Tuesday, 22 February 2022

Is The Ringgit Undervalued?

The Malaysian ringgit should be worth 58.9% more against the US dollar, or RM1.72 per dollar, instead of its current level of around RM4.19, according to the latest Big Mac Index released by The Economist (Feb 6, 2022).

Since 1986, the Big Mac Index has been comparing purchasing powers around the world using the price of the world’s most recognisable burger as its benchmark. The index is based on the theory of purchasing-power-parity (PPP), or the notion that in the long run, exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services in any two countries. The index, which the Economist says is never not to be taken as a precise gauge of “currency misalignment”, has now been globally accepted. In its latest edition, the ringgit emerges as the fourth most undervalued of 55 currencies tracked, each measured by GDP per capita and after taking into account differences in the standard of living.

“A Big Mac costs RM9.99 in Malaysia and US$5.81 in the US,” the survey report said.
“The implied exchange rate is 1.72. The difference between this and the actual exchange rate, 4.19, suggests the ringgit is 58.9% undervalued,” it added in reference to the ringgit’s market value earlier this week. What this means is that anyone who earns in ringgit will be able to buy fewer things in the US or any other country because the currency is undervalued.

Source: Focus Malaysia


Among the world’s other most undervalued currencies on the Big Mac index are the Turkish lira, undervalued by 67.9%, the Indonesian rupiah (undervalued by 59.3%) and the Russian ruble (undervalued by 70%).

Meanwhile, the index finds the Swiss franc and the Norwegian krone as the world’s most overvalued currencies.

Due to PPP, the cost to produce a Big Mac is cheaper in poorer countries. To address this, The Economist said it has factored in another important indicator – GDP-adjusted index – to reach a more accurate conclusion. At market exchange rates, a Big Mac costs US$2.39 in Malaysia, 58.9% less than in the US (US$5.81). But based on differences in GDP per person, a Big Mac should cost 37.2% less. This suggests that the ringgit is actually 34.6% undervalued.

On the adjusted index too, Malaysia’s currency remains heavily undervalued at sixth place, but less so than when dealing with straight conversion data. Using this measure, the Russian ruble is the most undervalued currency relative to the US dollar, by as much as 52.1%. Adjusted for GDP per capita, Uruguay has the most overvalued currency at 39.8%.

An index is an index. It is a gauge if perceptions, sentiments and speculation are not accounted for. The ringgit (like some others) is impacted because of interest rate differences, balance of trade/payments, desirability of the currency, policy flip-flops, political instabilities, corruption “tax” and low GDP growth. But together speculators move the exchange rate downward/upward as they deem fit. It is only when reserves of a country are significantly high like China, that speculators withhold any “attack”. Otherwise we could face the fate of Sri Lanka or Pakistan. But capital controls are not a solution if we believe in an open economy and practice the free market regime.

Reference:
Ringgit is fourth most undervalued currency, says latest global purchasing power index, MalaysiaNow, Feb 6, 2022 (https://www.malaysianow.com) 

Monday, 21 February 2022

“Ghost” Ships for a “Real” Navy?

The Littoral Combat Ships (LCS) is one the largest defence procurement in Malaysia’s history. Under the programme, 6 vessels were to be built by Boustead Naval Shipyard Sdn Bhd (“BNS”) for approximately RM9 billion. Of which, RM6 billion has been spent so far with no ships in sight.

The Royal Malaysian Navy or TLDM had initially agreed to use the Sigma design proposed by Damen Schelde Naval Shipbuilding. The first delivery of the 6 LCS’ was supposed to have taken place in April 2019. In December 2020 it was revealed that the first ship was only 59.79 percent complete despite some RM6 billion been paid out. A previous deputy defence minister said that RM1 billion paid out for the warships could not be traced.


https://www.freemalaysiatoday.com


Indonesia ordered four Sigma-class ships in 2010. This was the original request by TLDM. For Indonesia, the first ship was commissioned in 2017 while the second was commissioned in 2018.

BNS continued the project despite its alleged poor track record, including the New Generational Patrol Vessel (NGPV), which was reportedly impacted by delivery delays and large unforeseen additional costs. The matter was investigated by the 11th Parliament’s Public Accounts Committee in 2007.

The problem with defence procurement is that it is supposedly to be done in “secret”, so that others may not have information on details of our assets. But in Malaysia, we are an “open” book, most of our so-called secrets are known to others.

The LCS saga is for all to see and yet we may not have a closure. It is like buying two submarines that initially could not dive! We will talk of best practices, proper safeguards, transparency and commitment but in reality none of these matter when there are no ships and two thirds of the allocated sum is spent. Is there someone who will take the fall? None for now! Meanwhile, will the Government issue a White Paper on the saga without blaming other political parties? I suppose that is too much to ask especially if the former defence minister is the current chief of the ruling political party.

Reference:
MP Speaks: Government must be transparent on LCS saga, Nik Nazmi Nik Ahmad, Malaysiakini, Jan 30, 2022 (https://www.malaysiakini.com)

Friday, 18 February 2022

Fiscal Rules: Does Credibility Matter?

On December 14, 2021, Lee Heng Guie of SERC wrote an interesting treatise on the above subject.

A credible set of fiscal rules is needed to reduce fiscal deficits and debt-to-gross domestic product (GDP) ratios to sustainable level, promote inclusive economic growth, mitigate room for fiscal manipulation and encourage politicians to prioritise among the many demands on the annual budget.


Source:https://www.propelnonprofits.org

The government’s massive fiscal support that has salvaged the Malaysian economy and businesses by saving lives and jobs has worsened both the budget deficit and public debt since 2020. The statutory debt ceiling was raised twice from 55% of GDP in 2019 to 60% in 2020 and further to 65% in 2021. Malaysia’s budget deficit has widened from 3.4% of GDP in 2019 to 6.2% in 2020 and 6.5% in 2021. This is targeted to reduce to 6.0% of GDP in 2022. Public debt to GDP has reached RM969.3bil or 64% of GDP at end-September 2021 (end-2020: RM880bil or 62.1% of GDP; end-2019: RM793bil or 52.4% of GDP).

While it is expected that the budget deficit will improve and debt will decrease marginally in the next few years as the economy recovers, these developments raise questions about how deficit can be lowered and high debt can go without being disruptive.

Any loosening of fiscal discipline and unsustainable debt could bode ill for the country’s credit ratings. Malaysia needs to fix its tight fiscal space to build economic resilience for buffering against future adverse shocks.

In the Medium-Term Fiscal Framework, the average fiscal deficit is expected to reach around 5% of GDP in 2022-2024, and in the 12th Malaysia Plan (2021-2025), the fiscal deficit will reduce to between 3% and 3.5% of GDP in 2025.

A robust set of budgetary rules and fiscal institution is needed to achieve goals of ensuring fiscal stability and debt sustainability. Fiscal rules must be made simple, flexible and enforceable in the face of changing economic circumstances.

Lee Heng Guie argues that the government will enact the Fiscal Responsibility Act (FRA) in 2022, which aims at improving governance, accountability and transparency in fiscal management.

The government’s commitment and credibility to well-managed public finances can reassure financial markets and investors that our country’s sovereign credit rating is in good shape and lower the risk of credit default.

As he sees it, the following principles are needed to enhance the effectiveness of fiscal rules:

Fiscal structure
Revenue strategy that strengthens revenue collection and efficiency, including the predictability and stability of tax rates. Broadening of the narrow tax base and plugging tax leakages.

There must also be expenditure rationalisation and optimisation, which is outcome-based and meets expenditure efficiency rule to minimise wastage.

Fiscal discipline
Fiscal policy is only used for counter-cyclical or to mitigate adverse shocks-induced economic recession. The government should save money in good economic times and prevent large expenditure increases, which can absorb all revenue windfalls.

Achieve and maintain prudent public debt levels
Ceilings on public debt are a common feature of rule-based fiscal frameworks. Higher debt increases vulnerability to shocks and can undermine market confidence and lead to fiscal distress.

Contingent liabilities
Fiscal surveillance framework requires risk awareness and close monitoring of contingent liabilities. The government’s contingent liabilities have increased by 13.3% per annum to RM375.3bil at end-June 2021 (end-Dec 2015: RM177.7bil).

Escape clause to accommodate unexpected shocks/events
Precise exceptions are allowed under a well-defined fiscal surveillance framework. A limited and clearly defined set of events can trigger the exception.

Good communication, timely and regular fiscal updates
The International Monetary Fund research shows that a country’s commitment to budget discipline and clear communication of policy priorities, backed by transparency on government spending and revenues, will pay off.

All of the above are good principles to follow. But it is in the execution or implementation that we are sorely lacking. Accountability, transparency and authority are three pillars that are weak in Malaysia. No one wants to be accountable and no heads will roll for failures! No one will take responsibility as committees are the mode for execution. Even if one has authority, it is seldom exercised because that’s how the civil service is set-up.

Amidst all the above, if the bi-partisan Public Accounts Committee takes a more central role then it may force some movement to a more responsible implementation of the fiscal framework. Otherwise, we will have good pronouncements with no accountability.

Reference:
Fiscal rules: Credibility matters, Lee Heng Guie, Starbiz, December 14, 2021

Thursday, 17 February 2022

Has Unemployment Really Dropped?

According to the Department of Statistics Malaysia (DOSM), the number of unemployed persons fell below 700,000 in November 2021, the first time since March 2020.



This was a decrease of 1.5% month-on-month (m-o-m) to 694,400 persons, compared with 705,000 in October 2021, said chief statistician Datuk Seri Dr Mohd Uzir Mahidin. 

The labour force situation in November 2021 held steady with continuing employment growth reducing the number of unemployed persons as the revival of more economic and social activities stimulated a positive vibe for the labour market. 

November also saw another five states moving into Phase 4 of the National Recovery Plan except for Kelantan and Sarawak, which were still in Phase 3. 

By economic sector, the upward trend of employment in the services sector persisted mainly in wholesale and retail trade, food and beverage services, as well as transport and storage activities.  A similar trend was observed in the manufacturing and construction sectors, while employment in the agriculture and mining and quarrying sectors continued to decrease. 

By the duration of unemployment, 55.7% were unemployed for less than three months, while 7.8% were those in long-term unemployment of more than a year. For those who believed that there were no jobs available or were inactively unemployed, the number dropped 2.5% to 112,600 persons (October 2021: 115,400 persons). 

Youth unemployment rate for age 15 to 24 years reduced by 0.2 percentage point to record 13.7% after registering 13.9% since August 2021. But unemployment rate of youth aged 15 to 30 years recorded an increase of 0.1 percentage point m-o-m to register 8.2% (October: 8.1%).

The key point above is youth (age -15-24) unemployment is close to 14%! And that is a social cost. Those who have completed secondary or tertiary education may face unemployment. Why? Mismatch of skill sets, language (oral/written) fluency especially English is poor, and many have a laidback attitude to work. So, some end-up as Grab drivers or food delivery riders. Jobs that they had not envisaged when they started their tertiary programme. There is nothing wrong being a Grab driver or a food delivery rider, but some are over-qualified for sure. 

To live in an urban setting, you need a living wage of RM2,700. That’s according to BNM.  And starting salaries of graduates in some places are below RM2,500. How could they survive even if they do get a proper job?


Reference:

DOSM: Number of unemployed persons below 700,000 for first time since March 2020

Syafiqah Salim, TheEdgeMarkets, 11 Jan 2022


Wednesday, 16 February 2022

U.S. Student Loans: The Origin of a Racket

Before he even took office, President Joe Biden faced calls from student loan debtors and political colleagues alike to cancel – in full or in part – U.S. $1.7 trillion in student loan debt. This pressure is the culmination of years of effort. Almost a decade ago, the Occupy Student Debt Campaign, a student debt abolition movement, an offshoot of the Occupy Wall Street protests, announced as one of its goals the elimination of current student debt through a single act of relief. It sounded amazing at the time. 


Source: https://www.fairobserver.com


But less than a decade later, the ever-growing student loan bill became an issue in the 2020 Democratic presidential primary. While Sen. Bernie Sanders argued the entire sum should be forgiven, the Biden campaign ultimately floated the idea of making four-year public institutions free for any family earning under $125,000 annually, as well as forgiving up to $10,000 in federal student loan debt. In the last session of Congress, now Senate Majority Leader Chuck Schumer, Senator Elizabeth Warren, and Representative Ayanna Pressley introduced a resolution to forgive up to $50,000 in federal student loan debt. They reintroduced it once again within weeks of Biden’s inauguration.  

Originally, government and private banking made student loans available to increase enrollment and access to education. But over time, the ballooning cost of university and vocational training took on a life of its own. For the people who owe money, it impacts everything from career choices to marriage rates. People with student debt have fewer retirement savings at the age of 30 and are less likely to own a home by their mid-30s. 

Students, it turned out, were not price-sensitive when it came to using borrowed funds. Colleges quickly realised they could raise prices without affecting their enrolment. For example, in 1976, the average cost among all U.S. institutions when including room and board was $2,275, but that price more than doubled a decade later to $5,206. This price accounts for inflation. Many turned to loans to paper over the gap. Over time, students began to face higher debt loads and a harder time paying off the loans.

In Malaysia, PTPTN is sitting on a RM40 billion of government-guaranteed debt, which is expected to almost double to RM76 billion in 20 years. For perspective, this is more than the amount involved in the 1MDB scandal. The emphasis on the repayment problem has detracted attention from the more serious issue of the sustainability of the fund. The current model is not sustainable, as it borrows at 5% and lends at only 1%, with the difference being subsidised by the government. This is why it is now time for an overhaul of the fund’s operating model. The scale of the repayment problem is huge, with more than half of borrowers defaulting. The current loan repayment percentage ratio is 49:51, with 49% actively paying back their debt while 51% are not.

From RM56 billion that PTPTN has disbursed to date, only 32.5% has been repaid in full. The gap between the cumulative amount of loans disbursed and that have been repaid continues to widen every year.

Against that backdrop, the number of students requiring loans from PTPTN is also on an upward trend and is expected to grow from 180,000 to 250,000 by 2040, in line with the enrolment growth projected in the Higher Education Blueprint.

The only way this can work is if the loan sum to be repaid is paid partially by Government coffers from a new tax on financial transactions (This is not a new idea but something Elizabeth Warren suggested for the U.S. case). A financial transaction tax (FTT) is on buying/selling stock, bond, derivatives or options. Something like 2 sen for every RM1,000 traded. Will the Finance Minister be brave enough to do this?




References:

Student loans: the origins of a racket, Devan Lindey, Feb 18, 2021 (https://publicseminar.org)

Special Report: PTPTN in search of a sustainable model, Syahirah Syed Jaafar, The Edge Malaysia, Dec 7, 2019

Tuesday, 15 February 2022

Are SMEs “Forced” To Raise Prices?

Small and medium enterprises (SMEs) are struggling after being hit by the Covid-19 pandemic, and the 11-18.4% hike in electricity rates from February which will surely hamper recovery.

A hike of up to 18.4% in utility bills could mean a reduction of between 20% to 40% in profits (as reported by FMT, January 30, 2022). According to the Energy Commission, the increase will affect more than 1.6 million commercial and industrial users. Commercial and industrial users, besides losing the 2 sen/kWHh rebate given previously, would be imposed a surcharge of 3.70 sen/kWh in their electricity bills.


Source: https://www.malaysiatrend.com

How is TNB doing? Tenaga Nasional Bhd (TNB) posted higher net profit at RM1 billion for the third financial quarter ended Sept 30, 2021 (3QFY21), up 22% from RM821.5 million in the immediate preceding quarter (The EdgeMarkets, Nov 25, 2021). 

Revenue grew 4.3% to RM12.97 billion in the quarter under review against RM12.44 billion in 2QFY21. The utility group did not declare any dividend for the quarter.

The higher quarterly earnings against the preceding quarter were mainly due to lower net loss on impairment of financial instruments and current taxation in 3QFY21. On a yearly basis, TNB’s net profit was flat compared with RM1.01 billion recorded in 3QFY20. However, its revenue was 16.8% higher versus RM11.11 billion a year ago. 

For the cumulative nine-month period ended Sept 30, TNB’s net profit expanded nearly 17% to RM2.78 billion from RM2.38 billion a year ago, while revenue increased 9.64% to RM36.89 billion from RM33.65 billion. On an annualised basis, it may close with a net profit of RM3.6 billion, better than in 2020.

TNB’s profit was RM3.4 billion in December 2020, a drop from RM4.5 billion in 2019. This drop was mainly due to lower revenue, arising from Covid-19 – lower tempo in commercial activities.

With over RM3 billion annual net profit (over last 3 years), is there a need to raise tariffs? What is TNB trying to prove? Higher profit for analysts or bonuses? Meanwhile, if this increase is passed through by SMEs and others, the rakyat will face a higher CPI, and the measure to defer residential tariff increase comes to naught! Why? The price increase by SMEs maybe equivalent to the original tariff increase by TNB for residential users. Anyway, why increase when recovery is tepid and TNB already reports decent profits which translated to dividends goes to Khazanah Nasional, amongst others. And if the PM thinks SMEs should absorb the new tariffs, why can’t TNB do the same and not burden the rakyat or the SMEs?

References:

We’ll be forced to raise prices due to steep hike in power rates, warn SMEs, FMT Reporters, January 30, 2022 (https://www.freemalaysiatoday.com)

TNB sees RM1b net profit for 3QFY21 as electricity demand recovers, Shazi Ong, TheEdgeMarkets, November 25, 2021

Monday, 14 February 2022

The Ukraine Crisis: Who is Right?

Prof. John J. Mearsheimer of the University of Chicago thinks the West is to be blamed for what’s happening in Ukraine. But the prevailing wisdom in the West suggests the Ukraine crisis can be blamed almost entirely on Russian aggression. Russian President Vladimir Putin, the argument goes, annexed Crimea to resuscitate the Soviet empire, and he may eventually go after the rest of Ukraine, as well as other countries in Eastern Europe. In this view, the ouster of Ukrainian President Viktor Yanukovych in February 2014 merely provided a pretext for Putin’s decision to order Russian forces to seize part of Ukraine. 

Source: https://www.economist.com


Prof. Mearsheimer thinks this account is wrong: the United States and its European allies share most of the responsibility for the crisis. The taproot of the trouble is NATO enlargement. The central element of a larger strategy to move Ukraine out of Russia’s orbit and integrate it into the West. Since the mid-1990s, Russian leaders have adamantly opposed NATO enlargement. In recent years, they have made it clear that they would not stand by while their strategically important neighbour turned into a Western bastion. For Putin, the illegal overthrow of Ukraine’s democratically elected and pro-Russian president -- which he rightly labeled a “coup” - was the final straw. He responded by taking Crimea, a peninsula he feared would host a NATO naval base. 

As Prof. Mearsheimer sees it, Putin’s pushback should have come as no surprise. After all, the West had been moving into Russia’s backyard and threatening its core strategic interests. Elites in the United States and Europe have been blindsided by events only because they subscribe to a flawed view of international politics. They tend to believe that the logic of realism holds little relevance in the twenty-first century and that Europe can be kept whole and free on the basis of such liberal principles as the rule of law, economic interdependence, and democracy. 

But this grand scheme went awry in Ukraine. The crisis there shows that realpolitik remains relevant. The U.S. and European leaders blundered in attempting to turn Ukraine into a Western stronghold. The consequences are now laid bare. It would be an even greater mistake to continue this “silly” policy.

Just as the carefully balanced relationship between Taiwan and mainland China has been in place for years, with alternating periods of calm and tension. The same is true in Ukraine. Russia has regularly placed troops on its border with Ukraine, and vice versa. 

In 1989 and 1990, Europe went through a massive political earthquake, with the fall of the Berlin Wall and numerous related events. The Western powers and the Soviet Union held a series of meetings to reassure the other that they would not take advantage of the shake-up for purposes of aggressive expansionism.

The buzz phrase that emerged from those discussions was just three words long: “Not one inch.” It came, originally, from the mouth of the US Secretary of State James Baker, on February 9, 1990. NATO, he told Gorbachev, would move “not one inch eastward”.

Fast forward to the present day: NATO has spent years declaring itself a “defensive” rather than “expansionist” force, while its actions show itself doing precisely the opposite, year after year.

The “not one inch” promised has been disregarded, with Western diplomats saying that it was never intended to be lasting, and was never put down on paper, anyway.
Coming back to the present day, what is Russia asking for?

  • It is calling on NATO to halt its program of building missile bases in countries bordering or close to Russia’s territory.
  • It is asking NATO to withdraw troops in Poland, Estonia, Lithuania and Latvia.
  • It is urging NATO to make it clear that Ukraine is not being groomed to join, thus further damaging the 1990 agreement.

Like China, Russia will be painted as the aggressor whatever it does. The western powers will be portrayed as the defenders, whatever they do. But while the press is taking a sharply pro-western angle, academics and the public have a much wider range of views. Russia’s response “is relatively moderate when compared with the American reaction to Moscow’s effort to establish a military presence in Cuba during the 1960s,” he added. Then it was the Monroe doctrine.

What’s the way out? Make Ukraine a neutral state between NATO and Russia (a view expressed by Prof. Mearsheimer). The goal is for a sovereign Ukraine to be “independent” of Russia and the Western camp. That’s like Cuba not being in the Soviet bloc. And will the U.S. allow for that in the first place? Well, the Cuban missile crisis was a testimony to that.
Economic sanctions will not impact Russia, as it is no longer dependent on the West. Russia’s reserves (USD630 billion) are largely in gold and other currencies, not the U.S. dollar. The West, however, needs Russia’s gas – 40% of EU’s natural gas imports are from Russia. So the West maybe inflicting self pain if it goes on with the idea of further economic sanctions.

It is a “no win” situation. Can the U.S. afford to lose another war after Afghanistan, Iraq, Libya, Syria and Vietnam? But then again, U.S. military-industrial complex sees war as big business. Throughout the U.S. history, its military-industrial complex has repeatedly manipulated the country’s political decision-making and seen wars as a shortcut to profits, causing one catastrophe after another in the world!

Hopefully, this Valentine’s Day there is more love than aggression.

References:

Why the Ukraine crisis is the west’s fault, John J. Mearsheimer, http://www.foreignaffairs.com

Press stunned as Ukraine leader points finger at west, Seth Mallicks 
(https://www.fridayeveryday.com)

U.S. military-industrial complex sees war as shortcut to profits, Zhong Sheng (People's Daily) December 22, 2021