Malaysia’s Economy: Steady State?

Juwai IQI Global chief economist Shaun Saeed views the country will weather through the tempestuous global economy. Malaysia’s GDP growth is forecast at 3-4% by Juwai IQI with ringgit to track between RM3.67 and RM4.10 to the dollar. Local currency’s strength is primarily due to higher oil prices, movements aligned with the Yuan and macroeconomic stability. DBS Group Research is predicting BNM to cut OPR by another 25 basis points this Wednesday. That will leave OPR at a new low of 1.5%.

The move is to address potential impact on the economy due to recent announcements of state of emergency and MCO.

The overall GDP in 2021 is expected to trim by 0.8% to 5.2%, down from earlier forecast of 6%. Domestic consumption will be most affected. This will be a drag on the growth rate. Tighter restrictions on social and work mobility across Penang, Selangor, Melaka, Johor and Sabah as well as the Federal Territories of Kuala Lumpur, Putrajaya and Labuan will impact somewhat on GDP growth. The above states/ territories account for about two-thirds of the country’s GDP. Foreign flows into MGS and MGI issues have remained robust in recent months, due to higher energy prices and buoyant global risk sentiments.

Malaysia needs an injection of RM45 billion to overcome the recent MCO and Emergency declarations. There are sectors and people severely impacted. Without any further politicking, the Prime Minister has six months to deliver initiatives. It is pointless for him to examine Bersatu’s likely performance in GE15 or invite others from the Opposition into his grouping/ alliance. This is an opportunity for him to shine with new and courageous measures that will change a gloomy outlook to one more optimistic.

 Six months may not provide enough time but surely, he could:

·       Raise support/ funds for the unemployed;

·       Provide grants/ loans to SMEs or a loan moratorium up to mid- 2021;

·       Reduce his Cabinet by 50%;

·       Initiate construction of new hospitals and provide additional funds for KKM to mitigate Covid;

·       Improve all state and Federal roads (zeroize “potholes”);

·       Provide shelters for the homeless, especially in cities;

·       Assist old folks’ homes and orphanages with essentials;

·       Create motorcycle lanes and rain-shelters for motorcyclists;

·       Do a one-off tax relief for businesses;

·       Roll-out the vaccines free of charge to the public;

·       Provide free “meals on wheels” for the poor, elderly and marginalised;

·       Enhance corporate governance;

·       Expedite trials of the corrupt;

·       Strengthen law enforcement and the police;

And the list goes on ...

Many of the above seem very populist measures. Yes, they are! Six months is not a lot of time to implement large, infra projects. And if you are politically savvy, then being populist is the way to go. Most assuredly the economy and confidence will turn hugely positive rather than remain in a steady state.

Good luck Mr. PM!

 

Reference:

1. Business news, Daily Express,15 January 2021.

2. DBS Group Research, The Edge, 15 January 2021

 

Was Trump a “Wrecking Ball” for U.S Economy?

Miley Cyrus released a chart-topping number called “Wrecking Ball” in 2013. Trump seems to have followed her lyrics in respect of the U.S. economy. 

The US economy was hit by the biggest economic contraction ever recorded as a result of the pandemic. It has since bounced back strongly, but hasn't regained all its losses.

Six charts below by bbc.com show Trump’s impact in his term of office:

The latest numbers show economic output surged by an annualised 33% in the third quarter of 2020. This is after a record fall as a consequence of the coronavirus pandemic. The recovery, although strong, hasn't yet brought economic activity back to pre-pandemic levels. Yes, it is the biggest quarterly increase, but by more like double - outdoing the previous peak of 16.7% in the first quarter of 1950.

During his first three years in office, President Trump oversaw an annual average growth of 2.5%. The last three years of the Obama administration saw a similar level of growth (2.3%).

Prior to the recent post-pandemic fluctuations, if we look at growth rates as far back as comparable records allow, it's clear there have been frequent periods when the growth of GDP - the value of goods and services in the economy - has been significantly higher than under President Trump.

In the early 1950s, for example, annualised GDP growth rate periodically exceeded 10%.

 

President Trump often highlights the rising value of US financial markets as a measure of success. The Dow is a measure of the performance of 30 large companies listed on US stock exchanges, and it reached record highs at the start of 2020. It then crashed as markets reacted to the coronavirus pandemic, wiping out all the gains made since President Trump took office. But the financial markets have been remarkably resilient and have largely recovered back to near pre-pandemic levels, although there have been recent wobbles.

Prior to the pandemic, President Trump claimed to have delivered the lowest unemployment rate in half a century. This is true. In February this year, the rate stood at 3.5%, the lowest for more than 50 years. However, the Obama administration added more jobs to the economy, comparing similar time-frames. Under Trump, in the three years prior to the pandemic, there were an additional 6.4 million jobs. In the last three years under Obama, seven million jobs were added.

As in many parts of the world, coronavirus lockdown measures very quickly led to soaring levels of unemployment in the US. The rate jumped to 14.7% in April, the highest level since the Great Depression of the 1930s. The US Labor Department says more than 20 million people lost their jobs, eliminating a decade of employment gains in a single month.

Since the peak in April, unemployment has fallen back significantly to 7.9% in September.

  

Real wages (adjusted for inflation) grew throughout Trump's first three years in office. This growth reached 2.1% per annum in February 2019, prior to the pandemic.

This is lower than the real wage increases of up to 2.4% that President Obama oversaw in 2015

The rapid increase in average earnings then seen at the start of the coronavirus lockdown were largely as a consequence of the lowest-earning Americans losing their jobs at a disproportionate rate, following the economic downturn. With lower wage-earners out of jobs, the average hourly wage data skewed sharply upwards.

Average wages have since started to fall back, as economic restrictions have eased.

  

President Trump claimed in 2019 that he had delivered "the largest poverty reduction under any president in history". In 2019, around 4.2 million fewer people were living in poverty in the US compared with the previous year, according to official data. This is a significant drop, but not the largest reduction in history.

The US Census Bureau has published this poverty data since the end of the 1950s. The largest fall in a single year was in 1966 during the administration of President Lyndon B Johnson, when almost 4.7 million people were lifted out of poverty.

The financial crisis of 2007/8 and subsequent economic downturn saw sharp rises in poverty, which only began to decline from around 2015 during the Obama administration, with a growing economy and rising levels of employment. Food banks in the US face continued demand as unemployment due to the pandemic persist.

The continued strength of the economy under President Trump (at least until the pandemic hit) has been matched by a continuing fall in the poverty rate. This overall national figure masks wide variations across regions and ethnic groups in America. In 2019, while 10.5% of the population was defined as living in poverty, the figure for black Americans was 18.8 and for white (non-Hispanic) Americans it was 7.3%.  Figures for 2020 are not yet available, but are expected to show a sharp rise in poverty as a result of the pandemic.

So, was he a “wrecking ball”? Yes, he had the affinity to keep surprising everyone even his colleagues with arguments that only Peter Navarro (Trump’s economics chief) could explain. Perhaps, with his going we have a greater sense of normality.

 

Reference:

US 2020 election: the economy under Trump in six charts, Reality Check Team, BBC,
3 November 2020

Saving Lives or Saving the Economy?

With MCO 2.0, we have this global debate on the above. Is the debate necessary?

Do we have a correlation between lockdowns and Covid-19 deaths? Wuhan had a total lockdown and deaths reported (or under-reported) were lower than in the U.S. or Europe. Is that our standard?

An economic system is not a light switch, simply switched on and off.  It maybe more like a nuclear power plant that needs time to get to optimum capacity. We were generally getting there by December 2020 but we now have another shutdown.

Of the over 147,000 Covid-19 confirmed cases in Malaysia, only 578 fatalities were reported or about 0.4%. In the U.S. it has been around 2.0% (of confirmed cases). So, over 99.6% of Covid-19 patients in Malaysia did not die. That is because of the good stewardship of the Health Ministry and the hospitals involved – both public and private.

Every job is essential. When MITI classifies what is essential or not affects lives of SMEs primarily in services like hair salons, event management, gyms and others. How do they survive? How do they keep employing their workers? Like it or not, we are an interconnected bunch. So, if employees are WFH, then restaurants and others suffer! Yes, delivery services (Food Panda and the like) blossom but others do not. It is fine for MOH to say MCO 2.0 is likely to be only for 4 weeks. But the repercussion is that we may lose up to RM 20 billion in output. Toyota and Honda assembly plants are now shut because MITI classified them as non-essential.

Consequently, many owners or entrepreneurs suffer from depression, hunger and default on their loan obligations. Surely a more targeted approach on MCO or CMCO will meet both saving lives and saving the economy?

 

Reference:

1.Carmelo Ferlito, Free Malaysia Today, 14 January 2021

2. Yohei Muramatsu, Nikkei Asia, 14 January 2021.

Is Climate Change Not Happening?

Climate change scepticism exists in Western democracies, mostly among right-wing populists. American Republicans are the least likely to see it as a major threat. Only about 27% of Republicans say climate change is a major threat, compared with 83% of Democrats, a 56-percentage point difference!

Americans of all stripes generally trust scientists (86%), except for environmental research where there is a 30-point gap between Republicans and Democrats, a gap – more surprisingly is persistent among those with high science knowledge.

Besides individuals, it was estimated that the world's five largest publicly owned oil and gas companies spent about US$200 million a year on lobbying to control, delay or block binding climate policy.

This raises the question: Why are people denying climate change? Mark Maslin explained five types of denial in his article:

1. Science denial

Deniers suggest climate change is just part of the natural cycle, the climate models are unreliable and too sensitive to carbon dioxide. Some suggest that CO₂ is just a small part of the atmosphere and cannot have a large heating effect.

All these arguments are false and there is a clear consensus among scientists about the causes of climate change. The climate models that predict global temperature rises have remained very similar over the last 30 years despite the huge increase in complexity, showing it as a robust outcome of science.

2. Economic denial

Some climate change deniers are switching to new tactics. One of Britain’s leading deniers, Nigel Lawson, the former UK chancellor, now agrees that humans are causing climate change. But what he was concerned about was the cost and other implications of many of the policies currently being advocated.

Economists, however, suggest we could fix climate change by spending 1 percent of world GDP. Perhaps even less if the cost of savings from improved human health and expansion of the global green economy are considered. But if we don't act now, by 2050 it could cost over 20 percent of world GDP.

3. Humanitarian denial

Climate change deniers also argue that climate change is good for us. They suggest longer, warmer summers in the temperate zone will make farming more productive. These gains, however, are often offset by the drier summers and increased frequency of heatwaves in those same areas. For example, the 2010 "Moscow" heatwave killed 11,000 people, devastated the Russian wheat harvest and increased global food prices.

Climate change deniers will tell you that more people die of the cold than heat, so warmer winters will be a good thing. This is deeply misleading. Vulnerable people die of the cold because of poor housing and not being able to afford to heat their homes. Society, not climate, kills them.

4. Political denial

Climate change deniers argue that they cannot act because other countries are not acting. But not all countries are equally guilty of causing current climate change.

For example, 25 percent of the human-produced CO₂ in the atmosphere is generated by the US, another 22 percent is produced by the EU. Africa produces just under 5 percent.

Source: Global Carbon Project (2019)

5. Crisis denial

The deniers also argue that we should not rush into changing things, especially given the uncertainty raised by the other four areas of denial above. Deniers argue that climate change is not as bad as scientists make it out. We will be much richer in the future and better able to fix climate change.

And similarly, hollow arguments have been used in the past to delay ending slavery, granting vote to women, ending colonial rule, ending segregation, decriminalising homosexuality, bolstering worker's rights and environmental regulations, allowing same sex marriages and banning smoking.

People once denied that climate change is happening, and now they are denying that humans are responsible. The question is why are we allowing people with the most privilege and power to convince us to delay saving our planet from climate change? And what do we do as Malaysians?

 

Reference:

1.     Why is climate scepticism so successful in the United States? 21 Jan 2020, The Conversation

2.     Mark Maslin, Here Are Five of The Main Reasons People Continue to Deny Climate Change, 30 Nov 2019, www.sciencealert.com/

Is Our Economy on Self- Destruct Mode for 2021?

Source: Bernama

The expectation was Malaysia is to recover in 2021. Projections of 7%-7.5% for GDP were touted by many learned economists. No-one expected another round of MCOs or a State of Emergency! What is the implication?

Many say MCO 2.0 is only for two weeks and hence GDP growth will be impacted by a lower growth rate of 6.2% instead of 7.0%. In other words, the drag on GDP is perhaps 0.7% to 0.9% for 2021. According CGS-CIMB Research, the estimated daily economic losses due to MCO 2.0 is RM 750 million, higher than RM 200 million incurred daily under CMCO. That translates to RM 10 billion for a two- week shutdown or 0.7% off from projected GDP of 7.5%. If you allow health experts to rule, MCO will be extended by another 4 weeks or a total of 6 weeks for shutdown. That may translate to a “loss” of RM30 billion or a reduction of approximately 2% in GDP terms. So, growth may only be 5-5.5% for 2021. Sectors impacted will include wholesale and retail trade, restaurants, hotels, recreational services and leisure.

Fitch Solutions said in Focus Malaysia (12 January) that the state of emergency has mixed prospects with risks pronounced if Government takes the opportunity to push through legislation or measures that are inherently unpopular. Many have questioned the need for an emergency in the first place. Covid-19 is not a reason for emergency, otherwise Trump would have imposed one a long time back and avoided the election.

Dr. Musa Mohd. Nordin writing in Malaysiakini (12 January), suggested some best pandemic practices and these include ramped up-testing; triaged mass screening; contact tracing in digital mode; data sharing; improving healthcare capacity; and, enhancing public health initiatives. It is to MOH’s credit if it can harness ideas locally and abroad.

Meanwhile, our present trajectory suggests more SMEs floundering, unemployment rising above 1.0 million, domestic consumption declining, and private investments postponed further.

With an Emergency, we have FDIs dropping off, DDIs remaining stagnant, exports curtailed and a sense of gloom up to August 1, 2021. This time around, there is no talk of moratorium (maybe crematorium!), fiscal stimulus and support measures to stem business decline.

Why must we self-destruct the economy when there are other practical ways to stem Covid-19, especially with vaccines now being available?

 

Reference:

1.     Tan Siew Mung, These are the sectors that will be affected by MCO 2.0, according to CGS-CIMB, 12 Jan 2021, The Edge

2.     Cheah Chor Sooi, Fitch Solutions: Lockdown will likely last longer than two weeks, 12 Jan 2021, Focus Malaysia

Is Zafrul Delusional?

 

Finance minister Tengku Zafrul Aziz had said the level of investment in Malaysia last year (2020) had reflected the confidence investors had in the country. He has been criticised roundly by business leaders after he made a posting about the level of foreign investment in Malaysia. He had argued in a posting on the professional social media platform LinkedIn that foreign and domestic investment in Malaysia had amounted to RM109.8 billion for the first nine months of 2020. “How’s that for investors’ continued confidence in Malaysia?” he said.

 

However, Sven Schneider, chief executive of the European Chamber of Commerce, said in response to Tengku Zafrul’s post that European foreign investors have many concerns about Malaysia being a “viable investment destination”. “Until today, the Honorable Minister was not even able to meet with us and listen to the concerns of our corporations,” Schnieder said. “Without these inputs, your Ministry certainly cannot address the problems on the ground.”

 

There’s been much hype and agitation and, by extension, circulation of kopitiam (coffee shop) talk about reports of Malaysia falling behind its regional counterparts in terms of foreign direction investment (FDI). According to a United Nations Conference on Trade & Development (UNCTAD) report, “Investment flows to developing countries in Asia could fall up to 45 percent in 2020”. The report also highlighted that Indonesia, Singapore and Vietnam received more than 80 percent of the US$156 billion in FDI that ASEAN countries pulled in last year. Only five percent or just US$7.8 billion went to Malaysia – which of course doesn’t seem to augur well for the country. 

 

Some of the specific examples include: 

 

(1)  Samsung Electronics is intending to shift its display production operations from China to Vietnam – but which has actually been officially denied by the company itself. For the record, Samsung already has six factories and two research and development (R&D) centres in Vietnam; 

 

(2) Apple through its manufacturing partner, Foxconn, is moving only some (i.e., not wholesale) of its iPad and MacBook assembly lines to Vietnam from China as part of a “parallel supply chain” strategy. This means that there’s scope for other regional countries such as Malaysia to attract the rest of this production network in the global value chain (GVC); 

 

(3)  Tesla is building a factory in Indonesia and even contemplating a SpaceX launchpad too – when in reality talks between the electric vehicle and clean energy company with the Indonesian government is still on-going; 

 

(4) Amazon is investing US$2.8 billion to build a localised data centre (Amazon Web Services/AWS Region consisting of inter-connected clusters known as Availability Zones) for its cloud computing services in West Java, Indonesia. Data localisation would also minimise the potential for aggressive tax avoidance (transfer pricing) for companies such as Amazon. But should Indonesia decide to go ahead and join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), the advantages gained from data localisation will be diluted. This is because the CPTPP has an in-built bias against data localisation and corresponding tax implications alongside intellectual property rights (IPR); and 

 

(5)  Alibaba, Bytedance, Tencent, are setting-up their regional headquarters in Singapore. This has no bearing at all on the investment in Malaysia’s digitalisation drive, including assimilation of 5G technology, among others. It should be recalled that Alibaba had co-invested in the establishment of what is the world’s first Digital Free Trade Zone (DFTZ) in Malaysia

A new policy vision is called for in which the existing policy paradigm is turned on its head (Jason Loh, The Asean Post, 9 January 2021). SMEs have to be at the forefront as catalysts of economic and employment growth. That would also benefit the government-linked companies (GLCs).  

Other policy steps would include the resuscitation of cross-border listings such as the ASEAN Trading Link (set up in 2012) by building upon the ASEAN Capital Markets Forum (ACMF) for cross-border offerings of collective investment schemes (CIS). 

 

Thirdly, increase fiscal deficit to invest in DDI, including in research & development (R&D) and generate a job creation strategy at the heart of Malaysia’s macro-economic strategy.

Fourthly, further diversify and boost trade and investment links beyond traditional FDI partners – looking to Latin America (Central & South), the Middle East, Central Asia, North Africa, and Sub-Saharan Africa.

Beyond economics and incentives is political instability, racial and religious rhetoric and unnecessary grand standing by politicians from another era. If we focus on innovative, imaginative ways to attract DDIs and FDIs then we have a chance to be ahead of Vietnam or Indonesia. 

Now we have an emergency declared by the King, that’s the confidence of our present PM. God Bless Malaysia!

References:

1. Zafrul lambasted over claims about foreign investments, FMT, January 9, 2021

2. Beginning of the end as Malaysia’s FDI dries up? Jason Loh, The Asean Post, January 9, 2021

3. Economists explain why investors prefer other Asean countries, Jason Thomas, FMT, 19 Dec 2020

Haiti and Its Cost of Freedom

The Haitian Revolution was one of the largest and most successful slave rebellions in history. Over 12 years of uprisings formerly enslaved Africans overcame colonial rule. This ended slavery in France’s most profitable colony and established the first independent black republic in the Americas.

In the 18th century, the white population made up 40,000 of Saint-Domingue’s residents. The slave population was close to half a million – outnumbering them 10 to one. The slave rebellion in 1804 gained Haitian independence from France. The French government however demanded compensation for the loss of their property and slaves. In fear of invasion, Haiti agreed to pay back a sum of 90 million gold francs over the following 122 years. Haiti, in effect, was forced to pay reparations for its freedom.

This history is not as distant as it may seem. It set the stage for many decades of Haitian economic misery and underdevelopment to come—the country, one of the poorest nations in the Western hemisphere, did not finish repaying its 19th century debts to France and the U.S. until the middle of the 20th century.

Source: UNICEF

In 2004, the President at the time Jean-Bertrand Aristide suggested that France should repay $21 billion in reparations for this money extorted after independence. Soon after making this suggestion, the democratically elected president Aristide was overthrown by a military coup supported by the USA.

While France belatedly offered a public apology for the history of slavery that shaped the Caribbean, and cancelled Haiti's $77 million debt following the cataclysmic 2010 earthquake, the country remains impoverished and vulnerable to disasters and climate change. Loans have continued to be given, and the IMF ranks Haiti as at high risk of another debt crisis. Activists say that the indemnities unjustly forced on Haiti more than a century ago must be reversed. Some calculate that returning all those 19th century gold francs would add up to about $17 billion.

The resulting racial wealth gap is no metaphor. In metropolitan France, 14.1% (2017) of the population live below the poverty line. In Martinique and Guadeloupe, in contrast, where more than 80% of the population is of African descent, the poverty rates are 38% and 46%, respectively. The poverty rate in Haiti is even more dire at 59% (2014). And whereas the median annual income of a French family is $31,112, it’s only $450 for a Haitian family (source: https://en.wikipedia.org/wiki/Median_income).

In May 2015, when French President François Hollande became only France’s second head of state to visit Haiti, he admitted that his country needed to “settle the debt.” He then clarified that it was a “moral” debt, not a financial one. "No negotiation, no compensation can repair the wounds of history that still mark us today," Haiti's President Michel Martelly told French President Francois Hollande. "Haiti has not forgotten, but Haiti is not stubborn."

Meanwhile, Haiti wallows in misery while France ignores its financial obligation. Why can’t people see the injustice especially the French who uphold their national motto of liberty, equality and fraternity?

 

Reference:

1.     Haiti: Free from slavery, not yet free from debt https://jubileedebt.org.uk/

2.     Ishaan Tharoor, Is it time for France to pay its real debt to Haiti? 13 May 2015, The Washington Post

3.     Marlene Daut, When France extorted Haiti – the greatest heist in history 30 June 2020, The Conversation

4.     Lucy Campbell, Ten black history events that should be taught to every pupil, 11 Oct 2020, The Guardian