When Najib Razak first became the prime minister, he introduced us to his transformation programs in 2010. It was the Government and the Economic Transformation Programs, easier called the GTP and the ETP if anybody cares to remember anymore. On the eve of the 2011 Malaysia Day, the prime minister announced another one and called it the Political Transformation Program, the PTP, though it really appeared as an afterthought, probably included only because the speechwriter thought it sounded grand.

On that September night, the prime minister proposed to remove all emergency declarations made during the fight against the communist insurgents, relax laws against public assemblies and repeal the much-abused Internal Security Act. There were several other promises too. Notwithstanding the ominous caveats, he fulfilled his promise. Later in July 2012 and probably encouraged by the progress he made, Najib proposed to replace the Sedition Act with something else, giving the idea that more liberalization was on the way.

Enter 2013. As the general election approached, Barisan Nasional ran on the slogan “Janji Ditepati”, meaning promises fulfilled. It was not long before the counter-slogan “Janji Dicapati”, a humorous wordplay meaning broken promises, made its way to popular usage.

The 2013 BN under Najib did worse than Abdullah Ahmad Badawi in 2008. Stung by the electoral results, the conservatives within his party questioned whether Najib’s liberalization was working for UMNO. Their opinion was firmly in the negative.

Najib, losing his resolve and political capital while fretful of losing power the way his predecessor did, gave way and made multiple about faces. Among those U-turns was the direction of the political transformation program. And so, instead of liberalization, there was a noticeable reversal and a steady increase in political persecution.

The promise to repeal the Sedition Act remains a promise and in fact, it is being used more religiously now it seems with the latest case involving the arrest of several journalists from The Malaysian Insider.

New harsh laws are being introduced at Parliament that made the earlier repeal of the ISA a farce. Meanwhile, government critics are sent to lock-up as the police mete out some kind of extra-judiciary punishment while at the same time, UMNO politicians get special treatment and are free from the same ill-treatment others have received. The double standard says a lot about the ongoing political persecution however much the government denies it while hiding behind race, religion and the monarchy.

Regardless whether we agree on its efficacy, all the transformation programs have one intention in mind or at least they promised to do one thing: To push Malaysia into the wondrous modern First World from the tired old middle income grouping.

Unfortunately, the political part is subverting it. The so-called Political Transformation Program is transforming Malaysia from the verge of First World to the Third World.

We have to remember that being developed — First World, high-income nation and whatever the preferred jargons are — should be more than merely about income. Development has to be holistic and includes the sociopolitical front. Else, what we have is another old forgotten: First World infrastructure, Third World mentality.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on April 2 2015.

I am not a stylish person and my sensibility gets offended if I have to pay more than RM10 for a haircut. And so I typically go to an old barbershop within the Kampung Datuk Keramat wet market for a simple one for just six.

It is a quaint little utilitarian establishment with no pictures decorating its empty walls, just paint peeling off. The owner makes no pretension that it is anything else but a barbershop unlike the fancy salons you would find in the sexier part of town.

He was busy attending to another customer as I arrived. But as is true to most small businesses, his customers are mostly his friends.

His friends are of certain age, possibly above 50 years old. On his ageing analogue radio, old Malay songs from the sixties I do not recognize would blare out and fill the space. The generation gap between them and me is impossible to miss. As a young man with shorts and a pair of shoes, I stood out in that environment.

They were in a conversation but he found time to acknowledge me. “I’ll be with you in a minute,” he said in Malay. So I sat quietly on a wooden bench, took my phone out from my pocket and began browsing the Internet as I waited for my turn.

They returned to their conversation, which was about a condominium project nearby. It was the Datum project, a local issue that was in the spotlight several weeks back. I have patronized his establishment before and from my previous eavesdropping, I remember he said he used to operate at the old flats that were demolished for the Datum condominium on Jalan Jelatek.

The Kuala Lumpur City Hall — for close to two decades now — wants to relocate the ageing wet market to a new complex just down the road that they call the Keramat Mall, a building of confused architecture and utility. Local traders here have long complained the rent at the mall is too expensive, and it is located a story above ground to complicate matters. And so, they are in a permanent revolt against city hall and continue to operate at the wet market. Whenever there is a fire at the market, conspiracy theories make the rounds and they almost always feature the authorities trying to force them out. The Federal Territories minister recently accused outsiders of meddling and inciting the local traders not to move.

Keramat, together with the more famous Kampung Baru, falls under the Titiwangsa parliamentary seat in Kuala Lumpur. In 2008, for the first time ever, Umno lost the seat to PAS. The then representative, Dr Lo’ Lo’ lived here. She died of cancer 2011 and PAS struggled to fill her shoes, leaving Umno to win back the seat in the last general election. But it was a tough fight.

The so-called mall which for the longest time was a white elephant, home to street cats and frequented by suspicious characters, was turned into a mini-Urban Transformation Center with offices belonging to the immigration department, health department and the police just last year. The UTC as they call it.

The prime minister’s face is splashed across the building façade, possibly implicitly telling the residents to be thankful. Or perhaps the reason for the re-investment is the Umno-led government is anxious about its future in Kuala Lumpur: out of 11 parliamentary seats, BN controls only two. On a notice board, I could read yellowing Utusan news clippings boldly claiming that the mall could transform Keramat. I wonder what it wrote about the mall back in early 2000s when it was recently completed.

The old, smelly, wet market first opened in the 1970s, and still stands in defiance of the federal government.

A stark contrast presents itself to anybody who stands in the middle of the small, packed parking lot that more often than not is the source of congestion in the neighborhood. On a very bad day, the traffic could back up all the way to Jalan Ampang on one side and Setiawangsa on the other. A poorly dressed old man would park his deprecated motorcycle next to a shiny silver BMW car.

Look around and you would realize the market is a mishmash of wooden and concrete structure with zinc tops. Farther, a mid-range military apartment complex dominates the horizon that just 10 years ago was full of trees and abandoned buildings. To the right stand the more expensive condominiums along Jalan Jelatek. Turn around and you may possibly spot Petronas Twin Towers along with other modern buildings from the Intermark to the imposing Hong Kong’s Bank of China-like building with its crisscrossing frames on Jalan Tun Razak.

All of those surround the compact kampong with the wet market and a mosque nearby at the center of the area. Most of the houses here are standalone homes but there are several low-rise low-cost apartments nearby too. But farther away towards the limits are big bungalows with their shiny cars.

The planned Datum condominium, that luxury condominium project, will add to that contrast. Politically, the condo will be just across the border in Selangor, but it is an integral part of Kampung Datuk Keramat nonetheless. It is one of those things where an invisible line on the ground means nothing. This is where city and Selangor state politics mix, a mix that goes back all the way before 1974 when Kuala Lumpur was carved out of the state.

Datum will not be the first condominium here. The first went up during the go-go years of the 1990s, robbing some of Keramat residents of an unobstructed view of Kuala Lumpur. The UEM-controlled Faber Group is building another on Jalan Gurney where prices range from about RM400,000 to more than RM3 million per unit. There is also the recently completed Suria Jelatek Residences at the Ampang end of Jalan Jelatek, besides the Datum project — the lowest sub-sale prices running at around RM600,000 for a shoebox —  but this seems to be going farther, but still a walkable distance, into the expat enclave that Jalan Ampang is. I have a suspicion that Jalan Jelatek is slowing turning into an annex of that enclave.

Kampung Datuk Keramat is not immune to the changes. Hang around at the Datuk Keramat and Damai light rail train stations and you will find American, European and Middle Eastern people among the riders departing from here.

In the 1980s and 1990s, the foreigners were mostly Indonesians who eventually, I think, were absorbed into the community. The new foreigners are much harder to absorb into the community, they are more transient and they do not mix with the locals. They do not go to Pasar Keramat.

Kampung Datuk Keramat is finally experiencing what Kampung Baru went through more drastically back in the 1990s when Kuala Lumpur first rushed to the sky with the Twin Towers as the crowning jewel just right at its doorsteps.

Not everybody is comfortable with the change because it can mean having to move out. The old barber was chased out of the ground floor shop lot within the old low-cost flat compound where Datum will rise. He is now in Pasar Keramat but the federal government wants to clear the market, and move everybody out to the old, new mall.

This is gentrification. Located so close to the city, Keramat attracts the new well-to-do to the formerly unsexy location, and possibly pushing former residents out.

When the residents get kicked out, they become angry. Who would not, especially when you have been living here all your life? The fear of dislocation is especially acute: if you look at the voters’ age profile in 2013, 66% of them were 40 or older. Sure, voter and population profiles do not coincide precisely but it is still indicative of this particular society at the ground level. This is an amazing figure especially since the median age for the whole country is about 26-27 years old. Titiwangsa, and specifically Keramat, is an old neighborhood in a young country.

And so when the unruly protesters went nuts against the Datum project in late January, tearing the zinc wall marking the boundary of the empty construction site while throwing racist claims the development would turn Keramat into a “Chinese district,” I think they were judged too harshly, especially by outsiders who make no effort to learn the context on the ground.

I do think they — the local protesters — were really protesting against the gentrification of Keramat. They saw vast development going around their home and they are not directly benefiting from it. Right or wrong, they see themselves as the victims of gentrification. Racism is a secondary issue and perhaps, was put into the mix by outsiders who know only racial politics to win a brownie point. This is not to say okay to racism, but there is a need to separate the wheat from the chaff here.

I think gentrification is the cause and not so much race because when the developer of Datum came out to share that most of the interested buyers were Bumiputras, that fact did not relax the opposition to the development one bit. They continue to oppose because it does not matter if the new buyers are Malays or Chinese, or foreigners altogether. The development pushed them out of their homes and their shops. It is they who suffer, not anybody else, regardless of race.

The only ones who were embarrassed by the revelation were Perkasa and Umno.

I am not against gentrification. I feel it is inevitable and it revitalizes the community in some ways. It signals rising affluence and it makes the gentrified neighborhood cleaner and safer. And I personally am agnostic about the Datum development.

But the losers of gentrification must be compensated well. It cannot be that they are given some pitiful pocket money and be left to beg on the street and forced to move out elsewhere farther away from the city. That would create a sense of unfairness that could give rise to other problems in the future. The benefits have to be shared equitably with the residents.

To dismiss the opposition to the Datum project as being fueled by racism and instigated by outsiders is to miss the whole point altogether.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on March 27 2015.

Before UMNO shares its voting intention on hudud with the public tomorrow, I would like to point out what I think are the two assumptions behind hudud politics, as pushed by PAS.

One, all non-Muslim MPs would/must refrain from voting in the Parliament.

Two, all Muslim MPs would/must vote yes.

These assumptions are the very reasons why PAS think they have the numbers in the Parliament. There are 135 Muslim MPs out of total 222 Malaysian MPs. Assuming no abstained vote and full attendance, they will need at least 113 yes votes only to pass the bill with certainty.

But these assumptions are merely assumptions and they are far from being right.

The first assumption is based on the idea that hudud would not affect non-Muslims and so, non-Muslims have no business to interfere. I have registered my hostility to that notion for a long time now and I am restating it here: hudud is not a Muslim issue exclusively. It is a national one and so it affects all of us regardless of beliefs one way or another. Why? Anything that affects the majority population will inevitably affect the character of the whole society. And already, even with the current dual systems that we have, there are conflicts between Muslim authorities and the non-Muslim population, which proves that no community works in isolation.

The second assumption is based on the idea that the Muslims – really the Malay community – are monolithic. Further embedded in the assumption is that no Muslim-Malay would go against the words of god, which in turn is dependent on yet another assumption that takes the bill for the words of god. But the Malay world is diverse and not all would believe what a preacher-politician have to say. On top of that, several counterarguments have been thrown back to PAS and among them that the bill PAS plans to introduce to the Parliament is not god’s law but rather, it is written by PAS, i.e. human-made.

There are signs that the two hudud assumptions are disintegrating. DAP and PRS will vote no, primarily breaking the first assumption. PKR and PBB will vote no as well, breaking primarily the second assumption, as well as the first one since they have a number of non-Muslim MPs.

The pro-hudud camp is angry at this. As their assumptions fall apart and unable to appeal to the mind, they are now left with only physical threats to cow others into submission. 

Beginning April 1, cab fares as regulated by the government will increase from RM0.10 per 115 m to RM0.25 per 200 m. That’s about 43.8% fare increase. The flagfall cost remains at MYR3.00 for the first kilometer. There are other hikes but I want to focus on this particular case.

Nobody likes a fare hike. Whatever sense it makes, paying for something extra for the same thing is not something I enjoy. But cab fares have not been hiked for six years and I think, it is only fair to the drivers to hike it, especially when their real wages have definitely come down.

I do take cabs from time to time and I do talk to them, asking them about when do they wake up, when do they finish, how much do they make, how much rent do they pay for the car, do they own the car, etc. It is not an easy job. So, I will not complain too much about it and I do not think I have the right to say anything bad because as a consumer, I have benefited from the six years of no hike.

But Institut Rakyat thinks otherwise and they failed to notice the effect of compounded rate. From The Malaysian Insider:

“Having failed to conduct a fare review for the last six years, SPAD has now opted for a sharp and sudden increase,” Yin said in a statement.

He said this steep increase represented a regulatory failure on SPAD’s part, as the agency was supposed to conduct fare reviews every two years with focus on small and manageable increments of 10%.

Yin said SPAD should have considered a gradual increase in fares to balance both consumer and business interests, which would help promote the use of public transport in the country.

He said a gradual phase-in of the overdue fare increase, at 10% at regular intervals over a period of one to two years, would be fairer than making up for six years in one fell swoop.

He reckons it would be fairer for the consumers if the authority does a small hike at regular intervals instead of what will be done now. [The Malaysian InsiderFare hike too sudden, steep, says think tank]

He thinks it is better for the consumers if the authority “does a small hike at regular intervals instead of what will be done now.”

I think his analysis is wrong. Here is why.

If you look at the mathematics, for passengers, it is quite clear a frequent rate increase of 10% every one or two years is actually a worse hike-mechanism versus a 44% increase after six years. Worse in the sense that total fare paid in the former case is larger than the those paid in the latter one. There is a compounded effect here that makes the seemingly small 10% increase more expensive than the 43% hike.

Here is a graph where I demonstrate just that:

Compounded rate

The light blue line indicates how much total cab fare you would have paid if the rate had increased by 10% every second year.

The red line is the current scenario, explaining the total cab fare you have paid.

The assumption here is that you travel 5,000 km per year. The flagfall cost is ignored for ease of calculation. Having flagfall cost included does not change the analysis by much; remember, the flagfall cost does not change and only the rate changes. Also, just one person passenger with no other charge like baggage, toll, whatever.

As you can see, the blue line is consistently above the red line. That means you would have paid more if the rate was raised 10% every two years instead 44% once in the sixth year. In fact, the dark blue bars show exactly how much extra you would have paid in total.

For instance, in Y6 which is 2015, under the 10% increase every 2 year regime, you would have paid MYR3,976 fare in total over the six years. Under the 44%-hike-done-after-6-years regime, your total would be MYR3,715 in the same period, MYR261 lesser than the 10% case. You can see that in the chart.

So, the right conclusion here is that the 2-year-hike regime would be fairer to cab drivers but the riders would not like it by one bit. The 6-year-hike regime would be unfair to the cab drivers but it saves riders money.

The 44% figure is of course huge compared to a mere 10%, and superficially, it is easy to say we prefer 10% to 44% rise. But that is falling into a psychological trap prepared by the gods of compounded rate. Our job is to resist that psychological temptation.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — if you are interested, I have posted the simple model here (updated. Please read the second postscript). There are at least one or two more dynamics I have left unexplained. You can figure that one yourself. I want to go home.

pp/s — And it is the day after. I ran further modelling (see tab Model 2 in the spreadsheet) and I have to say the conclusion is specifically true for the last six years. If we put the two 10%-2 -year and the 44%-6-year series head to head and run it up long enough (unlikely to happen because the authority’s plan is to hike it once every two years), the compounded effect of 44% eventually catches up with the more frequent 10%: to be exact, 12 years later in 2027. But the 44% hike seems like a one-off event, and so, the failure to hike it once every two years is a boon for riders. Thus, as a passenger, on the balance over the past six years, I would not complain too much. And just to satisfy the cat, I also added a yearly increase in the model: a yearly increase at 10% makes the total fare paid zooms away, if I may exaggerate, exponentially, and never to look back. Clearly, a yearly hike is the worst option here and if it is to work to riders’ liking, the yearly increase has to be much, much lower for it to make sense.

And so, in the media, it is reported that Malaysia’s external debt (some were more careless by giving the impression that it was total debt, just to make a sexy, alarmist headline for the clicks) increased by more than three folds. This is one of those deplorable reporting:

Malaysia’s external debts grew by more than three-fold in less than a year, from RM196 billion at the end of 2013 to a whopping RM740.7 billion in the third quarter of last year. In a written reply to William Leong (PKR – Selayang), Finance Minister Datuk Seri Najib Razak attributed the spike to “new definitions” for external debts in 2014. Almost two-thirds of the increase was due to foreigners holding on to Malaysian bonds, now considered as part of the external debts. Leong warned that this is the scenario currently taking place with debt-laden 1Malaysia Development Berhad (1MDB) where a huge chunk of its RM42 billion debt is allegedly being held by foreigners. [Eileen Ng. The Malaysian Insider. Malaysia’s external debt tripled to RM740 billion last year]

From there on comes various accusations by a whole lot of laypersons, at a time the government is already under severe attacks for the fiasco that is 1Malaysia Development Berhad. I am not a fan of this government but in this particular case, the focus is misplaced and the criticism on external debt is based on a misunderstanding. The supposedly massive rise in the external debt is a non-issue, unless you are a wonk excited about the most technical of things. This is what it is, a technical matter.

The truth is that there is really no increase of that magnitude in Malaysia’s debt, totally, externally or internally. Malaysia has always owned all of those debts. What happened was that the term “external debt” was redefined to include all debts held by foreigners. Previously, the term was used to describe all Malaysian debts denominated in foreign currencies, regardless of ownership. The former is big, the latter is small. If you need a Venn diagram to understand them, here it is (the graph does not exactly correspond with the definitions but it is good enough to highlight the difference in definitions):

Malaysia's new external debt definition

This redefinition exercise had been recommended by the International Monetary Fund for the longest time and Malaysia only recently decided to adopt the proposed nomenclature. This in fact was announced last year, as early as March. When I first learned that last year, I made a joke that somebody would scream murder. Indeed, a year later, here we are. MP William Leong definitely fell into the layman’s trap, and a whole lot of others too.

There was only an increase if you used one definition at one point and then switched to another definition at the next point, and pretend the two definitions refer to the same thing. This is wrong. You need to compare points from the same definition for the growth figure to make sense. The supposedly dramatic jump-growth as reported in the media is just a garbage figure of no value. It was calculated by including a significant, large structural break.

While the media is utterly in the wrong and clueless even as they wrote the word “redefinition” in quotation marks as if it is a meaningless term, the Ministry of Finance is the cause of this misunderstanding. While it mentioned the redefinition exercise, the ministry compared the old definition with the new one and voila, a drastic increase just because they naively calculated the growth rate, despite, knowing a redefinition had occurred. So, it is a horrible answer, as horrible as the way the Finance Minister is handling the 1MDB issue. The media was just playing the role of a loudspeaker here, with no thinking in the middle.

I repeat. There is no increase as reported. If you keep the old definition and apply it forever, you will find any change from that will not come anything close to the sensationalist headlines featured by Malaysiakini and The Star all the way to, disappointingly, The Edge, which I consider as the most economic-financially literate Malaysian publication. I like The Edge but a mistake is a mistake. If you use the new definition and then stretch it backward, there will be no big change as well. Just keep the definition consistent if you want to calculate the growth.

Finally, there is really nothing sinister about the redefinition.

The reason for the redefinition has something to do with the evolution and the maturity of the Malaysian debt market. Twenty or thirty years ago, Malaysia did not have a big bond market and it was relatively unimportant to the economy, especially compared to today. So the old definition made sense then, in some ways. But since the 1990s, the Malaysian bond market has expanded rapidly to become one of Asia’s biggest. Foreign ownership of government debts also shot up as foreign investors searched for relatively safe assets. The debt market has become so large, that the newer definition becomes the more attractive one to use.

As in a lot of stuff out there, which definition to use really depends on your purpose. Just understand the data before using it.

So, ladies and gentlemen, please do not get too excited here. On this front, there is nothing to see really. Go, instead, to the next stage right across the road. Yes sir. A much more entertaining play called 1MDB is running there. Get your tickets. Sit back, and… be angry with 1MDB and not with the technicalities of debt redefinition.

January inflation clocked at only 1.0% from a year ago while in December it was 2.7%. That was a pretty drastic slowdown that I bet someone will cry deflation wolf somewhere soon.

The cause of the slackening is easy to explain. It is unambiguously due to the drop in retail petrol and diesel prices. RON95 fuel price, the most popular fuel in Malaysia by far, in January dropped from MYR2.26 per liter to MYR1.91 in December. Diesel went down 30 sen to MYR1.93 per liter in the same period. In January 2014, RON95 was MYR2.10 per liter.

At this rate, Malaysia might be seeing actual deflation this month. In February, both RON95 and diesel went down further to MYR1.70 per liter. The drop in yearly terms in February 2015 is greater than that seen in January because in February 2014, RON95 was MYR2.10 still. In January 2015, it fell 9% YoY. In February 2015, it decreased 19% YoY.

In fact, on monthly terms, we are already in deflation. This is not your monthly, seasonal price fluctuation that people usually ignore and say, ah, it is nothing. This is a clear deflation.

Is this deflation something to worry about?

No. I do not think so.

Deflation these days connotes bad news. Japan and Europe are trying hard to avoid deflation. In Singapore, deflation played a role in convincing the monetary authority there to loosen up its forex policy, which is their monetary policy. And the last time Malaysia had a deflation, it was during the 2009 recession.

But not all deflation are the same.

In Japan and Europe and Singapore today, and Malaysia in 2009, deflation came about from reduced economic activities. There was less demand and so, price pressure was weak and that pulled prices down. It was demand-driven. In fact, we really are worrying about demand rather than price itself. Price changes – inflation or deflation – are usually a symptom of something else.

Unlike in 2009, the (possible) February deflation would be supply-driven. The weakening in prices has been supply-driven in the sense that technological improvement – all the talk about shale mining that is turning the US into the world’s largest oil producer – has created oil glut in the market.

I do not worry because this is the same pressure that forced computer prices down over the decades. It is a kind of pressure that makes a typical person feels richer because he or she could now buy something else with the same amount of money and still afford the same quantity of fuel or more. Or save them. I do not see a price-wage spiraling down out of control here. The price deflation does not make them feel poorer because the deflation does not come about from them losing them job or suffering a pay cut. There are news of some retrenchment in the oil and gas sector but the size is small so far, as far as I know and besides, the sector is not the biggest contributor to the Malaysian economy. Indeed, the biggest sector, electronics, is having swell of a time and being ignored by the press.

I also do not worry about deflation because fuel is not something a typical consumer can live without for too long. Deflation can be disastrous to the economy in the sense that people would stop buying or postpone their purchases until prices fall further to stabilize at some low prices. But with fuel, I do not think you can do that to the point it would adversely affect growth. Fuel is an essential good and you just have to use them, especially in a society that is so dependent on combustion-type vehicles. If you do wait out, then you might not be able to drive or get to somewhere at all. You just need them and you will keep buying it even when you know prices are falling.

More importantly, the postponement of purchase is dangerous to growth especially when consumers do not know when prices would bottom out. So, they keep holding back and then not making purchases at all. This can be particularly devastating for fixed assets like homes and durable goods. In the case fuel prices, it does appear prices have bottomed out, especially since the prices used for the determination of petrol prices in Malaysia is lagged by a month, as I have explained previously. If global crude prices hold at the current level at about $60 per barrel compared to $45 in mid-January, it is very likely that retail petrol prices will be higher in March next month. So, a February deflation will be temporary. This also means people would line up at the gas stations at the end of this month preempting the loophole that comes with Malaysia’s imperfect dirty float system. So, instead of being encouraged to postpone purchases, they will hoard them instead.

Before I end, I am not saying there is no problem with demand. I still worry that consumption growth is slowing despite the surprisingly strong expansion last quarter. But the possible deflation in February is very much driven by the supply-side, and not demand.

So, do not worry about the deflation.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
p/s — I am tempted to say yet another reason why I was not worried about deflation, but decided the argument is problematic. That argument goes: core inflation is still more than 50 basis points above headline inflation. Since core inflation is more reflective of demand, and since it strips fuel away and therefore free from supply-driven inflation/deflation seen in January, it suggests demand is going well. But I checked the data from 2008-2009 and core inflation was somewhat healthy despite the fact there was a recession. This probably shows core inflation is an imperfect measurement of demand change.

I am putting it at the postscript to catalog my own thoughts on the matter and revisit it later.

The number 50 is psychologically special to almost everybody. Notwithstanding the debate about the age of Malaysia, whether it was 50 years old or 44 in 2007, we too had a huge celebration for our golden anniversary. Down south this year, Singapore is approaching its 50th anniversary as an independent state.

The Singaporean anniversary is less ambiguous than Malaysia’s. There are fewer ominous existential questions being thrown around unlike in Malaysia when from time to time, we hear secessionist sentiments coming out from Sabah.

There is a myth in Malaysia that Singapore seceded from our federation. In truth, it was Tunku Abdul Rahman who pushed the island-city out with a vote in Parliament in Kuala Lumpur sealing the decision.

Unilateral secession is impossible legally. Furthermore, Singapore itself did not want to leave and this was very clear through Lee Kuan Yew’s writings. Jeffrey Kitingan, unfortunately, recently repeated the secessionist myth as he pandered to Sabahan nationalists for his own political fortune by saying secession is a state right, showing again and again that history can be forgotten and worse, twisted to fit the preferred narrative.

That is not the only myth: some Malaysians still think there are 14 states in the federation somehow forgetting that Singapore is no more a member state. It is as if the vestiges of the Malaysian Singapore still linger and that these Malaysians have yet to come to terms with the 1965 separation.

The fourteenth stripe and the fourteenth point in the Federal Star of the Jalur Gemilang now have been redefined to represent the federal government and the three territories, instead of Singapore as was previously. Our coat of arms no longer has the Singaporean red and white crescent and star underneath the four colors of the old Federated Malay States. In its place is the red hibiscus, what seems to be the forgotten Malaysian national flower.

Regardless of the myths, Singapore and Malaysia did go separate ways and that has been the source of contention between the two. The issues range from water supply and train land in the heart of Singapore to ownership of rocky outcrops in the middle of the sea. Some have been resolved amicably but the general rivalry persists even as the Causeway ties have improved since the almost irrationally nationalistic days of Mahathir Mohamad and Lee Kuan Yew.

One can speculate what would have happened if Singapore had remained within the federation. This question has been raised as Singaporeans reflect on their 50 years of independence but I think the more interesting one is whether there would be a time when Singapore would rejoin Malaysia.

As much as I believe international borders with its passport and visa requirements are suffocating in this modern world, I think that is a very distant possibility. Malaysia is unprepared for Singapore just as we were not prepared for a Malaysian Malaysia in 1963. I do not believe the pro-Bumiputra policy will go away even if power does change from Barisan Nasional to Pakatan Rakyat in Putrajaya. The Bumiputras are the majority in Malaysia and there will always be pressure to appease them. It is the uncomfortable truth of electoral politics that makes idealists sigh.

Just look at the squabbling in Pakatan between PAS and DAP that has degenerated to race and religion. You can also read Datuk Seri Anwar Ibrahim’s speeches and wonder what exactly he is saying about hudud, for instance, out of fears angering either the liberals or the more conservative Muslim majority.

Meanwhile in Barisan, the slightest hint of liberalization is being fiercely opposed by the conservative sides in Umno. When discussing the Transpacific Partnership agreement, one of the top objections to the negotiation is how it would affect the Bumiputra, and really, the Malay, business community. Prime Minister Najib Razak is already facing a civil war within his party for the liberalization he did and other less admirable factors that include the mismanagement of the country.

Ultimately, there is a common theme across Barisan and Pakatan and that means it is more of a systemic Malaysian issue. Adding Singapore into the equation would not help and could even make it worse.

Singaporean diplomat Bilahari Kausikan recently said in a speech, it is “impossible for us to ever be part of Malaysia again unless Malaysia abandons its basic organizing principle.” That principle will not go away any time soon.

But we have Asean and in many ways both Malaysia and Singapore are already integrating. Both citizens can travel across the border without much hassle, if you discount the congestion at the Causeway. Some Singaporeans are already living in Malaysia as the government is promoting Nusajaya and Johor Baru, to put it bluntly, as the suburbs of the world-city Singapore.

And the Asean Economic Community due for implementation this year would deepen integration between the two, which is already one of the most ― I would think it is the most ― integrated national economies in the region.

Realistically the AEC would take time but the trajectory is clear. That I think is a reasonable future for both Malaysia and Singapore: a closer confederation of South-east Asian states.

So, we do not need Singapore in Malaysia. We just need to have both countries to be active in Asean.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malay Mail on February 14 2015.

The Malaysian GDP figures released yesterday suggest there was indeed a pre-GST spending spree.

Private consumption growth was phenomenal especially if you consider the fact that previous quarterly growth figures have been slowly dropping gradually over the past year from 8% year-on-year to all the way down to mid-6% in the third quarter of 2014. The latest consumption figure grew 7.8% year-on-year, which is crazy. It is so red hot that if the overall situation had not been so gloomy, Bank Negara would surely have panicked and raised its rates by another 25 basis points. This is quite a surprise even if you had believed the pre-GST spending spree hypothesis.

As a result, 2014 growth was at 6%, which is higher than most (well, all) economists watching Malaysia had projected.

But the central bank would not hike rate because the feeling is that the jump is temporary. I think it would last into this quarter before growth takes on a drowsy mode. The GST should depress consumption growth from April onwards. This is the danger. If consumption could jump so high pre-GST, how low would it get post-GST?

That is a scary thought.

This also gives more proof that consumers do expect prices to increase post-GST. I should add ceteris paribus, I guess, because the low retail fuel prices could make the net effect somewhat a wash. As for the recent electricity tariff cut, do not bother. I did a simulation and it hardly changed my headline projection.

Regardless of expectations, I am unsure there would be an actual net price hike. Last year, somebody told me the authorities expected (ranging from the Department of Statistics to the Treasury) inflation would hit 6% with GST, after months of official drive by the mainstream press that inflation would rise. Then it fell to about 4%. (You could understand why most banks are projecting about 4% inflation previously. They took the government’s guidance to heart) Now? I was informed the government expected it to be about 2%, mostly because of fuel prices. My own projection is about 3.3% YoY monthly average where I assume the GST will hit the economy in full force without any exception-zero rated stuff, but I keep several projections in the spirit of scenario analysis with the lowest at about 1.5% YoY where I pretend GST is the spoon in The Matrix.

My confidence in my models is  at an all time low and I have resigned to the fact that we will only know it in June or July when the Department of Statistics will release the April-May inflation figures. The crazy demand fluctuation, the retail fuel flotation and the GST make projections go everywhere.

I think the general consensus is that there will be a spending spree before the GST, which will be implemented on April 1. The idea is that a lot of consumers would expect price hikes of various degrees on or after April Fools’ Day. So, people would rush on to capitalize on current cheaper prices. This is much like how each time the government slashed petrol subsidies and hiked petrol prices previously, private vehicles would line up at the gas stations as consumers try to save the tiniest bits that they could.

I used to agree with that idea despite holding that the effects of GST would not be the same across all goods. A hike sounds likely for new homes but for some others, it does sound like a price reduction. In fact, I am unsure about a lot of stuff.

But in the end, it is expectations that affect current behavior and not actual future prices. The expectations might be wrong, but it will be wrong on the day consumers see the actual price, not before. So until then, expectations would still drive the spending spree. But of course, I am forming an expectation about people’s expectations, which can be problematic.

I am unsure about that spending spree now because I saw a piece of data from a survey at my workplace. I cannot reveal it because it is proprietary data. I would probably get into trouble for this (haha) but the result is quite different from my earlier expectation. I think all I can say is that more respondents expected to spend less instead of more before the GST!

The implications can be big. If you believe the consensus story, growth would be relatively strong in the first quarter and weak for the rest of the year. They spend first and spend less later.

Now, the survey result sounds like a straight up Ricardian equivalence, or at least close to it where consumers save to fund their near future spending (Ricardian is actually more than this but the saving story is similar). So, if the survey is right, there will be no spike in spending this quarter. Maybe even a slump.

People are asking me if the Malaysian government’s new 3.2% deficit ratio target is achievable.  I have read in the news that several politicians are skeptical about the target. I do not remember who said that but I feel the sentiment is shared by many.

But the only way to really answer this objectively is to run a sensitivity analysis.

It is relatively easy to do a sensitivity analysis and I have done one last week under the assumption of no expenditure cut. That one shows how the deficit ratio would react if the government had not changed its budget under a range of NGDP and revenue assumptions. I think it somewhat presents the realistic worst-case scenario. The government said its fiscal deficit would have gone up to 3.9% of GDP in 2015 without any expenditure cut. I think that would come close to my expectation (4.0%-4.1%), which is based on no revenue growth (not unreasonable) and at about 4%-5% NGDP growth. I am not reproducing the table here because I do not want to confuse the readers. If you are interested in that sensitivity analysis, you should revisit the post.

But that sensitivity analysis does not indicate whether the new 3.2% target is realistic. To answer that, it requires a bit more moving parts added into it. One additional dimension is required to be exact.

I am doing that here by showing 3 cases of revenue change under a range of NGDP and expenditure assumptions (note the not-so-small difference from the above model). To cut through the graphics, I think the 3.2% fiscal deficit ratio target is achievable if revenue grows by about 2% (I said about because I am too lazy to run a differential equation).

Before that, some legends for the three charts at the bottom. The yellow-highlighted cells describe the would-be situations if the expenditure was not cut (yes, it is a funny coincidence that the government had planned to increase its expenditure by 3.2% from 2014 in the original budget). The red-highlighted cells show the deficit ratio under the January 20 revised budget expenditure figures (Under revised budget, expenditure would still grow 1.2%. So, please do not call this austerity).

Here is the deficit ratio if 2015 revenue does not change from last year. Achieving 3.2% target seems impossible under this scenario (I wrote impossible because it would require a very strong NGDP growth at a time the GDP deflator appearing weak. If government revenue is flat this year, then my projection for the deficit would be about 3.6%):

No revenue change

Things would look a bit better if the government revenue would grow by 1% this year, but it would miss the deficit target still as 9% NGDP growth is beyond our reach, given current constraints:

Revenue growth 1%

Under 2% revenue growth case, the 3.2% deficit ratio looks achievable:

Revenue increases 2%

So, after reading through this, do you think the 3.2% deficit is achievable?

Ultimately, your answer must rely on revenue and NGDP growth. I think the reasonable NGDP growth assumption is about 4%-5%. As for revenue, I am unsure at the moment. There are just too many moving parts that require further investigation but the original budget had it grown at 4.5%. It will definitely be lower than that this year.

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