Maybank Previews Budget 2018

An early look into the 2018 Budget which would be tabled end of October.



Our Petrol Prices Being Rigged by Government?

With the recent rise in fuel prices albeit the whole world talking about major drop in crude. The chatter came onto social media saying that the government is rigging our petrol prices which makes it rise more than what it should.

Our analysis from historical data might disappoint you that it isn’t rigged. The chart below shows the plot from our expectation vs government determined pump prices.


As you can see from the plot, the variation was huge when the pump prices were determined monthly but the chart narrow its differences when the weekly mechanism came into place. The chart below shows RON95 determined by the government versus Brent instead.


Looks like the culprit is still our currency where Singapore Dollars are just getting stronger day by day. Our fuel prices are still determined using Mean of Platts denominated in SGD rather than USD. Just a quick disclaimer, our expected RON95 computed might have some discrepancies as we take our prices from Brent rather than Mean of Platts.

So remember this from now on, the pump prices are heavily pulled by the currency value and it gets worse if the economy of Singapore goes back to normal from their current slow growth.

Expected RON95 is calculated by using:-

RON95 price (last month) + (Brent price changes) + (Exchange rate changes)

= Expected Price for following month

You Still Have a Job Because Ringgit Devalued

What if I tell you that the reason you are still working and the availability of jobs is still strong is the reward for depreciated currency?

What if I tell you that low ringgit value no longer has the effect of 1MDB in it?

What if I tell you that the GST is good and the only way to save this economy?

Well, these few statements might have spurred the anger of anti-government parties and opposition supporters. For starters, I would like to clarify that I do not vote because I believe in what taught in economic books where politicians are a waste of a country’s resources. In laymen’s term, I hate politics.

Depreciated Currency Equals Jobs?

Many people in the country complains about the weak ringgit and how it’s affecting travel plans. All of a sudden, a pre-booked trip overseas raises in price due to currency depreciation. Often, people forgot that the depreciated currency actually protected jobs in the country itself. This is a common problem because jobs had always been there since the recovery from 2008’s financial crisis. The sudden drop in currency value is still fresh in people’s mind.

Malaysia still relies heavily on foreign direct investment (FDI) with the likes of electronics being the top export and top destination to seek OEM manufacturers like Dyson seeking the two plastic molding companies in Johor. Penang for example is heavily involved with plenty of local OEMs and multinationals such as Intel undergoes manufacturing in this region.


If ringgit did not devalue, it would mean that the cost of production rises for our country and the likelihood of foreign investors going to new frontier markets like Vietnam or India. So FDIs and high demand for OEM products is the reason why we still have a job at the current moment. The reason they are still here is because all of us are still cheap labor.

The weaker currency spreads across most commodities export sectors like oil, palm, plastics and rubber. Oil and gas sector in Malaysia sells at SGD per barrel but the cost denominates in MYR. The lower price of crude per barrel would have ruined the feasibility of oil production but the lower cost of production still has rigs operating albeit harder than it used to be.

Jobs are important to the economy because it ensures continuous spending by participants of the economy. The middle income is the biggest contributor to the GDP other than the government as well as the biggest percentage that earns their income in the form of monthly wages. Continuously feeding positive sentiment to this group would ensure that the economy works like a well-oiled machine.

Losing Jobs?

If you sell Nasi Lemak and mostly do local businesses, people losing jobs might affect you directly as well. Lowering of monthly income causes the general public to refrain from eating out taking the alternative of self-preparation.

This is why when people starts to lose jobs, its catastrophic. Sectors such as consumer, retail, travel, real estate and banking would feel the wave of deteriorating income when sentiment goes bad. Jobs remains the key catalyst in preserving the current strength of the economy.

1MDB No Effect on Ringgit?

Indeed it was a big scare earlier but bad news fades with time. The ringgit isn’t going to strengthen back to previous levels.

Reason 1: Chinese depreciated their RMB artificially to improve on exports. All export nations round the world would see their currency devalue automatically just to be competitive against China once again.

Reason 2: The currency traders had valued ringgit lower because it is hard for Bank Negara to raise the interest rates. Trader are banking on the inability for Bank Negara to raise rates since the government debt continues to climb. You wouldn’t want to raise the risk-free rate when you are trying to leverage on debt financing.

The macroeconomic environment had changed in respond to China and the need for more debt to finance and keep the infrastructure spending intact. Pretty clear that construction jobs are needed to spur the economy, the MRTs built are creating jobs for people directly and indirectly.

GST Saves Economy?

I might sound like someone promoting GST in the government department. But having an independent economic view, we are technically stuck between a rock and a hard place prior to the GST implementation. Yes, we can all agree that the government placed us in this bad situation in the first place but nevertheless that’s the way when one management passes the baton to another.

Management at the top would only strive to achieve what’s easiest or most visible to the people during their term. Longevity of a policy and the potential backfire from bad policies are not taken into account in the likelihood that might cause bigger issues in the future. In fact, it is someone else’s problem so its fine.

Things like that doesn’t only happen in Malaysia. We have yet to see the effect of excessive money printing in the process of QE by the US Federal Reserve. It just so convenient that it was the fastest feasible policy at that time and governments takes the easy way out. The problem that it creates close to 10 years later isn’t the problem of the initiator and this is why economic cycle are present in the world.

To sum it all up, the reason for writing this article is to urge the general public not to be so negative to our country’s current problem. People never focus on the good but the bad gets highlighted over and over again. I think we should be more positive and it is healthy to stay that way rather than focusing on the negative. Just remember that in economic cycles, bad times are short while booms are long!

CS on Malaysian Economy Q1 2017

Credit Suisse stated that Q1 2017 is likely the peak for our country’s GDP. Historically Q2 is proven to be much weaker than Q1 for obvious reasons but Raya seems to be in Q2 this year and hopefully that changes everything. This makes Q3 the definite slowdown quarter that would be recorded this year.

Take a look at CS’s report in the link below to see the segments that grew or shrunk in Q1.


Price Ceiling or Fixed Price for Petrol?

You might have already known that starting end of this week, the government would be introducing a price ceiling with a weekly revision for petrol prices at the pumps. Either its weekly or monthly, I believe that the effects are the same for petrol operators with high turnover on their inventory. Having too much inventory opens up pricing risk for an operator and this needs to be managed well.

Likely for the first months or so, petrol stations would follow the price ceiling set by government just to be safe than sorry. But as the months go by, some operators who are bigger and has a higher turnover might be more daring to tweak their margin in order to fulfill more sales. It takes one station to start adjusting prices somewhere on a congested road and you might see stations along the way adjusting their prices to compete as well.


In the future, this might turn into a familiar sight in front of petrol stations showing current selling price.

Deriving Price at Pumps

To derive prices that we are paying for at the pumps, the mathematical formula comes out to something like this.

Price at Pumps  = MOPS + Oil Company Margin + Petrol Dealer Margin

MOPS stands for Mean of Platts which is denominated in SGD (that’s why you see petrol going higher when ringgit weakens)

Oil Company Margin is likely going to be standardized but for bigger petrol station operators, a bulk discount might be offered when a station buys up the full content of a refueling tanker. A station operator might pass this benefit down to customers.

Petrol Dealer Margin is where the magic happens. This would be fully adjustable to the operators’ preference.

So Fixed vs Ceiling?

In economics, we try to promote competition among retail to derive the best equilibrium price possible which benefits the economy as a whole. This is why we felt that having a price ceiling mechanism would benefit consumers in the long run.

Moreover, petrol companies would need to step up their game to sell more products to stay on top. Clearly the price ceiling mechanism is a way the government passes the ball on to the petrol companies to provide lower prices to the public rather than re-introducing subsidies in the short term. Obviously, we have yet to know if subsidies would be returning when oil rallies again.


From the illustration above, if the petrol retailer is selling below the ceiling price, it definitely benefits the consumer as you can see the lower prices creates consumer surplus. Eventually the excess demand shows as well that retailers would be able to sell more and lower margins could by offset by a higher volume on sales.

Let’s see what happens to the petrol retailers and the fight that would likely rage between oil companies. Our local Petronas could finally go against the internationals like Shell and Caltex fighting it out in the open market.

But for now, we should welcome the price ceiling mechanism starting end of this week then!

HSBC – Bank Negara Policy Jan 2017

As we all know, Bank Negara did not move the Overnight Policy Rate and left it at 3.00%. Couldn’t be bothered by the way since it was expected that BNM couldn’t do much this time round.

But we are more interested this round in the lift in inflation outlook by BNM. Inflation target lifted meant that the economy is expected to rise in terms of activity and prices are going to respond to the demand before it stabilize. We agree with this issue as inflation would catch up once again with people spending when the ‘fear factor’ is gone.

But we didn’t quite agree with BNM’s outlook on exports saying that it would rise from its current point. Our ringgit dropped significantly and this is the first catalyst for better exports but this matter isn’t reflected as we can see in the chart below. Exports remain sluggish where it could suggest a global slowdown especially last year.


Unemployment rose again which is another major concern to take into account. Although its in between 3-3.6%, it may spell doom when it breaks 4%. That is how serious unemployment percentage can be.


We are still cautious on this market compared to how optimistic KLCI was towards the markets. Things might turn out differently immediately after Chinese New Year but we shall see and remain defensive on buying till then.

Charts are extracted from HSBC’s report


Click for Link


Property Prices Likely to Remain Stagnant for a Long Long Time…


I would try to represent this issue with simple supply and demand charts introduced in most Microeconomics 101 references. The movement in demand and supply lines always results in achieving an equilibrium price and quantity level where the market is comfortable with it.

We start ourselves in the year 2010 where the economy started rebounding after a major crisis and cheap financing is freely available to property buyers where banks are providing the longest term loan and the cheapest interest rates on the street.

Around this time the property market spike when the demand increases shifting the demand line to the right from D1 to D2. Prices spiked since the market only has the original amount of quantity to cater to the increase in demand. We can represent this in a chart like the one below.


Immediately, the housing prices raised quickly with limited quantity from P1 to P2. Looking at the market booming, developers took it as their chance to achieve more sales by providing more supply of houses. It would be ridiculous if developers aren’t catching this opportunity and that is where we see new projects started to pop out around the year 2011.

That moves the supply line to the right from S1 to S2 but prices still maintained at P2 in the short term since the property market has always delayed in adjusting since it’s rather illiquid as we can see from the chart below.

In fact, the developers would try their best to sell and provide the supply at demand price of P2 where it can squeeze the most revenue out of this property rally.


Sadly in the long term, prices would come back down to P3 to match with the long term equilibrium. Obviously this is nowhere near the ‘cheapness’ of P1 (around year 2007) but we wouldn’t likely see prices being ‘expensive’ at P2 (around year 2012) as well.

Since developers supplied the market with quantity based on P2 prices, this created a surplus when the market rebalance itself back to equilibrium. The surplus created due to exogenous pricing demand could explain a dozen or two empty properties in each project which we could clearly see it happening now.


The demand D2 line takes time to slowly creep up closing the surplus gap increasing the equilibrium price eventually which could be a factor of growing population or immigration but less likely the effect of inflation.

The situation gets a little complicated where the introduction of affordable housing increases the supply pushing the supply line from S2 to S3. Again the delay between demand creation versus supply generation present as the main culprit which causes this matter to get worse when more and more supply were added into the market.

As a matter of fact, the government can’t just scrapped the affordable housing program since it was part of the plan to allow the middle and lower income to buy houses. The plan was good and promote economic benefit but the timing was all wrong with house prices brittle as ever.

The availability of affordable housing increases the supply affecting prices of houses pushing it lower to P4 and home buyers are shocked to see a major adjustment in prices and lowered their demand towards any new property purchase. This explains the shift demand line from D2 to D3.

Prices coming down to P4 meant that it worsened the surplus on the original supply of houses initially provided between P2 and S2’s intersection. With a worsened surplus, recovery time gets extended and that is why we believe that it would remain stagnant for at least a couple of years. It takes 3 years to boom and it might take double the time to see prices moving upwards once again.


But what we fear most isn’t the problem with property prices maintaining stagnant but a recession that might appear in the near future would bring down the demand line even further creating a lower equilibrium price and once again widen the supply even more. We hope that this issue doesn’t happen but looking at how the market is currently, there aren’t that many catalyst ahead for a boom in the property sector a couple of years ago.

CS on Malaysia & Other Asian Economies Post Election

These are two articles from Credit Suisse for the outlook of our equity markets in Malaysian and other Asian economies after Trump got elected as President.

In the meantime, the biggest threat for our country is still Trans-Pacific Partnership Agreement (TPPA). The net benefit of TPPA for Malaysia far exceeds the negative effects with GDP forecast to rise about 8% after 2018.

Take a look at these two articles below!

1     2