Friday, 29 November 2019

CFA Institute Investment Foundations Program: Chapter 16 – Investors And Their Needs (Part I)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 16 provides an overview of the investors and their needs. The learning outcome of chapter 16 is as follows:
·       Describe the importance of identifying investor needs to the investment
·       process;
·       Identify, describe, and compare types of individual and institutional investors;
·       Compare defined benefit pension plans and defined contribution pension plans;
·       Explain factors that affect investor needs;
·       Describe the rationale for and structure of investment policy statements in serving client needs.

The investment industry provides a range of services—including financial planning, trading, and investment management—to a wide variety of clients. Individual investor clients range from those of modest means to the very wealthy. The investment industry also provides services to many types of institutional investors, such as pension funds, endowment funds, and insurance companies. Because investors are all unique, it is important to understand each of their specific circumstances in order to best meet their financial needs. It is not possible to act in a client’s best interests if those interests are not understood and incorporated into the chosen investment strategy.

Clients differ in terms of their financial resources, personal situations (if they are individual clients), objectives, attitudes, financial expertise, and so on. These differences affect their investment needs, what services they require, and what investments are appropriate for them. For example, elderly clients with significant resources may be very concerned with estate (inheritance) planning, but elderly clients with modest resources may be more concerned about outliving their resources. A shortfall in investment returns may have significant consequences for the latter but have less impact on the former.

Individual investors are often differentiated based on their resources. Most will have relatively modest amounts to invest. Other, more affluent individuals will have larger amounts. The term “retail investor” can be used to refer to all individual investors, but it is common to use the term to refer to individual investors with modest resources to invest.

Many investment firms make a distinction between their retail clients, more affluent clients with larger amounts, and high- and ultra-high-net-worth investors with the largest amounts of investable assets.

Retail investors are by far the most numerous type of investor. They buy and sell relatively small amounts of securities and assets for their personal accounts. They may select investments themselves or hire advisers to help them make investment decisions. They also may invest indirectly by buying pooled investment products, such as mutual fund shares or insurance contracts.

The investment industry provides mostly standardised services to retail investors because they generate the least revenue per investor for investment fi rms. Many retail investment services are delivered over the internet or through customer service representatives working at call centres.

Wealthier investors or high-net-worth investors, generally receive more personal attention from investment personnel. Their investment problems often involve tax and estate planning issues that require special attention. They either pay directly for these services on a fee- for- service basis or indirectly through commissions and other transaction costs.

Very wealthy individuals or ultra-high-net-worth investors usually employ professionals who help them manage their investments, future estates, and legal affairs. Th ese professionals often work in a family office, which is a private company that manages the financial affairs of one or more members of a family or of multiple families. Many family offices serve the heirs of large family fortunes that have been accumulated over generations. In addition to investment services, family offices may provide personal services to the family members, such as bookkeeping, tax planning, managing household employees, making travel arrangements, and planning social events.

Wealthy families often have substantial real estate holdings and large investment portfolios. Th e investment professionals who work in family offices generally manage these investments using the same methods and systems that institutional investors use. They pay especially close attention to personal and estate tax issues that may significantly affect the family’s wealth and its ability to pass wealth on to future generations or charitable institutions.

Institutional investors are organisations that hold and manage portfolios of assets for themselves or others. Th ere are many different types of institutional investors with varying investment requirements and constraints. Institutional investors may invest to advance their mission or they may invest for others to meet the others’ needs. Institutional investors that invest to advance their missions include pension plans, endowment funds and foundations, trusts, governments and sovereign wealth funds, and non- financial companies. Institutional investors that invest to provide financial services to their clients include investment companies, banks, and insurance companies.

Defined benefit pension plans promise a defined annual amount to their retired members. The defined amount typically varies by member based on such factors as years of service and annual compensation while employed. Typically, employees do not have the right to receive benefits until they have worked for the company or government for a period specified by the pension plan. An employee’s rights are vested (protected by law or contract) once they have worked for that period.

In a defined contribution pension plan, the pension sponsor typically contributes an agreed- on amount—the defined contribution—to an account set up for each employee. Employees also generally contribute to their own retirement plan accounts, usually through employee payroll deductions. Th e contributions are then invested, normally in funds that the employee chooses from a list of eligible funds within the plan. Th e plan provides enough choices of funds to allow employees to create a broadly diversified portfolio. Th e sponsor generally limits the choices to a set of mutual funds sponsored by approved investment managers. Th e pension plan sponsor should also ensure that the fees charged on the funds are reasonable. At retirement, the balance that has accumulated in the account is available for the employee.

The investment needs of individual investors are most likely: free polls

Thursday, 28 November 2019

Recession in 2020: Hoax or Real?

All this talk of recession in 2020, freaks-out many ordinary people. President Trump, our stable genius, thinks the U.S. economy is strong! Many key numbers tell a different story. Inverted yield curves, the Dow at the dizzying heights (of 28,000) and trade wars have confounded economists. In August 2019, a survey of 226 economists conducted by the National Association for Business Economics had the following results:

·       38% of respondents believed the U.S. will be in recession in 2020;
·       34% picked 2021; and
·       14% it is after 2021.

July 2019 marked the 121st consecutive monthly expansion of the U.S. economy – longest period of uninterrupted growth (no thanks to Trump!).

As pundits and experts argue there are some points we need to know whether recession is on the way or otherwise.

1.       What is a recession?
          Recession is two consecutive quarters of negative growth (GDP). For the U.S., the NBER determines the recession or otherwise.

2.       What happens in a recession?
          Jobs disappear, unemployment spikes, businesses close, property prices crash, stock prices tumble and the spiral continues until Keynesian measures are introduced.

3.       What’s with inverted yield curve?
          Inverted yield curves have preceded all nine recessions in the U.S. economy since 1955. So what is it? Normally, investors expect higher yields on longer-term bonds. But when yields are higher on short-term bonds than the long-term counterparts, the yield inverts. That’s a sign that people are worried about the economy’s health. The San Francisco Fed in a research paper in 2018 said the inverted yield curve is “strikingly accurate” record for forecasting recessions.

4.       How do I prepare for a recession?
          Look at your saving habits for unexpected events, such as medical emergencies. So have at least six months liquidity to survive. Second, restrain purchase on impulse which cannot generate income or value. Third, re-calibrate monthly expenses so that those fixed items (food etc.) could be sourced from cheaper outlets. Fourth, divest some stocks or assets that you could re-purchase when values have fallen 40% or more. Fifth, and most important trust in Him and don’t despair – recessions too will end.
1. US unlikely to avoid recession both this year and next:  Mohamed El-Erian (, Jul 3, 2019)
2. When Mohamed El-Erian speaks, Wall Street listens – and he says a crash is probably coming (
3. Should I Be Freaking Out About All This Recession Talk? Jay Willis, (

Wednesday, 27 November 2019

Do You Believe The Shared Prosperity Vision?

The PH Government unveiled the Shared Prosperity Vision 2030 during the Budget 2020 presentation. There were several disparities identified: urban-rural; regional; gender; and intra-ethnic divide.

Yes, all these divides need to be addressed so that every Malaysian has a decent standard of living by 2030. Median income disparity between T20 and B40 has widened – RM10,148 in 2016 compared to RM1,935 in 1989. So it sets out strategic thrusts and 15 key economic growth activities.

The Shared Prosperity Vision Targets as enumerated include:

The Vision narrative could become a nightmare if we are not honest enough to address issues at hand:
  • Why has the NEP failed in its targets? Or, did it actually fail, or for political reasons it is understated?
  • What are the implementation weaknesses identified in executing the Plans?
  • Is unity forged by economic targets and reduction of regional/economic disparities?
  • How much has been spent for Bumiputra upliftment since 1971 and what is the outcome of say, RM1 trillion investment?
  • Can we measure poverty level and its success since 1971?
  • How do we want to reflect our ethos – Rukun Negara? Then, how do we resolve issues like Zakir Naik, unilateral conversion bill, khat, ICERD, vernacular schools, “pendatangs”, prayers at assemblies and sensitivities of others?

Unless we are prepared to be courageous and review our shortcomings, we will repeat our failures. The cost of which is borne by future generations. 

So do you believe in PH's Shared Prosperity Vision? free polls

Shared Prosperity Vision 2030, Ministry of Economic Affairs, Malaysia

Tuesday, 26 November 2019

Tabung Haji: Who is Bailing-Out Who?

In May 2015, Mahathir Mohamad warned Tabung Haji to cancel its land purchase from 1MDB (1Malaysia Development Berhad). He disagreed that the Malaysia’s Pilgrims’ Fund be used to bail out 1MDB – purchasing a small 1.56 acre of Tun Razak Exchange land for RM188.5 million, when an area as huge as 70 acres was purchased by 1MDB for only RM194.1 million.

Tabung Haji was set up about 55 years ago to help Muslims in the country save up for the Hajj. Over the decades, the fund board gained respect in the Islamic world for its management of the savings and Shariah-compliant investments. And enabled over 30,000 Malaysian Muslims to perform Hajj every year.

Najib, however, decided to “milk” it secretly. By December 2015, Zeti Akhtar Aziz, then Governor of Bank Negara Malaysia (Central Bank of Malaysia) sent two letters to the chairman of the fund, Abdul Azeez Abdul Rahim and copied to the Prime Minister Najib Razak, who was also the Finance Minister about the pilgrims’ fund being on the brink of collapse. A massive bail out by taxpayers may be required.

The new government of Mahathir Mohamad refrained from announcing the bankruptcy of the institution for fear of upsetting the depositors. It would do more harm than good. If 4-million Malays were gullible enough to vote for Najib’s regime, despite the exposure of 1MDB scandal, chances are they would not understand why Tabung Haji could go bust.

It was revealed in December 2018 that UMNO, with endorsement from the PAS had transformed Tabung Haji into a Ponzi “get-rich-quick” scheme. At a time where fixed deposit rates were at about 3%, the dividend returns (6.25% to 8.25%) were so attractive that a single depositor had invested more than RM190 million in the fund. A report prepared by government-appointed accounting firm PricewaterhouseCoopers (PwC) to review the financial position for 2017 unveiled more interesting stories. Tabung Haji was actually sitting on up to RM10.2 billion in losses of its domestic and international equities as of October 2018. Its liabilities outstripped assets by RM9 billion.

Tabung Haji depositors actually applauded Najib for the handsome “hibah (dividend)”, which went up to as high as 8.25%, without realising that the dividends paid was their own money used to pay themselves. They (TH) could successfully do this because out of 9.3 million depositors, only 30,000 would use their money to perform Hajj every year. On April 5, 2019, Tabung Haji announced a “hibah” of 1.25%, for the financial year 2018, the lowest in its history.  Even at 1.25%, the payout was at a staggering RM913 million to its 9.3 million depositors. The Mahathir government also announced that it will allocate RM500 million in 2020 for the Pilgrims’ Fund and RM1.73 billion every year until all of its “sukuk” (Shariah-compliant bonds) were redeemed.

How could Tabung Haji suddenly become healthy? Two words – Bail Out!! As of January 1, 2019, the Islamic Pilgrimage Fund Lembaga Tabung Haji was placed under Bank Negara (Central Bank). A Special Purpose Vehicle (SPV) was created to nurse and rehabilitate the insolvent fund. In short, taxpayers’ money to the tune of RM20 billion is used in the bail out exercise (The “loss” or impaired sum is about RM9 billion as stated earlier).

Everyone contributes, including the “pendatangs”. Is this good business? Profits to depositors, bailout by others. How can one go wrong? The better way going forward, is for the TH to commit to pay a hibah of 2% to the Government as a gesture of appreciation for the bailout. And that money over 10 years is used to settle the “deficit” of RM9-10 billion. Isn’t that better?


1. Do Pro-UMNO Malays Realize They Will Be Bailing Out Tabung Haji To The Tune Of RM20 Billion For The Next 10 Years?
2. Mark Rao, Major bailouts that rattle the nation in recent times
3. This is how else the RM24b bailouts for Felda, Tabung Haji could have been used and abused, 17 Apr 2019, MalayMail

Monday, 25 November 2019

Doctors in Malaysia Unemployed?

Globally, WHO estimates a shortage of 4.3 million physicians, nurses and allied healthcare workers. Many developed countries report doctor shortages- U.S, Canada. United Kingdom, Australia, New Zealand and Germany. Developing nations often have shortages due to limited numbers and available supply capacity. But not Malaysia, we are in “surplus”.

The WHO has a ratio of 1 doctor to every 1,000 people, to meet basic needs of a developed country. For Malaysia, it was 1 doctor for every 625 citizens in 2018. The government’s target is one doctor to 400 citizens. How was this target arrived at? And whose agenda is this?

Dr Khor Swee Kheng in an article (Star Online, Nov 6 2019) reported that between 2011-2016, the annual number of new doctors graduating rose rapidly from 3,710 to 6,238. That’s close to double! And it was 10.3% (CAGR) for the period. We are graduating 1.7 times more doctors per capita than even the OECD.

If these numbers continue uncontrolled we may hit the target of 1:400 by 2021 or sooner. We have the quantity but what about quality, distribution, utilization, career or life expectations of those who are now doctors? Sure it increases social mobility and reduces inequality. But that presumes they have a contract with the Government. And contract staff earn less than a permanent one. And what the above exercise basically shows is that we are obsessed with a ratio.

The pursuit of which was probably to attain a developed nation status. But there are also other ratios that we need to consider. The inequality (Gini coefficient) and poverty ratios. In fact, if we had reduced poverty significantly then medical services will be less taxed, less budgeted and less bloated.

In the longer-term, we need a roadmap or masterplan for medical services to place it on par with more developed nations. That means quality and not quantity. Excellence not mediocrity. Diversity not homogeneity. And that may require massive political will and discipline. Are we ready for it?

In the meantime, it is best for “new” doctors to secure their experience in developed nations or private hospitals in Malaysia. Second we need to close some of the supply taps – de-recognise selected overseas medical schools and shut (or amalgate) 50% of local medical schools. This is done over a period of 5 years. That’s the view of Dr Amar Singh, HSS in an article (FMT) on November 9, 2019. Third, we may need mini or district hospitals in rural districts, including Sarawak and Sabah. Then existing supply is better utilised.

In the future, we need to focus on quality and disciplines that may be required soon for example, Geriatrics.

1.     Dr Amar-Singh HSS, Don’t treat our young doctors so unfairly, 9 November 2019;
2.     Dr Khor Swee Kheng, Star Online, How many doctors does Malaysia really need? 6 November 2019;
3.     Wikipedia, Physician supply.

Friday, 22 November 2019

CFA Institute Investment Foundations Program: Chapter 15 – The Functioning of Financial Markets (Part II)

In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.

Chapter 15 provides an overview of the functioning of financial markets. The learning outcome of chapter 15 is as follows:
·       Distinguish between primary and secondary markets;
·       Explain the role of investment banks in helping issuers raise capital;
·       Describe primary market transactions, including public offerings, private placements, and right issues;
·       Explain the roles of trading venues, including exchanges and alternative trading venues;
·       Identify characteristics of quote-driven, order-driven, and brokered markets;
·       Compare long, short, and leveraged positions in terms of risk and potential return;
·       Describe order instructions and types of orders;
·       Describe clearing and settlement of trades;
·       Identify types of transaction costs;
·       Describe market efficiency in terms of operations, information, and allocation.

Secondary markets are organised either as call markets or as continuous trading markets. In a call market, participants can arrange trades only when the market is called, which is usually once a day. In contrast, in a continuous trading market, participants can arrange and execute trades any time the market is open. Most markets, including alternative trading venues, are continuous.

Quote-driven markets, also called dealer markets or price-driven markets, are markets in which investors trade with dealers. These markets take their name from the fact that investors trade with dealers at the prices quoted by the dealers. Almost all bonds and currencies, and most spot commodities (commodities for immediate delivery), trade in quote-driven markets.

Quote-driven markets are often referred to as over-the-counter (OTC) markets because securities once literally traded over a counter in the dealer’s office. Now most trades in OTC markets are conducted electronically, by telephone, or sometimes via instant messaging systems.

In contrast to most bonds, currencies, and spot commodities that trade in quote-driven markets, many shares, futures contracts, and most standard options contracts trade on exchanges and alternative trading venues that use order-driven trading systems. Order-driven markets arrange trades using rules to match buy orders with sell orders. Orders typically specify the quantity the traders want to buy or sell. The order may also contain price specifications, such as the maximum price that the trader will pay when buying or the minimum price the trader will accept when selling.

Another type of market structure is the brokered market, in which brokers arrange trades among their clients. Brokers organise markets for assets that are unique and thus of interest as potential investments to only a limited number of investors.

A position refers to the quantity of an asset or security that a person or institution owns or owes. An investment portfolio usually consists of many positions.

Investors are said to have long positions when they own assets or securities. Examples of long positions include ownership of shares, bonds, currencies, commodities, or real assets. Long positions increase in value when prices rise. In contrast, positions that increase in value when prices fall are called short positions. To take short positions, investors must sell assets or securities that they do not own, a process that involves borrowing the assets or securities, selling them, and repurchasing them later to return them to their owner.

Market orders are instructions to obtain the best price immediately available when filling the order. They generally execute immediately but can be filled at disadvantageous prices. A limit order specifies a limit price—a ceiling price for a buy order and a floor price for a sell order. They generally execute at better prices, but they may not execute if the limit price on a buy order is too low or if the limit price on a sell order is too high.

Stop orders specify stop prices; the order is filled when a trade occurs at or above the stop price for a buy order and at or below the stop price for a sell order. Traders often use stop orders to stop losses on their long positions.

Intermediaries help traders clear and settle orders that have been filled. The most important clearing activity is confirmation, which is performed by clearing houses. Settlement follows confirmation; at settlement, the seller must deliver the security to the clearing house and the buyer must deliver cash.

The costs associated with trading are called transaction costs and include two components: explicit costs and implicit costs. Brokerage commissions are the largest explicit trading cost. Implicit trading costs result from bid–ask spreads, price impact, and opportunity costs. Traders usually choose order submission strategies that minimise transaction costs.

Well-functioning financial markets are operationally, informationally, and allocationally efficient. Operationally efficient markets have low transaction costs. Informationally efficient markets have prices that reflect all available information about fundamental values. Allocationally efficient economies put resources to use where they are most valuable.

Which of the following orders will most likely be executed immediately? free polls

Thursday, 21 November 2019

Why are Lawmakers so Worried about Libra?

Consumers using Libra will very soon be able to make purchases, according to Facebook. The number of purchases will be limited at first. Zuckerberg believes that Libra would “extend America’s financial leadership as well as our democratic values and oversight around the world.” He further emphasized that if the U.S. doesn’t develop a cryptocurrency like Libra, then China would.

Calibra, with other members from the non-profit Libra Association will manage the coin together. However, some of the companies that had originally signed onto the project have reportedly begun quitting, including PayPal, eBay, Visa and Mastercard. And recently, lawmakers started to grill Zuckerberg on Libra’s issues. The cryptocurrency has drawn heavy scrutiny from lawmakers since it was revealed. What are the issues? Why would PayPal and the others withdraw from Libra? What are the lawmakers worried about?

U.S. Treasury Secretary Steve Mnuchin raised concerns that the coin could be used for money laundering. Tax avoidance, drug dealing, or terrorism, could also go undetected. President Trump argued that Facebook should be required to obtain a banking charter to move forward with its plan. Democratic lawmakers have also taken issue with the cryptocurrency — Rep. Maxine Waters of California proposed legislation that would prohibit major tech companies from becoming financial institutions or offering cryptocurrencies. The fear is that if a group with such power as Facebook with its 2.4 billion users enters the financial market, the stability of this market could be at risk. What's more, that could stifle the role of the dollar as the world's leading currency. And that would have dramatic consequences for U.S. foreign policy.

Many sanctions against unpopular regimes or dictators work because of U.S.’s currency lever. In a digital currency world these sanctions would probably not work anymore. Whether money laundering or terror financing, if money flows are not transparent, things could get out of control.

And can we trust Facebook with our financial data? At a recent hearing (23 Oct 2019) in the House Financial Services Committee, Facebook said that no data from Calibra, would be shared with the social network. But we need to be reminded that Facebook was recently fined $282,000 by Turkish authorities for violation of data protection laws. And close to 50 million users had their personal information exposed in an attack on its computer network in September 2018. So the upshot of the matter is security, abuse and sheer power of Facebook. With no regulatory authority to oversee it is answerable to none if it goes forward with Libra.

1. JacobPassy, Why Facebook’s Libra coin could become a big pain in your wallet
2. Henrik Böhme, Opinion: Facebook's Libra and the power of money,
3. Lisa Eadicicc, Lawmakers just grilled Mark Zuckerberg about his company’s big plan to upend the way we send money around the world

Wednesday, 20 November 2019

Should Malaysia Ratify CPTPP?

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or the CPTPP, is a free trade agreement between 11 countries in the Asia-Pacific region. The signatories of the agreement, as of March 2018, were Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

The CPTPP is the successor to the Trans-Pacific Partnership (TPP), which was the original free trade agreement (FTA) between the United States and the 11 members of the CPTPP. The TPP was an ambitious FTA that had been negotiated for almost a decade under US leadership. Not only was the agreement broad, covering two-fifths of the world economy, it was also comprised of 30 chapters that covered areas from tariff reductions to labour standards and intellectual property rights. The concluded TPP Agreement was signed in New Zealand in February 2016 by all 12 countries.

However, on 23 January 2017, the US government decided to withdraw from the TPPA. Because the US accounted for 60% of the combined GDP of the 12 TPP members, the agreement could not enter into force without its participation. Nevertheless, in light of US withdrawal, the governments of the remaining 11 countries affirmed the economic and strategic importance of the TPP and met on several rounds to find ways to implement the agreement. On 8 March 2018, the 11 countries signed the CPTPP, essentially agreeing to enable the ratification of the Agreement in order to bring it into force.

Source: IDEAS, CPTPP: The Case for Ratification (January 2019)

Malaysia and the CPTPP

Malaysia signed the CPTPP along with the other signatories, however following the General Election in May 2018 the Pakatan Harapan government expressed scepticism over the benefits of the CPTPP. To date Malaysia has not ratified the deal.
What are the benefits of the CPTPP?

The benefits of the CPTPP primarily relate to the enhancement of trade among countries in the Asia-Pacific. If fully implemented, the 11 CPTPP countries will become a consolidated economy that represents 495 million consumers and 13.5% of global GDP. It is estimated that the CPTPP will generate global income benefits worth US $147 billion.

·       An integrated market of 495 million people with a combined output of US$10 trillion, representing 13.5% of the world economy.

·       According to IDEAS, Malaysia will prove to be the biggest winner of the CPTPP as the agreement would provide export access to markets that benefit palm oil, rubber, and electronics.

·       USD$147 billion in global income gains.

·       Hailed as the 21st century trade agreement.

The CPTPP will give Malaysia market access to Canada, Mexico and Peru- three countries with whom Malaysia has no free trade agreement and representing a combined market size 10 times bigger than the Malaysian economy. According to a study by Moody’s, Malaysia will prove to be the biggest winner from the revised CPTPP agreement. That is because the deal will provide export access to markets that will benefit palm oil, rubber, and electronics exporters.

Source: IDEAS, CPTPP: The Case for Ratification (January 2019)
Figure 1 above illustrates the significant economic benefit for Malaysia of acquiring access to significant new markets in Canada, Mexico and Peru

What are the concerns?
Rashmi Banga (UNCTAD) in a paper written in March 2019, suggests that Malaysia’s exports will rise marginally as Malaysia already has FTAs with top 3 export markets i.e. Japan, Singapore and Australia. If Malaysia remains out of CPTPP the decline in exports is much smaller than the rise in imports if it joins the CPTPP. The estimated tariff revenue loss to Malaysia of joining CPTPP is USD1.6 billion per annum.

IDEAS lists the arguments against CPTPP and the counter-arguments in favour thereof in their paper dated January 2019. Briefly, these include: Investor-State dispute settlement mechanism; price of medicines will rise; and constrained policy “space” in health, capital controls and procurement.

Eonomist Jomo Sundaram says a lot of “propaganda” to ratify CPTPP is based on falsehood. So he has urged Putrajaya to do nothing. He cites the Rashmi Banga paper to fortify his view. The downside according to him is Proton and Perodua will be impacted severely and plastic waste imports from Japan, Australia and Singapore would increase. The biggest mis-information is from those pushing for the trade pact, according to Jomo.

IDEAS on the other hand sees the benefits from:
·       Strengthened transparency and anti-corruption measures;
·       Improved governance of GLCs;
·       Increased accountability to Government; and
·       More transparent procurement system

Historically, Malaysia’s economic growth is driven by openness to trade. And so ratification will lead to reforms, sustainable development and good governance.

But how do we end this debate? The Government could be more transparent with its views on CPTPP and have public forums to discuss the issues. Also, the Government could appoint independent trade expert/s to review the pros and cons of CPTPP and table a bill in parliament for debate. That may take some time but it is better than be swayed by sentiments that never seem to end.

1. CPTPP: The Case for Ratification, Laurence Todd, Manucheher Shafee, IDEAS
2. Say goodbye to Proton if you ratify trans-pacific trade pact, Jomo warns Government, Robin Augustin,  (
3. CPTPP: Implications for Malaysia’s Merchandise Trade Balance, Rashmi Banga, March 15, 2019

Tuesday, 19 November 2019

Negative Interest Rates: What Does It Mean?

Can you imagine going to a bank and they said they would pay you if you took out a loan with them? That’s “negative” interest rates. It is ridiculous, counterintuitive but that happens in Sweden, Germany, Denmark, Switzerland and Japan.
From a practical perspective, the mechanics of negative interest rates are clear – borrower agrees to pay USD 1,000 in a year but the lender extends USD 1,020 (or a negative yield of 2%).
Wouldn’t the lender be better of keeping the cash? That’s another story! Standard economic theory would suggest interest rates should be reasonable enough for depositors to save. And low enough for businesses to borrow or invest. Economic theory has no room for negative rates. 
Interest rate is determined by the interaction of borrowers and lenders. Interest rates rise if there are more borrowers seeking funds than depositors (or savers). And borrowers are willing to pay for scarce funds. The converse is also true.
The interventions of central banks (especially the Fed, The European Central Bank and the Bank of Japan) have been very active since the financial crash of 2008. The Fed, under Chairman Powell, made a good faith effort over the last two years to get out of the business of suppressing interest rates. But the global efforts of the European Central and the Bank of Japan were in the opposite direction. Suppressing interest rates by them have put the Fed in an untenable position. Last month the Fed responded by cutting interest rates and signaling that more cuts might be coming. Despite eleven years of economic growth, we are back to a world of low interest rates and negative interest rates in much of the developed world. Central banks turn to them in the first place to stimulate inflation (Japan is an example) and defend currencies (Denmark and Switzerland). The effects of which were property prices rose; contradicted monetary policy and savers still saved.
Where do we go from here? No one knows. The hyperactivity of central banks has had some long-term damaging influences. Government debt has ballooned out of control, without the discipline of realistic interest rates to temper political ambitions. Corporate debt has also climbed to new heights. Low interest rates encourage companies to borrow cheap funds and buyback their own stock instead of paying workers higher wages. The world has learned how to manipulate fiat money for short term advantages. With the “quantitative-easing cat” out of the bag, populist like Bernie Sanders can just print money to finance healthcare, student loans and other popular schemes.
It will be a long and difficult road back to the inevitable reality that the world is not flat and that true purchasing power is represented by money earned and not just printed. In the meantime, it might not be a bad idea to buy a little gold and borrow for a good investment.

1.     Gordon C. Boronow, Op-Ed Contributor, Negative interest rates? How does that work?, 27 August 2019;
2.     Reuters, Explainer: How does negative interest rates policy work? 13th September 2019;
3.     Daniel Straus, Business Insider, Trump has ramped up calls for negative interest rates. Here’s what they are and why they matter, 11th September 2019;
4.     Chris Carosa, Forbes, What are “Negative’ Interest Rates and How Can You Make Money From Them?, 20th August 2019
5.     Alex Graham, Analyzing the Effects of Negative Interest Rates Across Five Economies,