Is Singapore’s Presidency a Consolation Prize for Tharman Shanmugaratnam?

The former deputy prime minister Tharman Shanmugaratnam, whether measured by opinion polls or real-world election results, is the most popular politician in Singapore. He is the smartest and most imaginative reformer in Singapore’s Cabinet in recent decades. Electoral setbacks in the 2011 parliamentary and presidential elections, Tharman has been credited with pushing the government to modify its longstanding aversion to welfare and introduce modest support for the elderly and the poor. These measures have not been sufficient to resolve the government’s electoral problems, but they have at least stopped the haemorrhage.

Tharman also has another political advantage — he is faithful to the most powerful patron in the country, Prime Minister Lee Hsien Loong. His patron–client relationship with Lee began in the 1980s when he worked for the Monetary Authority of Singapore. Tharman has been investigated by authorities over security concerns on three occasions, but these tight spots have not been allowed to adversely affect his political career.

Source: https://en.wikipedia.org

Opinion polls routinely name Tharman as the best candidate for prime minister. This is particularly so since Lee announced in 2017 that he planned to step down in 2019, not withstanding the reality that more than five years later, Lee remains prime minister.

Given his popularity and mastery of economics and public policy, Tharman should have been an obvious candidate to succeed Lee. But in 2008 Lee declared that only a candidate from Singapore’s majority Chinese community was acceptable. This verdict was confirmed in 2019 by Lee’s then-designated successor, Finance Minister Heng Swee Keat. In the same year, Tharman stepped down as Deputy Prime Minister to make way for Heng. This is the lot of a talented Indian in Singapore’s supposedly meritocratic society.

On 8 June 2023, Tharman announced that he was stepping down from Cabinet to run for President. This should not have been a surprise, given that he had no prospect of advancement in Cabinet.

The choice of Tharman for President arguably solves several problems for Lee. The presidency provides an august reward for Tharman’s loyalty and stunted executive mobility. Tharman’s popularity also guarantees Lee will not be embarrassed by the spectacle of an establishment candidate almost losing to a strong alternative candidate. This nearly happened in the presidential election of 2011.

But if the advantages to Lee are clear, so are the disadvantages. Lee loses the input of an innovative economic and public policy expert in Cabinet. This loss comes at a time when Singapore’s government is facing a potential electoral blowback over unpopular housing policy reforms. The government is also struggling with cost-of-living issues, the prospect of a deteriorating economic outlook and a growing list of scandals.

Could Lee have done better? Maybe, because the victory that Tharman had (over 70% voted for him) suggests he was popular with the majority group in Singapore. That speaks volumes on race relations and possibilities of others rising to the top in the Executive chain. For now, it is a good development for Singapore and others in the region.

Reference:

Singapore’s presidency a consolation prize for Tharman Shanmugaratnam, Michael Barr, East Asia Forum, 25 July 2023

Net Foreign Inflows Exceed Outflows?

One of the closest barometers for the ringgit is the correlation with foreign portfolio flows. And for the local bourse, a continuous inflow of foreign funds suggests that the market has good prospects.

Up to July 2023, based on data compiled by Bursa Malaysia and Bank Negara, foreign portfolio inflows into the Malaysian capital market has been strong with total cumulative net inflow at RM29.6bil. A strong inflow of RM12.7bil was seen in July 2023. The July inflow was mainly due to the massive inflow of some RM11.3bil in the Malaysian fixed-income market while the equity market saw an inflow of RM1.4bil for the same month.

For foreign investors, there are only two reasons to buy Malaysian fixed-income instruments and this is either related to the current yield spread vis-a-vis other foreign jurisdictions; or in anticipation of capital gains, which foreign investors may realise on the back of the strengthening ringgit or drop in the benchmark yields.

The benchmark five-year and 10-year Malaysian Government Securities (MGS) papers,  average traded yield in July 2023 was at 3.62% and 3.87% respectively, which is not significantly higher than regional peers and much lower than what US treasuries offer sovereign bond investors.

Based on the current yield on the 10-year MGS at 3.85%, the local sovereign paper is only higher than Canada (at 3.69%), half of Europe (which trades between as low as 0.95% in Switzerland to as high as 19.5% in Turkiye), Japan (at just 0.64%), Singapore (3.26%), Thailand (2.58%), Vietnam (2.68%), China (2.56%), and Taiwan (1.21%).

However, when viewed with Malaysia’s current credit rating of A- by Standard & Poor’s, Malaysia’s rating is only higher than that of Thailand and Vietnam as these two countries are rated BBB+ and BB+ respectively. Hence, the argument of foreign inflows into the Malaysian fixed-income market for carry trade purposes has little weight as there are other  more rewarding options out there, and to start with, the US treasuries.

Although in July, the 10-year US treasuries only gave investors almost identical returns when compared with the similar 10-year MGS, the yield spread has now widened to more than 40 basis points as the 10-year US treasury paper has now spiked to almost 40 basis points against the current yield on the 10-year MGS at 3.85%.

Hence, the other underlying pull factor has to be the inexpensive ringgit. In July this traded at about RM4.5939 to the US dollar and down some 4.6% since the end of last year’s close of RM4.3900 to the dollar. Short-term funds must have positioned themselves in anticipation of a weaker dollar, which in turn would result in foreign exchange gains once these positions are closed.

Bank Negara is not expected to raise the overnight policy rate (OPR) any higher. As such, portfolio inflows are in for both capital gains as well as perhaps foreign exchange gains.

Foreign shareholding, which stood at 20.6% as at the end of June 2023, remained unchanged in July despite the net inflow of some RM1.41bil. For July, the total market capitalisation of foreign-owned shareholdings improved by 5.2% month-on-month to RM361bil, in line with the increase of the total market capitalisation of Bursa Malaysia, which rose by a similar quantum to RM1.757 trillion from RM1.669 trillion as at end of June 2023.

Until and unless the Fed turns dovish and China stops cutting its benchmark interest rate, the ringgit is likely to remain under pressure and hence the capital market inflows seen in the past few months will likely reverse. It is trying times for BNM. To hold rates or otherwise? If they raise OPR, it may prove useful for foreign fund inflows and exchange rate but GDP growth will be impacted downward. Why? Some businesses may not survive with another rate increase, especially those that cannot pass on their costs to consumers. Adjustments have to be made in measured steps so that private sector performance and domestic consumption are not unduly affected.

Reference:

Is the tide turning? Pankaj C. Kumar, The Star, 26 August 2023

Education: The Challenge for Malaysia!

Recently, the authorities expressed a keenness to secure feedback from the public on suitability of the education curricula. This is in the form of a survey. Although I laud such an approach, the deficiencies are almost common knowledge. Then there are activists and public interest groups like PAGE Malaysia or Teach Malaysia who advocate their viewpoints.

If I were to do this (from the Ministry), I will put-out a policy paper for debate after consulting some key interest groups, including politicians. This outlines the Madani Government’s framework for the future of education for Malaysia. Feedback from public will be useful to “tweak” the Plan.

Source: https://www.wikiimpact.com

The key problems in education as many are aware, include:

• Quality of teaching;

• Content of curricula;

• Objectives of a society in 30 year’s time;

• Environment and competition over the longer term; and

• Resources required – people, talent and financials

Upon having a broad framework then I am able to keep improving almost yearly to better assess outcomes and objectives. We can delve on the problems and go down a slippery slope or be creative and find a new pathway for the future. Some key points must be at the back of our minds, which are sacrosanct for the harmony of the nation:

• The Malay language is the principal and official language of the Federation;

• Vernacular schools are permitted with ingredients to form a unified nation; and

• Religious education for those of the Islamic faith (and civics course for others).

Beyond that, we need to gauge what essential skill sets are necessary for the future. To my mind it is STEM (Science, Technology, Engineering and Mathematics) that needs to be emphasised from a very young age to university. Currently about 15% of form four students took pure science subjects, namely physics, chemistry, biology and additional mathematics. The percentage has fallen from about 19% back in 2019. All those countries that have progressed faster than us (Taiwan or South Korea) emphasised STEM, created an environment for R&D to blossom and commercialise patents that were secured by citizens.

If we accept STEM, the other area to emphasise is language – Malay, English, Mandarin and/or Tamil. We need a minimum of three languages to trade and invest. Even Saudi Arabia is having Mandarin as a compulsory subject for secondary school students.

Next, we need to ponder on those subjects that maybe required in the future. Currently, the world is about data mining, coding, artificial intelligence and the like. Then we bespoke resources to meet our objectives which are monitored by way of public exams and merit-based advancement. Affirmative action is not lost but focused on the needy or the B40 group.

If we could do all that, then Malaysia is on a secure road to being competitive, innovative and advanced. God Bless Malaysia!

Reference:

Comment: Some badly needed changes in education system, P. Gunasegaram, Malaysiakini, 29 August 2023

Malaysia Must Remain Resilient!

A small and open economy like Malaysia is sensitive to global macroeconomic challenges. With trade valued at 141% of national gross domestic product (GDP), Malaysia relies heavily on external demand, especially from its top trading partners such as China, the United States and Singapore.

The three countries contributed over 40% of Malaysian exports value in the first seven months of 2023. Malaysia is so intertwined with the global manufacturing landscape that one out of five chips imported by the United States in February 2023 came from Malaysia.

These countries (China, U.S, Singapore) are also the top investors for Malaysia. In 2022, the United States and Singapore contributed nearly 66% of total net foreign direct investment flows into the country.

Global economic growth has turned modest, with the world’s second largest economy – China – recording lower than expected growth. Its consumer spending, factory production and investment in long-term assets all slowed further in July from a year ago, according to the country’s National Bureau of Statistics.

Meanwhile, most countries in South-East Asia posted continued decline in exports, reflecting weaker external demand amid global technology down-cycle. Singapore, for example, saw its key exports – non-oil domestic exports – fall for the 10th straight month in July by 20.2%, dragged by weakness in both electronics and non-electronics exports.

As a result of the challenges, Malaysia’s GDP only managed to grow by 2.9% year-on-year (y-o-y) in 2Q23. This is below the market prediction of 3.3%. In comparison, the economy had grown by 5.6% y-o-y in 1Q23.

Economic growth was seen moderating for a third consecutive quarter after hitting 14.2% in 3Q22. The high base effect from 2022 and the 3.7% contraction in net exports also dragged down national growth in 2Q23.

Bank Negara clarified that the GDP growth in 2Q23 would have been recorded at 3.3% – in line with market prediction – had it not been for the “synchronised commodity-related factors”. The moderate growth in 2Q23 was partly driven by several temporary factors, including plant maintenance in the mining sector, hot weather affecting agricultural output, as well as high base effects from the economic reopening and policy measures in the second quarter of 2022.

Private consumption, which grew by 4.3% y-o-y in 2Q23, was underpinned by firm labour market conditions. Private investments grew stronger by 5.1% y-o-y, supported by further progress in construction projects and continued capacity expansion.

Sector-wise, services expanded at a slower pace of 4.7% y-o-y, compared to 7.3% in 1Q23. This was due to a moderation in consumer- and business-related services. The construction sector saw a growth of 6.2% y-o-y amid continued progress of large infrastructure projects and support from higher special trade activities. The manufacturing sector recorded a flattish growth of 0.1% y-o-y in 2Q23, down from 3.2% in 1Q23. This was caused by weaker electrical and electronics production as well as lower refined petroleum production amid a decline in mining output.

So, in all likelihood, we are only be growing by 3.5% to 4.0% for 2023. And 2024 is not expected to be anything higher. Why? All the major economies are expected to grow lower or remain flattish. That’s the World Bank’s forecast. It is incumbent upon the PM and the Economy Minister to devise steps for higher private investments and consumption to offset the decline in trade-related expansion.

Reference:

M’sia to remain resilient amid global uncertainties, Ganeshwaran Kana, The Star, 19 August 2023

R&D Investments: We are on the Decline!

Six decades ago, Malaysia was richer than South Korea and Taiwan. Today, the country is behind these two technology superpowers. Taiwan overtook Malaysia’s gross domestic product (GDP) per capita in the mid-70s, and not long after that, South Korea overtook Malaysia in the mid-80s.

A major reason for Malaysia lagging behind Taiwan and South Korea is the failure to invest adequately in research and development (R&D). This is reflected in the number of patents granted, as mentioned in the World Intellectual Property Indicators report. In 2022, a total of 6,876 patents were granted in Malaysia, out of which almost 85% were granted to non-residents. In contrast, South Korea granted 145,882 patents in 2022. Three out of four patents in that year were granted to residents.

Official figures show that Malaysia’s gross expenditure on R&D (GERD) has been declining in the past several years, even before the Covid-19 pandemic. The country’s GERD as a percentage of GDP dropped to just 0.95% in 2020. The lowest since 2010.For comparison, countries like South Korea, the United States and Japan spent 4.81%, 3.45% and 3.26% of their GDP in 2020 for R&D, respectively. Notably, China’s GERD per GDP stood at 2.4% in 2020, significantly higher than Malaysia despite having an almost similar GDP per capita.

Malaysia is well behind its GERD per GDP target of 3.5% by 2030. The intermediate target is 2.5% by 2025 which seems a mile away! There is a funding shortfall of RM40bil to achieve the 2025 target.

Malaysia’s long-delayed ambition to become a high-income nation relies on the country’s ability to effectively spend on R&D efforts in high-potential areas. Increased R&D efforts that would lead to greater technology adoption in the country are highly necessary, considering that Malaysia is set to become a super-aged country by 2056.

In the Madani Economy Framework, Malaysia is to be among the top 20 countries in Global Innovation Index (GII) by 2025. As for Global Competitiveness Index (GCI), Malaysia aims to rank in the top 12 within the next 10 years. Foreign investors examine these indices.

The easy supply of cheap foreign workers, particularly before the pandemic, has further allowed Malaysian companies to avoid R&D and automating a large part of their operations. Malaysian companies also face fundraising difficulties for R&D purposes, especially small and medium enterprises and unlisted companies.

R&D efforts are not just about investing a large sum of money. They will only yield best results if they are supported by qualified, world-class researchers. Unfortunately, in the case of Malaysia, brain drain has become a major challenge in pushing for greater R&D.

The ongoing decline in interest among schoolchildren in science, technology, engineering and mathematics (STEM) studies will only worsen the situation in the future.

There is a shortage of STEM graduates in Malaysia to serve the needs of the industries. The country’s target was to have 500,000 STEM graduates by 2020, but we now have only 68,000 such graduates. The highest number of unemployed graduates here is from the STEM stream. Currently, about 15% of form four students took pure science subjects, namely physics, chemistry, biology and additional mathematics. The percentage has fallen from about 19% back in 2019. This is alarming. We need more students to take pure sciences if we want to create more scientists, data analysts and researchers for the future. STEM culture has to be fostered among children from a very young age.

In 2020, Malaysia saw a decline in the number of researchers per 10,000 labour force at only 31.4 persons, as compared to 74 persons in 2016. This was the lowest level since 2010. Malaysia’s researchers and R&D personnel in the labour force fall way below that of Japan, South Korea, Taiwan, Singapore, and China.

Many things are on the Government’s plate. STEM and R&D take countries forward. We don’t have much time and children lose their future when a Government dithers on reformasi!

Reference:

Reversing declining R&D investments, Ganeshwaran Kana, The Star, 26 August 2023

Malaysia Day: Have We Restored Status?

On 3 November 2021, the Malaysian government tabled four constitutional amendments relating to Sabah and Sarawak, which was to realise the terms agreed to under the Malaysia Agreement 1963 (MA63). MA63 was a treaty for the creation of the Federation of Malaysia by combining the states in the Federation of Malaya with North Borneo (which became Sabah), Sarawak, and Singapore. The Federation was left with the Malayan states as well as Sabah and Sarawak after Singapore seceded by mutual agreement in 1965.

The first three amendments are symbolically important, though their legal significance remains unclear. The first amendment concerns Article 1(2). The proposed amended Article 1(2) would specify that “[T]he States of the Federation shall be (a) the States of Malaya …; and (b) the Borneo States, namely Sabah and Sarawak.” The current version of Article 1(2) was the product of a further constitutional amendment in 1976 and lists all states within the federation under a single category in alphabetical order. This effectively placed Sabah and Sarawak on equal footing with the other states in the Federation. The 1976 amendment was justified as necessary to create equality among states and ensure further unity within the federation, and received overwhelming support in the federal legislature, including the acquiescence of members of Parliament from Sabah and Sarawak. Opposition on this only came from the DAP. So, the “downgrading” in 1976 was with consent of the representatives from Sabah and Sarawak.

The current amendment reverts Sabah and Sarawak’s perceived status change, clarifying that the Federation is comprised of two groupings – one encompassing the states in Peninsular Malaysia and the other comprising the two territories of Sabah and Sarawak. Besides changing Article 1(2), the second amendment namely Article 160(2) has a new definition. The new definition of “The Federation” refers to the Federation that was first established under the Federation of Malaya Agreement 1957 and MA63, taking into account the separation of Singapore from Malaysia. The third amendment, also to Article 160(2), includes a new term, ‘Malaysia Day,’ defined as 16 September 1963, the day Sabah and Sarawak joined the Federation. This is in addition to ‘Merdeka Day,’ which remains 31 August 1957, when the Federation of Malaya was created.

The constitutional amendments are welcomed by Sabah and Sarawak for restoring their status as equal to the Peninsular Malaysia. But this begs the question of what legal impact these amendments will have. The Constitution had already granted Sabah and Sarawak special status, conferring specific powers to Sabah and Sarawak not available to the other states. An entire section in the Federal Constitution (Part XIIA) is devoted to additional protections for Sabah and Sarawak. It preserves the use of English (time limited) and native languages in native courts in Sabah and Sarawak (Article 161); restricts non-residents from practicing before courts in Sabah and Sarawak (Article 161B); and gives the two states veto rights to certain constitutional amendments which affect them, including in relation to citizenship, the High Court in Sabah and Sarawak, legislative power and executive authority, and financial arrangements, religion, language, special treatment of natives of the State, as well as allocation of members of the federal House of Representatives (Article 161E).

But the amendments do not go far enough to address the actual demands that Sabah and Sarawak have concerning financial allocation, resource autonomy, as well as the assurance over matters not already currently included in the State List, such as educational policy. As resource rich territories, Sabah and Sarawak’s levels of economic development simply do not match their financial contributions. 

The proposed constitutional amendments are a step in the right direction, symbolically restoring the status and dignity of Sabah and Sarawak within the Malaysian constitutional order. The amendment to Article 161A is also an important step in the devolution of powers to Sarawak, which hopefully would allow for stronger protection of native rights. Other matters such as resource allocation, financial/budgetary support and education also need to be addressed. Hopefully, we will progress as one nation.

Reference:

Restoring Constitutional Equality to Sabah and Sarawak: Do the Proposed Amendments to the Malaysian Federal Constitution Go Far Enough? Jaclyn L Neo, Constitutionnet, 19 November 2021

Is Rent-Seeking Entrenched?

The government intends to draft new laws to curb rent-seeking or the “Ali Baba” culture. Estimated losses from rent-seeking is around 1% of the country’s gross domestic product (GDP), or RM17.9bil of GDP (nominal GDP in 2022: RM1.791 trillion).

Rent-seeking practices have become entrenched in government processes such as procurement, licensing, permit and quota allocation, as well as the distribution of subsidies and grants. The AP holders are the best known rent-seekers. Why work? When others will work for your and give a percentage of their revenue.

Rent-seeking includes the mark-up of government projects, piracy, lobbying the government for subsidies or acting as a middle-man soliciting government’s contracts for some fees.

Source: https://corporatefinanceinstitute.com

There are three costs associated with the rent-seeking activities. First, direct costs such as consumers pay higher prices of goods and services due to market imperfection. Second, opportunity costs as real resources were not invested productively. And third, moral costs as people and businesses also join the fray of engaging in rent-seeking themselves.

Studies have shown that the rent-seeking activities have exerted a heavy economic and social toll on a country. Pervasive rent-seeking reduces economic efficiency through the misallocation of resources.

It does not add value as it distorts market competition that provides the products and services at reasonable and competitive price. It hinders the creation of wealth, reduces government revenue, increases income inequality, and potentially leads to decline in national output and productivity.

Ali Baba is a classic example of a bumiputra firm having won a government contract or obtained a licence for a contract, but it did not do the work or operate the business. Instead, it is sub-contracted to other firms at a price for easy monetary gains. This system has created a rent-seeking class among the politically-connected, plus an inefficient and uncompetitive economy.

Individuals and firms spend vast amounts of money attempting to lobby and convince bureaucrats and regulators to provide some forms of protection, concession, monopolistic structure or restrict free entry or competition so that some industries or individuals can realise economic rent.

Less government involvement and intervention, as well as less bureaucratic and regulatory procedures will reduce the opportunities for rent-seeking. If a reasonable reward and punishment mechanism is in place with third-party Oversight, then you may reduce this activity.

Many say public procurements must be by way of competitive tender. Even this, rent-seekers can manipulate. The key issue is integrity – and that too at the highest levels. Some previous PMs had no compunction to this malfeasance.

The enactment of the Government Procurement Act is a positive step to curb excesses. But in the end it (rent-seeking) is something society has to abhor. If you say “rasuah” is “rezeki Tuhan” and it is permitted then we have a long way to go.

Reference:

The economic and social bane of rent-seeking, Lee Heng Guie, The Star, 17 August 2023