Slow and Steady, BNM!

Bank Negara Malaysia (BNM) has continued with its monetary policy normalisation with a third 25 basis point (bps) hike, to bring the Overnight Policy Rate (OPR) to 2.75%. The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 3.00% and 2.50% respectively.

This is in tandem with the forecast of most economists. Further expectations are for another 0.25% increase in January 2023 and another 0.25% increase in March 2023, bringing OPR to 3.25%.

Inflationary pressures have been persistent with strong demand, tight labour markets, and elevated commodity prices. Consequently, many central banks are expected to continue raising interest rates to manage inflationary pressures.

Going forward, BNM expects the global growth outlook to continue to face headwinds from tighter financial conditions amid elevated inflation in major economies and the domestic challenges in China. The growth outlook remains subject to downside risks, including escalation of geopolitical tensions, worsening of domestic headwinds in China and potential energy rationing in Europe.

Household spending will continue to be underpinned by improvements in labour market conditions and income prospects. Tourist arrivals have increased following the re-opening of international borders is expected to further lift tourism-related sectors. Investment activity and prospects will be supported by the realisation of multi-year projects.

Downside risks to the domestic economy continue to stem from a weaker-than-expected global growth, higher risk aversion in global financial markets amid more aggressive monetary policy tightening in major economies, further escalation of geopolitical conflicts, and worsening supply chain disruptions, according to BNM.

In line with earlier assessments, headline inflation is likely to have peaked in 3Q 2022 and is expected to moderate thereafter, albeit still elevated. Underlying inflation – as measured by core inflation – is projected to average closer to the upper end of the 2.0%-3.0% forecast range in 2022, having averaged 2.7% year-to-date given some demand-driven price pressures amid the high-cost environment.

Moving into 2023, headline and core inflation are expected to remain elevated amid both demand and cost pressures, as well as any changes to domestic policy measures. The extent of upward pressures to inflation will remain partly contained by existing price controls, subsidies, and the remaining spare capacity in the economy.

BNM believes its monetary policy is supportive of economic growth. Sounds like Turkey? Erdogan believes in growth with a low interest environment amidst hyperinflation. Nothing gets solved and the Turkish lira gets battered. Are we trying to follow them? Slow and steady is supposed to win but when you are too slow you will never make it!

Reference:

Another 25 basis points hike in Bank Negara’s OPR as expected, Cheah Chor Sooi, Focus Malaysia, 3 November 2022

Tax Revenues: Any New Measures?

 The government had intended to introduce the Fiscal Responsibility Act (FRA) as well as the Medium-Term Revenue Strategy (MTRS) to improve tax collections. But this is now on “pause” because of GE15.

Malaysia has time and again resorted to Petroliam Nasional Bhd (PETRONAS) to rescue the nation.  It (Government) is constrained by limited fiscal space to diversify its current base. More developed nations have tax revenues of 15-20% of GDP. Other nations like Denmark, Netherlands or Belgium have tax revenues of 40-45% of GDP. But these are “welfare states”. We are at 11-12%.

The petroleum-related revenue for 2022 surged 80% to RM77.8bil, mainly due to the higher crude oil prices, representing 27.3% of the government’s revenue. For 2023, with the crude oil price estimated at US$90/barrel, the government foresees revenue falling to RM58.9bil or 21.6% of the total revenue, inclusive of RM35bil dividend from PETRONAS. Malaysia needs to move away from being dependent on the national oil corporation. This is unsustainable.

A RM1 tax per litre, assuming RON95 at RM4.80 to RM5 per litre (which is what other South-East Asian nations are pricing) will go a long way to curb wastage, encourage public transport and collect at least RM20bil to RM25bil in indirect taxes. The government can then easily provide about RM8bil to RM10bil for targeted groups that require subsidies via direct cash transfers.

The Budget 2023 alluded to borrowings of almost RM100bil. This is again not sustainable. Between 2021 and 2023, the Government’s borrowings will be close to RM300bil with total debts ballooning to RM1.178 trillion or 64.9% of nominal GDP from 63.0% in 2022. Statutory debt will rise to 62.3% in 2023 from 60.2% in 2022. 

As seen in Figure 2, other than direct federal government debts, the government also carries the burden of debts that were previously assumed off-balance sheet. This includes committed guarantees of almost RM200bil, the balance of 1MDB debt of almost RM26bil and liabilities defined under PPP/PFI of RM149.6bil. Taken together, the total government debt in 2022 will increase to RM1.455 trillion, or 85% of nominal GDP. It will rise to RM1.541 trillion next year, or 84.9% of 2023 nominal GDP.

To address our debt problem, it is a simple equation of either boosting our revenue (via higher or new taxes) and cutting down on Operating Expenditure (OE) via leakages. Without new taxes or higher tax rates introduced in this budget, the government is simply kicking the can down the road and delaying the inevitable to a later date and time. Although the budget deficit is expected to be lower at 5.5% in 2023, it is only due to growth in the denominator as the budget deficit for next year remains largely unchanged from this year in absolute terms. Without a proper strategy to increase government revenue and lower OE, the fiscal deficit target of 3.5% by 2025 will be tough to meet as it will require the government to take drastic actions, post-GE15.

The higher debt level also means higher debt service charges for 2023. This is expected to increase to RM46.1bil or 16.9% of revenue, well above the acceptable international standard of 15%. With government debts expected to continue to increase, the government needs to raise revenue stream via new taxes. Higher tax rates – not the Goods and Service Tax (GST), which is seen as a regressive tax and hurts the lower-income group.

What new taxes? There is a range of taxes: from higher tax rates for the top-end (top 10% of taxpayers), windfall tax on energy and banking to forex transaction tax and “exit” tax for remittances. Much more thought needs to be given on new taxes but serious efforts also need to be done on OE. Otherwise, we are perpetually in deficit with inflationary pressures and future generations having to meet the debt obligations of today.

Reference:

Budget 2023 – Much ado about nothing? Pankaj C. Kumar, The Star, 15 October 2022

Who Do We Vote?

The election season is on – a time to determine who will represent us in Parliament. After the euphoria of the 2018 general election, many were disappointed when political ‘frogs’ (defectors), through their ‘Sheraton Move’, overthrew the duly elected government. So, in this election, keep in mind two words – character and credibility. This is about individual commitment to moral standards which enhances character and builds credibility. It is not about being perfect or saintly but being aware of mistakes and taking corrective action.

Source: https://www.malaysia-today.net

Individuals should be held accountable for their actions and politicians cannot tell blatant lies, amass wealth beyond measure and defraud the nation.

The choices are many, and the field will be filled with many parties. There may be scandalous or questionable individuals, warlords and political operators whose shelf-life is over. We must remove them.

These tainted politicians believe that, if they get to form the government, they can then appoint an attorney general who will clear them.  They have no regard for institutions but seek to benefit themselves, even at the expense of the nation. Who are they? They adorn the front pages of our newspapers.

There is this one coalition that ruled Malaysia for six decades. It is in no better place today. It has become weaker, because of infighting, lack of credibility and downright arrogant which then leads to the present coalition.

Multi-ethnic Malaysia falls victim to identity politics based on ethnicity or religion. Race, religion and royalty remain the cry of one party, only to have its actions defame each of these. Populist ideas that play on the insecurity and fear of ‘the other’ dominate political discourse for votes.

We see scant discussion of critical issues like inflation, the weakening ringgit, the recession, unemployment, migrant workers, relations with China, and key foreign affairs issues like Myanmar, Asean and many others.

The state of the country illustrates this reality. Corruption has become systemic in major institutions. For instance, the Companies Commission of Malaysia, Bank Negara, the Securities Commission and even the Malaysian Anti-Corruption Commission (MACC) have had to deal with corruption-related issues.

Another breeding ground for corruption is at the local government level. As land is a state matter, many grey areas are not exposed. Environmental degradation, river pollution and massive floods occur because they are no elected councils.

Corruption is not an ethnic issue. You meet the challenges of corruption in China, South Korea, India, Indonesia and the Philippines, as well as in the West. It is human failure facilitated by long periods of being in power. The root cause is unbridled greed.

Consider candidates and evaluate their character, behaviour and wealth. Many are warlords, irrespective of their ethnic origin, are in politics for the benefits that power gives them in terms of wealth and rewards. Some are over 85 or 97 and still want to be your representative!

Evaluate their education, character and sincerity to the cause they represent. Note how much wealth they have accumulated. If their cause is only self-interest, then please strike them out.

Where are the fresh faces? 

What lies ahead of us is a daunting choice, which we all must make in the best interest of our nation. Systems can be manipulated, offices can be corrupted, but in the end, it is the quality of our leaders that matters. Not race or religion. Vote well for a future that breeds hope and not despair!

Reference:

Election 2022: Throw out the warlords, the corrupt and the racists! K. Haridas, Aliran, 

24 Oct 2022

What Do We Want?

Our conscience must define who and what we are. But that assumes we have one. There are people who have none and are willing to “hoodwink” with their lies. Take Trump or some other “great” leaders.

Humanity has certain instinctive and intuitive values that allow us to discern right from wrong in general. We also have the knowledge of values acquired from tradition, parents, ancestry, faiths, families and friends, community, culture and our social acquaintances. We may hold these dear to us.

We may celebrate diversity of culture, ethnic or religious values and may incorporate some as our own. It is an appropriation that may transform us into complete persons.

Source: https://www.dreamstime.com

In our world today, we find ourselves besieged by much sensitivity. There is the never-ending paradox and dilemma of unseen forces that lead to phobias of every colour and nature. Each side believes they are right. Any question that could lead to the betterment of society is discarded. We cage these inner feelings within us for fear that we may trespass upon the concerns of others or jeopardise our rights of some but that’s fine if we are in the majority.

For example, if

• one expresses feelings about the trespasses of China or India, all hell may break loose! It is immediately construed as negative. 

• Islam is discussed, it is reserved for adherents of the faith or better still the “right” theologians to discuss. Others are excluded. 

In these situations, discourse or discernment is drowned by a siege mentality. When transparent, respectful communication is neutered, the integrity and independence of the soul’s liberty is incarcerated. We cannot be disabled or destroyed by differences or disagreements. We must each be courageous about speaking up about rights or wrongs, no matter where they are – in high or low places. Inaction gives the other side power. Silence gives the other side power. That was how Nazi Germany and Hitler rose. 

Each must seek to live a life well lived. This is an essential part of our journey. Such a struggle, futile as it may seem, may well be a treasure, a gift to bequeath to our children.

Now we are heading for national elections, let’s do some soul-searching.

• What is our true “north” that allows us to discriminate, disadvantage, demoralise others?

• Do we reject the deceptive divisions of race and religion?

• Do we reject corruption? 

• What are the values that will guide us that even “thieves” dare to stand for election?

No one party or candidate must determine for us what our nation should become. It is the collective conscience of the many that must determine the actions of the few. In this PRU15, examine your heart and your head for those with love, faith, righteousness, integrity and hope for a better future for Malaysia.

Reference:

What kind of nation do we want? Listen to your soul, Dominic Damian, ALIRAN, 18 Oct 2022

WTO Slashes Trade Growth in 2023

 The World Trade Organisation (WTO) anticipates global merchandise trade will slow next year as "multiple shocks" ranging from Russia's war in Ukraine, high energy costs in Europe, and US monetary policy tightening. All of which will raise manufacturing costs and squeeze households.

The Geneva-based institution said it expects trade growth to fall sharply in 2023 to 1%, compared with its previous forecast of 3.4%. The WTO also raised its projection for growth in merchandise trade this year to 3.5%, up from its previous projection of 3%.

The WTO's forecasts — which are in line with International Monetary Fund and Organisation for Economic Co-operation and Development projections — mark a major deceleration from 2021's 9.7% growth in global trade. That was fuelled by consumer purchases of household items while travel and other service industries were limited during the depths of the Covid-19 pandemic.

In addition to the economic risks facing the US and Europe, the WTO said poor nations stand to suffer more. Other potential drags include central banks raising interest rates too high or acting too late on inflation. 

Policymakers are confronted with unenviable choices as they try to find an optimal balance on tackling inflation, maintaining full employment, and transitioning to clean energy.

A slowdown in trade poses challenges for logistics industries such as container shipping, where the biggest players posted record profits in recent quarters because of sky-high ocean freight rates. Some of them are already adjusting their businesses to account for lower volumes.

The world's largest container carrier, Geneva-based Mediterranean Shipping Co, announced the suspension of a transpacific service and cited significantly reduced demand for shipments into the US West Coast.

A slower global GDP growth, high inflation and an ever increasing interest rate regime is a toxic mix for lower growth of merchandise trade. Malaysia’s trade to GDP ratio was 130.7% in 2021. We are an open economy dependent on Singapore, China and the U.S. We have been reporting consistent trade surpluses since 1998. This is mainly due to rise in exports of electrical and electronics products.

To diversify export markets and export products, the Government has implemented various initiatives. In the light of global developments, we need to review and re-order priorities in our tax and incentive regime for DDIs and FDIs, if we want to cushion any shocks to the economy.

Reference:

WTO slashes forecast for merchandise trade growth in 2023, Bryce Baschuk (Bloomberg), TheEdge CEO Morning Brief, 6 October 2022

Why is the Singdollar on an Uptrend?

The Monetary Authority of Singapore (MAS) tightened its monetary policy for the fifth time in a year, which strengthened the Singapore dollar.   That helps neutralise inflation. The Singapore Central Bank has re-centred the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band “up to its prevailing level”. The slope and width of the band were left unchanged. MAS is effectively allowing the Singapore dollar to appreciate. This makes imports cheaper and in turn helps to put a lid on the rise in prices of goods and services in Singapore.

The global economy faces high inflation and lower growth in 2023 while Singapore’s economic growth will "come in below trend" in 2023 amid intensified downside risks. Core inflation is expected to remain elevated over the next few quarters, with risks still tilted to the upside.

Source: https://en.wikipedia.org

Singapore's central bank has a unique approach to monetary policy. Unlike most central banks that manage monetary policy through the interest rate, it uses the exchange rate as its main policy tool because Singapore is an open economy that depends heavily on trade. It is 3x the GDP.

The exchange rate of the Singapore dollar managed against a trade-weighted undisclosed basket of currencies from Singapore’s major trading partners, referred to as the S$NEER . MAS allows the S$NEER to float within an unspecified band. Should it go out of this band, it steps in by buying or selling Singapore dollars. The central bank also changes the slope, width and mid-point of the band when it wants to adjust the pace of appreciation or depreciation of the local currency based on assessed risks to Singapore’s growth and inflation.

With Singapore buying almost everything it consumes from abroad, a stronger Singapore dollar will help convert foreign prices of imports into lower local prices. The flip side of that, however, is a possible hit on the competitiveness of the country's exports.

The three policy levers of MAS are:

1. The slope

This is probably the most common tool used by the MAS to adjust the band. Simply put, the slope determines the rate at which the Sing dollar appreciates. If the slope is reduced, this means the local currency will be allowed to strengthen at a slower pace. It strengthens at a faster pace when the slope is increased.

2. The mid-point

This is a tool generally reserved for “drastic” situations, such as recessions, when the outlook for growth and inflation sees an abrupt and rapid change. Compared to tweaks in the slope, an adjustment in the mid-point either upwards or downwards is likely to yield a quicker and bigger impact on the currency, economists have said.

3. The width

This controls how far the Sing dollar can fluctuate. This means the wider the band, the more volatile the currency can be. It is typically reserved for periods of increased uncertainties or volatility.

Under both exchange rate (MAS) and interest rate regimes (followed by BNM), monetary policy operations lead to changes in the central bank’s balance sheet. For example, the selling of US$ to strengthen the S$NEER will have the effect of reducing Official Foreign Reserves on the asset side of MAS’ balance sheet, which is matched by a reduction in banks’ cash balances with the MAS on the liabilities side. This is akin to a central bank that targets a higher interest rate by selling domestic currency-denominated securities and thereby reducing the asset side of its balance sheet, matched by a reduction in banks’ cash balances with the central bank on the liabilities side.

MAS’ intervention operations are thus akin to interest rate-targeting central banks’ monetary policy operations. Instead of using money market operations to achieve a targeted policy rate, Monetary and Domestic Markets Management Department (of MAS) uses FX intervention operations to ensure that the S$NEER stays within the policy band.

MAS has reserves in excess of USD400 billion while BNM’s reserves is only above USD100 billion.

So, what’s best? An interest rate regime or forex intervention as a monetary tool? Either tool is neutral and can be used to meet overall objectives.

From an inflation perspective MAS is direct and efficient in managing its core inflation with the exchange rate mechanism. BNM has been focused on growth, which suggests keeping rates as low as possible and leaving exchange rate to find its own level. The problem with that is we are not in lock-step with the Fed which leaves us vulnerable to exchange rate depreciation and imported inflation. If we drop this growth obsession and move in tandem with the Fed, we will ameliorate imported inflation and have a decent exchange rate. To do so, we need to increase OPR by another 0.75% - 1.0% in November. Will we do that? No, it is probably going to be an increase of 0.25% which is neither here nor there!

References:

MAS tightens monetary policy for the fifth time in a year to dampen inflation, Tang See Kit, 

14 Oct 2022, Channel News Asia

How does MAS carry out its monetary policy?  https://www.mas.gov.sg

Inflation Outlook Does Not Change BNM’s Intransigence!

Outlook for inflation is choppy and elevated. Many economists are pegging a 25-basis-point interest rate hike by the monetary policy committee (MPC) of BNM in their meeting in early November.

According to the Statistics Department, headline inflation slowed down year-on-year (y-o-y) to 4.5% for September 2022, core inflation in turn picked up to 4% y-o-y compared with 3.8% in August.

More importantly, however, the data showed that headline inflation had decelerated by 0.1% in September, compared to 0.2% and 0.4% in August and July, respectively.

The headline inflation gauge takes into account the whole basket of goods and services produced by a nation’s economy for the period in review, while core inflation removes items whose prices fluctuate more wildly – usually food and petrol – from the equation.

While it may be encouraging that inflation had eased up month-on-month from July to September, Public Investment Bank Bhd (PIB) Research believes it may be too early to tell of any trend.

Despite pegging its 2022 whole-year inflation projection at 3.3%, Maybank Investment Bank Bhd (MIB) Research predicted that prices of goods and services could increase by up to 4% in 2023. This will be underlined by the impact of the announced rationalisation in price subsidies for essential food, fuel and energy, as well as the expected gradual adjustments in fuel prices and electricity tariffs due to subsidy reviews in 2023.

TA Research and CGS-CIMB Research, in the meantime, are forecasting Malaysia’s headline inflation rate to hover around 3.1% for the whole of 2022. Like MIB Research, both TA Research and CGS-CIMB Research are also of the opinion that Bank Negara would be increasing the OPR in its next MPC meeting by another 25 basis points to continue curbing inflation.

But is that enough? No! The Fed’s hikes increasingly appreciate the dollar against other currencies, including the ringgit. Why can’t we raise OPR by 0.75 - 1.0% now and stop the continued decline of the ringgit and consequently suffer from imported inflation? Why are we so focused on growth when inflation should be our No. 1 enemy? What’s the point of 4-5% growth when inflation is also above 4%? Does it make sense in real terms? Liz Truss and her economics may do well in Malaysia!

Reference:

All eyes on inflation outlook, Keith Hiew, The Star, 26 October 2022