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Thread: Economy: Malaysia Illicit Outflow & Debt - Sinking deeper and deeper

  1. #31
    Join Date
    Oct 2008

    M'sia feeds fiscal elephant in the room: its civil service

    From unwinding subsidies for food and fuel to imposing a new sales tax, Prime Minister Najib Abdul Razak has plenty to do to rescue Malaysia from a possible credit rating downgrade when he presents his government's annual budget this month.

    One thing Najib won't dare risk is upsetting the country's majority ethnic Malays by downsizing a bloated civil service, despite its heavy impact on a fiscal deficit that is the biggest in emerging Asia after India.

    Though the next election is only due by 2018, the ruling BN coalition is already looking nervously to the future after a contentious victory last May, and Najib cannot take for granted that his own party, Umno, won't jettison him before his term is up.

    "If the BN institutes policies that make the Malays or the government servants unhappy, a 2-3 percent swing next time to the opposition will spell defeat," said Ibrahim Suffian, director at the respected pollster Merdeka Centre.
    Dominated by Malays, the civil service, with its jobs for life and access to cheap loans, serves as part of a decades-old affirmative action policy. At RM60 billion its wage bill is the single largest budget item, accounting for a third of total spending.

    The fiscal burden, along with a shrinking current account surplus, renders Malaysia vulnerable to foreign capital outflows at a time when investors are eyeing emerging markets with growing caution due to expectations that the US Federal Reserve call time on years of easy money in the coming months.

    But, mindful of preserving stability, policy makers often make ethnic considerations a priority in this nation of 29 million people, made up mostly of Malays, Chinese and Indians.

    It was the Malay vote that helped the BN, which comprises parties from each ethnic group, scrape back into power, despite losing the popular vote for the first time in 56 years since independence from British colonial rule.

    Umno holds elections on Saturday for senior party positions, and with conservatives circling, the more liberal-minded Najib will be keen to shore up support, though he is not facing re-election himself as party chairperson.

    "Now, he has to really take care of the Malays," said an ethnic Malay clerk, whose civil service unions have asked for a two-and-a-half month bonus to be included in the budget.

    Faced with these compulsions, Najib is likely to make cuts elsewhere when he unveils the budget on Oct 25.

    "Food and fuel subsidies will be the easiest expenditure for Najib to cut after the elections, but not the civil service," said Chua Hak Bin, a Singapore-based economist with Bank of America Merrill Lynch. "That is out of the question, for now."

    Instead, Najib is expanding the public service, a vital source of support for Umno. Some 200,000 people have joined the civil service since he became prime minister.

    At 1.4 million people, the civil service accounts for 10 per cent of the labour force, and by that measure is the largest in Southeast Asia. The hiring isn't over. This year there are plans to add 80,000 employees, double last year's intake.
    Unemployment is not particularly high at 3 percent, but young Malays often struggle to find work in the private sector. Nine out of 10 unemployed graduates are Malay, raising a fear in Umno that first-time voters in youthful Malaysia could turn against the party at the next election, unless they have jobs.

    Cut or be cut

    In reaction to the unconvincing election victory, Fitch Ratings warned in July that deteriorating public finances or a current account swing into deficit, along with other concerns, could lead to a cut in Malaysia's credit rating, though it is comfortably lodged in investment grade.

    Currently, the government receives nearly half its revenues from Petronas, the state oil and gas giant.

    "There may be efforts to increase the revenue base with the goods and services tax and other tax increases, but this amounts to little if government efficiency does not improve and the bureaucracy keeps on growing," said Chua.
    Deputy human resources minister Ismail Abu Muttalib said the size of the civil service was not a worry as employees would find jobs in the private sector as Malaysia develops more.

    "The situation will resolve itself," he told Reuters.

    "For now these government servants are needed to deliver the government's social programmes to the wider public."
    - Reuters

  2. #32
    Join Date
    Oct 2008

    M'sia still bleeding billions in dirty money

    EXCLUSIVE Crime, corruption and tax evasion - the hemorrhaging of billions of ringgit in dirty money from Malaysia, one of the world's top countries in illicit capital flight, continues unabated.

    A total of RM173.84 billion (US$54.18 billion) was siphoned out of Malaysia in 2011, Washington-based financial watchdog Global Financial Integrity (GFI) says in its latest annual report that tracks capital flight.

    Having catapulted into second position last year when close to RM200 billion of dirty money was siphoned out of Malaysia in 2010, putting the country just under Asian economic powerhouse China in global capital flight. Malaysia is ranked No 4 in this year's GFI report.

    GFI has yet to obtain data for 2012 and 2013, but these will be included in future reports.

    For 2011, Malaysia is behind giants Russia (US$191.14 billion), China (US$151.35 billion) and India (US$84.93 billion). Still, the level of illicit cash flowing out of Malaysia is second highest in the past decade.

    This is despite Bank Negara Malaysia (BNM) having set up a task force in 2010 to implement measures to put a plug on illicit funds leaving the country.

    However, BNM has taken pains to stress that the estimates by GFI are essentially ‘unrecorded financial flows', which are not necessarily synonymous with ‘illicit financial flows'.

    The central bank also pointed out that, among others, the data does not take into account goods that are exported via re-export hubs.

    "After taking into account Malaysia's trade that is exported via Singapore and Hong Kong (re-export hubs), the estimate of trade mispricing between Malaysia and its top 10 trading partners were reduced significantly by about 70 percent," BNM said in a statement in March.

    "Since the estimates in the report of trade mispricing do not take into consideration such discrepancies in trade statistics, the estimates of illicit flows are overstated."

    The 'Hong Kong effect'

    GFI chief economist Dev Kar, who authored the 2013 GFI report with junior economist Brian LeBlanc, said the financial watchdog had taken cognisant of the re-exporting issue and this was addressed in its latest report.

    "We adjusted for the ‘Hong Kong effect' in estimating trade misinvoicing by Malaysian traders. Essentially, the revised methodology involves taking account of disaggregated re-exports data published by the Hong Kong Census and Statistics Department that breaks down re-exports to and from Hong Kong by destination and source countries, including Malaysia," Kar toldMalaysiakini.

    "Because such a detailed breakdown of re-exports data are not published by Singapore, a similar adjustment of Malaysian exports and imports involving Singapore could not be made.

    "However, please note that the adjustment involving Singapore would be far smaller (due to the fact that Hong Kong eclipses Singapore as a trade entrepot, i.e., the volume of re-exports) and are unlikely to impact the misinvoicing estimates significantly."
    BNM has also argued that the entire errors and omissions (E&O) figure could not be attributable to illicit activities, as it also includes genuine statistical errors from the compilation of statistics of external trade and cross-border financial transactions.

    Kar (left) said BNM was correct that the net errors and omissions (NEOs) reflect both statistical errors and unrecorded capital flows.

    "Economists have for decades used the NEOs as a proxy for illegal capital flight provided two conditions are met - (i) they are persistently negative and (ii) they are sizable.

    "Both these conditions are met in the case of Malaysia whose reported balance of payments statistics are basically reliable (due to the fact that they average around 2 percent of total trade).

    "We therefore feel that persistently negative NEOs under conditions of overall statistical reliability, provides prima facie evidence of illegal capital flight."

    Kar nevertheless commented Malaysia's central bank for the formation of the task force following publications of GFI reports.

    "At a minimum, such governmental actions convey to the public that it is serious in addressing governance issues and that it will take action against corruption wherever such actions are warranted."

    Tax haven secrecy

    GFI's latest report released today - ‘Illicit Financial Flows from Developing Countries: 2002-2011' - is its 2013 annual update on the amount of illicit capital flowing out of developing economies, and it is the first of GFI's reports to include data for 2011.

    "Anonymous shell companies, tax haven secrecy, and trade-based money laundering techniques drained nearly a trillion dollars from the world's poorest in 2011, at a time when rich and poor nations alike are struggling to spur economic growth," said GFI president Raymond Baker.

    "While global momentum has been building over the past year to curtail this problem, more must be done. This study should serve as a wake-up call to world leaders: the time to act is now."

    The report incorporated for the first time trade data on re-exports from Hong Kong and the first to integrate bilateral trade data for those countries which report it - making this report the most accurate analysis of illicit financial outflows produced by GFI to date.

    "We're constantly striving to improve the accuracy of our estimates. We determined that by omitting data from the use of Hong Kong as a trade intermediary, the previous methodology - which was accepted by most economists studying trade misinvoicing - had the potential to overstate illicit outflows from many Asian countries," said Kar.

    Correcting for this ‘Hong Kong effect' sharply reduces the share of outflows from Asia.

    "Nevertheless, Asia still has the largest share of illicit flows among the regions, and six of the top 15 exporters of illicit capital are Asian countries (China, Malaysia, India, Indonesia, Thailand, and the Philippines)," said Kar.

    "The estimates provided by our new methodology are still likely to be extremely conservative as they do not include trade misinvoicing in services, same-invoice trade misinvoicing, hawala transactions, and dealings conducted in bulk cash," added Kar, who served as a senior economist at the International Monetary Fund (IMF) before joining GFI in January 2008.

    "This means that much of the proceeds of drug trafficking, human smuggling, and other criminal activities, which are often settled in cash, are not included in these estimates."

    Financial transparency

    The US$946.7 billion of illicit outflows lost in 2011 is a 13.7 percent increase from 2010 - which saw developing countries hemorrhage US$832.4 billion - and a dramatic increase from 2002, when illicit outflows totaled just US$270.3 billion.

    The GFI study estimates the developing world lost a total of US$5.9 trillion over the decade spanning 2002 through 2011.

    "It's extremely troubling to note just how fast illicit flows are growing," said Kar.

    "Over the past decade, illicit outflows from developing countries increased by 10.2 percent each year in real terms - significantly outpacing GDP growth. This underscores the urgency with which policymakers should address illicit financial flows."

    Meanwhile, Baker hailed the effort by some countries to increase the transparency in the international financial system as a means to curtail the illicit flow of money.

    "Much progress has also been made in targeting anonymous shell companies over the past year, with the United Kingdom announcing in October that they would be creating the world's first central public registry of corporate beneficial ownership information," he said.

    "(British Prime Minister) David Cameron should be commended for his courage, but the rest of the world must now move to follow suit - making public registries of beneficial ownership information the global standard."

    Cameron was spurred to action following a global investigationcoordinated by Washington-based International Confederation of Investigative Journalists (ICIJ) in April this year, which included a team from Malaysiakini.


  3. #33
    Join Date
    Oct 2008
    Tuesday, 23 December 2014 09:59

    Don't believe Putrajaya's propaganda. The economy is not doing well, a CRISIS may hit in 2015

    Written by Sam Chee Kong

    If any of you can remember for the past few months our government has been engaging on a propaganda spree claiming that our economy is doing excellent and our budget deficit is on track hitting the 3% target.

    In addition it is also reported that our household sector is supported by sustained income growth and hence consumption. Our high level of international reserves, current account surplus, resilient domestic financial system and low level of external debt helps reinforce the strength of our economy. Bank Negara even forecast a GDP growth between 5.0 to 5.5% for fiscal 2015? Is our economy really that resilient and solid?

    This article aims to dissect the reported facts above and also at the same time gauge the performance of the Malaysian economy.

    External Debt.

    From 1990 to 2013, Malaysia’s external debt averages about RM 43 billion but somehow as of the 2nd quarter of 2014 it exploded to RM 740 billion (Chart shown below). This represents an astonishing further 17x leverage in the past year. I do not know have the breakdown on where are those funds headed to but I suspect some might have gone to 1MDB or One Malaysia Development Berhad, another Malaysia Sovereign Wealth Fund. Getting highly geared during such challenging economic times is not only unwise but suicidal especially when you are on the wrong side of the fence. This is because our Ringgit has been depreciating sharply recently. I shall go into details next on why we are in trouble when leveraged with foreign money no matter what currency it is denominated in.

    Due to the near zero interest rate policy in the West and the excess supply of funds available, naturally money will always go to the place where it is best treated. Hence as a result there was a frantic search for a higher yield debt market. There is no better place than Asia because Asia offers one of the safer and higher yield market. Consequently, there was a huge inflow of funds especially from Europe to Asia since 2009. This can be shown by the following chart.

    As seen, the emerging market corporate debt market has grown more than 400% since 2008 and is still growing. One reason for the massive increase is the growth of the corporate bond market. Instead of relying on the traditional bank financing, more corporations are looking into non-bank financing options which also offers a cheaper solution. As a result the corporate bond market in Asia has grown tremendously in recent years. This can be demonstrated by the following graph. Total outstanding debts in bond are worth about USD 2.6 trillion. This is huge and a time bomb waiting to explode.

    So how big is Malaysia’s Bond market? The following chart best depicts the size of our bond market. Malaysia’s bond market is one of the biggest in Asia (about 50% to GDP) due to the fact that Malaysia can be said to be the center for issuing and trading Islamic bonds.

    So what are the risks of having a large portion of debts denominated in bonds? Firstly since bond is a form of debt and any debts that are leverage to the hilt always poses a danger. If the bonds are denominated in USD then there is always the danger of exposing to the risk of ‘Foreign Exchange Exposure’. Foreign exchange exposure refers to a situation where you are exposed to the ups and down (volatility) of the foreign currency the loan is denominated.

    For example, if a corporate had raised USD 10 million from the bond market in 2012 with the prevailing exchange rate of 3.10. Putting aside the interest rate, total debt payable converted to Malaysian Ringgit shall be RM 31 million. What happens when our Ringgit depreciates against the Dollar like what is happening now? With the current exchange rate of 3.46, the principal amount payable will increase to RM 34.6 million. Hence, there is a foreign exchange loss of RM 3.6 million. However, this risk can be reduced through hedging using tools like Currency Options, Currency Futures or Currency Forward Contracts. However I doubt it if there are many corporate borrowers hedged their foreign currency exposures due to the high costs associated with it.

    What happen when the bonds are denominated in local currency or Ringgit? Well foreign bond holders will be on the losing side. This is because when they exit the bond market they will be getting less USD when they convert their Ringgit to the USD. To ensure the bondholders do not exit at the same time, interest rates will have to increase as a form of compensation. This is because the price of bonds relates inversely with the yield. When they start selling, the price of bonds will go down but the yield will go up. The risk is when every bondholders start rushing for the exit, this will cause a meltdown in the bond market.

    Depreciating Ringgit

    As we have known our Ringgit has been on the downtrend since last year only recuperating some losses beginning of this year. However the slide begins again and it looks like we are yet to see the worse. The following chart denotes the exchange rate between the USD and our Ringgit. As can be seen it is now fast approaching the 3.70 level that was set back in 2009 during the Global Financial Crisis.

    USD/MYR chart

    Similar to the Bank of Indonesia’s intervention into the Rupiah on 17/12/2014 to prevent it from sliding below the 2008 level, Bank Negara Malaysia has also been involve in the intervention of the Malaysian Ringgit through open market operation by selling the Dollar to prevent further slide of the Ringgit. This can be shown by the sharp decline of our Foreign Exchange Reserves in the following chart.

    From the chart above, our Foreign Exchange Reserves peaked at $155 billion in August 2011 but has since been declining rapidly. In October our Foreign Reserves stood at $134 billion, a drop of $21 billion from the peak. We have been recording Balance of Payment surplus for the past many years and by right the excess Dollars should be added into the Foreign Exchange Reserves. Yet we are seeing dwindling reserves and one explanation will be some of the reserves are being used for open market operations to support the Ringgit.

    Similar to a fall in oil price, a fall in the Ringgit will have both negative and positive effects. Positive effects includes more exports hence more foreign currency receipts and negative effects include higher import costs and hence higher inflation.

    As already mentioned above, one of the major side effects of the appreciation of the Dollar will be exiting by foreign bondholders and hence the repatriation of the Dollar. The Federal Reserve has already started tapering and eventually this will lead to a Dollar liquidity crunch. To overcome this imbalance, funds will have to be redirected from elsewhere. The Dollar Liquidity Crunch caused by tapering will ultimately lead to an interest rate hike soon. When interest rates are hike, it will attract more Dollars from abroad and this will further strengthen the Dollar. In a way this will cause a feedback loop whereby the faster the U.S economy recovers then the higher the U.S Dollar appreciates. This spells trouble for countries sitting on the wrong side of the fence (having huge foreign debts). The following Dollar index chart shows how fast the Dollar appreciates in the last few months.

    Notice that the Dollar started to appreciate in July when it moved above the Moving Average 50 and 200 days. Not only that if you take a look at the Brent Crude Oil chart below, the price of crude oil also started to drop n July. What this tells us is that there exist a correlation between the price of oil and the Dollar. As I have indicated above, the Dollar is expected to keep strengthening due to the Dollar liquidity crunch and interest rate hike. This means that the price of oil will have problem moving higher as long as the value of the Dollar remains high.

    But the peculiar thing is that even when our Ringgit is falling, our exports volume declined as compared to import volume recently. Why is this happening? I will try to address the problem below on why our exports are declining.

    Declining competitiveness

    Balance of Trade or trade balance is the difference between a country’s exports and imports. A country is experiencing a deficit when imports exceed exports. Likewise a surplus will be the reverse. Malaysia recorded a trade surplus of only RM 1.186 billion in the month of October 2014. This represents a sharp decline as compared to a surplus of RM8.23 billion in October 2013. This has due to the increased in import by 9.1% and a fall in exports by 3.1% (RM 67.19 billion in Oct 2013 and RM 65.1 billion in Oct 2014) during that period of time.

    From below our current trade balance has recorded one of the worst readings for the past 10 years. Again from the Currency chart above, even when our ringgit was trading at the lowest (USD/MYR = 3.70) in 2009, we recorded one of the highest positive trade balance of RM 16 billion. So what caused our exports to decline?

    Historical Data Chart

    There are two reasons attributed to this conundrum. One might be that our Ringgit has not been depreciated as drastically as other currencies. For example the Indonesian Rupiah depreciated to a low of 12,725 to the Dollar on 14/12/2014 which was lower than the level set back in 2008. Thus, this made Indonesian exports like Rubber, Palm oil and other commodities cheaper than Malaysia, hence contributed to our decline in exports.

    The other more important factor is our declining level of competitiveness. Although our authorities claimed that our country is getting more competitive in the international arena but statistically it proved otherwise. A good statistical tool to demonstrate the competitiveness of a country will be the Current Account (CA) to GDP. If a country exhibits a strong CA/GDP then it is consider very competitive because of its strong exports. Likewise if a country is experiencing a low CA/GDP reading then its competitiveness is deteriorating due to declining exports.

    As shown above Malaysia’s CA/GDP has been on the decline since 2008 and recently recorded the lowest for the past 10 years. In 2013, our economy recorded a 4.7% reading in the ratio. So what are we going to do to reverse the trend? I reckon it is best to leave it to our experts in the government.

    Declining Oil Revenue

    Malaysia has been experiencing a steady decline in its crude oil production. Production peaked in October 2004 with 790,000 barrels per day. This can be shown by the chart below.

    The price of crude oil has been holding above the $100 for about 43 months before it began to slide downwards in July this year. The recent fast and huge decline in oil price is also known as the Mega Oil Price Crash. This extent of the carnage can be shown by the chart below.

    What are ramifications to our economy when oil price crashed?

    Less oil revenue received. Based from the above data, we can calculate the approximate loss of revenue from our oil exports. With the following assumption.

    July pricing = $110 per barrel
    December pricing = $ 61.38

    Daily Oil Output = 550,000 barrels a day. Averaged from Jan – Dec 2014.

    USD/MYR as of December 19 2014 = 3.476

    Revenue as per July 2014.

    550,000 barrels/day x $110 = $60.5 million per day

    Revenue as per December 2014

    550,000 barrels/day x $61.38 = $33.75 million per day

    So, the loss of revenue per day = $69.75m - $33.75m = $26.75m

    Per year loss of revenue = $26.75 x 365 = $9.763 billion x 3,476 = RM 33.94 billion.

    Even with the recent complete removal of fuel subsidies which amounts to about 2.3% of GDP, it still not enough to cover the loss in revenue.

    Malaysia cannot expect to use its oil revenue to balance its budget due to its high budget deficit and also being a relatively small oil exporter. According to the chart below, we needed more than $200 in oil price to balance our budget.

    According to IEA the price of oil should be trading between $60 to $70 from 2015 to 2016 due to demand weakness plus additional fresh supply of 2.5 million barrels per day coming from the Gorgon field in Australia, Kashagan field in Kazakhstan and also the Angolan and Columbian fields in 2016.

    Apart from the shale boom in the U.S, other factors affecting the demand for oil is not only the advancement battery technologies but also increased financial commitment by Governments to develop EV technologies. Germany and China has both $Billions to jumpstart their research and development transition into EVs or Electric Vehicles.

    Dramatic development in battery technology resulted in higher efficiency, has been made possible by companies like SeeO and Sakhti. Another recent breakthrough in battery technology using titanium was developed by the Nanyang Technology University of Singapore. The battery is made from titanium dioxide and can last up to 20 years. This enables ultra-fast charging for batteries, recharging up to 70% in 2 minutes. Electric vehicles can now be charged within minutes and can go faster and further due to the lesser weight of the batteries. So with all these developments, it will be a challenge for oil price to remain above $70 in the future.

    Further to this, there is no rush for OPEC to cut production and risked losing customers because they can now afford lower price to balance their budget. To show you how they can now afford lower prices to balance their public budget, I shall use Nigeria as an example. As from the above Nigeria needed about $100 to balance its public budget will now only need about $88. This is because the USD has appreciated more than 12% since July 2014. Thus, if the USD continues to rise then oil exporting countries can live with lower oil price because any revenue loss from lower price will be compensated by the gain in the USD.

    Balancing Budget

    Malaysian Prime Minister Najib Razak said that we are on track to shrink our budget deficit down to 3% from the current 3.9%. Can he do it? Looking at the global economic scenario developing at the moment I reckon it is very difficult if not impossible to achieve the target.

    Firstly Malaysia is an oil exporter nation and hence its oil revenue will be subjected to the volatility of the global oil price. When oil price was above $100 it is very likely we can achieve the deficit target given the recent complete fuel subsidy removal and the intended implementation of GST April next year. Given the recent mega oil price crash that has taken everyone by surprise, the equation on balancing budget has certainly changed. Below is the table that shows the impact of a $10 reduction in oil price on GDP growth.

    Source : Business Insider

    As can be seen from above, a $10 reduction in oil price will slice of 0.2% from Malaysia’s GDP growth. If the current oil price stays at around $60 - $70, then our next GDP growth next year will be reduced by at least 0.6%.

    Secondly, balancing a budget requires more than cutting down government expenses and increasing income as can be shown below. For a full picture we need to bring in the Balance of Payment because of its relationship with the national income or GDP. Thus,

    GDP or the National Income (Y) can be defined as follows.
    GDP = Y = C + I + G + (X - M)


    C = Consumption
    I = Investment
    G = Government Expenditure
    X = Exports
    M = Imports

    When we introduce savings into the equation then it will be different picture. Savings can be defined as the amount left from the National Income and Consumption and Taxes. Hence,

    S = Y – (C – T) or can be written as below
    S = C + I + G + (X – M) – (C – T)

    Now from Balance of Payment definition (X – M) = BCA (Balance of Current Account)

    After netting off the Consumption or C, the equation can be re-written as follows.

    (S – I) + (T – G) = (X – M) = BCA
    (T – G) = (X – M) – (S – I)

    Thus from above we can see that for the budget deficit (T – G) to reduce, either (S – I) or (X – M) has to increase. The following shows our savings rate which have been on the decline since 2002.

    Malaysia Savings Rate

    Thus by assembling all the data above we can derive the performance of the different economic indicators and the results can be summarized as follows.

    ↑ M , ↓ X , ↑M and ↓ S

    So how can we reduce our budget deficit when our economic indicators moved in different directions? One way to do it is to massively increase the taxation income and drastically cut back on government spending. Unfortunately both are not the best option at the moment.

    Wrapping Up

    In wrapping, from above and going through the complete cycle you notice that not all is about oil, it has much more to do with the USD. The current turmoil in the oil market has benefited the USD by regaining some relevance as the reserve and trading currency.

    According to the IEA, currently there exists an excess supply of about 2 million barrels a day that caused the current dampening oil prices. The funny thing is that if there exist an oversupply for years, why has the oil price managed to stay above the $100 level for more than 43 months.

    Another argument is that oil price can resume back above $100 in no time if the American Government decides to soak up the extra supply into its strategic reserve. By adding the extra 2 million barrels a day to its strategic stockpile, it only cost the American Government about $77 million a day ($100-$61.38 x 2 million barrels). That works out to be about $23.1 billion in a month. What is $2.3 billion when compared to the monthly injection of $85 billion into the economy?

    Hence, the BIG picture is all about the USD. It is the main threat to the emerging markets as their exposure to external debts amounts to $5.7 trillion. Out of that $3.1 trillion are in bank loans and $2.6 trillion in bonds. If the U.S continues to pursue Exchange Rate Stability then the rise in the USD will certainly increase the risk of credit default in emerging markets.

    The question is how long can the emerging markets sustain their pain threshold? If there is another black swan event causing Western lenders to recall their loans and exiting the door at the same time, then emerging markets currency will faced meltdown and hence causing another Financial Crisis. - Malaysia Chronicle


  4. #34
    Join Date
    Oct 2008
    Only bitter reforms left to jump-start stalling Malaysian economy, FT says

    Wed May 27, 2015

    Financial Times says circumstances now have caused Malaysia, Thailand and Indonesia’s emerging markets to bleed even as the rest of the world recovers. ― File picKUALA LUMPUR, May 27 ― Malaysia has few options beyond painful structural reforms in order to reignite the country’s economic growth now stalling due to a decoupling from the global recovery, according to the Financial Times.

    The London-based paper said that while export-dependent countries such as Malaysia, Thailand and Indonesia had once been able to take heart as the world economy improves, circumstances now have caused these emerging markets to bleed even as the rest of the world recovers.

    Exacerbating Malaysia’s case is its high debt levels ― both the government’s and consumers ― that discourage more aggressive fiscal policies while declining oil prices that have benefitted most nations have cut deeply into the oil-exporting nation’s coffers.

    “The way forward, of course, is structural reform,” said the FT.

    “Across most of the EM (emerging markets) world, there is significant scope for further supply-side reform, including reducing bureaucracy, improving education, deregulation and privatisation,” the paper wrote in its opinion column.

    High among the list of reforms demanded by Malaysia’s critics is the removal of the pro-Bumiputera New Economic Policy (NEP) that is condemned for blunting the country’s competitiveness.

    Beyond the direct effect on Malaysia’s edge, the NEP and other programmes in its vein have also been blamed for driving the country’s non-Malays to find an exit, with neighbouring rival Singapore being the destination of choice for geographic and cultural reasons.

    Upon taking office in 2009, Prime Minister Datuk Seri Najib Razak announced an ambitious plan to do away with race-based affirmative action from the NEP and replace this with merit-based aid in what he then called the New Economic Model (NEM).

    But the plan was short-lived as conservative Malay groups baulked at the idea, forcing Najib to not only abandon his proposal but to also increase aid for the dominant Bumiputera community.

    Despite its prescription for such substantive reforms, however, the FT acknowledged their improbability in the current climate of stuttering economic performance.

    “But this (reforms) is difficult stuff and twice as difficult to do when growth is already falling,” it said.

    Still, it pointed out that Malaysia and other countries in the same dilemma may have little choice if they hope to revive their economies.

    “Most EMs sharply reduced interest rates during (and following) the crisis, so there is not much more they can do to make their currencies more competitive or to stimulate domestic consumption,” it said.

    Bank Negara Malaysia kept the key Overnight Policy Rate (OPR) at 3.25 per cent this month ― nearly a year since it last made a change ― even as a new Goods and Services Tax (GST) introduced in April 1 depressed consumer spending.

    The central bank is particularly wary of encouraging Malaysians to take on more debt, with households having already piled on the equivalent of 86 per cent of the country’s gross domestic product in borrowings.

    The sharp depreciation of the ringgit ― Asia’s second-worst performing currency ― also compounded the decline in oil prices that forced Putrajaya to tinker with its Budget for 2015 in January, just two months after it tabled the original.

    Low oil prices continue to plague Putrajaya’s biggest source of revenue; five days ago state oil company Petronas announced a 38 per cent drop in its profit and expected poor earnings throughout 2015.

    Malaysia’s exports fell 9.7 per cent in February from a year earlier, the biggest drop since September 2009, due to a slump in oil prices and a weakening Chinese economy that cut demand for commodity shipments.

    Malaysia's economy likely grew at a slightly slower pace in the first quarter due to weaker exports, but a surge in factory output and private consumption in March prior to the implementation of a new consumption tax may offer support.

    First quarter gross domestic product (GDP) was estimated to have risen 5.5 per cent from a year earlier, according to the median forecast of a Reuters poll, slower than 5.8 per cent in the fourth quarter. The forecasts ranged from 5.0 to 6 per cent.

    Full-year growth is expected to come in at 5.0 per cent according to the latest poll, compared with 6.0 per cent in 2014.

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