Categories
Economics

[2767] Deflation is coming to Malaysia. Is it bad?

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.

Categories
ASEAN History & heritage Politics & government

[2766] 50 years outside of Malaysia

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.

Categories
Economics

[2765] If pre-GST spending was that high, how low would it be post-GST?

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.

Categories
Economics

[2764] Will there be a spending spree before the GST?

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.

Categories
Economics

[2763] Is the new 3.2% deficit target achievable?

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.