Category: Economics

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Economics

[2639] Calculate your personalized inflation rate, the French edition

Remember that one post where I outlined how you can calculate your personalized inflation rate?

Well, it is a bit long-winded and doing math in English is always painful. Words do not have the power to concisely deliver a message like how algebra can. But not everybody works well with algebra unfortunately.

But do you know what is better at delivering the same message than algebra? An application.

The French National Institute for Statistics and Economic Studies (the equivalent of Malaysia’s Department of Statistics, I think) has produced an application to calculate personalized inflation rate. It is here if you want to play around with it.

The only downside with it is that it is in French… and it only works if you live in France.

I think if somebody with great coding knowledge can replicate the same thing for Malaysia, I can supply the data easily.

Categories
Economics

[2638] The market will see through the undisclosed, differentiated Indonesian capital adequacy ratio

Bank Indonesia, the central bank of Indonesia, has been introducing several new institutional frameworks and rulings in the Indonesian economy. I suppose, that signifies that rate of reform in Indonesia.

One is the introduction of a trust fund. It is established to encourage Indonesian firms with earnings from abroad to keep it in Indonesia, at least for a bit longer than what typically happens now. The ultimate goal is to prevent the rupiah from depreciating further.[1] I do not understand how that will keep the money in. That is a polite way of saying, I do not think it will work too well.

Maybe the Indonesian central bankers know more than me about their economy and I am missing a piece of the jigsaw puzzle.

Another is the introduction of a new differentiated capital adequacy ratio ruling. Soon, different bank will face different ratio requirement based on their risks as determined by the central bank. But according to a report in the Jakarta Globe:

Under the new regulation, Bank Indonesia requires a minimum 8 percent capital adequacy ratio — which measures the lender’s financial strength — for banks with the soundest risk profile but it set a higher ratio for the riskiest. In the previous regulation, the ratio was set at 8 percent, regardless of the risk profile.

Bank Indonesia groups the country’s 120 commercial banks into five risk profiles. It usually updates a bank’s risk profile every 6 months but does not make the rankings or their specifications public to avoid a run on deposits at lower-ranked banks. [Dion Bisara. Bank Indonesia Sets New Rule to Strengthen System. Jakarta Globe. December 5 2012]

Bank Indonesia does not make the rankings or the specification public to avoid a run.

That is tough because as long as one can have access to the accounts of a particular bank, one can try to figure out the ratio faced (or really, ratio maintained) by the bank. From there on, the market can imply the imposed ratio.

In other words, the public can find out exactly what Bank Indonesia tries to not divulge. So, here is a ruling that I think is good but as far as risks, bank run and the differentiated capital adequacy ratio are concerned, I am quite certain that it cannot work. Bank Indonesia is revealing the very information it wants to hide.

To come to think of it, in times of banking crisis, it appears that banks with the highest ratio may face the highest likelihood of experiencing a run (ceteris paribus… and knock on wood).

The simplest and the most effective way to have a good ratio and not tell the market anything about individual banks is to impose a more or less uniform requirement across the board. There are issues with uniform requirement but it will address the problem of information superbly.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — The central bank on Friday took another step to retain foreign earnings by setting up a trustee fund that will ensure steady and sustainable flow of overseas earnings that will be repatriated into the country. The move might also help to stem the rupiah’s depreciation against the dollar by holding income earned from abroad over a period of time rather than being withdrawn quickly. [Francezka Nangoy. Dion Bisara. Central Bank Sets Rule to Keep Foreign Earnings. Jakarta Globe. November 24 2012]

Categories
Economics

[2637] The necessity of fiscal austerity, sometimes

This is an excerpt from an old article by Raghuram Rajan. The excerpt is a point on the necessity of having a fiscal austerity program during crisis times even when it is ideal to have it spread over time. It is not a new point, but it is worth to be highlighted as a reminder on why some things are as they are right now.

…Fiscal austerity is not painless and will probably subtract from growth in the short run. It would be far better to phase reforms in over time, yet it is precisely because governments did not act in good times that they are forced to do so, and quickly, in bad times. Indeed, there is a case to be made for doing what is necessary quickly and across the board so that everyone feels that the pain is shared, rather than spreading it over time and risking dissipating the political will. Governments should, however, underestimate the pain that these measure will cause to the elderly, the youth, and the poor, and where possible, they should enact targeted legislation to alleviate the measures’ impact. [The True Lessons of the Recession. Raghuram Rajan. Foreign Policy. May 2012]

Categories
Economics

[2636] Greek buyback program is not ideal

As part of the bailout agreement between Greece and the Troika, the Greek government has agreed to reduce its debt. This is the context behind the latest Greek buyback program, where the Greek government is looking to reduce EUR20 billion worth of debt. While I typically like debt reduction exercise by the public sector, I am unsure how this particular effort at this particular moment is ideal.

The main issue I have with the program is that Greece has no cash of its own. At least they do not have enough. On top of that, the government suffers from primary deficit and that means the government is unable to finance its operations. So, it is dependent on bailout money, provided by the reluctant Troika which includes European governments, which includes even the more reluctant Germany, the country that is really footing in the afterparty clean-up bill.

So, that is a bailout financed by public money of a different country.

The problem here is that the money will be used to buy back debt from private creditors. As you can see, it is a transfer of wealth from public coffers to private individuals and firms. There is something repulsive in doing so.

The factor that may mitigate that sentiment is that a majority of those private shareholders are Greek banks. In some sense, a large chunk of the bailout money used in the buyback program will help strengthen Greek banks and indirectly, the Greek economy. A majority of holders of Greek sovereign debts, apart from the Greek banks, are European of origin. So I suppose the buyback does help stabilize the European market too.

Anyway, while these private bondholders suffered a large haircut recently, the buyback program will mean that these holders will book in some profits according to the Wall Street Journal.[1]

Another factor is that because the offer is slightly above market price of those debts, the price of Greek sovereign debt has increased and that reduces its yield. In other words, that allows for cheaper financing for Greek government. But I do not think anybody will be crazy enough to buy Greek sovereign debt any time soon.

Regardless the mitigating factors, I prefer one thing more than the buyback: more debt haircut but this time on the public side.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — Greece’s debt agency launched a multibillion-euro offer to retire roughly half the debt the country owes to private creditors, part of the latest effort to trim a towering debt burden. Bond markets reacted positively after Greece signaled it would pay a slight premium to buy back that debt, but the higher price and the limited size of the offer raise questions about whether the country will be able to cut its debt as much as its European and international creditors hope. [Alkman Granitsas. Neelabh Chaturvedi. The Wall Street Journal. Greece offers to buy back debt. December 4 2012]

Categories
Economics Society

[2634] Any Malaysian welfare system may encounter some problems 30 to 50 years from now

An ageing population is a major economic problem to a number of developed countries. It is not ageing itself that is the issue or even slower economic growth. An aged society usually has an advanced and rich economy. Further economic growth does not mean much if the society is already extremely rich. The problem comes when there is a social welfare system that depends on the young to support it. With an aged society, the system would have to distribute its resources to the aged majority with the young minority supporting contributing to the system.

Malaysia does not the demographic problem yet because the country has a very young population. The median age is approximately 26 years old. In fact, Malaysia’s baby boomer generation has just entered or just about to enter the Malaysian labor market. With a high proportion of productive population, Malaysia is set to grow in a meaningful way in the long run.

Population growth, specifically labor force growth, is important to the sustainability of a social welfare system, including the Employees Provident Fund. The EPF is a retirement fund for those working in the private sector in Malaysia. It is not a comprehensive welfare system but it is still susceptible to demographic changes nonetheless.

At the moment, words on the streets have it that the EPF has more money than it can invest in Malaysia: there are not enough Malaysian sovereign bonds for EPF to buy (this probably leads to a conclusion that I dislike: the Malaysian government can comfortably raise more debt, especially in this environment of low yield without much economic repercussion). That is a testament of how favorable Malaysian demographics is at the moment.

This is the latest population profile for Malaysia from the Department of Statistics:[1]

You can see the baby boomer generation in the lower part of the chart.

What may be of concern — some far distant future, probably in 30, 40 or even 50 years — is when the Malaysian baby boomers begin transitioning into their golden years. I give the 30 to 50 years range because the current boomers are below the age of 30; remember the population median is 26. Assuming that they will retire at 60 years, you will get an estimate. My guesstimate is somewhere between 30 and 50.

Already the 0-4 years old, 5-9 years old and 10-14 years old cohorts are individually smaller than the 15-19 year old and 20-24 years old cohorts. The profile of a boom is clearer when one compares the population profile in year 2000 against that in year 2010.

There is still possibility that the baby boomers may have more children to produce yet another population boom sometime in the future. Yet, with rising income which tends to lead to smaller families everywhere in the world, I doubt it. And average Malaysian income is set to rise (at least in the next few decades notwithstanding business cycle) — please, not because of Pemandu — it’s the population boom dividend!

I may be wrong still — we will see that within the next 40 years’ time — but I think we are seeing our only population boom. If I am proven right, then the EPF might have trouble servicing the retirees in 40 or 50 years’ time, unless Malaysia suddenly develops a greater appetite for immigration.

The problem of EPF will be the least of our concern if Malaysia institutes the so-called 1Care scheme which aims at creating a more comprehensive healthcare system, which includes universal insurance coverage.

The problem however is beyond the horizon of the current leadership, in both Barisan Nasional and Pakatan Rakyat, judging by the populism of the day.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — Population and Housing Cencus, Malaysia 2010. Department of Statistics.