To make things simpler, you can go through the key highlights and look at the parts that interest you before actually reading through 200 pages of stuff. Tip: Don’t read everything!
Donald Trump said that with tariff imposed it will make their country richer. Ermm… maybe not.
Let’s go back to university level 101 basic economics, when you buy products from a maker as big as China, we could consider them the price maker.
Thus imposing a tariff see’s supply reducing (moving to the left) and consumer would have to survived with the latest pricing rise. Immediately the X-axis quantity to be consumed declines. Instantly we could tell that we are bound to see lower growth if tariffs were to be implemented.
Worsening things, Trump started a trade war on China. The maker of goods for the world. A price setter in general and sort of a monopoly power in manufacturing.
A tax on China’s exports to US would see demand going downwards like so.
The new quantity for consumption of imports would decline with goods turning more expensive. Another evidence that China have a huge leverage towards United States.
This is what we learn in Economics 101 but merely Trump chooses to do what he likes and looks patriotic in the eyes of Americans. True fact is that he started a war that he shouldn’t get involved in the first place. Somewhat like Vietnam I would say…
It looks like our interest rates will raise again following the US and this time, the sentiment shows positive results than before.
Consumer inflation from fuel prices had already turn into something that we can’t get away from and MYR had strengthened once again. Although we are indifferent than was it was a year ago, the consuming index continues to improve.
A simpler way to put this “Life goes on…”
Take a look at the report from Credit Suisse
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
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.
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!
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.