How do we measure the progress of a nation? I propose to measure our progress by an increase in the job opportunities available to ourselves and our children, as well as an increase in our incomes in terms of the quantity and quality of things that we can buy for our families.
In other words, household incomes in addition to corporate profits. We want our companies to make more profits so that they can reinvest and create better jobs and pay better. We do not want companies to make more profits so that the executives can pay themselves better while suppressing wage increases down the corporate ladder.
We started as a commodity-producing country, as in primary commodities. Do we continue to be a commodity-producing country, even as we embark on the industrial development with MNCs providing jobs for our people, as in electronic assembly? In other words, do we continue to produce goods and services where prices are determined by the world markets and not by the quality of our products?
If the prices of our products are dictated by the global commodity markets, then to stay competitive, we have to keep our nominal wages low and the ringgit weak. There are then only two ways by which corporate profits can be increased:
(i) Increase in production volume - two or three shifts
(ii) Fortuitous increase in global commodity prices.
Nominal wages per head stay relatively unchanged. If there is an increase in the trade surplus because of (i) and/or (ii), to keep the ringgit unchanged, the central bank increases the supply of ringgit in the domestic economy which will then be translated in higher domestic prices. Wages per head after adjusting for inflation then decline and the welfare of the people is reduced.
If, in trying to increase their profits, companies pitch local workers against desperate foreign workers on the grounds that foreign workers can work harder and longer for less, and if the government condones such a policy, then the nation is commoditising the unskilled local labour market. In such a situation, our people become displaced in their homeland and become unemployed. Herein lies a potential social problem which can have long-term detrimental impact on our society.
The reason why such a policy should not be condoned is that, in order for the nation to progress and for real wages per head to rise, there must be an increase in productivity gains. There must be corporate and economic structural change which can be initiated by allowing the ringgit to appreciate naturally in the face of the trade surplus. The trade surplus may become less as a result, but companies have already made their profits and therefore there should be pressure for them to invest in other businesses such as by going into downstream industries where there is higher value-add. Corporate profits are then fruitfully spent in upgrading technology and in ensuring productivity gains rather than paying fat dividends to shareholders.
Plantation companies may not wish to reinvest here and may instead wish to venture into the same industries in neighbouring countries (because of similarity of climate). Electronic-assembly companies may wish to move to other low-cost countries (because of similarity in labour laws). Certainly, any change in the key parameters of the country - ringgit and wages - will bring about the dynamics of change and change for the better is called national progress.
Such national progress in the use of more advanced technology and the improvement of productivity gains in the country - in consonance with the aspiration of having more literate and educated children and young generations who can think and innovate and a better life outside of plantations in air-conditioned executive office suites - must be the result of a systemic and consistent government plan and policy that encourages all and sundry among the citizenry and friends of the nation to participate and contribute.
We have to realise that the strategy of encouraging FDI in providing jobs for unskilled and semi-skilled labour is anachronistic to the aspirations of our children.
In moving forward, therefore, we should not get stuck in the policy traffic jam of a national car policy and APs and highways which unjustifiably drains the resources of the young just to be mobile in town. We should be building infrastructure for the application of ICT in order that our young can participate in the global supply chain that links our nation, with the region, the West and the markets. Instead of creating jobs for our young at home, corporates are leaving home to invest in nearby markets to invest.
It may be hard for a nation of traders to invest in technology on a long-term basis. While we are finding our own feet in basic research (which we have), we also need groups of young people to commercialise existing technology (which we have), to find venture capital (which we have), and to find new market (which we may or may not have). We should a set up a network that can cater to investments systematically in more technology as well as traditional technology in downstream activities of old industries.
Whether going for the service industries is the right answer or not is a big subject in itself.
Tuesday, June 30, 2009
Monday, June 29, 2009
Engineering A Strengthening Of The Ringgit: Strategic Considerations
Let's us go into policy considerations - which must necessarily be strategic in nature.
With nearly RM1 trillion in the money stock, the foreign reserves of RM318 billion is insufficient to hold the ringgit at current rates should half the ringgit stock decides to exit this economy altogether.
If this capital outflow happens, the consequences will be as follows:
1. The central bank can try to support the ringgit at its current equilibrium rate as let the foreign reserves dwindle. This is not a bad thing as the outflow will actually reduce the excess liquidity and hopefully gives the central bank the reason to give some interest rates to the poor deposits which cannot go elsewhere.
2. The central bank can let the forex market go and let the ringgit collapse with the capital outflows. In this way, the central gets the keep as much of the foreign reserves as it can.
The people taking the money out do not actually have to be the original importers. They can be anybody who have ringgit, as they can just buy the foreign currencies from the banks or the central bank.
The money could wish to flow out for several reasons:
1. Zero deposit rate
2. weak currency i.e. currency with a tendency to weaken than to strengthen
3. No investment opportunities
4. No business opportunities
5. Weak stock market - because weak corporate sector
6. Lack of confidence in the system
I have written at some length in the previous posts on some of these issues.
In the recent posts, I am trying to suggest that, in addition, we could try to engineer a strengthening of the ringgit or to let the ringgit strengthen or to show that the ringgit can strengthen on a more steady basis - why - because we have had an external surplus.
The external surplus is an opportunity to let the ringgit strengthen - because it is justified on fundamentals.
Should the foreign reserves fail to accumulate further and the ringgit remains weak (even if in equilibrium), then I think we may be in for a rollercoastal ride.
I have been suggesting that the strategy of have a stronger ringgit may that be all that bad for the economy.
In fact, I argued that it might even do it good. If the trade surplus is due to good global prices, a stronger ringgit merely reduce some of the profits - and of course cut some of the trade surplus. In return, we can have:
1. Reduced liquidity and hence less inflationary pressures
2. Reduced gap between domestic salaries and imported salaries
3. Better retention or attraction of skilled and experienced workers who will then help to make the economy more efficient and productive and hopefully more innovative.
In this way, we hope to be able to do the following:
1. Have positive deposit rates because of the reduced liquidity
2. Currency with a tendency to strengthen rather than to weaken
3. Confidence in the system and hence the keenness to look for business opportunities.
Once the corporate sector improves, there may be hope for the stock market. In the meantime, its all sideway with the nose dipped.
With nearly RM1 trillion in the money stock, the foreign reserves of RM318 billion is insufficient to hold the ringgit at current rates should half the ringgit stock decides to exit this economy altogether.
If this capital outflow happens, the consequences will be as follows:
1. The central bank can try to support the ringgit at its current equilibrium rate as let the foreign reserves dwindle. This is not a bad thing as the outflow will actually reduce the excess liquidity and hopefully gives the central bank the reason to give some interest rates to the poor deposits which cannot go elsewhere.
2. The central bank can let the forex market go and let the ringgit collapse with the capital outflows. In this way, the central gets the keep as much of the foreign reserves as it can.
The people taking the money out do not actually have to be the original importers. They can be anybody who have ringgit, as they can just buy the foreign currencies from the banks or the central bank.
The money could wish to flow out for several reasons:
1. Zero deposit rate
2. weak currency i.e. currency with a tendency to weaken than to strengthen
3. No investment opportunities
4. No business opportunities
5. Weak stock market - because weak corporate sector
6. Lack of confidence in the system
I have written at some length in the previous posts on some of these issues.
In the recent posts, I am trying to suggest that, in addition, we could try to engineer a strengthening of the ringgit or to let the ringgit strengthen or to show that the ringgit can strengthen on a more steady basis - why - because we have had an external surplus.
The external surplus is an opportunity to let the ringgit strengthen - because it is justified on fundamentals.
Should the foreign reserves fail to accumulate further and the ringgit remains weak (even if in equilibrium), then I think we may be in for a rollercoastal ride.
I have been suggesting that the strategy of have a stronger ringgit may that be all that bad for the economy.
In fact, I argued that it might even do it good. If the trade surplus is due to good global prices, a stronger ringgit merely reduce some of the profits - and of course cut some of the trade surplus. In return, we can have:
1. Reduced liquidity and hence less inflationary pressures
2. Reduced gap between domestic salaries and imported salaries
3. Better retention or attraction of skilled and experienced workers who will then help to make the economy more efficient and productive and hopefully more innovative.
In this way, we hope to be able to do the following:
1. Have positive deposit rates because of the reduced liquidity
2. Currency with a tendency to strengthen rather than to weaken
3. Confidence in the system and hence the keenness to look for business opportunities.
Once the corporate sector improves, there may be hope for the stock market. In the meantime, its all sideway with the nose dipped.
Engineering A Strengthening Of The Ringgit: Theoretical Underpinnings II
1. Let me elaborate on the last post regarding exchange-rate regimes:
(i) There are different types of exchange-rate regimes, of which the fixed-exchange rate and the floating-rate are but two of the extreme or the pure. There is potentially an infinite number of regimes between those two, depending on the objective of the central bank. The solution on choice of regime is indeterminate.
(ii) Each of the infinite number of regimes, including the two pure ones, are complete equilbrium models by themselves - meaning, which ever regime is chosen, there are consequences on the fundamentals of the economy. Forces will be at play and, one way or another, the economy will adjust.
(iii) I had taken pains to elaborate on how such adjustments did actually take place in 1997/98 in an earlier post on 23rd June. The central bank may control one or two variables, but the rest of the economy will have to make all the adjustments - sometimes without choice, as the 1997/78 case showed us.
(iv) The most glaring consequences of the current regime are the inflationary forces in the local economy (as probably in other parts of the world). The external surplus gives huge liquidity to the corporate sector and the banking sector which together drive their profits not only through volume increase but mostly through the management of inflationary expectations - such as property prices will always go up. The second impact is through the higher global commodity prices and higher imported prices.
(v) It is easier to strengthen the currency in an external surplus situation (because the central bank can print less money to buy the foreign reserves) rather than trying to defend the currency in an external deficit situation (because the central bank may not have enough foreign currencies to buy back its own currency from the market).
2. Let's introduce the interest rate.
(i) Technically, the interest rate influences short-term capital flows. If the local deposit rate is higher than foreign deposit rate (which it is currently not), short-term capital will flow in. If the local deposit rate is lower than the foreign deposit rate (which it is not, except with respect to Australia and New Zealand), short-term capital will flow out. It is probably for the reason of keeping short-term capital flows at bay that the policy is to keep local deposit rates very closely to foreign interest rates. At the moment, zero interest rates are a global fashion.
(ii) As an aside, though the local deposit rates may take a neutral stance on short-term capital flows, capital especially of private individuals and corporates may still move for other reasons. The lack of investment and business opportunities. The loss of confidence. There is no money to be made for taking risk.
(iii) The interest rate of course has an impact on business profitability. But to lower deposit rates even to zero may not be sufficient to revive the economy for various reasons. The deposit rates may be zero but the lending rates may be unchanged. There is a transfer of income from depositors to banks. Banks may be fearful to lend without collateralising on real estate because of rising bad and doubtful debts in their books. Banks may have no view on where the economy is going.
(iv) Some investors (rather speculators) try to gauge local investment conditions from the real interest rate. Lending interest rate (5%) minus inflation rate (3%) equals real interest rate (+2%). There is no scope for arbitrage: borrowing from banks to pay back through inflation. You can see from here the strong urge to fan the flames of inflation so that there is money to be made by the girls and boys in suits at the expense of the general public's real purchasing power.
(i) There are different types of exchange-rate regimes, of which the fixed-exchange rate and the floating-rate are but two of the extreme or the pure. There is potentially an infinite number of regimes between those two, depending on the objective of the central bank. The solution on choice of regime is indeterminate.
(ii) Each of the infinite number of regimes, including the two pure ones, are complete equilbrium models by themselves - meaning, which ever regime is chosen, there are consequences on the fundamentals of the economy. Forces will be at play and, one way or another, the economy will adjust.
(iii) I had taken pains to elaborate on how such adjustments did actually take place in 1997/98 in an earlier post on 23rd June. The central bank may control one or two variables, but the rest of the economy will have to make all the adjustments - sometimes without choice, as the 1997/78 case showed us.
(iv) The most glaring consequences of the current regime are the inflationary forces in the local economy (as probably in other parts of the world). The external surplus gives huge liquidity to the corporate sector and the banking sector which together drive their profits not only through volume increase but mostly through the management of inflationary expectations - such as property prices will always go up. The second impact is through the higher global commodity prices and higher imported prices.
(v) It is easier to strengthen the currency in an external surplus situation (because the central bank can print less money to buy the foreign reserves) rather than trying to defend the currency in an external deficit situation (because the central bank may not have enough foreign currencies to buy back its own currency from the market).
2. Let's introduce the interest rate.
(i) Technically, the interest rate influences short-term capital flows. If the local deposit rate is higher than foreign deposit rate (which it is currently not), short-term capital will flow in. If the local deposit rate is lower than the foreign deposit rate (which it is not, except with respect to Australia and New Zealand), short-term capital will flow out. It is probably for the reason of keeping short-term capital flows at bay that the policy is to keep local deposit rates very closely to foreign interest rates. At the moment, zero interest rates are a global fashion.
(ii) As an aside, though the local deposit rates may take a neutral stance on short-term capital flows, capital especially of private individuals and corporates may still move for other reasons. The lack of investment and business opportunities. The loss of confidence. There is no money to be made for taking risk.
(iii) The interest rate of course has an impact on business profitability. But to lower deposit rates even to zero may not be sufficient to revive the economy for various reasons. The deposit rates may be zero but the lending rates may be unchanged. There is a transfer of income from depositors to banks. Banks may be fearful to lend without collateralising on real estate because of rising bad and doubtful debts in their books. Banks may have no view on where the economy is going.
(iv) Some investors (rather speculators) try to gauge local investment conditions from the real interest rate. Lending interest rate (5%) minus inflation rate (3%) equals real interest rate (+2%). There is no scope for arbitrage: borrowing from banks to pay back through inflation. You can see from here the strong urge to fan the flames of inflation so that there is money to be made by the girls and boys in suits at the expense of the general public's real purchasing power.
Thursday, June 25, 2009
Engineering A Strengthening Of The Ringgit: Theoretical Underpinnings I
The theory is simple.
Consider a surplus on the external balance - where we are today.
Floating Exchange Rate Regime. There is an excess of demand for ringgit (from exports) over that of foreign currencies (for imports). The ringgit strengthens against foreign currencies. There is no change in the holdings of the foreign reserves of the central bank because the central bank is not involved in the forex market. It is truly free.
Fixed Exchange Rate Regime. The central bank does not want the exchange rate to change. The central bank issues more ringgit to buy the excess foreign currencies from the external surplus. The ringgit rate does not change. Foreign reserve holdings of the central bank increases. The quantity of ringgit in the economy increases.
Conclusion. To engineer a strengthening of the ringgit, just let the ringgit float (when there is an external surplus). It's a bit harder in a deficit situation, admittedly.
Consider a surplus on the external balance - where we are today.
Floating Exchange Rate Regime. There is an excess of demand for ringgit (from exports) over that of foreign currencies (for imports). The ringgit strengthens against foreign currencies. There is no change in the holdings of the foreign reserves of the central bank because the central bank is not involved in the forex market. It is truly free.
Fixed Exchange Rate Regime. The central bank does not want the exchange rate to change. The central bank issues more ringgit to buy the excess foreign currencies from the external surplus. The ringgit rate does not change. Foreign reserve holdings of the central bank increases. The quantity of ringgit in the economy increases.
Conclusion. To engineer a strengthening of the ringgit, just let the ringgit float (when there is an external surplus). It's a bit harder in a deficit situation, admittedly.
Wednesday, June 24, 2009
Malaysia's Problems VI: National Savings
There is a general misunderstanding over the national savings of Malaysia.
The layperson thinks in terms of income that is not consumed but kept aside. In macroeconomic terms, the layman concept applies exactly to the closed economy.
In an open economy, however, there is an additional component that is exactly the same as the current account on goods and services in the Balance of Payments. The current account is added to the layman concept of savings.
So, the "huge" gross national savings rate of 30% to 40% for Malaysia that is often quoted should contain a sizeable "external trade surplus" that is attributable the corporate sector - in Malaysia, this would mostly be palm oil plantations and tourism (who is making the huge income from tourism?)
From the Final Estimates of the GDP by Income Approach published by the DOS, I only have at hand data up to 2004.
The gross national savings rate for Malaysia was estimated at 42.3% comprising 22.6% (closed economy) plus 19.7% (current account component).
It is therefore logical that when the National Accounts are redone by Institutional Sectors, we will find most of the surplus to go to the corporate sector.
The estimates by DOS by Institutional Sectors produced a different set of estimates for the gross national savings rate of 36.1%.
This statistical discrepancy is normal in the business because of the different sets of data used. There is nothing we can about it - but try to see beyond the precision and look at what the order of magnitude tells us.
Gross national savings rate (36.1%)
Corporate sector (33.5%)
Non-financial corporate sector (28.8%)
Financial sector (4.7%)
Government sector (2.0%)
Household sector (0.5%).
The data show that the corporate sector is the largest contributor in national savings while the household sector is tiny.
I have, in my last post, gave the data for the rate of gross savings for the respective sectors - against their respective incomes.
Corporate sector (80.4%)
Non-financial corporate sector (80.0%)
Financial sector (83.2%)
Government sector (24.2%)
Household sector (1.1%)
The household income includes not only wages and salaries, but also entrepreneurial (or profits) and property incomes (which flow from the corporate sector to the government and households.)
While it is correct to say that the gross national savings rate is high at 30% to 40%, it is not correct to conclude that, therefore, households must consume more.
Instead, the correct conclusion is that the corporate sector should invest more.
Investment is a challege for the corporate sector - to diversify in the local economy (the multiplier effect of job creation) or to venture abroad (where we create jobs outside the country).
Whether investment is forthcoming in Malaysia is not a function of the interest rate or bank's willingness to lend, for the corporate sector as a whole is flushed with funds. It is a problem of ideas, as well as that of intermediation of financial resources. While the old firms may be stuck in their agro-based industries, new firms in other sectors (manufacturing and services) may be under-resourced.
The layperson thinks in terms of income that is not consumed but kept aside. In macroeconomic terms, the layman concept applies exactly to the closed economy.
In an open economy, however, there is an additional component that is exactly the same as the current account on goods and services in the Balance of Payments. The current account is added to the layman concept of savings.
So, the "huge" gross national savings rate of 30% to 40% for Malaysia that is often quoted should contain a sizeable "external trade surplus" that is attributable the corporate sector - in Malaysia, this would mostly be palm oil plantations and tourism (who is making the huge income from tourism?)
From the Final Estimates of the GDP by Income Approach published by the DOS, I only have at hand data up to 2004.
The gross national savings rate for Malaysia was estimated at 42.3% comprising 22.6% (closed economy) plus 19.7% (current account component).
It is therefore logical that when the National Accounts are redone by Institutional Sectors, we will find most of the surplus to go to the corporate sector.
The estimates by DOS by Institutional Sectors produced a different set of estimates for the gross national savings rate of 36.1%.
This statistical discrepancy is normal in the business because of the different sets of data used. There is nothing we can about it - but try to see beyond the precision and look at what the order of magnitude tells us.
Gross national savings rate (36.1%)
Corporate sector (33.5%)
Non-financial corporate sector (28.8%)
Financial sector (4.7%)
Government sector (2.0%)
Household sector (0.5%).
The data show that the corporate sector is the largest contributor in national savings while the household sector is tiny.
I have, in my last post, gave the data for the rate of gross savings for the respective sectors - against their respective incomes.
Corporate sector (80.4%)
Non-financial corporate sector (80.0%)
Financial sector (83.2%)
Government sector (24.2%)
Household sector (1.1%)
The household income includes not only wages and salaries, but also entrepreneurial (or profits) and property incomes (which flow from the corporate sector to the government and households.)
While it is correct to say that the gross national savings rate is high at 30% to 40%, it is not correct to conclude that, therefore, households must consume more.
Instead, the correct conclusion is that the corporate sector should invest more.
Investment is a challege for the corporate sector - to diversify in the local economy (the multiplier effect of job creation) or to venture abroad (where we create jobs outside the country).
Whether investment is forthcoming in Malaysia is not a function of the interest rate or bank's willingness to lend, for the corporate sector as a whole is flushed with funds. It is a problem of ideas, as well as that of intermediation of financial resources. While the old firms may be stuck in their agro-based industries, new firms in other sectors (manufacturing and services) may be under-resourced.
Tuesday, June 23, 2009
Engineering A Strengthening Of The Ringgit
Warning: Too long for my liking. But now that it's done, I'll just let it through.
I concluded my last post as follows:
"Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people."
There are two possible ways of reading this statement:
1. That the central bank push up the ringgit and let the economy adjust accordingly. This is not an unrealistic approach. Afterall, the whole economy is interlinked with itself and the rest of the world.
2. Let the ringgit find its own path. This is an idealistic way of looking at things. This could be a culmination of the balance on goods and services, or the flows of short-term capital (as well as long-term capital) depending on the market view of the economy and the stock market.
Taking the economy as an integrated whole, therefore, there is a correlation between a stronger currency and productivity growth and real incomes and real wages.
Let me elaborate, using scenario (1).
Consider that the central bank positions the ringgit at RM3.00 to the USD.
Can the central bank just do that? Of course, it can. The central bank can support the currency at any rate that it wishes. Look at how long we did it at RM3.80!
Is it a stupid thing to do?
It depends on who you are.
If you are a strong headed PM with a finance portfolio, and if you are fighting foreigners in the name of the national interest, then you are a hero to fix the exchange rate. You can even pull all the stops just to get it done. Chop off the head. Chop off the hands. Chop off the legs. (Remember the Last King of Scotland.)
And let the whole economy adjusts....
And the Malaysian economy has been adjusting since.
How did the economy adjust?
1. The game stops for the stock market. No foreign portfolio investor will touch the Malaysian stock market, save for some brave souls from down south who figure they can do a hit and run. The KLCI is not reported by the whole press any more. It is off the radar screen.
In the meantime, we are waiting for Godot. We sit and wait and get ourselves all excited over nothing. The market treads sideways, simply because the corporate sector is dead - well, more of it being dominated by a handful of monopolies.
2. The current account in the BOP blossomed. Suddenly, from a massive deficit, we have a massive surplus. What happened? We have stopped importing machinery and investment goods. We get the surplus from commodities, electronics (this can be argued to be exaggerated), and services (more specifically, tourism, where measurement is disputable).
We have a scenario where the entire economy stopped investing and entered into an era of mass consumption. Banks with plenty of cash (or, in the jargon, excessive liquidity) find that they have interest to pay on deposits. So, they are going to create a self-sustaining virtuous circle. Because of the wholesale rescue of the economy from bankruptcy by the prevention of the workings of the financial markets, real estate values were preserved, more or less. The short-lived new central bank governor ordered an increase in the money supply by 5% per annum. Banks lent out of the basis of the surplus of the asset market value over debt. The surplus was massive. Bank loans to real estate boomed. That started the phase of the escalation of real estate prices. In this manner, the great surplus on the current account got translated into higher prices.
Is it an equilibrium?
You bet it is. With an exchange rate that was suppressed, the net foreign assets of the banking system was over-blown, which allowed them to lend and lend - not to businesses, but households.
I must confess. There is truth in the observation that, after 7 lonely years of suppressed currency, the economy has been brought closed to equilirium following the sustained escalation of domestic prices.
3. Higher Imported Prices. So when commodity prices in the global markets hit their peak just prior to the Beijing Olympics, what did we do?
We allowed full pass-through of the imported prices.
The general prices in Malaysia jumped a hefty 40%. (Who was that smart guy who argued for full pass-through?)
What happened to the economy? From my ground investigations, every other ordinary businessmen and hawkers suffered at 40% drop in business.
I presumed they meant in volume terms. And that was the start of the current economic downturn, unhelped by the bust in the US financial markets.
4. Bailing out of talents. Because of the poor business volume, local salaries and wages do not rise. Employer says to employees: "You are lucky to have a job. Oh, by the way, let's take a 40% pay cut across the board so that I do not have to sack anyone." Against the backdrop of 40% increase even in hawker food, then is a drop in real incomes and real wages.
Those who have good skills will try to look for a better jobs. Of course, you are not going to find them in Malaysia. You are going to get out of here. We are losing our talents, and hence a loss of our productivity gains. (Well, maybe the loss will result of loss of motivation and probably lack of ideas.)
5. So, as the economy grinds to a screeching halt, what did the monetary authorities do? Zero deposit rates. So cash should also flow out of the local currency and the local economy. With the people with also go capital, natural if there is emigration.
6. We respond with the liberalisation of the services sector. What does this mean? Liberalisation means we are letting foreigners open up shop in the local economy. There should be some happiness among bankers and financiers since these foreign financial institutions will pinch them by paying them 20% higher. This may not be good enough to cover for the consumer inflation but better than nothing. The same goes for other parts of the services sector. Other services: law, transport, computer, health, tourism. Yes, there could be increases in the salaries and wages of these sectors, although those unemployed will be grateful for a job regardless of pay.
7. If the services industry is going to expand as a result of the liberalisation, there could be an absorption of the unemployed but experienced workers (particularly, those who had escaped into the stockbroking business during the good old days) and probably spotted increases in salaries but I do not expect much. (Qualify: Top managers always feel they command top pays, so I won't say no to the likelihood of salaries being raised for these people. I shall wait for the NPL to rise in their last firms and look at their faces.)
This will create more jobs for white collar workers (Malaysian graduates), rather than more jobs for construction workers (foreign workers).
8. So, by taking all things into consideration, where do we think the ringgit should go?
I am not too sure about the impact of the higher salaries in the services sector on the exchange rate. (I learned that one theory says that, technically, if the services sector is big enough, the ringgit can be stronger to be at par with service prices in other countries, assuming the currencies are in equilibrium in the first place.)
Let me now try to think.
I think the salaries will have to go very much higher if we were to be able to retain the very good workers in the services sector in Malaysia, if we have a weak ringgit. If not, then we may have to let the ringgit strengthen in order that the hike in local salaries to get top-notch workers in the services sector be not too excessive - we need them to create an efficient and competitive services sector.
If the ringgit is weak, then the differential between the top-notch workers (at international prices) with the ordinary workers (at local prices) will be so huge that there will be bound to be jealousy in the work place.
Are we already in this situation in the work place? I think we are. Foreign consultants with their foreign fees which are probably 10x to 20x more than what a local professional will earn doing the same job, but probably with different experience and exposure.
This is because of systemic inefficiency and lack of competence giving rise to a weak ringgit and which together produce a vicious circle of secular economic decline.
9. I can also think of the zero deposit rate as a reflection of the current economic problem at home. Productivity growth is so low at home, and ideas so bankrupt, that even if you throw free money at the corporate sector, you ain't going get any improvement in the economy. Traders and carpetbaggers simply do not invest.
At zero deposit rates, I think we are asking for trouble.
There is this mistaken view that the 30% to 40% "gross national savings rate" is a big number.
This savings rate includes the EPF that most people have to save for the retirement. (Thank you, government for consistently eroding the real purchasing power of our future savings through sustained inflation and sustained weakness in our currency.) If we are to consider the household sector as a whole, the savings rate was only 1% (2004), according to the National Income.
The gross savings rate of our government was 24%. But by far the largest was the corporate sector (80%), largely financial sector (83%) and non-financial sector (80%).
So, I don't think we should kid ourselves. The truth of the matter is that the corporate sector was a net lending in Malaysia, while the government and households are net borrowers.
Why should the government and household sectors be asked to support the economy, specifically, the corporate sector which is sitting pretty - especially, the big, strong, friendly ones.
Where are the corporate investments?
10. Do I think the RM2.70 to the USD for the ringgit is mythical? No! It is a clear number. I dream of RM1.80 to SGD and RM4.50 to the pound sterling - like the alignment of planets.
11. Engineering the strengthening of the ringgit? Conclusion.
I think in terms of direction. In central banking parlance, it is called the exchange rate "stance" if you like. You take a position. It becomes a signal to the world.
Once the signal is clear, the world knows what to do.
For central bankers who want a quiet life, the best thing is to say nothing. To give no clue to the market, so that the market cannot speculate against it. Fine! That's another stance.
If nothing is happening, the market just ignores the ringgit. There is no engagement.
How do you think the ringgit can stay "so stable for so long"? We are being ignored.
The little transactions in the local forex market, for trade purposes, is not a really free market. It is a provincial market in some forgotten town.
Is Malaysia ready to engage the world and play the global economic and financial market game professionally, without thrashing the game board when we lose?
I concluded my last post as follows:
"Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people."
There are two possible ways of reading this statement:
1. That the central bank push up the ringgit and let the economy adjust accordingly. This is not an unrealistic approach. Afterall, the whole economy is interlinked with itself and the rest of the world.
2. Let the ringgit find its own path. This is an idealistic way of looking at things. This could be a culmination of the balance on goods and services, or the flows of short-term capital (as well as long-term capital) depending on the market view of the economy and the stock market.
Taking the economy as an integrated whole, therefore, there is a correlation between a stronger currency and productivity growth and real incomes and real wages.
Let me elaborate, using scenario (1).
Consider that the central bank positions the ringgit at RM3.00 to the USD.
Can the central bank just do that? Of course, it can. The central bank can support the currency at any rate that it wishes. Look at how long we did it at RM3.80!
Is it a stupid thing to do?
It depends on who you are.
If you are a strong headed PM with a finance portfolio, and if you are fighting foreigners in the name of the national interest, then you are a hero to fix the exchange rate. You can even pull all the stops just to get it done. Chop off the head. Chop off the hands. Chop off the legs. (Remember the Last King of Scotland.)
And let the whole economy adjusts....
And the Malaysian economy has been adjusting since.
How did the economy adjust?
1. The game stops for the stock market. No foreign portfolio investor will touch the Malaysian stock market, save for some brave souls from down south who figure they can do a hit and run. The KLCI is not reported by the whole press any more. It is off the radar screen.
In the meantime, we are waiting for Godot. We sit and wait and get ourselves all excited over nothing. The market treads sideways, simply because the corporate sector is dead - well, more of it being dominated by a handful of monopolies.
2. The current account in the BOP blossomed. Suddenly, from a massive deficit, we have a massive surplus. What happened? We have stopped importing machinery and investment goods. We get the surplus from commodities, electronics (this can be argued to be exaggerated), and services (more specifically, tourism, where measurement is disputable).
We have a scenario where the entire economy stopped investing and entered into an era of mass consumption. Banks with plenty of cash (or, in the jargon, excessive liquidity) find that they have interest to pay on deposits. So, they are going to create a self-sustaining virtuous circle. Because of the wholesale rescue of the economy from bankruptcy by the prevention of the workings of the financial markets, real estate values were preserved, more or less. The short-lived new central bank governor ordered an increase in the money supply by 5% per annum. Banks lent out of the basis of the surplus of the asset market value over debt. The surplus was massive. Bank loans to real estate boomed. That started the phase of the escalation of real estate prices. In this manner, the great surplus on the current account got translated into higher prices.
Is it an equilibrium?
You bet it is. With an exchange rate that was suppressed, the net foreign assets of the banking system was over-blown, which allowed them to lend and lend - not to businesses, but households.
I must confess. There is truth in the observation that, after 7 lonely years of suppressed currency, the economy has been brought closed to equilirium following the sustained escalation of domestic prices.
3. Higher Imported Prices. So when commodity prices in the global markets hit their peak just prior to the Beijing Olympics, what did we do?
We allowed full pass-through of the imported prices.
The general prices in Malaysia jumped a hefty 40%. (Who was that smart guy who argued for full pass-through?)
What happened to the economy? From my ground investigations, every other ordinary businessmen and hawkers suffered at 40% drop in business.
I presumed they meant in volume terms. And that was the start of the current economic downturn, unhelped by the bust in the US financial markets.
4. Bailing out of talents. Because of the poor business volume, local salaries and wages do not rise. Employer says to employees: "You are lucky to have a job. Oh, by the way, let's take a 40% pay cut across the board so that I do not have to sack anyone." Against the backdrop of 40% increase even in hawker food, then is a drop in real incomes and real wages.
Those who have good skills will try to look for a better jobs. Of course, you are not going to find them in Malaysia. You are going to get out of here. We are losing our talents, and hence a loss of our productivity gains. (Well, maybe the loss will result of loss of motivation and probably lack of ideas.)
5. So, as the economy grinds to a screeching halt, what did the monetary authorities do? Zero deposit rates. So cash should also flow out of the local currency and the local economy. With the people with also go capital, natural if there is emigration.
6. We respond with the liberalisation of the services sector. What does this mean? Liberalisation means we are letting foreigners open up shop in the local economy. There should be some happiness among bankers and financiers since these foreign financial institutions will pinch them by paying them 20% higher. This may not be good enough to cover for the consumer inflation but better than nothing. The same goes for other parts of the services sector. Other services: law, transport, computer, health, tourism. Yes, there could be increases in the salaries and wages of these sectors, although those unemployed will be grateful for a job regardless of pay.
7. If the services industry is going to expand as a result of the liberalisation, there could be an absorption of the unemployed but experienced workers (particularly, those who had escaped into the stockbroking business during the good old days) and probably spotted increases in salaries but I do not expect much. (Qualify: Top managers always feel they command top pays, so I won't say no to the likelihood of salaries being raised for these people. I shall wait for the NPL to rise in their last firms and look at their faces.)
This will create more jobs for white collar workers (Malaysian graduates), rather than more jobs for construction workers (foreign workers).
8. So, by taking all things into consideration, where do we think the ringgit should go?
I am not too sure about the impact of the higher salaries in the services sector on the exchange rate. (I learned that one theory says that, technically, if the services sector is big enough, the ringgit can be stronger to be at par with service prices in other countries, assuming the currencies are in equilibrium in the first place.)
Let me now try to think.
I think the salaries will have to go very much higher if we were to be able to retain the very good workers in the services sector in Malaysia, if we have a weak ringgit. If not, then we may have to let the ringgit strengthen in order that the hike in local salaries to get top-notch workers in the services sector be not too excessive - we need them to create an efficient and competitive services sector.
If the ringgit is weak, then the differential between the top-notch workers (at international prices) with the ordinary workers (at local prices) will be so huge that there will be bound to be jealousy in the work place.
Are we already in this situation in the work place? I think we are. Foreign consultants with their foreign fees which are probably 10x to 20x more than what a local professional will earn doing the same job, but probably with different experience and exposure.
This is because of systemic inefficiency and lack of competence giving rise to a weak ringgit and which together produce a vicious circle of secular economic decline.
9. I can also think of the zero deposit rate as a reflection of the current economic problem at home. Productivity growth is so low at home, and ideas so bankrupt, that even if you throw free money at the corporate sector, you ain't going get any improvement in the economy. Traders and carpetbaggers simply do not invest.
At zero deposit rates, I think we are asking for trouble.
There is this mistaken view that the 30% to 40% "gross national savings rate" is a big number.
This savings rate includes the EPF that most people have to save for the retirement. (Thank you, government for consistently eroding the real purchasing power of our future savings through sustained inflation and sustained weakness in our currency.) If we are to consider the household sector as a whole, the savings rate was only 1% (2004), according to the National Income.
The gross savings rate of our government was 24%. But by far the largest was the corporate sector (80%), largely financial sector (83%) and non-financial sector (80%).
So, I don't think we should kid ourselves. The truth of the matter is that the corporate sector was a net lending in Malaysia, while the government and households are net borrowers.
Why should the government and household sectors be asked to support the economy, specifically, the corporate sector which is sitting pretty - especially, the big, strong, friendly ones.
Where are the corporate investments?
10. Do I think the RM2.70 to the USD for the ringgit is mythical? No! It is a clear number. I dream of RM1.80 to SGD and RM4.50 to the pound sterling - like the alignment of planets.
11. Engineering the strengthening of the ringgit? Conclusion.
I think in terms of direction. In central banking parlance, it is called the exchange rate "stance" if you like. You take a position. It becomes a signal to the world.
Once the signal is clear, the world knows what to do.
For central bankers who want a quiet life, the best thing is to say nothing. To give no clue to the market, so that the market cannot speculate against it. Fine! That's another stance.
If nothing is happening, the market just ignores the ringgit. There is no engagement.
How do you think the ringgit can stay "so stable for so long"? We are being ignored.
The little transactions in the local forex market, for trade purposes, is not a really free market. It is a provincial market in some forgotten town.
Is Malaysia ready to engage the world and play the global economic and financial market game professionally, without thrashing the game board when we lose?
Thursday, June 18, 2009
Malaysia's Problems V: Weak Currency & RM1 Trillion
Malaysia has a weak currency that is wrecking havoc on the relative values in the country.
Since 1990, the ringgit has weakened by 23% against the US dollar, 17% against the pound sterling and 38% against the Singapore dollar, among others.
The period chosen is arbitrary and hence the percentages are just for illustrative purposes.
The point is that the ringgit has weakened severely among major currencies.
Of course, the momentuous event was the 1997/98 crisis - which was dubbed the Asian Financial Crisis - although nobody has just suggested that it had also been a Malaysian economic disaster.
The economy has not really recovered since then.
Money Supply
I am astonished to discovered that the M3 money supply has now reached RM948 billion at the end of April 2009.
We are only a step away from having a RM1 trillion worth of M3 money supply - which could be reached before the end of 2009!
What happened?
M3 grew at an average growth rate of 8.8% in the last night years from 2000 to 2008.
Starting with an M3 of RM436 billion in 1999, we have of course more than doubled it to MR948 billion in 2008.
There has been aggressive increase in the money supply since 2002 - growing at double-digit rates on average.
The whole upward spiral started with the crash in the ringgit in 1998 and by keeping the currency at low values, the central banks and other financial institutions have been able to revalue their foreign assets at inflated ringgit values.
That increase in the ringgit value of foreign-denominated assets provided the financial institutions a justification to multiply their loans.
Between 2000 to 2005, the loans of commercial banks grew RM231 billion, from RM295 billion - which is a 78% increase.
85% of the loan increase went to the household sector: 47% for residential property, 30% for transport vehicles and 5% for credit cards and 3% for personal uses.
Which means 15% of the loan increase went to the business sector.
Between June 2006-March 2009, loans of commercial banks rose another RM157 billion or 27% in the three years.
About 47% of the new loans went to the household sector: 25% for residential housing, 10% for cars, 7% for personal use and 4% for credit cards.
About 25% went for working capital (which is good), and 6% for the purchase of shares.
But there was not much for business expansion.
Implications
We can see that the problem of the economy is a banking system that is awashed with cash but no ideas.
We have to stop pretending that keeping a weak ringgit will help the economy.
A weak ringgit has devalued the wages and salaries of the common people while foreigners (especially consultants) priced their work in foreign currencies.
This must surely caught a silent satobage of the human capital of the nation - with locals bailing out into foreign outfits.
In the meantime, higher imported prices chewed up the real purchasing power of the general public - which is really a way of rationing the foreign reserves so that big glamourous imports by the government or the GLCs can be made.
There is a sickening collusion by the corporate sector - as if with the banks of all kinds - to defraud the general public by escalating inflation to inflate their paper profits so that their share prices can rise despite poor fundamentals.
Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people.
Further reading from hishamh: here and here and his criticisms here.
Since 1990, the ringgit has weakened by 23% against the US dollar, 17% against the pound sterling and 38% against the Singapore dollar, among others.
The period chosen is arbitrary and hence the percentages are just for illustrative purposes.
The point is that the ringgit has weakened severely among major currencies.
Of course, the momentuous event was the 1997/98 crisis - which was dubbed the Asian Financial Crisis - although nobody has just suggested that it had also been a Malaysian economic disaster.
The economy has not really recovered since then.
Money Supply
I am astonished to discovered that the M3 money supply has now reached RM948 billion at the end of April 2009.
We are only a step away from having a RM1 trillion worth of M3 money supply - which could be reached before the end of 2009!
What happened?
M3 grew at an average growth rate of 8.8% in the last night years from 2000 to 2008.
Starting with an M3 of RM436 billion in 1999, we have of course more than doubled it to MR948 billion in 2008.
There has been aggressive increase in the money supply since 2002 - growing at double-digit rates on average.
The whole upward spiral started with the crash in the ringgit in 1998 and by keeping the currency at low values, the central banks and other financial institutions have been able to revalue their foreign assets at inflated ringgit values.
That increase in the ringgit value of foreign-denominated assets provided the financial institutions a justification to multiply their loans.
Between 2000 to 2005, the loans of commercial banks grew RM231 billion, from RM295 billion - which is a 78% increase.
85% of the loan increase went to the household sector: 47% for residential property, 30% for transport vehicles and 5% for credit cards and 3% for personal uses.
Which means 15% of the loan increase went to the business sector.
Between June 2006-March 2009, loans of commercial banks rose another RM157 billion or 27% in the three years.
About 47% of the new loans went to the household sector: 25% for residential housing, 10% for cars, 7% for personal use and 4% for credit cards.
About 25% went for working capital (which is good), and 6% for the purchase of shares.
But there was not much for business expansion.
Implications
We can see that the problem of the economy is a banking system that is awashed with cash but no ideas.
We have to stop pretending that keeping a weak ringgit will help the economy.
A weak ringgit has devalued the wages and salaries of the common people while foreigners (especially consultants) priced their work in foreign currencies.
This must surely caught a silent satobage of the human capital of the nation - with locals bailing out into foreign outfits.
In the meantime, higher imported prices chewed up the real purchasing power of the general public - which is really a way of rationing the foreign reserves so that big glamourous imports by the government or the GLCs can be made.
There is a sickening collusion by the corporate sector - as if with the banks of all kinds - to defraud the general public by escalating inflation to inflate their paper profits so that their share prices can rise despite poor fundamentals.
Half the problems of the nation can be solved by the simple act of engineering a slow but steady strengthening of the ringgit in the next 5-7 years - as part of the strategy to bring about an improving in productivity gains and a rise in the real income and wages of the people.
Further reading from hishamh: here and here and his criticisms here.
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