Impact of Money Supply and Fiscal Management on the Ringgit

The price of money is influenced by its supply, hence, a stable currency with appropriate money supply growth requires well-managed debt levels and a healthy fiscal position. (This article is based on a MARC Ratings report).

Over the past decade (2012–2022), Malaysia’s broad money had been growing by 4.9% per annum and exceeded the nation’s real economic growth rate of 4.1%. Additionally, Malaysia’s 10-year average (2013–2022) broad money-to-GDP ratio was 129.8%, higher than the ASEAN-6 median of 10-year averages of 117.3%. This in theory means we will continue to have inflation. Real GDP is a lower than nominal GDP, after accounting for inflation.

Malaysia’s low interest rate environment contributed to a preference for borrowing and credit creation. From 2013 to 2022, Malaysia’s private debt-to-GDP ratio had been relatively high, averaging 121.8% against the ASEAN-6 median of 10-year averages of 112.4%. This may partly be attributed to Malaysia’s significantly higher household debt of 85.6% during this period, against the ASEAN-6 median of 54.4%. While Malaysia has a resilient financial system, encouraging savings instead of borrowings may contain excess credit creation and improve capital availability for future investments. 

Low interest rates are positively correlated with money supply growth and the government’s expansionary fiscal policies. Persistent fiscal deficits and missed targets have led to Malaysia’s government debt-to-GDP ratio reaching close to the statutory debt limit of 65% (2023: 64.3%). High public debt levels raise the perceived country risk, leading to portfolio outflows and a weaker ringgit.

In addition, fiscal expenditures need to be allocated for capacity building rather than current expenses. Of note, development expenditure as a percentage of total government expenditure in the past decade (2013–2022) decreased to 17.5% compared to that of the previous decade (2003–2012) of 22.8%. During the same period, in terms of operational expenditures, the share of emoluments experienced the largest increment, from 27.7% to 33.0%; followed by pensions and gratuities (from 6.9% to 10.1%); and debt service charges (from 10.3% to 12.9%). Furthermore, the government’s plans of hiking civil servants’ salaries may hamper fiscal consolidation efforts. Therefore, new initiatives are required to improve tax revenue and reduce the deficit. That will help ringgit appreciation.

The key to all of this is the real interest rate differential. Unless we address this, it is not going to help the ringgit appreciate. BNM is fully aware and has been trying to balance growth and interest rates. And so long as inflationary pressures remain, interest rates will not be on a downward trend.  That’s the current case even for the U.S.

Reference:

Ringgit realignment (part 4): Money supply and fiscal management, MARC Ratings Berhad press announcement, 30 May 2024

 

The Bank Merger Pushback!

The government’s proposal to merge development financial institutions (DFIs) has unsettled some industry players.  They claim there are solid grounds for the ongoing restructuring to be halted. A single merged entity will have a reduced focus on the micro, small and medium enterprises (MSME), leading to dire consequences.

The proposal to consolidate and strengthen the DFI eco-system was first mooted by then finance minister Lim Guan Eng in 2019. This was reiterated by Prime Minister Anwar Ibrahim during his Budget 2024 speech last October. Phase 1 of the merger process, involving Bank Pembangunan Malaysia Bhd (BPMB), and Danajamin Nasional Bhd, was concluded in March last year. Phase 2 involving BPMB, SME Bank and Export-Import Bank of Malaysia Bhd (Exim Bank) is expected to be completed up by year-end.

Source: FMT, 6 June 2024

Is there a need for merger? The business model and focus for each of the three banks are different. BPMB focuses on large-scale projects. EXIM Bank targets medium-sized SMEs while SME Bank’s mandate is to develop and nurture MSMEs. The merger will likely result in reduced focus on all. The merger may also result in layoffs, with more than 95% of staff in the three banks being Bumiputera.

What are the advantages in terms of funding costs? All three banks rely on sukuk/bonds and corporate deposits as sources of funds. The three banks are fully owned by the Minister of Finance Incorporated. There are currently six DFIs in the country that are regulated by Bank Negara Malaysia under the Development Financial Institution Act 2002. The other three are Bank Kerjasama Rakyat Malaysia Bhd (Bank Rakyat), Bank Simpanan Nasional (BSN) and Bank Pertanian Malaysia Bhd (Agrobank).

However, Geoffrey Williams, an economist has said the negative scenarios raised by critics do not appear to be evidence-based and may be part of the normal pushback that happens in

any change process. According to him, all objections to the merger must be viewed in the reality of the current situation, adding that the DFIs’ assets under management (AUM) are too small. Based on 2023 data, BPMB (with RM26 billion), SME Bank (RM11 billion) and Exim Bank (RM8 billion) have only RM45 billion compared to the EPF at more than RM1 trillion. Their impact is limited.

Meanwhile, Malaysian Institute of Economic Research (MIER) head of research views the merger as helping with scale and access to pooled capital. The resulting entity will have the benefit of mobilising a larger combined stock of capital which can then be efficiently and optimally allocated. There is no reason why the MSME sector should be neglected post-merger – that’s one view.

A RM45 billion monster will not solve SMEs problems. Let me be clear, I am not for the merger. Why?

(i) All the silly synergies one talks about is actually “crap” – I have seen it;

(ii) Each institution best plays its role as independent entities. What about inefficiencies? That is a problem whether one is large or small. You don’t merge to get efficiencies. You need a dynamic team; a mixture of all races in a ratio reflecting the population working at all levels and a sense of passion for their mission;

(iii) A merged entity will “blur” the lines of service and standards will drop; and

(iv) As it stands, they need a revamp and a merger will not help, it meets somebody’s pre-conceived idea!

I could go on but just look at U.S., U.K., Europe and Japan. Did they merge all their entities? No! So, what’s our big idea, other than creating a bigger sludge!

Reference:

Pushback against Bank Pembangunan-Exim Bank-SME Bank merger, Lee Min Keong, FMT, 6 June 2024

Deforestation: Natural Forest Under Threat

Over 3.2 million hectares of the country's natural forest are under the threat of deforestation, according to environmental watchdog RimbaWatch. The group said its analysis of last year's concession data revealed that the land areas were within concession boundaries. This represent 16 percent of our remaining forest cover. If this deforestation occurs, Malaysia’s forest cover will drop below 50 percent of our landmass, thereby constituting a failure of Malaysia’s commitment to maintaining 50 percent forest cover. The overall 3.2 million hectares of deforestation is almost equivalent to an area the size of Pahang.

Source: https://en.wikipedia.org

According to RimbaWatch, its data analysis also revealed that 2.4 million hectares of the said area are under the threat of deforestation to make way for timber plantations. It urged the country to immediately end all conversions of forest reserves to make timber plantations. Malaysia should also expand on its 50 percent forest cover commitment. Transparency is needed. Malaysia’s reporting agencies are little more than Greenwash deception.

The problem of greed will not go away. One of the easiest ways to make money is to fell trees! It oils the political machine and is the “bread and butter” for many elite groups. Unless we have a popular movement, it is difficult to reverse current thinking.

References:

Deforestation: Data reveals 3.2m hectares of natural forest under threat, Malaysiakini, 28 May 2024

Malaysia’s rainforest threat is focused on Sarawak, Sarawak Report, 2 June 2024

Poverty Has Increased in the U.K.!

 More than 1 in 5 people in the UK (22%) were in poverty in 2021/22 – 14.4 million people. This included:

• 8.1 million (or around 2 in 10) working-age adults

• 4.2 million (or nearly 3 in 10) children

• 2.1 million (or around 1 in 6) pensioners.

Poverty rates have returned to around their pre-pandemic levels, as middle-income household incomes rose at the same time as a range of temporary corona virus related support was withdrawn.

The overall level of poverty has barely moved since Conservative-led Governments took power in 2010. Poverty last fell consistently during the first half of the last Labour administration (between 1999/2000 and 2004/05). It rose in the second half of their time in power. 

Before 1979, levels of poverty had been broadly flat at around 14%. In the 1980s, under the Conservative Government of Margaret Thatcher, there was then an unprecedented rise in poverty. This has not been reversed, meaning children have consistently had the highest poverty rates, while pensioners along with working-age adults without children now have the lowest.

In 2021/22, 6 million people - or 4 in 10 people in poverty – were in ‘very deep’ poverty, with an income far below the standard poverty line. More than twice as many (over 12 million people) had experienced very deep poverty in at least one year between 2017–18 and 2020–21.

Between 2019/20 and 2021/22, the average person in poverty had an income 29% below the poverty line, with the gap up from 23% between 1994/95 and 1996/97. The poorest families – those living in very deep poverty – had an average income that was 59% below the poverty line, with this gap increasing by around two-thirds over the past 25 years.

This is equivalent to a couple with 2 children under 14 years old needing, on

average:

• an additional £6,200 per year to reach the poverty line if they are living in poverty

• an additional £12,800 per year to reach the poverty line if they are living in very deep poverty.

Some groups of people face particularly high levels of poverty. This includes:

• Larger families - 43% of children in families with 3 or more children were in poverty in 2021/22. 

• Families whose childcare responsibilities limit their ability to work – 44% of children in lone-parent families were in poverty in 2021/22.

• Many minority ethnic groups – around half of people in Pakistani (51%) and Bangladeshi households (53%) and around 4 in 10 people in households headed by someone from an Asian background other than Indian, Pakistani, Bangladeshi or Chinese (39%) or households from Black African backgrounds (42%) were in poverty between 2019/20 and 2021/22. These households also have higher rates of child poverty, very deep poverty and persistent poverty.

• Disabled people – in 2021/22, 31% of disabled people were in poverty. 

• Informal carers – 28% of people with caring responsibilities were in poverty in 2021/22. 

• Families not in work – more than half of working-age adults (56%) in workless households were in poverty in 2021/22, compared with 15% in working households. 

• Part-time workers and the self-employed - amongst people in work, the poverty rate for part-time workers was double that for full-time workers (20% compared with 10%) and self-employed workers were more than twice as likely to be in poverty as employees (23% compared with 10%).

• People living in rented accommodation – in 2021/22, more than 4 in 10 social renters (43%) and around a third of private renters (35%) were in poverty after housing costs. 

• Families claiming income-related benefits – their high poverty rates may be expected given the ‘low income’ eligibility criteria for claiming these benefits, but it demonstrates that benefit levels are frequently not sufficient to enable recipients to escape poverty.

Between 2019/20 and 2021/22, the average poverty rates in England (22%), Wales (22%) and Scotland (21%) had converged to around the same level, although poverty rates were much lower in Northern Ireland (16%).

Between 2019/20 and 2021/22, the West Midlands had the highest rate of poverty at 27%, followed by the North East and London (both 25%), Yorkshire and The Humber, the East Midlands and the North West (all 23%).

To reset social and economic fundamentals, start with the following, as suggested by Joseph Rowntree Foundation:

• help and space for people looking for work to find a secure job 

• raising the basic level of workplace rights and protections

• protecting time for caring around work, while building up and strengthening the infrastructure of care services for families to rely on

• ensuring social security provides enough income to afford the essentials, 

• making future pension provision more secure, by raising minimum contribution rates and establishing good options for people to use their savings to provide a secure standard of living in retirement

• helping people build up modest savings, access affordable credit, gain relief from problem debt and hold assets

• expanding access to secure homes, whether rented or owned, by building more new homes and shifting the distribution of existing homes.

The poverty levels could be addressed if the U.K. is not funding some war in the world, impose new tax on the rich and curtail unwanted expenditure on past imperial glories. For a rich king and a richer PM, this is a disgrace, especially if you see the homelessness on the streets.

Reference:

UK Poverty 2024, Joseph Rowntree Foundation, 23 January 2024

Are There Illicit Oil Transfers Off Malaysia?

A U.S. Treasury official warned of environmental risks from illicit transfers of Iranian oil off Malaysia. This was reported by news portal Malaysiakini on 9 May 2024. The United States sees Iran's capacity to move its oil as being reliant on service providers based in Malaysia.

The official also said the United States was attempting to prevent Malaysia from becoming a jurisdiction where the Palestinian militant group Hamas could raise and transfer funds. The main ways Iran raised money was through the sale of illicit oil to buyers in East Asia.

Source: The Maritime Executive

Malaysian officials in October 2023 reported that they have detained two tankers suspected of conducting an illegal ship-to-ship oil transfer. The not-for-profit group United Against Nuclear Iran (UANI) posted online citing the vessels in an October 2023 report.

UANI identified the two tankers that MMEA had only said were registered in Panama and Honduras. The larger of the two vessels is the Artemis III, registered in Honduras and managed by companies in China. Built in 1996, she is a 300,360 dwt VLCC. The vessel’s AIS signal shows that she has been in the area since late August.

The other vessel involved in the transfer, the Ocean Hermana is registered in Panama and managed from India. Built in 2004, she is 159,100 dwt. The ships were being investigated for undertaking the transfer without a permit and for anchoring without permission. In Malaysia, those crimes could result in a fine of approximately $20,900 and imprisonment of up to two years. In addition, the captains of both tankers are also being investigated for obstructing the efforts of the MMEA. That would also result in jail sentences of up to two years and a fine of approximately $2,000.

Meanwhile, Malaysia Prime Minister said recently there was "not one shred of evidence" of ship-to-ship transfers of sanctioned Iranian oil off Malaysia. This is amid U.S. concern that Iran was using Malaysian service providers to move its oil. It is either the PM is wholly ignorant or providing a classic disinformation. Which is it dear PM? Do you understand the consequences? Our output of oil cannot just spike from 600k barrels per day to 3 million barrels per day!

References:

US flags environmental risks from illicit transfers of Iranian oil off Malaysia, report says, Reuters, 9 May 2024

Malaysia detains two tankers accused of trading Iranian oil, The Maritime Executive, 26 October 2023

Malaysia PM says no evidence of ship-to-ship transfer of Iranian oil off Malaysia, Reuters, 14 May 2024

Are FDIs Always Fickle?

Foreign direct investment (FDI), the net inflow of long-term investments, is rather fickle. When the Prime Minister says there were RM330 billion in total approved investments for 2023, it does not mean that this amount of investments was made. They were approved but have not yet transformed into actual investments on the ground.

And, these are total approved investments, both domestic and foreign. Out of this total, 57 percent were foreign and 43 percent were local, amounting to RM188 billion and RM142 billion respectively.

However, actual FDI for 2023 was about RM38 billion compared to approved investments of RM188 billion, or just one-fifth of approved investments.

Two factors are at play. First, RM330 billion comprises mere approvals. The second factor is that these investments are not committed for 2023 but can extend to an investment over years. For example, Microsoft’s US$2.2 billion investment (over RM10 billion) in Malaysia spans four years.

FDIs and domestic investments are about conducive investment climates. That involves multiple, complex factors and interactions. It means strategic, long-term measures translated to clear, careful execution on the ground. The talk must be followed by action.

We need to improve infrastructure. We need to streamline and re-evaluate the incentives we give for FDI and give similar ones to local investors. We need our leaders to stay put in the country, put their heads together, get expertise in and prioritise what needs to be done and execute without delay. We need to focus on domestic issues where we can make positive change rather than foreign ones where we will have no or little impact at all.

What foreigners want is stability, investment friendliness, great infrastructure, good quality of

life, educated smart locals, no red tape, efficiency, corruption-free measures, better productivity, progressive thinking, less extremism and many more.

If we take care of ourselves and our country then investments will surely flow. Focus on the basics, not Gaza or Central Asia!

Reference:

Enduring myths and realities about FDIs, P Gunasegaram, Malaysiakini, 24 May 2024

Subsidies, Subsidies, Subsidies!

A study by the Kiel Institute indicates that Beijing heavily subsidizes its domestic industries. These are in sectors such as green technologies like electric mobility or wind power. Estimates suggest that China's overall subsidies range between three to nine times that of other OECD countries.  According to the analysis of new data, one of the major beneficiaries is the electric car manufacturer BYD. This reflects BYD's significant expansion in both technological and production capacities, as well as its increasing competitiveness.

Government subsidies (by China) cover over 99 percent of listed companies receiving direct government subsidies (in 2022). These subsidies are strategic to advance key technologies to market readiness. 

https://en.wikipedia.org

In addition, preferential access to critical raw materials, “forced” technology transfers from foreign investors, and favourable treatment in public procurement and administrative procedures, Chinese companies have rapidly expanded in various green technology sectors. They dominate the Chinese market and are penetrating EU markets. 

China has emerged as the leading global producer of photovoltaic systems and battery cells. The country clearly aims to achieve similar leadership in other green technology sectors, including electric vehicles and wind turbines.

The electric car manufacturer BYD receives particularly high subsidies. Direct subsidies amounted to approximately EUR 220 million in 2020, rising to EUR 2.1 billion in 2022. In terms of business revenues, direct subsidies increased from 1.1 percent in 2020 to 3.5 percent in 2022. Additionally, BYD receives significantly more purchase premiums for electric cars in China compared to other domestic manufacturers like GAC or foreign companies producing locally, such as Tesla or VW's joint ventures. 

Leading Chinese wind turbine suppliers, such as Goldwing and Mingyang, also benefit significantly from government subsidies. In the case of Mingyang, subsidies increased from EUR 20 million in 2020 to EUR 52 million in 2022. Relative to revenue, recent subsidies were comparable to car manufacturer GAC and amounted to approximately 1.2 percent in 2022.

Targeted demand subsidies are justified, because they speed up EV adoption. While success of Chinese EVs has spooked Western car manufacturers, some of the pain is self-inflicted. Having bet on massive ICE for too long, they delayed the all-but-inevitable switch to EVs. But that’s not all, Chinese EVs are cheaper for the same reason that most everything manufactured in China tends to be cheaper than American or European products.

Introducing EV tariffs in response to intense lobbying by Western car manufacturers might make for good election-year politics. A much better idea is to subsidise domestic manufacturing. This approach is reflected in the US Inflation Reduction Act and Bipartisan Infrastructure Law, and in targeted EU subsidies. Some of these subsides can be justified simply as a politically feasible, second-best alternative to carbon pricing, including as a stepping stone toward pricing policies.

Tariffs may be preferred on “public finance” grounds: they generate government revenues, while subsidies cost taxpayers money. But that calculus is short-sighted. Early analyses of the Inflation Reduction Act shows that its hundreds of billions of dollars’ worth of subsidies raise economic output in the US and elsewhere, both during and after the initial decade of government spending.

European car manufacturers have realised this and are themselves now calling for further subsidies in lieu of tariffs, seeking an Airbus-like, cross-country alliance to subsidise European EV manufacturing. While any subsidy scheme is messy and raises a hot of thorny political-economy and economic-efficiency questions, such subsidies are surely preferable to EV tariffs. A subsidy race, together with stronger efforts at pricing carbon dioxide emissions, is vastly superior to a tariff war. The world will be both richer and cleaner for it.

References:

China’s massive subsidies for green technologies, Kiel Institute, 10 April 2024

The right response to China’s electric-vehicle subsidies, Gernot Wagner and Shang-Jin Wei, Project Syndicate, 5April 2024