disappointingly, fundamental reforms to budget revenues with the introduction of goods and services tax have been postponed.

"That kind of reform and structural improvements in the budget revenue are what we are looking for to restore positive pressure in the credit ratings," he told reporters after Fitch Ratings's 2010 credit briefing here on Tuesday. He said reforms had the potential to significantly improve the public finances on the structural side.

Meanwhile, Fitch Ratings' senior director of Financial Institutions Asia, Ambreesh Srivastava, said outlook for Asian banking systems was expected to be better this year.

"In 2009, sector return on asset (ROA) rose in Indonesia, the Philippines and Vietnam, and was stable in Singapore and Thailand.

"Malaysian banking sector's ROA was down due to one-off goodwill impairment at Maybank, excluding which ROA would have been relatively unchanged," he said.

On local banks, Ambreesh said, the rating outlook was mostly stable, but positive rating actions were possible for a few banks whose financial profiles had improved despite the recent downturn. He said under Basel 3 framework, banks were required to increase their tier-1 core capital ratio and this would result in moderation in return on equity (ROE).

"But capital position may need to be strengthened if the bar is raised significantly," he said.

The Basel 3 framework is scheduled for implementation by end-2012.

"If the bar is raised, I won't be surprised if there are some negative implications on ROE for the local banks," he said, adding that most local banks were at eight per cent and above.

Ambreesh said the banks, however, were likely to have adequate time to do so should this happen over the medium term.

-- BERNAMA

Najib Leaves For Hong Kong To Attend Asian Investment Conference

SEPANG, March 22 (Bernama) -- Prime Minister Datuk Seri Najib Tun Razak left to Hong Kong this afternoon to attend the Credit Suisse 13th Asian Investment Conference 2010 which starts Tuesday. Accompanied by his wife, Datin Seri Rosmah Mansor, Najib left on the government plane at 5.30 pm from Kompleks Bunga Raya at the KL International Airport. International Trade and Industry Minister Datuk Seri Mustapa Mohamed is also accompanying the prime minister on the trip. Najib is expected to deliver a speech at the four-day conference organised by global financial services group, Credit Suisse.

Najib, who is also Finance Minister, is expected to touch on Malaysia's liberalisation measures, provide hints on the make-up of the soon-to-be unveiled New Economic Model, increased efficiency via the Government Transformation Plan (GTP) and moves to make Malaysia a high-income economy.

The Prime Minister will also discuss with Sir John Major, former British Prime Minister and special adviser to Credit Suisse, steps taken to make Malaysia one of the favourite destinations for investors in Asia and outline the nation's plan for economic development. Najib's packed itinerary also includes meetings with Brady Dougan, Chief Executive Officer of Credit Suisse and Kai Nargolwala, Chairman of Credit Suisse Asia.

The Prime Minister will also be interviewed separately by Wall Street Journal's Peter Stein, Bloomberg TV's Susan Li, Business Week, Denise Tsang from the South China Morning Post and Duncan King, Credit Suisse AIC TV.

He will meet a group of Malaysian chief executive officers and hold one-on-one meetings with Credit Suisse fund managers. Najib and wife will return home on Wednesday.

-- BERNAMA

The leap we need to make — Tengku Razaleigh Hamzah

MARCH 23 — James Puthucheary lived what is by any measure an extraordinary and eventful life. He was, among other things, a scholar, anti-colonial activist, poet, political economist and lawyer.

The thread running through these roles was his struggle for progressive politics in a multiracial society. His actions were informed by an acute sense of history and by a commitment to a more equitable and just Malaysia.

James was concerned about economic development in a way that was Malaysian in the best sense. His thinking was motivated by a concerned for socioeconomic equity and for the banishment of communalism and ethnic chauvinism from our politics.

The launch of the Second Edition of this collection of James Puthucheary’s writings, “No Cowardly Past”, invites us to think and speak about our country with intellectual honesty and courage.

Let me put down some propositions, as plainly as I can, about where I think we stand.

1. Our political system has broken down in a way that cannot be salvaged by piecemeal reform.

2. Our public institutions are compromised by politics (most disturbingly by racial politics) and by money. This is to say they have become biased, inefficient and corrupt.

3. Our economy has stagnated. Our growth is based on the export of natural resources. Productivity remains low. We now lag our regional competitors in the quality of our people, when we were once leaders in the developing world.

4. Points 1) -3), regardless of official denials and mainstream media spin, is common knowledge. As a result, confidence is at an all time low. We are suffering debilitating levels of brain and capital drain.

Today I wanted to share some suggestions on how we might move the economy forward, but our economic stagnation is clearly not something we can tackle or even discuss in isolation from the problem of a broken political system and a compromised set of public institutions.

This country is enormously blessed with talent and natural resources. We are shielded from natural calamities and enjoy warm weather all year round. We are blessed to be located at the crossroads of India and China and the Indonesian archipelago.

We are blessed to have cultural kinship with China, India, the Middle East and Indonesia. We attained independence with an enviable institutional framework.

We were a federation with a Constitution that is the supreme law of the land, a parliamentary democracy, an independent judiciary, a common law system and an independent civil service. We had political parties with a strong base of support that produced talented political leadership.

We have no excuse for our present state of economic and social stagnation. It is because we have allowed that last set of features, our institutional and political framework, to be eroded, that all our advantages are not better realized.

So it makes little sense to talk glibly about selecting growth drivers, fine-tuning our industrial or trade policy, and so on, without acknowledging that our economy is in bad shape because our political system is in bad shape.

A case in point is the so called New Economic Model. The government promised the world it would be announced by the end of last year. It was put off to the end of this month. Now we are told we will be getting just the first part of it, and that we will be getting merely a proposal for the New Economic Model from the NEAC. Clearly, politics has intruded. The NEM has been opposed by groups that are concerned that the NEM might replace the NEP. The New Economic Model might not turn out to be so new after all.

The NEP

The irony in all this is that there is nothing to replace. The NEP is the opposite of New. It is defunct and is no longer an official government policy because it was replaced by the New Development Policy (another old New policy) in 1991. The “NEP” was brought back in its afterlife as a slogan by the leadership of UMNO Youth in 2004. It was and remains the most low-cost way to portray oneself as a Malay champion.

Thus, at a time when we are genuinely need of bold new economic measures, we are hamstrung by by the ghost of dead policies with the word New in them. What happens when good policy outlives its time and survives as a slogan?

The NEP was a twenty year programme. It has become, in the imaginations of some, the centre of a permanently racialized socio-economic framework.

Tun Ismail and Tun Razak, in the age of the fixed telephone (you even needed to go through an operator), thought twenty years would be enough. Its champions in the age of instant messaging talk about 100 or 450 years of Malay dependency.

It had a national agenda to eradicate poverty and address structural inequalities between the races for the sake of equity and unity. The Malays were unfairly concentrated in low income sectors such as agriculture. The aim was to remove colonial era silos of economic roles in our economy. It has been trivialized into a concern with obtaining equity and contracts by racial quotas. The NEP was to diversify the Malay economy beyond certain stereotyped occupations. It is now about feeding a class of party- linked people whose main economic function is to obtain and re-sell government contracts and concessions.

The NEP saw poverty as a national, Malaysian problem that engaged the interest and idealism of all Malaysians. People like James Puthucheary were at the forefront of articulating this concern. Its present-day proponents portray poverty as a communal problem.

The NEP was a unity policy. Nowhere in its terms was any race specified. It has been reinvented as an inalienable platform of a Malay Agenda that at one and the same time asserts Malay supremacy and perpetuates the myth of Malay dependency.

It was meant to unite our citizens by making economic arrangements fairer, and de-racializing our economy. In its implementation it became a project to enrich a selection of Malay capitalists. James Puthucheary had warned, back in 1959, that this was bound to fail. “The presence of Chinese capitalists has not noticeably helped solve the poverty of Chinese households.. Those who think that the economic position of the Malays can be improved by creating a few Malay capitalists, thus making a few Malays well-to-do, will have to think again. “

The NEP’s aim to restructure society and to ensure a more equitable distribution of economic growth was justified on principles of social justice, not claims of racial privilege. This is an important point. The NEP was acceptable to all Malaysians because its justification was universal rather than racial, ethical rather than opportunistic. It appealed to Malaysians’ sense of social justice and not to any notion of racial supremacy.

We were a policy with a 20 year horizon, in pursuit of a set of measurable outcomes. We were not devising a doctrine for a permanent socio-economic arrangement. We did not make the damaging assumption of the permanently dependent Malay.

Today we are in a foundational crisis both of our politics and of our economy. Politically and economically, we have come to the end of the road for an old way of managing things. It is said you can fool some of the people some of the time, but not all of the people all the time. Well these days the time you have in which to fool people is measured in minutes, not years.

The world is greatly changed. The next move we must make is not a step but a leap that changes the very ground we play on.

The NEP is over. I ask the government to have the courage to face up to this. The people already know. The real issue is not whether the NEP is to be continued or not, but whether we have the imagination and courage to come up with something which better addresses the real challenges of growth, equity and unity of our time.

At its working best the NEP secured national unity and provided a stable foundation for economic growth. Taken out of its policy context (a context that James helped frame) and turned into a political programme for the extension of special privilege, it has been distorted into something that its formulators, people such as the late Tun Razak and Tun Ismail, would have absolutely abhorred: it is now the primary justification and cover for corruption, crony capitalism and money politics, and it is corruption, cronyism and money politics that rob us and destroy our future.

No one who really cares about our country can approve of the role the NEP now plays in distorting the way we think about the economy, of our people, of our future, and retarded our ability to formulate forward-looking economic strategy.

The need for a wholistic approach to development based on the restoration and building of confidence.

We need a wholistic approach to development that takes account of the full potential of our society and of our people as individuals. We need an approach to development that begins with the nurturing and empowerment of the human spirit. Both personally and as a society, this means we look for the restoration of confidence in ourselves, who we are, what we are capable of, and the future before us.

I return to the question of the Middle Income Trap that I alluded to some time ago. I am glad that notion has since been taken up by the Government.

The middle income trap is a condition determined by the quality of our people and of the institutions that bind them. It is not something overcome simply by growing more oil palm or extracting more oil and gas. Our economic challenge is to improve the quality of our people and institutions. Making the break from the middle-income trap is in the first place a social, cultural, educational and institutional challenge. Let me just list what needs to be done. Before we can pursue meaningful economic strategy we need to get our house in order. We need to:

1. undertake bold reforms to restore the independence of the police, the anti-corruption commission and the judiciary. Confidence in the rule of law is a basic condition of economic growth.

2. reform the civil service

3. wage all out war on corruption

4. thoroughly revamp our education system

5. repeal the Printing Presses Act, the Universities and Colleges Act, the ISA and the OSA. These repressive laws only serve to create a climate of timidity and fear which is the opposite of the flourishing of talent and ideas that we say we want.

6. Replace the NEP with an equity and unity policy (a kind of “New Deal”) to bring everyone, regardless of race, gender, or what state they live in and who they voted for, into the economic mainstream.

These reforms are the necessary foundation for any particular economic strategies. Many of these reforms will take time. Educational reform is the work of many years. But that is no excuse not to start, confidence will return immediately if that start is bold. As for particular economic strategies, there are many we can pursue:

* We need to tap our advantage in having a high savings rate. Thanks to a lot of forced savings, our savings rate is about 38%. We need more productive uses for the massive funds held in EPF. LTH, LTAT and PNB than investment in an already over-capitalized stock market. One suggestion is to make strategic investments internationally in broad growth sectors such as minerals. Another is that we should use these funds to enable every Malaysian to own their own home. This would stimulate the construction sector with its large multiplier of activities and bring about a stakeholder society. A fine example of how this is done is Singapore’s use of savings in CPF to fund property purchases.

* The Government could make sure that the the land office and local government, developers and house-buyers are coordinated through a one-stop agency under the Ministry of Housing and and Local Government. This would get everyone active, right down to the level of local authorities. The keys to unleashing this activity are financing and a radical streamlining of local government approvals.

* We have been living off a drip of oil and cheap foreign labour. Dependence on these easy sources of revenue has dulled our competitiveness and prevented the growth of high income jobs. We need a moratorium on the hiring of low skilled foreign labour that is paired with a very aggressive effort to increase the productivity and wages of Malaysian labour. Higher wages would mean we could retain more of our skilled labour and other talent.

* Five years ago I called for a project to make Malaysia an oil and gas services and trading hub for East Asia. Oil and gas activities will bring jobs to some of our poorest states. We should not discriminate against those states on the basis of their political affiliations. No one is better placed by natural advantage to develop this hub. Meanwhile Singapore, with not a drop of oil, has moved ahead on this front.

* We should ready ourselves to tap the wealth of the emerging middle class of China, India and Indonesia in providing services such as tourism, medical care and education. That readiness can come in the form of streamlined procedures, language preparation, and targeted infrastructure development.

These are just some ideas for some of the many things we could do to ensure our prosperity. Others may have better ideas.

Conclusion

We are in a foundational crisis of our political system. People can no longer see what lies ahead of us, and all around us they see signs of decaying institutions. Wealth and talent will continue to leave the country in droves.

To reverse that exodus we need to restore confidence in the country. We do not get confidence back with piecemeal economic measures but with bold reforms to restore transparency, accountability and legitimacy to our institutions. Confidence will return if people see decisive leadership motivated by a sincere for the welfare of the country. The opposite occurs if they see decisions motivated by short term politics. Nevermind FDI, if Malaysians started investing in Malaysia, and stopped leaving, or started coming back, we would see a surge in growth.

In the same measure we also need to break the stranglehold of communal politics and racial policy if we want to be a place where an economy driven by ideas and skills can flourish. This must be done, and it must be done now. We have a small window of time left before we fall into a spiral of political, social and economic decline from which we will not emerge for decades.

This is the leap we need to make, but to make that leap we need a government capable of promoting radical reform. That is not going to happen without political change. We should not underestimate the ability of our citizens to transcend lies, distortions and myths and get behind the best interest of the country. In this they are far ahead of our present leadership, and our leadership should listen to them.

* Speech by Gua Musang MP Tengku Razaleigh Hamzah at the launch of the Second Edition of “No Cowardly Past: James Puthucheary, Writings, Poems, Commentaries” at the PJ Civic Centre on March 22, 2010.

* This is the personal opinion of the writer or publication. The Malaysian Insider does not endorse the view unless specified.

Morgan Stanley Global Research Upgrades Malaysia

The influential Morgan Stanley Research has upgraded Malaysia and Egypt last week in the much followed Asia Strategy Report. Below are excerpts from the report:

Key changes in our country quant model this month are:

Upgrading: Malaysia and Egypt from equal-weight to overweight;
Downgrading: Peru and Chile from equal-weight to underweight.

Overweight countries are: China, Brazil, Taiwan, India, Israel, Poland, Malaysia and Egypt;
Underweight countries are:

Strong points for Malaysia in our model include a #1 currency ranking and #4 business cycle ranking. Relative P/Book has fallen to 1.0x due to recent under performance. Malaysia also gains in our model ranking this month, moving from #8 to #6. Strong points for Malaysia in our model include a #1 currency ranking (a combination of fundamental upside and a stock market consisting mainly of domestic demand, Malaysia ringgit earning stocks).

Malaysia ringgit is making steady progress against the US dollar.We also rank Malaysia’s business cycle score in the top quartile of EM countries in the model. Exports seem set to
trend up strongly from here, and Malaysia is one of the EM countries most geared to a recovery in global trade and commodity prices.

Due to recent under performance, the P/BR relative of MSCI Malaysia to the EM benchmark (now 1.0x) has fallen significantly. Malaysia is one of the least technically overbought markets in the asset class, ranking #5 on this metric. Moreover, the median GEM fund is running a significant underweight of 132 bps versus the benchmark, substantially higher than the average for the last five years.

Malaysia Country Forecast By EIU

There are research units, even highly respected ones, that actually makes "big picture" business environment forecast on Malaysia and other emerging markets. I guess its to help foreign companies to better plan their long term investment plans. Some of the forecasts are quite "in your face" and matter of fact, not so sure if you ask me. My comments in colour.


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Malaysia: Business environment at a glance

FROM THE ECONOMIST INTELLIGENCE UNIT Policy towards private enterprise and competition 2010-11: The government gradually reverses the decades-old policy of discrimination in favour of bumiputera (ethnic Malays and other indigenous peoples). Protection of intellectual property rights continues to improve. (Yes, there have been some deliberate action towards that. For Najib to make the biggest impact prior to the next election, I think giving bumiputera status to all Malaysians born on and after 1957 would be the simplest and most effective reversal of said policy, without actually having to remove the policy, which might be politically insurmountable). 2012-14: Scope for the government to protect domestic industries and bumiputera groups dwindles as South-east Asian economic integration proceeds. (I totally agree and Malaysia better remove the subsidies and indirect duties that protect these domestic industries in order for them to better compete, or be decimated). Policy towards foreign investment 2010-11: Competition with China guides investment incentives; Malaysia emphasises its advantages in labour skills (such as English-language proficiency), natural resources and infrastructure. 2012-14: Malaysia expands incentives in order to establish itself as a regional services centre. Foreign trade and exchange controls 2010-11: The ringgit appreciates against the US dollar, but the exchange-rate regime of a managed float against a trade-weighted basket of currencies is maintained. 2012-14: Further bilateral trade agreements and progress towards regional economic integration prompt Bank Negara Malaysia (the central bank) to allow offshore trading of the ringgit. (Bank Negara is treading very cautiously on this, and they have their reasons. International convertability and free flow of the ringgit should be promoted, albeit gradually). Taxes 2010-11: The government continues to subsidise fuel and food. It also makes minor changes to personal tax rates, as part of a package of measures aimed at supporting domestic demand. 2012-14: Macroeconomic fundamentals improve, allowing the government to introduce a goods and services tax. Financing 2010-11: Keeping financial markets liquid remains a priority for the government. 2012-14: Competition for corporate finance intensifies as the economy recovers fully from the global economic downturn. Malaysia continues to play a leading role in the development of Islamic banking and finance. The labour market 2010-11: Despite government efforts to trim the size of the foreign workforce, illegal immigration remains a problem. 2012-14: A shortage of highly skilled labour impedes progress at the upper end of the value chain. Positive discrimination in favour of bumiputera continues to harm labour market efficiency. Infrastructure 2010-11: The government implements projects aimed at supporting activity in the construction sector. Public transport improves as a result of increased government investment. 2012-14: Major infrastructure projects are delayed, owing to a lack of private-sector involvement. Energy policy focuses on improving distribution rather than increasing generating capacity.

The Economist Intelligence Unit

p/s photos: Janine Zhang

Why FBM KLCI Can Touch 1,260 In This Rally

Foreign funds have largely neglected Malaysia for the past 6 months, even though equity markets in general have performed well. Asian equities have outperformed mature markets in 2009 thanks to foreign institutional investment inflows, hopes of economic revival in H2 2009, and fiscal stimulus and liquidity measures that are finding their way into equities. These factors might be making some Asian markets expensive.

Markets have gained 48% YTD as of July 27 (82% since October 2008) with China (50%), India (65%) and Indonesia (62%) as the best performers, and Vietnam (22%) and Malaysia (35%) as the worst. Hence, looking at the broader picture, Malaysian equities have been a huge laggard and under performer. The first chart basically shows how much funds from foreign investors have dried up for Malaysian equities.

That has been reflected in the level of foreign ownership of listed Malaysian shares. Despite the consensus that the global economy may well be on its way to recovery, foreign funds ownership levels has not gotten anywhere back to the pre-crisis level of say April 2008 (25.7%).

I have managed to come across a great chart by the highly respected Bank Credit Analyst, which basically explains which markets would "see the most action" in this current rally. Anyone could plot a valuation chart based on the country's prevailing interest rates and match that with the country stocks' forward or trailing PER. That would be quite one dimensional. The BCA's chart is a lot more persuasive in that it is based on forward and de-trended (I don't even want to attempt to know what that word meant, but it sounded so sophisticated) trailing PERs, price to book ratio, and dividend yields shown relative to the average of 18 countries".

Hence it is a peer-to-peer analysis. There is one major shortcoming in that tabulation, in that it does not take into account the historical average valuation of each specific market say over the past 5 years. The BCA chart only looks at how each country is faring in valuation terms relative to one another. For example, if Malaysia's historical PER forward valuation was 18x, and HK's historical PER forward valuation figure is 15x - naturally if we just look at PER, HK will always look cheap relative to Malaysia. However if the current forward PER for Malaysia and HK are 14x and 13x respectively - HK would still be cheaper on a straight out valuation but in actual fact, we should look at its PER now compared to the historical valuation for a more nuanced and value-add commentary, whereby Malaysia's market would be the 'cheaper' one.

Malaysia - You wouldn't get many houses recommending Malaysia, but the BCA thesis puts Malaysia as highly attractive. Bank Negara's recent decision to leave rates unchanged makes things hotter still till the next BN meeting.

What has been happening over the past week or so - I am beginning to see a trickling of fund flowing back into Malaysia. The first two charts basically imply that we are at a low and foreign holdings and funds inflow can only turn positive from here on. The lack of foreign funds inflow for the past 6 months can be largely attributed to the uncertain political environment - the situation is much better now despite rumblings here and there.

When we least expect it, we are likely to see 1,260 being hit at least in this run alone on momentum - just look at the top volume stocks and top gainers today.

Dissecting The Economics Of Malaysia

The size of Malaysia’s export sector is huge at more than 100% of GDP. Hence its importance in driving domestic demand should not be exaggerated. The manufacturing industry is under severe assault due to the collapse in exports. Consequently, manufacturing employment has plunged by 10% from year ago and wages are also falling. In contrast, private consumption fell only 0.7% year over-year in the first quarter, and imports of consumer goods have been relatively resilient.

One reason could be that, even though exports are a significant part of the economy, manufacturing employment is relatively small – about 18% of total employment. By contrast, service sector accounts for close to 60% of total employment. Meanwhile, agriculture and plantation make up 9% of employment, and the construction sector 13%.

Resources/plantation exports such as palm oil, petroleum, natural gas and minerals account for about 30% of total Malaysian exports and the share is rising. China, being the past decade’s fastest growing economy with an seemingly insatiable appetite for resources, has naturally increased in bilateral trade with Malaysia. Trade between the two countries has increased four-fold since 2002.

Malaysia’s exposure to manufactured-goods exports to the G7 is still large, commodities and China are playing a more prominent role in terms of overall exports. The better outlook of these segments – compared with that of manufactured goods exports – will help pull the economy out of the slump.

Malaysia’s banking system is healthy and in a position to support a recovery in household spending. Remarkably, the lending rate of Malaysian banks has fallen to new lows in response to the central bank’s rate cuts and the authorities’ efforts to facilitate borrowers’ access to credit. There are already signs of stabilization in indicators of domestic demand. Housing approvals and loan disbursements for car purchases are bottoming.

Resources-related industries contribute over 50% of government revenues. Since late 2008, both palm oil and crude oil prices have rebounded strongly. Unless they collapse anew, exports of crude oil and palm oil, which accounts for 15% of total Malaysian exports, will boost both domestic income and government coffers and help plug the fiscal deficit.

The odds of recovery in domestic demand are notable, despite continued contraction in the export sector. The 1997-1998 Asian financial crisis was a watershed event for Malaysia’s banking industry. Although some post-crisis policy measures adopted by the Malaysian authorities – mostly notably capital controls – have long been a source of controversy and outright criticism, banking industry consolidation and much stricter supervision from the central bank have fortified the position of banks and largely insulated them from the current global
credit crisis.

Industry consolidation and continued enhancement in risk management have borne fruit in the form of enhanced returns on capital. Currently, the Malaysian banking sector is well capitalized, with a risk-weighted capital ratio of 14.2% as of March 2009. The private credit-to-GDP ratio has fallen since the Asian crisis, implying there has been no froth in bank lending over the past several years. Within the structure of banks’ loan portfolios, household loans account for 54% of all loans, while lending to the manufacturing sector is only 11%.

Malaysian banks are awash with liquidity as the country runs a large current account surplus (17.5% of GDP in 2008). The loan-to-deposit ratio in the banking system is 74%. Bank credit accounts for about 90% of gross financing to the private sector.

Still, Malaysia’s banking system is not without problems. Bankruptcies are rising sharply, access to credit has deteriorated markedly since the onset of the global credit crisis and banks remain somewhat wary of extending credit. The problems in Malaysia’s banking sector pale when compared with the difficulties in many other countries around the world. A relatively healthy banking system puts Malaysia in a better position to cope with economic challenges stemming from the synchronized global growth slump.

The government’s recent move to scrap the long-standing Bumiputera ownership requirement for 27 service sectors and to increase foreign ownership of its commercial banks (from 49% to 70%) could help unlock growth potential by encouraging investment and boosting productivity within domestically-oriented segments. This, along with other reforms within the public sector aimed at reducing red tape, corruption, government intervention and overall inefficiency, could unleash positive forces that will produce stronger growth in domestic segments of the economy.

Malaysia small caps offer a better outlook profile than many other emerging markets. They will benefit most from potential political and economic reforms. Besides, small-cap valuations are decent on both an absolute basis and relative to the emerging market small-cap universe. The currency’s outlook is bullish versus the U.S. dollar. The country has huge external surpluses and the ringgit will benefit from the U.S. dollar’s decline. Relative to other Asian currencies, the rating the outlook for the ringgit as neutral as the central bank is unlikely to allow for much appreciation due to export sector concerns. As for currency valuation, the currency is cheap versus the greenback but is fairly valued versus the Singapore dollar.


p/s photos: Hanako Takigawa

Second Stimulus Package & Information Dissemination (Lack Of)

Hmmm, now we will have the Second Stimulus Package, so I guess most of us were right after all. We have been proclaiming that the initial stimulus was not sufficient and the government was kidding themselves if they thought Malaysia was special in its ability to avert a global crisis when our industry make up is so open to exports and when we do not have a domestic market that is sustainable nor does it have critical mass. There is a big difference to "reacting" late, many jobs would have been lost already. By being late, it would have delayed attacking the problem, its like treating cancer at second stage when things would have been better if we had treated it earlier - the symptoms were all there but maybe we have been reading for different degrees at universities.

Citigroup economics came up with a credible analysis on the SSP and the probable economic impact, but apparently ALL the editors at ALL publications did not have the guts to publish the piece - were their hands tied, is that the way we still operate? Information dissemination must be made available to all Malaysians so that we can weigh all views. Basically the report looked at the fiscal deficit as a percentage of GDP and its implications. As things stand we will be incurring a 4.8% deficit. If the SSP is another RM10bn, the deficit will swell to 6.9%; if its RM15bn the figure will be 7.6%; and if the government is aggressive and do a RM30bn SSP, the figure will be a scary 9.6%.

I believe sober heads will prevail and it will be between RM10bn to RM15bn, any sum north of that will bring about a substantive downgrade in our sovereign ratings and could weaken our ringgit substantially.

Make no bones about it, we need the SSP, but we also need to be prudent. The SSP is likely to expedite on construction jobs but actual disbursements will be to lower labour costs and save jobs. There are already a huge number of construction projects in the 9th Plan so some of them needs to be brought forward in terms of priority.

Corporate taxes contributes about 21% of total federal government revenue while personal income taxes make up only 9%, hence reducing corporate taxes will be much more expensive. Hence it is more likely we will see preferential tax rate for SME's to go from 20% to 18% or 17% as that sector is hardest hit. At most, corporate tax rate will only come down 1 percentage point. As for personal tax rate the reduction should be the same for corporate rate. Reductions in personal tax rates will be regarded as not as effective because only 10% of the working population pays income taxes. Thus a cash rebate would be better, a one off would also be cheaper - e.g. rebating half the taxes already paid for 2008 (yea).

The other area will be credit availability. Currently Bank Negara's SME Assistance Guarantee scheme is at RM2bn and enable SMEs to obtain financing of up to RM500,000 for up to 5 years. It is likely that the sum will be increased and the size added.

The most controversial part will be using EPF contribution, am I the only one hopping up and down? Do not reduce our contribution rate, and do not reduce the employers' rate also. Any attempt to do that will be short-sighted as most Malaysians will not be able to retire well as things stand.

The bone of contention by Citigroup is that a big SSP will result in a huge issuance of MGS and GII and the funds to absorb those papers may be stretched. If its too big, it may weaken the sovereign ratings, then the appetite may reduce foreign funds participation in those papers. As it is, Fitch Ratings has already placed Malaysia on negative watch early last month.

The government should instead draw on the cash reserves at Petronas (via a special dividend) to finance the deficit. Yes, it might cutback future petroleum revenue and see reduced investments by Petronas, but we are in an unlikely crisis which requires unlikely measures. Petronas has RM72bn in cash reserves, a RM10-15bn drawdown is not too much. Then it would not necessitate such a large paper issuance.

For all of Citi's concerns, they are only concerns, not a sentence. Foreign institutions only hold some 14% of MGS and will not be a huge force. Just keep the SSP at RM15bn or below. Even if you compare country by country basis, every country is doing deficit funding, and thankfully Malaysia is at a better position than many to do one.

What irks me is that the media would shut the report out (it has been around for more than a few days) because it highlighted some credible concerns. Are we so shallow? Is that the pervading mentality in dealing with economic issues? What was even more galling was the papers would print shit-stuff like three Malaysian banks now having a larger market cap than Citigroup!!! That kind of shit gets printed but not an important report on the SSP, what the bloody fuck?!!! By printing that "ha-ha" kind of stuff, it tells a lot about our business mindset. Being censured by the government is not an excuse, it just enlarges the blame from the bottom all the way to the top, it does not absolve the media.

I also got very royally pissed off when a senior government official working in an important economics division pooh-pooh the Citi report by saying its not worth looking at it because the bank is collapsing. What an incredulity, what shallowness? What kind of people do we have at these places making critical economic and strategic decisions for the rest of us? What an idiot! For that idiot and those of you who think likewise, did you know that Citi's 7 local branches makes more money than Ambank's 180 branches collectively. Have a sense of perspective. I am not defending Citi's research, just that I wish better information gets disseminated to allow for better critical thought.

p/s photo: Deborah Priya Henry

Recent Views On Malaysia

• Growth forecasts revised down: 2008: 5.7% (IMF), 5.6% (ADB), 5.5%(WB) 5%(Govt), 4.8-7.2%(I-banks). Forecast for 2009: 4.8% (IMF), 4.5% (ADB); 0.5-5.6%(I-banks)
• Q3-08 GDP growth rate slowed to 4.7%y/y, lowest level in 3 yrs (2Q-08: 6.7%) led by decline in exports, easing investment (credit crunch, slowing demand).
• Export growth moderated in Q3 but stayed firm at 16.9% (Q208: 20.8%) due to high exports price and sustained demand of resource-based products; Imports went up by 10.3% (Q208: 9.9%); Net real export good and services declined by 14.8% (Q208: +20%)
• In Oct, exports fell 2.6% yoy due to low global demand for electronics and commodities; Total exports was declined to RM53.46bn ($14.69bn) from RM62.31 in Sep; Imports (RM43.84) also fell 5.3% from a year ago; Trade Surplus in Oct was RM9.62bn
  
• Govt. unveiled its RM7Bn stimulus package to boost domestic economy; revised down forecast GDP growth in 2009 to 3.5%; fiscal deficit at 4.8%;
• Growing concerns that economy will slump to below 3.5% growth in 2009 or even slip into a recession as US and global slump intensify starting late 2008; govt planning for fiscal stabilization program
• Industrial production grew only 0.9% y/y in Aug (weakest in a yr), Manufacturing production rose 0.8% (14-month low); Inflation, high production cost, subsidy bill may also impact consumption; investor sentiment weakening amid high inflation, political uncertainty
• Risks: slowing oil and commodity prices, global slowdown, slowdown in global (China) construction will impact commodity exports, the already slowing industrial production, pose risk to current a/c surplus; inflation and tax increases will impact consumer spending; depreciation of Asian currencies relative to ringgit
• Bank Negara: Growth will be affected in H2 2008 on slowing exports and inflation risk from food and energy prices; but domestic demand and energy/resource exports may lend support to growth; might use interest rates and fiscal stimulus to boost consumption and investment
• Morgan Stanley:Growth would slump to an eight-year low in 2009 as narrowed trade surplus amid slowing export demand and lower commodity price
  
• Mohamed Ariff: electrical and electronic sector is very vulnerable; to avoid recession, Malaysia has to support service sector, expected main engine for economic growth in 2009
• EIU: Growth will be hit by slowdown in fixed investment, consumption (unemployment in export sector)
• UBS: 0% GDP growth in 2009 due to weak exports to G7 countries, but weak global demand and easing energy and food price would lower inflation pressure at 1%
• Stan Chart: current account surplus to narrow in 2008 due to declining exports of Palm oil and electronics to U.S., EU, and Japan
• DBS: Growth will moderate as consumption, investment are slowing in spite of fiscal spending
• Citi: Growth to slow in spite of fiscal spending due to significant slowdown in manufacturing exports and domestic demand on global slowdown, fuel price hike
• MIERS: in spite of declining exports and manufacturing sector, fiscal stimulus and service sector will support domestic demand
• JP Morgan: fiscal spending, food subsidies, cash transfers for poor will support domestic demand
• ADB:GDP growth revised up due to temporary fiscal stimulus, accommodative monetary policy, support from commodity exports. Inflation is expected to remain elevated due to high food, oil prices and reduction in fuel subsidies
• World Bank: Downward revision to growth as political uncertainty hurts domestic/foreign investment and deep global slowdown impact exports

p/s photo: Vivian Hsu

EIU's Bleak Prognosis Of Malaysia

Economic Intelligence Unit / Dec 14 — Political uncertainty and instability are unlikely to dissipate in the months ahead, despite an expected orderly transfer of power from the prime minister, Datuk Seri Abdullah Ahmad Badawi, to the deputy prime minister, Datuk Seri Najib Razak, in March.

The leader of the opposition alliance, Datuk Seri Anwar Ibrahim, will continue with his campaign to destabilise the ruling Barisan Nasional government by persuading BN legislators to switch to the opposition. The Economist Intelligence Unit expects the BN coalition to remain in power in the forecast period. The BN still has a sufficiently large majority to pass the bulk of new legislation unchallenged.

We expect real GDP to grow by just 1.5 per cent in 2009, reflecting Malaysia's exposure to the global economic slowdown. We expect world trade to shrink by 0.5 per cent in 2009.

Inflation is forecast to moderate markedly in 2009-10, from an estimated average of 5.7 per cent in 2008. Domestic demand growth will be sluggish, and global prices for oil and industrial raw materials will fall sharply in 2009.

The merchandise trade surplus will fall to US$22.9 billion (RM82.4 billion) in 2009, from an estimated US$35.3 billion in 2008. The current-account surplus will also shrink in the next two years.

The slow pace of judicial reforms has led to growing concerns in the past month that the next prime minister of Malaysia will clamp down on critics and members of the opposition.

Bank Negara Malaysia reduced the overnight policy rate by 25 basis points on Nov 24 to 3.25 per cent, the first reduction since 2003. The government unveiled a package of fiscal stimulus measures in early November. It also revised its economic forecasts for 2009.

Malaysia's economy grew by 4.7 per cent year on year in the third quarter of 2008, a marked slowdown compared with the second quarter, when the economy grew by 6.7 per cent. The annual rate of inflation fell below 8 per cent for the first time in three months in October. Inflation, as measured by the consumer price index, increased by 7.6 per cent year on year in October. Merchandise exports grew by 15.1 per cent year on year in September, bolstered by still high global prices for oil, palm oil and liquefied natural gas. But prices for all three commodities have declined sharply during the fourth quarter.

p/s photo: Kou Shibasaki

Proverbial Stuff Hitting The Fan

Why can't we have people with a better grasp on economic realities in this country??? Yours truly, and a few others have been harping that the "official statements and official response" to how Malaysia will be affected by the current global financial turmoil, have been overly optimistic. We understand the need to promote "positive expectations" as consumer expectations forms an essential part in spurring demand. However, when we keep hearing we will still get 3.5% growth, or that we are mildly affected - it shows that many people DO NOT even understand or fathom the make up of our economy. How can a 25m open economy, with weak domestic demand, with no discernible "high value add industries" (patented technology), commodity driven to some extent ... say we will manage to survive well???

Datuk said...Obviously, an open economy like the Singapore and HK will be very much affected when the economy activities that were support by the external demand from USA and Western Europe began to disappear with the current global slump. The negative domino effects has fast spreading across to other export orientated nation in Asian continental. That's understandable and well acknowledged by the local authorities in the said area. The masses mentalities have been position into "actionable mode" and major initiatives have been triggered by its people, corporate leaders and decision makers to reduce the negative impacts to the minimum level in the wake of the current economy depression. However, i'm sad to say that in Malaysia the decision makers and economy think tank were too defensive in its approach and too political motivated in their attempt to picture a less gloomy prospect in the current economy meltdown! My goodness.....we still have economists dare to picture the prospect of 3.5% growth for next year and even worst....there is a 5% potential growth in 2009forecasted by the Asian strategic studies highlighted in one of the forum yesterday. What the hell of these people are doing and contributing for our beloved country????? The cynic is....the same day the oct key figures released by the authority revealed the complete contradicting picture! We are in the stage of heading to the negative growth in 2009 unless miracle happen.....and nearly 100%negative growth in 2010 as the shrinking in key exports (electronic, textile, palm oil and petrol, sufficient to name few..) are still at the beginning stage (oct 08).

Now the October figures are out, let's see what the people say. For September 2008 we exported RM62.3bn, October was just RM54.8bn. Thats a huge drop even if you take in the currency effects. Imports for September was RM47.5bn and thankfully we also imported less in October RM43.8bn. One can see that the export contraction has been way way too sharp, blowing out the blue-eyed optimists predictions. For comparison, Singapore's GDP growth contracted -6.8% q/q in Q3-08 (-0.6% y/y) from -5.3% in Q2-08. Industrial production in Singapore continued to fall in Q2 and Q3 by -4.9% and -11.5% led by pharmaceuticals sector and electronics; exports fell 5.7% in Sep (-13.9% in Aug) led by electronics (-10.7%), pharma (-28.7%), semiconductors grew by mere 0.1%, non-electronics fell -1.9%; exports to EU fell -23.6% and to U.S. fell -24.5%; net export (260% of GDP) contribution to Q2 GDP was -1.9% ... ball in Malaysia's court.
I don't want to be right just for the sake of being correct. Its the economy we are talking about, Datuk & I would rather be wrong and that the local economy comes through unscathed. But when you see mis-readings by certain people, naturally the measures taken to counter will also be muted and insufficient. That's why RM7bn is not enough.

I would like to see a more sobering commentary and leadership from the top politicians and top financial people in government institutions such as Bank Negara, MIER and even RAM and the like. I am not asking for them to give pessimistic views, I am asking them for clarity and realistic views. Do not try and instill a false sense of confidence in the people. I know that the rule book would call for a need to keep an optimistic view so that domestic consumption stays strong, but I also believe that a realistic view would help restore confidence that the people would know the government is handling the issue properly, and more importantly has a good handle on the issues we are facing. Time for sobering leadership.

Things are crumbling in the US and much of Europe. Many nations are already in a recession statistically, even some Asian countries. Malaysia is not in that boat (yet), but we also need to know why we are not there (yet). Is that inevitable? Can we dodge the bullet? Or are we deluding ourselves?

This is not 1997, it is not a financial crisis in our own backyard, hence we should not and will not feel the effects firsthand. For my life I cannot understand how those people out there can say Malaysia will not be affected or will be only marginally affected by this crisis. We will be affected because:

a) We do not have a big enough or strong enough domestic economy. If we had a population of maybe 80m-100m and domestic consumption makes up 65%-75% of our economy, maybe we can ride it out, but we are not.

b) If the turmoil is a short one, e.g. if the US and Europe will come out of this with positive growth by 2Q or 3Q 2009, then we can safely say we might only be marginally affected, but that is not the case here.

c) Our major trading partners are the US, China and Singapore. Of that, maybe China can still chug along and save us, but we are not supplying the right products in their enlarged fiscal stimulus (rail and infrastructure). We are rerouting a lot of exports normally to the US to China as partially finished products to be assembled or finished in China for exports. Well, some 60%-70% of China exports are really MNCs funded manufacturing / outsourcing concerns operating out of China - I don't think they will be unaffected.

Oil and CPO prices have crashed, and both help to boost our coffers. CPO prices affects CPO companies rather than the bulk of the population, hence we do not see great wealth effects when CPO is at RM3,000 and we will also not feel it that much if it goes to RM1,200. Oil would affect government coffers and the ability to fund our budget deficit. Some would scream that we are at a highish 4.8% deficit, but I am actually comfortable with that.

RM7bn stimulus is OK but will not be sufficient. I hope the government will add to it with another RM5bn at least, this time do it with a 2 percentage points cut in income tax. I know that will hurt government receipts but its a time to go further into deficit spending as the alternative is not nice. The other recommended measure is for the government to totally pay up on all bills and claims for work done within 2 weeks of invoice receipt. Governments (including state governments should lead the way to pay all bills, we all know that many bills are left unpaid or delayed for the longest time, bickering over amounts and maybe something else to happen... the trickle down effect will be substantive.

The biggest job losses will be in Penang with the high number manufacturing firms there, and watch the trickle down contraction. Oil and CPO price collapse does not hit jobs that much as the number of employees needed to run an oil company are not critical, or rather the revenue/employee is very high. Plus even at US$50, its still profitable and many suppliers and contractors are on long term contracts anyway. As for CPO, well, we know their cost is still around RM650-750 and you still need people to tend to plantations.

For impact, just take a minute to reflect on your job, how much does your company rely on strong foreign demand, how much does your company rely on domestic demand, now look at the demand outlook from both sides 3 months out and then 6 months out. Now take two of your close friends in different jobs, do the same exercise ... maybe you will have a better idea now. Malaysia relies a lot on foreign investment and that will dry up over the next few quarters. Thankfully, Bank Negara has maintained good discipline and our reserves are at an enviable level, thus allowing the country many options to deal with this crisis better than many countries. For those who does not like a weak ringgit above 3.60 vs the USD, grow up, in times of global turmoil I'd rather have a weakened currency to maintain better competitiveness. A strong ringgit would have seen more industries collapsing outright. Plus we are in a deflationary environment, hence a weaker ringgit won't be importing inflation.

Lastly, while the stockmarket has lost substantial ground over the past 12 months, this time around the bulk of retail players have been able to sidestep the fall and is in fact quite cashed up. Nonetheless Malaysia has one of the highest percentage of GDP that is listed and stock prices have a large correlation to domestic consumption, we have yet to see the wealth effect coming through.

Do not be blinkered in that we have not yet seen the effects, by virtue of the makeup of this crisis, it will only hit us with a 3-6 month delayed effect. What am I saying, the October trade data was precisely the 3 month delayed effect hitting us. October saw the impact, and we have closed for November already.... guess what the November figures will be??? Bank Negara will have to put rates down to 2.75% swiftly.

p/s photos: JJ