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Saturday 28 February 2015

Saudis’ Oil Price War Is Paying Off

by Grant SmithAnthony Dipaola
Published in Bloomberg Business
on 27th February 2015


Three months after Saudi Arabia made clear it was going to let oil prices keep tumbling, the strategy is showing signs of working.

U.S. drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers.

Those steps highlight how the Saudi-led OPEC decision on Nov. 27 to maintain output levels and protect its market share is having the desired effect -- pushing prices down so far that they threaten to curb output in the U.S. and other non-OPEC countries. Saudi Arabia, the most powerful member of the Organization of Petroleum Exporting Countries, will maintain that tack when the group next meets in June, according to some of the world’s biggest banks.

“OPEC giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”

The number of rigs drilling for oil in the U.S. dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc. showed Feb. 20. Since Dec. 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell Plc and Chevron Corp. have announced spending cuts of almost $50 billion since Nov. 1.


Wednesday 25 February 2015

Public Lecture: Size Matters: Why is it so Small and How to enlarge It, the Middle Class.


Size Matters:  Why is it so Small and How to enlarge It, the Middle Class.

By Tan Sri Datuk Dr. Kamal Salih

Abstract of Lecture

The lecture will address the issue of the middle class in inequality and Inclusive Growth, which entails lifting households out of poverty and facilitating upward, especially inter-generational, mobility through graduation to middle class status. Noting the difference between the “aspirational” middle class reported by the World Bank recently which was put at 65% of all households, while the finding of the first Malaysian Human Development Report 2014 put the “actual” middle class size, defined in income terms by the World Bank as those households positioned between 20% above and below the median income, has remained relatively small for Malaysia, trending around the 22% level when in comparison in the typical developed country situation the percentage is closer to 50-55%, the lecture will attempt to explain why the Malaysian middle class is relatively so small through historical comparisons as well as with countries at a similar stage of development. 

This lecture will note that the median income profile of the NEP generation improved more rapidly than that of the earlier generation and in comparison with  the post-NEP generation, though the median levels of incomes are higher for the latter.  In other words middle class formation was fastest during the implementation of the NEP in the twenty-year period involved, but evidently not in the liberal and globalization era after the Asian Financial Crisis of 1997. 

The lecture will also describe the status of the middle class in terms of the composition of its fiscal capability. While the bottom 50% has wages/salaries making up 97% of their purchasing power, the upper part of the middle class would exhibit a similar pattern to the upper 50% with contribution from wealth effects approaching 11% and increasing as they climb the income ladder.  In other words, on the basis of household fiscal capability Malaysia essentially exhibits a two-class social stratification, with inequality diminishing between ethnicities but within-group income gaps rising more and more to obliterate the NEP-based ethnic classification as a relevant issue of equity in development.   Income inequalities then become essentially a question of class. 

The lecture will seek to find the factors behind this, including issues such as the contribution of labour productivity to per capita income growth, wage-productivity gap and the wage premium, and the distortions attributable to policy and institutional failure, and conclude with some exploration of how to enlarge the middle class through appropriate interventions through the next generation of development policies.


Disparities that Threaten 1Malaysia

BY CHANDRA MUZAFFAR
Published in The Star

Tuesday February 24, 2015


WHEN Yayasan 1Malaysia was launched in July 2009, it identified five major challenges to national solidarity and cohesion, among them growing socio-economic disparities.

In the last six years, the Government has made a number of efforts to reduce these disparities. A minimum wage has been established. There is an attempt to raise the educational level of the workforce, about 70% of whom have only an SPM.

Labour skills are also being upgraded. The over-dependence upon foreign labour is recognised as a problem.

A national education blueprint for schools seeks to improve the quality of primary and secondary education.

The public healthcare programme is under review to ensure that it continues to be affordable for the lower-income strata of society, while enhancing its quality.

Monday 23 February 2015

Towards Inclusive Development for Malaysia

Kamal Salih
23rd February 2015

In the Malaysia Human Development Report 2014 we define inclusive growth as comprising equitable distribution of benefits of economic growth and of social spending across distinct income groups and the poor irrespective of their group membership; involving robust generation of broadly accessible opportunity for economic participation and safeguards for the vulnerable; and inclusion of citizens in policy formulation and implementation, aimed towards minimizing social exclusion and increasing social cohesion. For the purpose of the Eleventh Malaysia Plan, we need a new second generation set of policies which aim at inclusive development.

The challenge for Malaysia in adopting the inclusive growth approach is the peculiarity of the country’s political economy which attaches a significant ethnic dimension to development policy. This was the underlying problem addressed by the New Economic Policy (NEP) at its inception which was based on the notion of redistribution with growth.  The problem over the decades involved has not been with the intent nor the content of the NEP and its successors but the manner of their implementation, which had produced new inequalities, poverties and vulnerabilities in the development process. 

Monday 16 February 2015

The Episodes: Chapter 2 Episode 3 is Now Out!

Good teachers are fire starters, I find.  The intellectual firestorm they created in the young mind would spread for me into uncharted territories as fiercely as the Victorian bushfires in the summer.   By the time I got into the third Honours year of the geography programme in 1968, my mind and mental horizon had expanded beyond the bounds of geography, while deepening it.  Like the engulfing fire, they couldn’t be confined by artificial firebreaks.  Like one starving without food from wandering in the desert, I found myself ravishing over a feast of knowledge that still left me unsatiated.

Friday 13 February 2015

Pillar of Malaysia's Consumer Spending May Be Weakening


With the nation’s key oil exports falling and budget cuts coming, Malaysia still had consumer spending as a prop for growth late last year.

That pillar may be weakening, escalating the risks for a middle-income economy that expanded an average 5.8 percent in the past half decade. Measures of manufacturing wages and credit-card spending are the weakest since at least the global financial crisis, according to inflation-adjusted data compiled by Bloomberg.



Malaysia’s currency, the worst performer against the dollar in Asia in the past three months, is already lumbering under concerns foreign investors will pull out their money as the Federal Reserve prepares to raise U.S. interest rates. Prospects for weaker growth threaten to add to the gloom.

Goldman: Here's Why Oil Crashed—and Why Lower Prices Are Here to Stay


Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.

Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off. Goldman was able to quantify these effects.

The Culprit Is in Blue



Goldman’s model is simple on its face, looking at just two variables over time: the price of oil and the value of U.S. stocks (as measured by the S&P 500). The idea is that the stock market is a pretty good indicator of economic demand. So when stocks move in tandem with oil prices, demand is in the driver’s seat. When the price of oil moves in the opposite direction of stocks, the shock is coming from supply.

It’s a bit more complicated than that—for the statistically inclined, Goldman uses a “vector autoregression with sign restrictions”—but you get the idea. In the following chart, they split apart the effects of demand shocks (left) from supply shocks (right).

Monday 9 February 2015

Malaysia’s Soaring Household Debt Feared ‘UNSUSTAINABLE’, may Trigger Crisis


KUALA LUMPUR, Feb 7 — Malaysia has failed to rein in household debt that started ballooning since the 2007 global financial crisis and may expose the country to crisis should the credit bubble burst, according to a report released this week.

In the report tracking household liability in the seven years since the US subprime crisis by international research firm McKinsey Global Institute (MGI), Malaysia’s consumer debt was shown as having surpassed even that of the US.

The Southeast Asian economy was also listed among seven countries most vulnerable against debt.

“In developing economies, household debt is generally at much lower levels, but it is growing rapidly. In Thailand and Malaysia, household leverage exceeds US levels,” said the report titled “Debt and (not much) deleveraging”.

“The question today is whether countries with high levels of household debt are at risk of a crisis, or whether high debt levels can be sustained.”

Wednesday 4 February 2015

Currency Manipulation and Economic Sabotage


This started circulating on blogs and social media sometime late last week:

How Tong Kooi Ong is attempting to break Bank Negara and crash the RM
An owner of a prominent news media empire is casting undue influence on the financial and political state of Malaysia for his own personal monetary gain. 
Sources within Bank Negara Malaysia (BNM) revealed that Tong Kooi Ong, the owner of the Edge Group and The Malaysian Insider has taken a USD1.4 billion short position on the Ringgit through a proxy. The first transaction took place in August 2014 and subsequent short positions have been taken leading up to January 2015….

The government’s reaction can be read here and here. I find it telling that Deputy FM Datuk Ahmad Maslan mentions MCMC, which suggests the investigation would include not just the allegations, but the allegers as well.

It's a long, and fairly erudite posting – there are little details in there that suggest the writer knows what he/she is talking about, like for instance the role Germany played in the UK’s 1992 ERM crisis.

But to summarise, the blog post alleges that Mr Tong took multiple short positions on the Ringgit, and used his control over his media empire to foster a climate of doubt and uncertainty over the Ringgit to profit from its selldown. The blog post also alleges that this was also an attempt to “break” BNM (*snort*) and undermine the economy.

I won’t address the media angle (which honestly sounds fiddly to me), only the economic and financial ones.

First, here’s the volume of transactions on the FX markets over the past three years:


Tong’s alleged USD1.4b would have been big money – in 1997. Today, not so much. Between August and December last year, total FX turnover (inclusive of spot, swaps, forwards and options) in Malaysia exceeded RM1 trillion. USD1.4b would have been a blip. It’s also laughably small compared to BNM’s international reserves of nearly RM400 billion.