Singapore: Asia’s New Financial Centre

Hong Kong has lost its premier finance centre status to Singapore in a global ranking list. New York and London maintained their number one and two spots.

Singapore jumped three places to third in the twice-a-year Global Financial Centres Index (GFCI) which assesses 119 cities around the world.

Hong Kong has adhered to a version of China’s strict zero-Covid rules throughout the pandemic, battering the economy and deepening a brain drain as rival business hubs reopened. The city still mandates three days of hotel quarantine for all international arrivals while its border with the Chinese mainland is mostly closed.

Source: https://en.wikipedia.org/wiki/Singapore

In contrast, Singapore successfully shifted to endemicity earlier this year and has reopened without restrictions. The city-state is hosting a slew of financial and business conferences in the coming months as well as a Formula 1 night race soon. 

San Francisco came in at number five in the survey, up two spots. Shanghai, which was shut down earlier this year under China’s coronavirus controls, was number six followed by Los Angeles, Beijing and Shenzhen. Paris took 10th spot, replacing Tokyo which fell to 16th place. Kuala Lumpur dropped to 56th spot (down from 48th position previously).

There is a desire to create Kuala Lumpur as a financial centre regionally and perhaps globally. Then there is our Labuan Offshore Financial Centre (LOFC). So there is a little bit of confusion – which is it? Besides that a financial centre is not the building or an area like TRX, it is the people and the institutions that participate for various reasons.  Singapore didn’t become a top centre by chance, default or sheer providence. It has been working on this for over 40 years. It takes plan, people, and providence to turn your mission into reality. Ask Dubai or Qatar, both working their way up the ladder (GFCI).

In Malaysia, we have too many issues to become a regional centre. The Government and BNM would say we are a global powerhouse in Islamic finance. That’s partly true. The Middle-East, however, does not accept our Shariah principles and hence any comparison or ranking is not fully accepted or supported. So, what do we want to be? If we get our goals right then maybe we could create a Financial Free Zone (FFZ) where local issues are not applicable and a separate authority runs the FFZ, not BNM or the LOFC.

References:

Asia’s new financial centre, The Star, 24 September 2022

Global Financial Centres Index 32, September 2022

Will Rising Obesity Impact Economies?

Rising levels of obesity are set to cost the world economy 3.3% of GDP by 2060, slowing development in lower-income countries. This also makes it hard for people to lead healthy lives.

Globally, nearly two in three adults are now living with overweight and obesity. An AMJ Global Health report projects that this will be three in four adults by 2060.  

Source: https://en.wikipedia.org

Currently it costs 2.2% of global GDP, and the biggest increases are expected to be seen in lower-resourced countries. China, the US and India are projected to experience the highest impact in absolute terms – costing the countries US$10 trillion, US$2.5 trillion and US$850 billion, respectively. As a proportion of the economy, the worst impacted countries are set to include the UAE, where obesity would account for 11% of GDP, and Trinidad and Tobago at 10.2%.

Population and economic growth are the primary drivers of obesity prevalence – as countries increase their incomes, they experience changes in diet to highly processed foods. In rich nations, ageing populations are also a major factor as older people find it harder to lose weight.

The report stressed the economic costs of high weight and obesity “are not attributable to individual behaviour” but rather a consequence of social and commercial priorities shaping environments. As such, responsibility for tackling the issues lies with those in power. Better labelling, counselling, drug treatment and taxing processed foods high or higher will help.

Reference:

Rising obesity projected to hamper developing economies, AFP/FMT, 21 September 2021

Is Budget 2023 Void?

Budget 2023 has no legality with Parliament now dissolved before it (Budget) was approved. The Federal spending plan for next year would only remain a Bill until it undergoes the complete process of debate and voting approval. Consequently, any measures or policies announced in the budget cannot be implemented until a new one is tabled by the next government. The same Bill could be tabled again in order for it to proceed to the second reading when debate could take place, or a new one submitted entirely. Either scenario could lead to significant delays in passing Budget 2023 as both would have to wait until the 15th Parliament is sworn in, which could be weeks or months after the general election.

Source: https://budget.mof.gov.my

The tabling of Budget 2023 was expedited by three weeks to October 7 and on hindsight reflects a propaganda piece or perhaps an election manifesto.

In 1999, Tun Dr Mahathir Mohamad, who was the prime minister at the time, sought the dissolution of Parliament shortly after the tabling of Budget 2000 in November, and his finance minister was forced to table another one at the end of February 2000 or around three months later, after Barisan Nasional prevailed.

It is a disservice to Malaysians at a time when the country should be grappling urgently with an impending monsoon, a cost-of-living crisis and a rapidly depreciating currency. The present Budget does not take care of anybody’s needs, including the civil service (since it is not approved as yet). On all accounts it was an academic exercise and a pure waste of many people’s time. Commentaries were made by many including accounting firms, captains of industry, academics and newspapers/media columnists on the positives of the Budget. But it all seems rather futile in the light of what has happened. Will the PM or FM remain in a new Government? That is for the voters to decide. Meanwhile, this Budget could be said to be dead on arrival!

Reference:

Budget 2023 void if Parliament disbands before its passage, constitutional experts say, Opalyn Mok, The Malay Mail, 2 Oct 2022

Do You Need RM1m to Retire?

Those retiring in 20 to 30 years will need to have at least RM900,000 to RM1mil, according to Employees Provident Fund’s (EPF) chief strategy officer. The basic threshold now is RM240,000. The “bare minimum” after factoring inflation and medical bills is the higher figure of RM1m.

For those retiring soon, about RM600,000 is required to have a “dignified” retirement in Kuala Lumpur. Based on this, only about 4% of Malaysians could afford to retire.

Alor Setar was the cheapest place to have a comfortable retirement. A person would need RM480,000 to retire there. Still this is twice the basic threshold for retirement savings of RM240,000 earlier held.

Some 56% contributors, who are 54 years old, have less than RM50,000 in their accounts.

Source: https://ms.wikipedia.org

With RM50,000, one can only sustain for a little over four years, assuming that their expenses amount to RM1,000 a month. Currently, about 52% EPF members have less than RM10,000 in their accounts while about 27% have less than RM1,000.

Prior to the Covid-19 pandemic, about 22% members met the basic saving requirement but the numbers fell to 14% after several rounds of special withdrawal schemes namely i-Sinar, i-Lestari, i-Citra and most recently the special withdrawal facility of RM10,000.

Deputy Finance Minister I told the Dewan Negara in August that in total, RM145bil was withdrawn by EPF members under the four withdrawal facilities. Overall, the impact of these programmes related to Covid-19 on members’ savings was estimated at RM155bil, comprising RM145bil withdrawn by members under the four withdrawal programmes, and almost RM10bil from the impact of the employee share statutory contribution rate reduction programme.

Solutions are not easy. One may need to debate on extending retirement age to 70? Use the Socso funds for retirement – like a pension? Restore EPF savings partially though a government “bail-out”? Use “excess profit” earned by corporate for the EPF restoration fund?

None of the measures mentioned above are simple to implement politically but the government has a responsibility and an obligation to restore the funds after permitting the withdrawals from the four facilities.

Reference:

RM1mil needed for retirement, Fatimah Zainal, Ragananthini Vethasalam, The Star, 23 September 2022

The U.S. Dollar or an Asian Dollar?

The interest rate differential in favour of the US dollar and it’s safe haven status will continue to keep USD strong. This is until inflation expectations and interest rates projections peak and policymakers start to roll back measures.

The ringgit closed lower at RM4.65 against the dollar on 4 October 2022. More gains for the USD could be on the cards. The ringgit now having crossed 4.60 levels, it is now expected to weaken to 4.65 in the near term.

The local unit has depreciated by about 12% against the greenback since January 2021. In comparison, it fell by about 27% against the dollar over a 36-month period in 2014-2016 when crude oil prices crashed and from the Fed tapering action. The ringgit also fell by some 28% against the dollar during a 10-month period following the Global Financial Crisis and 43.7% (from April 1998 to January 1999) during the Asian Financial Crisis in 1997 and 1998.

The weak ringgit in the meantime would benefit export-oriented industries such as palm oil producers and, electrical and electronics manufacturers while costing domestic market oriented industries with high import content.

Despite Malaysia’s annual food imports over RM60bil and core inflation in August rising to 4.7% driven by higher food prices, inflationary pressures on consumers could be limited as final consumption goods account for about 9% of the overall consumer price index basket.

Cost pressures will likely be felt via imports of intermediate goods which account for some 55% of the country’s imports. US dollar debt, meanwhile, is low at 5% of total external debt.

Current projections imply another 125 basis point tightening over November and December which would take the Fed fund rate to the 4.25% and 4.5%. The consensus is for Bank Negara to raise its overnight policy rate (OPR) by another 25 basis points in November.

Is this enough? No, another 0.25% rise is not going to stem the ringgit’s decline. It has to be significant and impactful to be meaningful. Why doesn’t BNM do it? It is into “growth with stability” mentality which means measured and “behind the curve” increase. What is the upshot? Many countries in Asia face outflow of funds with the Fed’s actions. Can it lead to the Asian Financial Crisis 2.0? Yes and no. Yes, if the outflows damage markets which lead to a contagion. No, many Asian central banks hold higher foreign reserves which could stem outflows.

In the immediate, it is necessary to follow the U.S. in “upping” the rates or at least to keep the interest differential as low as possible. In the medium to long-term, develop an Asian dollar backed by rare earth, commodities and other reserves as the new reserve currency for the region. 

Asia needs a central bank like the ECB for Europe. Many have also asked what if China dumps its reserves in U.S. Treasuries – that’s over USD 3 trillion! China will not do that in the immediate because it has to sell the dollars it receives for another reserve currency – the yuan? This is not feasible. It will prefer an Asian Central Bank and a reserve currency like the proposed Asian dollar before it dumps U.S. Treasuries. That may end the hegemony of the USD. A prospect that the U.S. will oppose strongly and call it “economic terrorism”.

Reference:

US dollar likely to keep going strong, Bhupinder Singh, The Star, 28 September 2022

British Chancellor Kwasi Kwarteng Hails “New Era”!

Chancellor of the Exchequer Kwasi Kwarteng unveiled the highest tax cuts in 50 years and hailed it a "new era" for the UK economy.

Income tax and the stamp duty on home purchases will be cut and planned rises in business taxes have been scrapped. It comes as the Bank of England warns the UK may already be in recession. The pound sank to a 37-year low against the dollar as the chancellor gave his statement. The basic rate of income tax was reduced from 45% to 40% but u-turned under pressure—and he was thrown under the bus by Truss.

Other measures include:

• The threshold people in England and Northern Ireland start paying stamp duty on home purchases will rise to £250,000

• For first-time buyers the threshold will rise to £425,000 and the value of the property they can claim relief will increase from £500,000 to £625,000

• Planned increases in the duty rates for beer, cider, wine and spirits will be axed

• The cap on bankers' bonuses will be lifted

• New investment zones, where business will benefit from tax cuts and planning rules will be relaxed to encourage house building, will be established

• Planned corporation tax increase from 19% to 25% is scrapped.

• Reversed the rise in National Insurance payments 

 

The total cost of the permanent tax cuts announced by the chancellor is estimated at almost £45bn by 2027. The Government borrowing will increase by £72bn as a result. The changes to income tax do not apply in Scotland but cuts to corporation tax and national insurance are UK-wide.

The independent Institute for Fiscal Studies, said the statement amounted to the biggest tax cuts since the 1972 Budget, with the cuts constituting 50% bigger than had been expected.

The government normally releases an independent forecast of how major tax changes will impact the economy, but Mr Kwarteng has opted not to do this, as his statement is not technically a Budget. However, Mr Kwarteng promised the Office for Budget Responsibility would publish a full economic forecast before the end of the year, with a second to follow in the new year.

The huge increase in borrowing comes at a time when inflation - the rate at which prices rise - is at a 40-year high, leading to higher interest payments. The Bank of England raised interest rates on 22 September from 1.75% to 2.25% - the highest level for 14 years - in an attempt to cool soaring prices.

This is the classic “trickle-down” economics, which is really the “trickle (or tickle) up” version. The U.K. cannot afford this, in the midst of rising inflation. A stimulus budget is in a recession not when prices are rising. Yes, there is a need for help to the most vulnerable, with rising cost of living but not for the ultra-rich! This will certainly cause a bad situation to get worse – a tropical storm is now upgraded to a hurricane!

So, what is this new era? More of the old Labour ways of borrow, borrow, borrow (sounds like Bora-Bora, a tropical island in the South Pacific) and spend!

Reference:

Chancellor Kwasi Kwarteng hails “new era” as he unveils tax cuts, Becky Morton, BBC, 24 September 2022

Trickle-Down Economics: Does it Work?

Trickle-down economic theory states that benefits for the wealthy trickle down to everyone else in the economy. These benefits for the wealthy include tax cuts for dividends, capital gains, high-income earners, and businesses.

Trickle-down economics assumes that company owners, savers, and investors drive growth. This theory promises that they will expand businesses using any extra cash from tax cuts. For example, owners will hire workers and invest in operations; banks will increase lending, and investors will buy more stocks and companies. Then, all of this expansion will trickle down to the working class, where they will drive demand and economic growth by spending their wages. 

Supply-side economics, which is a theory that states that all tax cuts lead to economic growth, is similar to trickle-down economic theory. However, trickle-down economic theory is more specific, saying that targeted tax cuts are more effective than general tax cuts. Trickle-down economics recommends cuts to capital gains, corporations, and savings taxes, but it doesn’t promote tax cuts across the board. Instead, the wealthy receive all of the tax cuts, and the benefits trickle down to everyone else. 

Proponents of supply-side economics and trickle-down economics prove their theories using the Laffer Curve. This is a curve created by Arthur Laffer, who showed the way that tax cuts create a powerful multiplication effect. These tax cuts create sufficient growth to replace the government revenue that was lost from them, resulting in an expanded, prosperous economy that provides a larger tax base. 

Laffer did note that this effect is best when taxes are in the “Prohibitive Range,” which goes from a 100% tax rate to around 50%. When tax rates fall below this range, further cuts won’t be able to stimulate enough economic growth to offset lost revenue. 

During Reagan’s administration, his policies (known as Reaganomics) made it seem that trickle-down economics worked since they helped to end the 1980 recession.

Not only did Reagan cut the top tax rate from 70% for people earning $108,000 or more down to 28% for those earning $18,500 or more. He also cut the corporate tax rate down from 46% to 40%. 

However, trickle-down economics wasn’t the only reason for the recovery. In addition to the tax cuts, Reagan increased the government’s spending by 2.5% a year, and he also tripled the federal debt. It went from $997 billion in 1981 to $2.85 trillion eight years later in 1989. Most of this spending went to defence, supporting Reagan’s efforts to bring down the Soviet Union and end the Cold War.

Because of these other factors, Reagan never tested trickle-down economics in its pure form. It’s very likely that his huge amounts of spending played just as large a role as trickle-down economics in ending the recession.

According to trickle-down economics, Reagan’s and Bush’s tax cuts should have helped those at all income levels. But the opposite result took place: income inequality worsened. Between the years 1979 and 2005, the bottom fifth saw a 6% rise in after-tax household income. While this on its own seems great, it’s important to note what the top fifth experienced an 80% increase in after-tax household income. The income of the top 1% tripled, showing that prosperity was trickling up rather than down.

Trickle-down economics generally doesn’t work for the following reasons:

• Tax cuts for the wealthy don’t often translate to increased consumer spending, rates of employment, and government revenues in the long term.

• Instead, tax cuts for the middle- and lower-income earners drive the economy through the trickle-up phenomenon.

• The increased income for the wealthy that comes from the tax cuts only increases income inequality

So, Liz Truss and her tax cut plans may only result in a “trickle-up” phenomenon than a “trickle-down” expectation. That’s what happens when you don’t have a sense of economic history.

References:

Trickle-down economics: Why it only works in theory, Economics Online, 29 July 2021

Trickle-down economics, Tejvan Pettinger, Economics Help, 22 September 2022