Wednesday, January 21, 2015

Economy January 2015

It is early in the new year and we are already making adjustments to our expectations and resolutions.

The first thing to note is that the current developments in the world economy is not a short-term blip and will prove to be a major structural adjustment in the global economy.

We are probably witnessing the end of nearly three decades of expansionary monetary policies by both Japan and US. Standard monetary easing evolved into "quantitative easing" as the central banks ran out of papers to buy from financial institutions instead bought governments papers directly. This was when money flooded the global economy and China boomed, as the US and Japan governments tried to spend their way out of recession.

The US reckoned that its economy has adjusted enough and that early shoots of a recovery can be seen as evidenced by job growth. QE can now taper. This signals to US money all over the world to go back to motherland because US interest rates will be the first to rise. The US dollar strengthens as funds go back to the US after having sold down stock markets in Asia. This is where we are as a fundamental factor.

The second thing is that the discovery of shale oil in the US. This must be seen as a strategic move by the US to regain control of the global economy. This go-ahead on shale oil is to make the US less dependent on oil imports. The lower the cost of fuel also helps to strengthen the economic recovery. The IMF revised US growth to 3.6% in 2015 (from its October forecast of 3.2%).

The third thing is the regime change in China which requires that a major structural change is required for the Chinese economy. The old political power which has gained control of real assets must be eliminated by triggering a consolidation in the property market. The IMF expects China to grow 6.8% in 2015 (from the October forecast of 7.1%) down from 7.4% in 2014 and 7.7% in 2013.

The increase of oil from shale and the slowdown in China, the price of oil has come down to US$55 per barrel, from US$100 before.

It is in this context that the Malaysian government is reviewing its situation.

The adjustment is basically financial. Because of a loss of revenue from oil, and in some part made less painful by the resultant cut in oil subsidy from the oil price drop, government expenditure must be cut accordingly. The government decides to cut operating expenditure while keeping development expenditure unchanged, probably on the thinking that OE is boring spending stuff and DE is major capacity expansion stuff. In truth, massive projects cannot be simply abandoned without wastage, and trouble must be taken till completion. While unnecessary OE should be cut, there should be increase in OE in order to improve the efficiency of the government further, by putting in more machinery to do the work with human cannot or are unable or unwilling to do.

The government budget deficit rises from 3% to 3.2% of GDP. Economic growth is revised down one percentage on the lower end to 4.5% which optimism is kept at 5.5% on the upper end of the forecast range. The deficit increase would more likely be seen from the smaller denominator.

There is no word of the GST which presumably means that the government is pushing ahead with its implementation on 1 April 2015. Without the GST revenue, the government finances could become worse. The GST has come in time to replace oil as a revenue for the government.

Isn't it time for the government to size down? Or rather, to cut down on its massive development projects? This supposedly "counter-cyclical", "stimulative", etc fiscal expansion has been going on for too long. There is a need for the government to expand to increase economic efficiency so that more growth can be squeezed out of existing assets. Capacity expansion should come in when decent efficiency levels are reached. It is not good to cover up inefficiency through side-way expansion. It doesn't create high income for all; it create high income disparity.

The world is undergoing a structural change. At home, we are shuffling things about.

We should create a better ecosystem for entrepreneurship. Not the type of entrepreneurship that go after government projects (a legacy of sustained development expenditure of the government). The key word for entrepreneurship is efficiency and competitiveness. We should operate in moderate sizes. It should not be a world dominated by conglomerates and monopolies. The government should be small and efficient. The private sector should dominate the economy, be big and efficient. People should be busy cracking their brains, rather than playing politics.

In the face of the loss of revenue from oil and gas, are we building our non-oil economy?


walla said...

How long can the Saudi reserves last that it and others in Opec can continue to produce to capacity in order to dis-incentize the propagation of shale oil fracking?

Even if they do it for the next ten years, that technology will still be around. In fact its investors may even improve upon it to eclipse Opec in cost-effectiveness, thereby creating a trump card for the energy-hungry US economy in the near future, global warming aside.

It is thus hard to imagine oil prices climbing back again in the short term.

Not that it matters much to us anyway. After all, last year alone we were already a net oil importer, if anyone cares to look up the numbers.

In addition, with the US dollar strengthening further, our ratings will drop and syndicated finance charges will balloon with the specter of 1MDB and two others looming as tipping points.

Seeing all that against the background of how fast our current account surplus has halved, one cannot therefore be too sanguine about the near term, despite the usual federal soporifics, possibly dished out by fevered brains brought about by bouts of e.coli.

Meanwhile, there are just over 300,000 companies GST-registered as of this month. With people still jittery about inbound air travel and thus tourism, and the agricultural sector still down by 30-50 percent, depending on those private sector companies for new tax revenue from GST can only provide token relief to federal debt at the gargantuan cost of the entire population being awe-jawed by the multiplier effect of that tax on prices of goods and services that the common folks need for mostly an already tattered lifestyle that's only going to get worse before getting burst-ed.

(still with me?)

Was there anything for the agricultural and manufacturing sectors?

Since last year, palm oil has been been roundly savaged by poor weather and thus low yields yet weak prices compounded by high costs.

Yet taxes remain high while harvesters are in constant dire shortage in an industry where any remedial effect in the field can only be seen at the earliest fifteen months later.

Since its sales price is outside our control, the costs of this industry must be pared down if it is to survive competition for their own workers from the neighbor.

The taxes can be reduced because you don't need to get tax money just so to widen a rural highway segment that is not traffic-jammed in any case which makes one wonder how development expenditure projects are actually decided. Maybe that explains why devex was not touched.

And workers from other countries must be allowed. Do try to wake up to the hidden fact that there is already a fifth column embedded because actually some 90 percent of the IC holders are those foreigners laughably estimated to be only a hundred thousand.

And do appreciate when labor is short and workers are savvy with their multiple hand-phones, they can ramp up pressure on their rates with slowdowns even if that means they will get less for some months because their tactic is to do it en masse to find precedent-creating breaking points across the sector. Even a leopold can't disagree about the wilyness, no?

One more for that road. Don't raise the worker's levy. Because only the majikan pays for it as well as their passports, not the worker. Especially now when the worker's own home country industry is growing competitively. Once they get those documents, some will be tempted to vanish together with their tools.

Policy-makers must get out of their mindset prejudice that an industry if doing well in the past can afford to be sucked dry in the present and future. Saw how fast the current account surplus has nose-dived? In an industry that takes time to develop, its financial situation can change very fast. Something to ponder.

walla said...

This january budget. Where is the interim auditor-general's report? No federal budget must ever be read without the auditor-general's report. Because the key abiding thing is politically-aspirated corruption.

What is the friggin' point of milking more tax money from rakyat and private sector just so to buy something for one hundred sixty percent of its market price and get only sixty percent of worth, with the balance one hundred percent disappearing into thin air?

Year after donkey year, this magic show is brought out without fanfare but with utmost finality. In fact it is the only thing that is assured. Like the azan.

Corruption breeds itself. It also breeds politicians to craft discriminatory policies that breed more hangers-on and free-loaders. In turn these create the reason to breed the same policies which must mean the honest and hardworking rakyat and company will be taxed more while facing every day the inefficiencies, tidakpathy and higher costs so unnecessary just so they can be more financially independent, all the more in an economy that is no longer relevant to the world whose other members have become more competitive until the local cost of importing essential tools and raw materials will increase because the matawang is fast collapsing.

Do a survey across the land how many offices have tv sets at a corner so that staff with little to do can while away their time with their presence brazenly and lightly excused off because government in this country is actually more social net than service provider? The same government that was tardy in moving relief to flood victims only saved by volunteers braving flood storms in rusty 4wd's.

All the excesses must go. Why the need to pay retainer fee for the NS suppliers? Whose money is it? Was permission sought from its owner that such a social net allowance can continue to be made? What criteria went into the decision? Forty seven voting rights?

Let's now be completely candid about one thing left unsaid for too long a time. The one thing that this budget has missed out is a monetary incentive to those rakyat of a certain profile - that will entice them to reproduce themselves LESS.

It will solve everything long term, doesn't it? Even the Allah issue.

walla said...

walla said...


With the strengthening of the US dollar, China with her plentiful reserves of that currency can now afford to buy more from us.

How many foreigners ever really comprehend the depth of her long-term strategic positioning?