Macro Economy Strategy



  • Low Interest Dilemma
    The low interest regime imposed since September 98 have given debt ridden companies space to breath. However, its also limit number of tools available for Bank Negara Malaysia to manage the monetary policy.
    Theoretically, low interest rate encourage transfer of bank deposits to other assets like property, stocks, foreign currency, etc. However, due to low confident level, even the current official inflation rate of 5.3%, which is marginally higher than bank fixed deposit rate has failed to shift large proportion of fixed deposits to other assets. Statistics for the last few months show, less than 10% of RM400bn available in the banking sectors is transferred to property and stocks.
    To encourage further spending, Bank Negara Malaysia can reduce bank interest further. Extreme low interest as practice in Japan has shown, without market confident, low interest rate doesn’t guarantee increment of consumers spending. However, should there be any increment of confident, the negative real interest rate will likely to fuel assets (e.g. property) and consumer inflation.
    In the event that negative real interest rate is maintain longer than short term, with low confident level, the obvious alternate assets for bank deposits is foreign currency or commodities traded in foreign currency (e.g. gold). Should the government decided to allow ringgit to float or freely convertible, it is likely to cause massive outflow of ringgit deposits to other currency. But to protect debt ridden companies, the Government is determined not to allow interest rate to rise.
    A basis of market economy (capitalism) called for destruction of inefficient companies and freed the resources for efficient companies. A function of high interest rate during recession is to weed out these inefficient companies. An assets inflation during recession will masked the inefficient (debt ridden with excessive capacity) companies, burden efficient companies and create an unsustainable bubble. As the results, inefficient companies will survived and efficient companies will be weaken.
    To compete in today’s global economy, efficiency and productivity is the key to survival. As there are very limited tools available to strengthen efficient companies without impairing inefficient companies. To open up to globalization, raising of interest rate is inevitable.
    Therefore, it is fairly to conclude that the Government is unlikely to allow ringgit to float or freely convertible in the short to medium term unless the Government permit to interest rate to rise, and rise in inflation (assets and consumer) is likely. In the longer term, the Government has a difficult task to nurse the country to compete globally.April 4th., 1999

  • GDP Forecast for 1999

    • With data currently available, this editorial forecast Malaysia GDP to shrink between 3% to 5% in 1999. March 1999.

  • Investment Risk in Malaysia

    • As a foreign investor, the foremost concern is protection of investment. Malaysia’s track record in the past two years is less than idea.
    Imposition of capital control on 1st. September 1998 does not guarantee similar unorthodox policy will not be implemented in the future. Foreign holding in KLSE is estimated at between USD7bn to 10bn. Come 1st. September 1999, should these investments be repatriated, the country foreign reserve may be depleted by between 25% to 50%; which may cause a fresh round of Ringgit depreciation and crisis in KLSE. To conserve the foreign reserves, the Government may spread the amount to be repatriated over a few months by limiting the total amount allowed to repatriate in a month equivalent to current account surplus of that month.
    When things turned sour as in 1997/8, divestment was labelled as economic sabotage by the then chief of Malaysian Police, which is liable for detention without trial under the notorious Internal Security Act. And legal case of ex-deputy prime minister Datuk Seri Anwar Ibrahim and opposition MP had demonstrated, the judicial is inclined to bow to political pressure.
    The Government has yet to use sanctuary offered by capital control to reform the economy, e.g. merger of banks and finance companies have yet to take place. Fundamentally, the economy remain over built, inflated and uncompetitive.
    Minority shareholders’ interest in KLSE is poorly protected. Awarding of contracts lack transparency, executives accountable to board of directors only, assets valuation worth only the paper printed on, there isn’t any governmentship over board of directors e.g. lack of representative of minority shareholders or independent directors. The regulating authorities like Foreign Investment Committee (FIC) and Security Commission have regularly permit proposals benefit exclusively to majority shareholders e.g. exemption from compulsory buy out. By any conventional analysis or international standards, KLSE is overpriced.
    By requirement of liquidity, funds manager is prohibited to invest in country with capital control. To invest in Malaysia required return better than internet stock.
    Note: This web host, GeoCities, which was floated at $9 a share last autumn is offered by Yahoo!'s for $113.
    note: Prime Minister Mahathir Mohamad said Monday (2/1/99) that foreign funds accounted for about 23% of the stock exchange's market capitalization, which stood at about 600 billion ringgit when the key index was at the 600 level.

  • A Revised Economic Policy For The People

    • Objective of this economy policy is to achieve a competitive macro economy and better standard of living through a lower cost of living.
    1. To shift income tax collection to tax on spending; to implement 5% VAT (Value Added Tax) on all goods and services except foods, baby clothing, books and medicine.
    2. To overcome global over capacity and competitiveness in motor industry, to merge Proton and Modenas with foreign car manufacturer e.g. one of US big three or any of Japanese.
    3. To nationalise all monopoly service providers (eg PLUS toll way) and to keep these revenue at operation and maintenance cost.
    4. To discourage speculation in property market, to revise Property Gain Tax as follow;
    For property sold within 2 years of purchase, to tax 50% of selling price.
    For property sold within 3 years of purchase, to tax 40% of selling price.
    For property sold within 4 years of purchase, to tax 30% of selling price.
    For property sold within 5 years of purchase, to tax 20% of selling price.
    5. To discourage speculation on stock market, to impose Capital Gain Tax for shares sold within one year of purchase at 10% of selling price.
    6. To shift business risk from consumer back to developer, banks can only give out housing loans to property that is developed and have obtained certificate of fitness (CF).
    7. To encourage development of people’s house; rebate on corporate tax would be granted to developer for building house or apartment with 1000ft2 or more built-up useable area at below RM80000 selling price.
    8. To abolish capital control. However, Malaysian Ringgit to remain unconvertable outside the country.
    9. Foreigner is only permitted to purchase non-landed residential property with value more than RM300 000.
    10. To reduce import duty of all intermediate goods to 15% or less.
    11. To eliminate import duty of all raw materials and items not manufactured in the country.
    December 98

  • Economy Outlook November 1998

    The 1999 budget is basically indifference with 1998 budget.
    From data available in the economic report, citing the following;
    - Government gross development expenditure is to reduced by 9.4% to RM19.5bn.
    - Construction industry is to contract by 8% in 1999.
    - The Government to narrow saving investment gap of about 5,4% of GNP.
    If the current Governmenr persist, We forecast in 1999;
    - Real GDP to contract 4 to 6%.
    - Liquidity to tighten from second quarter.
    - KLSE to collapse.
    - Inflation rate to be higher than bank fixed deposite rate.

    With oustanding bank credit is about RM418 billions or 160% of nominal GNP and of these, 40% is in broad property sector and shares financing means borrowers need to pay about RM40bn of interest payment p.a. With loan repayment, large proportion of borrowers (companies and individuals) are having negative cash flow and value of assets pledged as security is lower than outstanding loans.
    The BNM is required to implement policy to ease credit repayment; otherwise, even with exceptional low interest rate many companies will fold. Economic expansion through loan growth is inflational and unsustainable. The priority should be bringing price (particulary assets) down to an affordable level. Otherwise, the bubble will eventually burst.
    Nov 98

  • Economy Outlook October 1998

    The GDP is likely to shrink between 7% to 9% and 6% to 8% for third quarter 1998 and whole year 1998 respectively. GDP forecast for 1999 will only possible after the budget is announced. Without fundamental changes or major restructuring, any GDP growth is required to fuel by foreign capital. Otherwise, another crunch and crash is inevitable.
    Compared with one year ago, the economy structure and fundamentals remain largely unchanged. By the end of this regional recession, the country will be uncompetitive and worst off than our neighbours.
    The current Bank Negara policy on lending will; - decrease quality of banks' loan portfolio. - throw good money after bad money. - increase banks' business risk.
    World Bank is unlikely to disperse USD700m loan by the end of this year. The proposed Japanese USD30bn loans to Asean come with strings attached. The recipients country need to award certain portion if not all contract to Japanese firms.
    The RM10.5bn bail out of Renong has set a precedent to encourage 'strategic' companies to venture into unprofitable or unviable business. Inefficient and grossly managed companies must be allowed to fail. Otherwise, these companies are consuming resources wastefully. As Plus has been granted tax free status and capital investment is taken care of, Plus toll charges should be reduced accordingly. However, Plus toll charges is expect to rise in the new year.
    Accumulated current surplus for the past eigth months since January is RM32.4 billions. However, foreign reserves held by BNM in USD remain largely unchanged means; - Many export are 'big ticket' items like aircraft and ship. - Surplus is used for foreign loan repayment. - Capital flight from the country (eg withdrawal of foreign capital). - redefinition or reclassification of items. - Statistical error. - Drop in import is faster than export.
    Current account is expected to deficit in twelve months time; - Currency gap caused by depreciated ringgit has narrowed. - Import is expected to rise faster than export.
    Should there be a global recession within the next three years, with the current structure, the economy will be in prolonged depression.
    Oct 18, 1998

  • Forecast based on current Government Policy
    The Government current policy of ;
    - reducing SRR
    - reducing interest rate
    - encourage construction and housing sectors
    - propping up KLSE
    - loan expansion of 8%
    - fixed forex.
    - capital control.
    - revive infrastructure projects.

    Will result;
    - Fixed deposit rate is expected to be at or below inflation rate, hence discourage saving.
    - Many listed companies are protected from going downunder.
    - Listed companies to launch more property development projects in RM200000 sectors.
    - Liquidity will be channelled into KLSE and property market, hence rise in stock and property price.
    - Economy is revive for the period.
    - The Government committed the entire country resources to kick start the economy. - GDP to contract by 2 to 3% for year 1998.
    - GDP either to contract up to 1% or growth by 1% in year 1999

    In addition of the above, we proposed the Government to address the following;
    - Manufacturing productivity and efficiency has not rise significantly to compete with other countries.
    - With about 55% of export go to Asian countries. With localised boom and the rest of Asian in recession, import will rise faster than export. Hence, current account is expected to go into deficit in about a year time.
    - Low interest rate in Japan (was at 0.5% before it dropped to 0.25% last weekend) didn’t prevent Japan’s economy to contract three quarters in a row.
    - Excessive loan expansion above GDP will create excess liquidity for speculation, hence another unsustainable bubble. To introduce capital gain tax for short term seller eg one and five year for stock and property respectively.
    - American and European fund managers are unlikely to participate in KLSE at least in the duration of present administration.
    - Average consumer’s disposable income is not expected to rise in the next twelve months. Hence, consumers confident remain low.
    - With minimum reserve, diminishing deposits and growing NPL, the banking industry may not be able to withstand runs on banks and large default on loan.
    - Cost of doing business in Malaysia remain high with excessive monopolised service providers.
    - Parallel forex market should forex control remain in place after one year.
    - Average house price is still beyond the reach of average wage earners (RM3000 per family).
    - Supply in construction industry still remain over demand.
    - It is estimate that; the domestic resources can support the above growth for one to three years. Thereafter, foreign funding is required to sustain the growth.
    Should this policy failed; cash is not only king but god, and the country will be at the mercy of multilateral agency. Therefore, it is utmost critical to be successful. 15th. Sept 98

  • An Open Letter to Prime Minister Mahathir from Prof Paul Krugman

  • Capital Control And Fixed Forex Rate
    The fixed forex rate announced by the Government on 2nd September is a stop gap solution for short term only. This fixed forex rate should be removed in six to twelve months time. If the fixed rate does not reflect market demand and supply equilibrium, a parallel black market rate will emerge in Malaysia.
    Capital control imposed on 1st. September may insulate Malaysia from forex speculation, cut link between interest rate and forex and force repatriation of offshore ringgit in the short term. However, without fundamental reform (eg Japan), low interest rate, stable forex rate and budget deficit will not be sufficient to turn around the ailing economy.
    The Government should select infrastructure projects that provide positive contribution to social cost and economy at the end of project; otherwise, demand created by infrastructure is only for the duration of the project and will drain off resources in the long run. 3rd. Sept 98.

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