the __earthinc

The soon-to-be Minister in the Prime Minister’s Department overseeing the Economic Planning Unit Abdul Wahid Omar commented on the 1Q real GDP growth earlier this week. He said:

“The gross domestic product (GDP) growth for the first quarter was a bit slow, but that’s reflective of the economic activities which are typically slower (in this period),” Wahid said. [Liz Lee. Wahid: M’sia growth prospects still bright, will be driven by Govt identified projects. The Star. May 21 2013]

That is untrue. He has very likely confused his base.

It is true on quarter-on-quarter basis that 1Q tends to grow slower than the other quarters but the 4.1% is not measured on quarter-on-quarter basis. Instead, it is measured on year-on-year basis which pretty much controls the seasonality that bedevils quarter-on-quarter measurement (by the way, seasonality makes unadjusted quarter-on-quarter measurement unhelpful in most cases).

If you take a look for the past 11 years or so, there is not enough evidence to show that it is typical for year-on-year growth of 1Q RGDP to be slower than other quarters. You can see it for yourself:

In fact, the more than 10% growth that some BN politicians liked to crow without contextual understanding happened in 1Q2010.

I hope whatever he said to the media was an honest slip of the tongue mistake. Otherwise, his term as a minister will be full of statistical controversies.

The GDP growth for the first quarter in 2013 is bad. The economy in the period grew by only 4.1% from a year ago, which is a marked slowdown from 6.5% year-on-year growth in the fourth quarter. Despite the high 6.5% growth, the fourth quarter GDP figures were problematic. An anomaly pushed the growth in that quarter up.

The latest quarter has no such anomaly and so, the headline number does a better job in describing the economy this time around. Just to give context how bad the number is, the market had expected growth to be above 5.0% year-on-year with the median as compiled by Bloomberg being 5.5% year-on-year. You can compare the latest growth rate to previous rates in the chart below; 1Q growth is the lowest since the fourth quarter of 2009 which was right at the tail end of the 2009 global financial crisis.

Just earlier, France officially went back into recession with Germany barely grew after having its economy contracted in the last quarter.

Indeed, the reason for the slow growth was net exports. It was down by 36.6% y-o-y in real terms:

Of course, this is not the first time net exports dropped like a rock from the 7th floor. With Europe and China in trouble, exports have trouble growing. If it were not for strong growing demand from Southeast Asia and the United States, it would have been far worse.

But there is some good news. Private consumption growth accelerated to 7.5% year-on-year a low 6.2% year-on-year. Domestic consumption growth was very much supported by that consumption growth; domestic consumption growth accelerated to 8.2% year-on-year from 7.8% year-on-year.

The fact that consumption has been strong is partly the reason why net exports dropped. Consumption growth means import growth and boy, did imports grow.

I am not sure why consumption grew as it had grown. The way I looked at it, imports of consumption goods and industrial production were bad. I had expected consumption to not perform as well as it had. What was it? Minimum wage? Cash transfer? I did see MIER’s consumer sentiment spiked up but that does not explain much. I hope somebody else would be able to enlighten me on this.

Another thing that came as a surprise to me is the practically non-growth of government expenditure. I had expected all those heavy electioneering to boost government spending but it did not. In fact, government spending dropped in nominal terms! It may appear that the government may be on target to reduce the deficit ratio after all. Hurrah!

It will be interesting to see the actual federal government expenditure number later on, which is different from the GDP component.

As for investment, it was high and that made it hard for it to grow any faster. There was a one-time jump and that was it:

That one time jumped led to the 26.6% year-on-year jump in 2Q2012. Investment growth has been stuck at that level ever since. The next quarter… or rather this quarter, faces the risk of investment contracting, unless there is something big coming in our way. I do not see anything big coming in the second quarter, yet.

So, after all that has been said and done, the 4.1% is bad, but it is not as bad as it looks. I mean what is not to like?

Consumption grew well and government expenditure was stable. I like this 4.1% growth better than the “fake” 6.5% growth in 4Q2012.

  p/s — federal government expenditure actually grew by 9.3% y-o-y in 1Q2013 and revenue was down 8.6% y-o-y. Fiscal deficit ratio for the quarter was 6.4%. It is an improvement from 8.7% deficit in 4Q but I am unsure about the government lowering its deficit now.

So, trade surplus in the first quarter of 2013 very much contracted. Net exports in current prices were down by 44%. Although imports fared considerably better than exports in the quarter (hence the big drop in trade surplus), imports of consumption goods were weak, which may suggest that consumption itself slowed. Another bad news is that industrial production also did not grow. I do not think it was mostly due to the fact that 2012 was a leap year since March y-o-y figures were weak.

I am unsure about the investment figures but those investment figures are already high, thus making faster growth unrealistic.

On the plus side, government expenditure was likely up due to electioneering. But that part of the economy is the smallest among all of the components.

Whatever it is, that quarter growth will be significantly slower than the surprising 6.4% y-o-y achieved in 4Q2012. Consensus has it at 5.4% y-o-y according to Bloomberg. I have a feeling it will be lower.

The official GDP estimates will be released by the Department of Statistics on Wednesday’s evening.

Stark’s system of government was based on mistrust. He looked for laziness, insubordination, drunkenness, and strife; he pretended to suppress them, and only succeeded in creating the further vices of cunning, deceit, and ill-will. Too many laws and regulations stifle the sense of good and evil. No one looks beyond his own personal interest; and nothing matters except the evasion of punishment: The plantation was an overgoverned state, as are all the European States of today; and the men were an army of demoralised by discipline. Henri Fauconnier. The Soul of Malaya. Chapter 1. 1931]

Managing imbalances and rising indebtedness under a low interest rate environment

Very low interest rates have now prevailed for a number of years and appear to be likely to continue for the foreseeable future. Given the duration of the easing period, a key question is whether monetary policy can still be considered as being counter-cyclical or has there been a stuctural change in the monetary environment. It also gives rise to the potential unintended consequences of the prolonged low interest rate environment in terms of the mis-pricing of risks, overleveraging and rising household indebtedness, disintermediation of savings away from the banking system, excessive speculation, and the formation of asset price bubbles. Such developments could create financial and macroeconomic vulnerabilities that could harm the long term growth potential of the economy.

Papers on this topic could touch on potential policy issues arising from the prolonged period of low interest rates, and explore possible measures to address financial imbalances. Studies on the effectiveness of alternative monetary tools and instruments in managing risks of imbalances are also welcomed. [Bank Negara Malaysia's Conference on "Monetary Policy in the New Normal". Bank Negara Malaysia. Accessed May 8 2013]

It was a Pyrrhic victory for Barisan Nasional and Najib Razak’s post-election speech called for national reconciliation. That is perhaps admittance that his 1Malaysia policy has not been as successful as he had hoped. It is all a nice, humble speech but his call for national reconciliation suffers from credibility crisis.

Soon after, various UMNO leaders made it clear that they did not plan to take up the reconciliation tone. They immediately took up their racialist perspective and blame the Chinese for their loss. The bitter former Chief Minister of Malacca Ali Rustam who lost his election went as far as accusing the Chinese as being ungrateful. Only the heaven knows what Utusan Malaysia will spew out today and the days after.

Najib may be sincere about reconciliation but the party is always bigger than him even as Najib is proving to be more popular than everybody else in his party. The truth is that the majority in his party does not believe in an inclusive Malaysia. If Najib is honest in reconciliation, he has to address his party, not the wider Malaysians, about his reconciliation agenda. He needs to convince his party of reconciliation and not the wider Malaysians. The wider Malaysians hear both Najib and his parties and there are stark diverging themes going on there.

Besides, it was UMNO — the primate party of BN by far — who pushed the Chinese aside. Can you really blame the Chinese for rejecting UMNO and BN?

And the suggestion that BN lost because of a “Chinese tsunami” is not entirely true. BN lost the popular votes for the first time in a long time. That would not have been possible if it were all Chinese votes. There are just not enough Chinese voters to go around making that kind of shift. And the Chinese have been hostile to BN for quite some time now. Does the death of MCA, Gerakan and SUPP not tell you something?

Maybe it was something else. Maybe, it was the urban-rural divide. The urban-rural factor has more explanatory power to describe BN’s loss of popular votes.

Maybe BN believed in its lying media too much that they thought they would have performed better. Maybe, the lesson of 2008 of the importance of credible media has not been learned by BN. They ate their own propaganda and then when it tastes bitter, they begin to blame for someone else.

For reconciliation to happen, BN needs to look at the urban-rural factors. Looking through the racialist view and then talking about reconciliation just will not fly.

I do not know what to write. Yet I need to write as we come closer to the election date.

I guess I just want to say that I am scared. I am scared of heartbreak.

I volunteered in the 2008 general election and the 2011 Sarawak state election. The two campaigns that I participated in were successful. The joy of winning the election was beyond words. But most importantly, I did not hold high expectation of winning. Things came out as a complete surprise. It was a pleasant surprise.

This time around I have a problem. Although I am less involved as I am not volunteering for anyone and I have not been to too many political events, I somehow have set a certain expectation. Past victories made me addicted to that feeling of joy.

I will not share the expectation but I can tell you that it is susceptible to disappointment.

I did not realize how much emotional investment I have made into the political process over the years until just now. I did not realize how much I am rooting for a certain party to win. I know I have always rooted for them over the past years but the intensity that I feel right now goes beyond my comprehension. It is as if I just realized I have made considerable emotional investment while I was sleeping. Then suddenly, just as I wake up, I find out of that investment with tomorrow will be the judgment day. Tomorrow will decide whether that investment will bear fruits. I wake up shocked, feeling naked with no time to regain my composure.

That is just too much for me.

I now somehow understand how a person can resort to violence. The impossibility of accepting a disappointment so big will force one to reject reality and forcefully change what is true. Slam the sledgehammer hard enough and then maybe reality will change so that it will no longer be a disappointment. It can become what you want and expect. From a loss, to a win, by force.

And if you have been in power so long, being out of power can create a sense of denial that is so strong…

I am not advocating violence. Violence is the worst thing that can probably happen the day after tomorrow. Violence will undo whatever progress we have made, win or lose. Yes, win or lose, there will be progress. We cannot allow violence to undo the progress.

But I think I can understand why someone would or could resort to it. I think so.

As I sit here, I am hoping for the best and try to temper my expectation down. The high expectation is unhealthy for me, especially since, well, what can a person do so late right now? It is unreasonable to punish myself for something I realistically have no control over. Damn those political scientists.

Hopefully tomorrow by the time I wake up and get ready to vote, my expectation will be lower than what I have right now, just to save myself from any heartbreak that I cannot stand.

I am curious at some of the projected fiscal deficit figures which have come out from the internet. A number of them are fanciful.

One that I have read has the deficit under Pakatan Rakyat manifesto rising to close to 12% of nominal GDP while BN would be as low as 4%. The 4% figure is really the number that is stated in the 2012/2013 Economic Report as published by the Treasury for the 2013 budget back in September 2012. This number was published much earlier than 2013 BN manifesto and I doubt the 4% incorporates most if not all of BN manifesto. So, citing the 4% is misleading. In any case, I have written how that 4% in fact is increasingly an incredible figure. I have in fact wrote about this at work as early as October 2012. It is just common sense if you know your stuff and have been monitoring government finance for some time.

First, I have a gripe on some of the numbers. Many projections appear to be based on 2012 nominal GDP figures. Obviously, any ratio based on that number will overstate the deficit ratio since the 2012 GDP figure will very likely be smaller than the 2013 GDP figure.

Second, some take the whole manifesto expenditure and lump it up in just one year when it is clear that many of those spending will be distributed across multiple years. Naturally, you will get a humorously humongous number if you do that.

So, I am annoyed. And to disprove those numbers, I need to produce one of my own.

I hate to disprove Syed Hussein Alatas but I am lazy. I am taking manifesto expenditure figures estimated by The Malaysian Insider and comparing it to Treasury’s 2013 nominal GDP figures. I am not fully convinced of the numbers estimated by TMI but like I said, I am too lazy to produce my own estimates. After all, these are numbers for my blog. If it were for work, I would be more diligent. So, the TMI is the best I have. In my defense, the TMI numbers do not suffer from the two criticisms I have listed down.

TMI has it that BN manifesto in the first year would cost RM12.5 billion while PR’s to cost RM25.6 billion. I do not know the assumptions behind it but I am taking it in good faith.^[1]

The Treasury in its Economic Report projects the nominal GDP for Malaysia in 2013 to be slightly more than RM1.00 trillion.^[2] The Treasury also projects a fiscal deficit of close to RM40 billion in 2013.^[3] So, the base case has the fiscal deficit as 4.1%.

Taking a simple view that all manifesto expenditures are unaccounted for in the 2013 fiscal deficit, that would mean BN manifesto would increase the deficit to 5.4% while PR manifesto would push it to 6.7%.

As you can see, the numbers are less alarming than what political hacks all around have been brandishing. That is not to say those figures are acceptable and I am sure Fitch, S&P and Moody would stand up and yields to spike a bit but it is not the end of the world.

Now, the definition of first year is problematic because the winner of the election will have only about six months to implement their manifesto in 2013. Furthermore, the expenditure for 2013 has been set, notwithstanding possible additional unbudgeted spending that may come later in the year. Furthermore, the six months of 2013 will likely be months of firefighting for both sides.

Because of that, it is probably better to look at the deficit number in 2014 instead.

Now, let us say that the nominal GDP in 2014 would grow at its 2011-2013 growth average (inclusive of the 2013 projected figure), which is about 6.6%. That suggests the nominal GDP in 2014 would be close to RM1.07 trillion.

Let us also assume that the deficit stays the same at RM40 billion however unlikely that will be.

So under a base case scenario before accounting for manifesto spending, the 2014 deficit-to-nominal GDP ratio will be 3.7%.

Accounting for manifesto spending, for BN it might be 4.9%. For PR, it might be 6.1%.

Now, PR manifesto cost might be slightly overestimated. This is especially so because the TMI figures is a gross number. PR will likely institute open tender system more widely and that may reduce overall expenditure by a bit.

As for BN estimate, it is likely slightly overestimated given the base case because I would think some manifesto expenditure would have been included in the budgeted expenditure. Furthermore, some the MRT spending is a kind of contingent liability expenditure: it is “off the balance sheet”. It is just not included in the official deficit calculation.

And the revenue side has not been considered yet. But I am not going to do the revenue projection. After all, the purpose of this entry is to show that it is not the end of the world.

There is just too much uneducated fear mongering and I hate that.

  [1] — [Populist pledges weigh on Malaysia’s wallet, reports WSJ. The Malaysian Insider. April 30 2013]

[2] — [Gross National Income by Demand Aggregates. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]

[3] — [Federal Government Finance. Economic Report 2012/2013. Malaysian Treasury. Accessed May 1 2013]

Here is an interesting paragraph which describes how a cut in government debt can lead to lower borrowing cost in the economy:

A decrease in the supply of government debt has forced some money fund managers and cash investors to scramble for alternatives. Higher demand for commercial paper, repurchase agreements and other short-term private debt has knocked down borrowing costs on Wall Street. [US expects to pay down debt in Q2 for first time since 2007. Reuters. April 29 2013]

How about that? A clear crowding out (or rather, crowding in) effect between the public and the private sectors.

Life in Kuala Lumpur in the past few weeks has been a constant reminder of our flawed democracy.

If you are in the city, look all around you. You will see banners and posters of political parties almost everywhere. Superficially, the colorful show of political flags is a sign of democracy. Now, look closer at those belonging to Barisan Nasional and especially those with Raja Nong Chik Raja Zainal Abidin on it. Be mindful of their messages.

Those messages celebrate the achievements of Raja Nong Chik as a minister. It highlights what he has done over the past few years, with him heading the Ministry of Federal Territories. It appears like the all too admirable democratic judge-my-record, thank-me politics. He even thanked himself in many of his political banners and posters for stuff he did in the city.

Yet underneath this veneer is acid corroding the pillars of our democratic institution.

The campaign narrative told by BN to the voters in the city makes one think that Raja Nong Chik is the mayor of Kuala Lumpur. This is all the more so in Bangsar where he is contesting in the general election. If those messages are to be believed, it would appear that he was both the mayor of Kuala Lumpur and the Member of Parliament for Lembah Pantai, the parliamentary seat which Bangsar is a part of.

If all those achievements highlighted for electioneering purposes are truly his, then he must have directed the very public resources belonging to the city to do what he did. He takes credit for things that are the normal function of City Hall, like the maintenance of drainage around the city, which is funded by taxpayers’ money.

There is a problem with this if one views it through a democratic lens.

The truth is that Raja Nong Chik is an unelected senator appointed as the minister for the Federal Territories. He is not the elected mayor of Kuala Lumpur and he is not the elected representative for Lembah Pantai.

The 2008 general election saw BN win only one out of 11 Parliamentary seats in Kuala Lumpur. While Parliamentary seats are an inadequate proxy to the will of the majority in the city, it is the best proxy we have got since there is no local election. Based on that proxy, the majority in the city conclusively rejected BN candidates and BN itself then in March 2008.

In spite of that, BN continued to control City Hall through the Ministry of Federal Territories as if they had the moral mandate to do so. With that, the party was the one that determined the development agenda of the city. Or perhaps, more importantly, BN controlled the spending priority of City Hall.

Add in the fact that the actual mayor of the city also is unelected, voters of Kuala Lumpur are quite simply unrepresented in the very authority that governs the affairs of their home. The elected representatives are dependent on the goodwill of City Hall and the ministry to execute the normal functions of an elected representative.

It is Putrajaya with its pretentious grandiose buildings that dictate the affairs of Kuala Lumpur. The city of millions is being governed from a desolate town erected in the middle of nowhere.

That is undemocratic. And that, ladies and gentlemen, is exactly the premise that BN’s campaign messages rest upon.

How long more will the Kuala Lumpur electorates continue to be politically unrepresented in the running of the city?

There is no reason for BN to change the status quo because it is the beneficiary of things as it is. If BN continues to be in the minority in the city, it is in their favor to keep the whole undemocratic structure intact. Even if BN somehow miraculously wins a majority of Kuala Lumpur Parliamentary seats and by proxy, the will of the voters of Kuala Lumpur, the moral authority BN might gain through this democratic process is only a redundant bonus.

That begs a question. If Raja Nong Chik and BN do not require a win to do what he did in the next Parliamentary term, why vote him in at all?

  First published in The Malaysian Insider on April 24 2013.