Macro Economy Strategy



  • The End of Independent BNM
    The resignation of BNM governor Ahmad Mohamad Don and his deputy Fong Weng Phak will undermined the independent and creditbility of BNM. In the last thirty years, BNM have been a counter balance to market short-term inequilibrium. To lose this ability will exaggerate long term volatility of the whole financial system.
    The Government gamble on interest rate and forex may have pay off in the last four weeks does not means the forex market is indifference to interest rate movement. 31st. August 98

  • BNM To Lower BLR
    The expected lowering of Base Lending Rate in August will caused further depreciation of ringgit and outflow of funds. As demand of loan from productive sector (e.g. manufacturing) has reduced, ease of liquidity will benefit non-productive (e.g. property) more. Reducing interest rate by up to 2% will not provide significiant assistance to ailing companies in the short term. What these ailing companies need immediately is cash flow and demand for their grossly overpriced property. The current priority should be reducing price of supply and increasing consumers disposable income. 1st. August 98

  • National Economic Recovery Plan
    Regular visitors to this website may find the National Economic Recovery Plan (NERP) familiar.
    The objectives of the plan is expected. However, more information on implementation should be released.
    This editorial recommend;
    To publish the proposed band and composition of Ringgit exchange rate and be endorsed by IMF.
    To avoid infrastruture projects that do not generate positive contribution to the economy (e.g. privatised projects with excessive profits).
    To avoid infrastruture or construction project with negative utility value or dubious value (e.g. building something for future generation or to beat the world).
    To set a new guide line on privatised projects e.g. maximum 5% return on capital or minimum 10 years pay back period, maximum 15 years concession period, price increase at or lower than inflation rate, price charge at or lower than existing rate, to set up watch dog commission for overseeing this projects.
    To encourage housing projects that have 100m2 built up area and cost less than RM100,000.
    To abandon creative accounting scheme (e.g. MAS Capital).
    Consistent Government policy inline with NERP.
    The market will give the NERP three to six months to implement before further action is taken. All else failed, the Government can resort to the last, easiest and worst option; printing more money to increase inflation rate. 26th. July 98

  • With domestic saving at more than 150% of GDP, demand can be re-generated by monetary and fiscal expansion as suggested by Prof Krugman for Japan (The Times, 12th. June). However, the country must have low inflation rate, low bank interest rate and stable exchange rate. Otherwise, it will be like adding fuel to fire to boost inflation to hyper.
    13th. June 98

  • The Myth of Asia's Miracle by Prof Paul Krugman
    If one is agreed with Prof Krugman; to develop cutting edge technology in Malaysia is beyond the country's capability at the present. However, the Government can provide accelerated depreciation to companies for purchase of machinery to improve productivity, and encourage economic growth thru output of capital products rather than of capital investment. 8th. June 98

  • High Interest Is Neccessary in the short term to resist rising inflation and devaluation of ringgit. The dark side of market economy required weak and poor companies to fail for others to flourish, and high interest rate accelerate the fall out of weak companies. Furthermore, these ill managed companies are wasting valuable resources (eg banking loans).
    Current supply and demand curve (eg property) is not in equilibrium because price is still too high. High interest rate at current stage is an instrument to push down price. Once price is at about or below replacement cost, price will stabilised and demand will surge. Lowering interest rate too soon will only prolong and worsen the current reccession.
    Domestic interest will eased when NPL (Non Performing Loan) ratio is declining. It is an incentive for the BNM and banks to reflect NPL early.
    Transferring NPL to Assets Management Corporation (AMC) will remove burden from banking industry. However, without major foreign capital involvement will have negative impact on the economy. The worst scenario would be for the Government to print money for AMC.
    High offshore ringgit interest rate mean either offshore is short of ringgit, ringgit is likely to devaluate or domestic interest rate is likely to soar.
    The independence of Bank Negara Malaysia is critical to long term stability of the financial system. Hence must be left alone at all cost. 2nd., 3rd., 13th. June 98

  • The Theory of Disposable Income.
    This theory argued disposable income is a better yardstick of economic performance.
    This theory stated in the long run, an individual can only afford a certain portion of his income on essential items; 3 years of his wages on house, 1 year wages on car and 15% of wages on food. If an individual pay more than the above maximum sum, he has to cut down on other spending or if he can't spend on other item (eg house), he saves. This partly explain high saving rate in Malaysia.
    Once essential items price is more than affordable price, the supply and demand for that item is said to be imbalance. Once prices is more than double of affordable price, the price will crashed.
    Disposable income of masses has more impact than corporates profit. Rise in corporate profit allowed corporates to either invest to increase in supply of goods or distribute profit to sharesholders. However, if disposable income of masses is not increase sufficiently, increased in supply of goods will not be consumed fully.
    The current privatisation policy guarantee profits to privatised company, allowed price increase above inflation rate and consumers have to pay additonal cost for these privatized services (these cost were included in tax previously). Hence, disposable income of masses have suffered.
    Economic recession is a period of supply over demand. Demand can be boosted by increasing disposable income. Disposable income can be increased by increasing income (ie wages) or reducing cost of essential items (e.g. house, car, food, clothing, tax burden, converting public service 600 phone number to 800 free phone, etc).
    Increasing wages currently without improvement on productivity will create a bigger unsustainable bubble; furthermore, current productivity is still below international average. Therefore, economy can be revived by reducing prices of house, car and privatised services. 13th. May 98

  • Malaysia has high national saving rate means more money is available for investment. Unfortunately, many of these investments are unproductive or even counter productive eg popping up shares price and bailing out poorly managed companies. A main reason why Malaysia has high saving ratio is house price is beyond most wage earners. If reasonable houses (about 100m2 living space) is made available at maximum of 3 years of average wages (about RM100 000); these saving will be transferred into productive use; construction industry, manufacturing industry (electrical appliance, furniture), service industry, utility, etc.
    In the US, house ownerships is high with low saving ratio. However, in Japan, house ownerships is low with high saving ratio.
    Therefore, producing affordable and habitable house is a key to economy revival. To achieve this, the Government must ensure; lands is available cheap, developer to complete house before selling, speculation is limited and loans is available to house buyers. 4th. May 98

  • Economic Recovery Politicians may say what they like on economic recovery, monetary policy need 6 to 18 months to take effect, and no one can predict or tell when is the worst of recession until it is over.
    However, economic recovery can be indicated by;
    Better than expected profit and sales (real, inflation adjusted).
    Companies are planning for investment.
    House price start to move up.
    Waiting list for new cars is three months or more.
    Interest rate is lowering.
    Ringgit is stable (fluctuate +/ 5%) or appreciate against USD.
    The above indicators are selected because there are not easily manipulated.
    20th. Jan 98

  • High Inflation rate in 1998 As the effect of Ringgit depreciation filtering through, high inflation rate in the first half of the year is unavoidable. Real wages is expected to shrink by up to 20%. Should the Government bow to the pressure to print more money will send the country to spiral inflation, further devaluation of Ringgit, delay, prolong and deepen the expected recession. As Malaysians are proned to band wagon effect, sending the country to hyper-inflation is a possibility. Credit crunch and tight money supply is essential to control the inflation rate.
    Once the economy is at disinflation period, easing of credit crunch and money supply will create a positive multiplier effect to economic growth. To avoid repeated excessive loans created by high saving rate, the Government can purchase US Treasury bills.
    More information on disinflation and deflation is available from Money section of Times newspaper dated 17th. Jan 98. 17th. Jan 98

  • IMF team to visit Malaysia on Tuesday, 13th. January 1998 and to be followed by its Managing Director Mr. Michel Camdessus. As IMF don't visit without agenda, an annoucement after the visit will bring light to the direction of Ringgit.
    Source: BBC World News
    According to Far Eastern Economic Review , the visit by IMF team didn't take place as the Malaysian Government feared it might create a negative impression. 15th. Jan 98.
    Source: Far Eastern Economic Review
    Mr. Michel Camdessus's comment will stabilised the Ringgit for a while. We expect the Ringgit to float between RM3.80 to RM4.80 to a dollar until current account is in surplus. The current priority for the Bank Negara is not to strenghten the Ringgit but to stabilize the Ringgirt within a range and peg Ringgit against basket of currency (e.g. USD, JPY, DEM and UKP). 17th. Jan 98. Source: Financial Times

  • Putra Jaya Multi billions Ringgit works at Putra Jaya should be suspended immediately until economic situation is improved. Unfortunately, tenders are still being awarded as late as last week of December 97. Putra Jaya will exaggerate surplus of office space in the capital, does not generate foreign income or improve effeciency of economy (except social cost from possible reduction of traffic jam in town center), and is a drain of foreign reserve (about 30% to 50% of construction cost are imported). As the current forex market is fueled by sentiment, if works at Putra Jaya is not suspended, Ringgit will continue to slide. 11th. Jan 98

  • What Happened to Asia , a paper by Prof Paul Krugman of MIT. 11th. Jan 98

  • Supplier to Developed Countries Setting aside ideology, Malaysia should concentrate to become a supplier to developed countries especially in small to medium industries. In doing so, the country will gained in foreign investment, widening manufacturing base and surplus in current account. Small and medium industry (e.g. light engineering, consumer products, support manufacturing, etc) may not be glamour but have low barrier of entry. Currently, EC and USA protecting these small and medium industry with standards (e.g. UL, ISO, TUV) and distribution network.
    The Government should made UL and ISO standards a compulsory requirement for all manufacturers, made UL and ISO available to public at low cost, subsidizing exhibition in overseas, allocate free trade zone for export orientatal small to medium scale industry, reduce transport cost and efficient delivery system. 2nd. Jan 98

  • Immediate Action required by the market to stabilise forex rate is continuous current account surplus for at least a quarter. The fastest way to achieve this is to dampen domestic consumption. 13th. Dec 97.

  • Natural Growth. Long term sustainable growth without creating a bubble for an economy similar to Malaysia is between 3% to 5%, provided current account is in surplus. Growth rate above these for more than 2 to 4 years will induce inflation. 13th. Dec 97.

  • To take the collapse of market in one shock or over a longer period. If market will be in equilibrium is true, then both ways still reach the same destination. To take it in one blow, situation can not be worst off but better. However, prolong the fall will allowed pain to bite in slowly with longer and slower recovery rate. 10th. Dec 97.

  • Availability of market information (ie transparency) is the single most important factor in market volatility. (1) Market Volatility is inverse proportion to availability of market information or transparency. (2) The rate of change of market expectation and sentiment is inverse proportion to availability of market information or transparency. (3) Whenever fundamentals is not available, decision will be made on sentiments or expectation. (4) In the absence of information, the rate of change is intensify by band wagon effect. 10th. Dec 97

  • In the event of bail out by IMF , IMF is likely to impose the following conditions on Malaysia;To link Ringgit to a bag of currency (preferable major trading partners), instead of just to USD; Fiscal surplus; Current account surplus; To open up protected industry e.g. car, financial; To reduce import barrier e.g. car; To increase transparency of policy (ie greater freedom of information); To pursue market friendly policy (e.g. reduce restriction on foreign exchange, licensing, sharesownership, etc); To reduce number and profit of monopoly companies. 3rd. Dec 97

  • Issue: The rise and fall of stock, property market in Malaysia is spontaneous and excessive. The Malaysian public tend to be influnced by band wagon effect, loop sided media reporting and politicians don't tell the truth.
    Strategy: To permit impartial and free media reporting. 1st. Dec 97

  • Issue: Protected And Unproductive Industry All protected and unproductive (output is less than input in social cost, public cost, etc) industry is a burden to the country (e.g. Proton car, National trucks, National bikes, etc).
    Strategy: To libealise all these industries for fair competition. 1st. Dec 97

  • How and why the 1997 currency crisis started .

  • In order for our products to be exported, our products must be competitive. As a producer, competitive products can only be achieved with low capital cost and operation cost. 30th. Nov 97.

  • The USA is the single largest market in the World. Before July 97, wages in the US is higher than in Malaysia; yet tax, food, house price, car price and clothes in the US are cheaper than in Malaysia. Means certain fundamentals in Malaysia is fraud. 30th. Nov 97.

  • 'The Malaysian Economist' forecast the current recession will last until year 2001 for the following reasons; current property glut need 4 to 5 years to consume, Thailand expect to come out from recession in year 2000 (our economy is about 6 to 12 months behind Thailand), the new millennium factor and expected change of Administration in year 1999. 30th. Nov 97

  • Issue: Industrial Land. Before July 1997, industrial land in Subang Jaya, Glenmarie, Shah Alam were going for MYR1000/m2 or more. Cheapest industrial land available in the market were more than RM150/m2.
    In Britain, the local Government sell selected industrial land at nominal price and pay for industrial building in grant. In the USA, certain industrial land cost less USD10/m2.
    Strategy: Allowed automatic conversion of agricultural land to industrial status. 30th. Nov 97.

  • Issue: Privatized Utility. The Objective of privatization is to provide same service at a lower cost by better efficiency. However, all privatized utilities cost more than before and increment is higher than inflation.
    Strategy: Limit increment to less than rate of inflation, allowed competitive service, limit return on capital to 5%, appoint independent commission to approve charges. 30th. Nov 97.

  • Issue: Transportation. Toll charges on PLUS is more expensive than vehicles (car and lorry) fuel consumption.
    Strategy: Khazanah Nasional Bhd to take over UEM in stock market, at RM3.3/shares cost less than RM2.6 billion (note on 28th. November 97, UEM is valued at RM3.24/shares). At current toll charges, RM2.6bn can be recovered in less than 8 years. 30th. Nov 97.

  • Issue: Telecom Charges. Most if not all companies telephone cost has more than double after Telecom Malaysia charge local call at RM0.03/minute. In the telecom industry, variable cost is vertical i.e. the variable cost for 1 minute and 20 hours duration call is about the same.
    Strategy: Revert local call to RM0.13/call. 30th. Nov 97.

  • Issue: Electricity. TNB charge RM0.27/kwh is more expensive than in the USA at USD0.05/kWh.
    Strategy: Fixed TNB rate at not more than 10% from US rate. 30th. Nov 97.

  • Issue: Proton Car. Proton car was initially set up as an export industry. After more than twelve years, Proton is still unable to compete internationally and derived all its profits from the domestic market. At total market size of 150k car per year; by protecting Proton, cost consumer more than RM3000 millions per year. 30th. Nov 97.
    Strategy: Reducing CUB and CKD import duty on car to 100% and 35% respectively will free more than RM3 billion into economy but will wiped out more than 50% of used car value instantly. Since used car price is depressed during the recession, car price reduction will not hurt that much. However, this can only applied after the next Umno election and the feel good factor will push the whole market to new high. 30th. Nov 97.

  • Issue: Indirect Taxes. All increment charges by privatized industry is a form of indirect taxes unless compensate by direct tax reduction. After adding these indirect tax, all enterprise can confirm taxes in 1997 is more than before.
    Strategy: Some charges should be paid by Government from existing tax collection eg Indah Water, AlamFlora, etc. 30th. Nov 97.

  • Issue: Putra Jaya. In recent history, country that tried to construct a new capital city from ground zero will be in serious financial trouble. e.g. Brazil. Because too much expenditure is spent on unproductive infrastructure and landscapping.
    Strategy: Downsize Putra Jaya development. 30th. Nov 97.

  • Issue: Import Duty for Export goods Everyones know it is extremely difficult to get tax rebate from the custom. Without these tax rebate on paid import duty make local products uncompetitive globally.
    Strategy: Allowed 10% to 15% of export value as corporate tax credit. 30th. Nov 97.

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