Friday, 30 September 2016

Economic Crisis: Ignoring Statistics and Data

Kadir Jasin is at it again.
Now he’s “reminiscing” over the glorious days of the past administration under his beloved boss, Mahathir.
Although he’s basically repeating the same points over and over again, I feel like I need to call him out, again, on his latest writing here.
Some of his points, which were recycled from his previous blog post (Enough of Selling Snake Oil) into his latest post has been rebutted by yours truly here.
The first major crisis in 1986 was triggered by the US high interest rate policy in the early 80s dubbed as “the Volcker shock” which has led to a massive collapse of world commodity trade.
In 1986, export prices for palm oil and tin dropped by 50%, overall export price fell 30% and total exports fell 10% from RM38 billion in 1985 to RM35 billion in 1986:

Total Exports from 1981 to 1990

Unemployment rate jumped to 5.6% and 7.4% in 1985 and 1986 respectively and slowly recovered to pre-crisis level by the end of the decade:
Unemployment Rate from 1982 to 1990
Kadir claimed that the cabinet took a pay cut at that time to show to the rakyat that they’re willing to sacrifice when the people are facing a difficult time and he also claimed that the government froze the intake of civil servants and saved a lot of money because government didn’t need to pay civil servants salary and pension that have been absorbed to private sector.
Data from the EPU show that emoluments (salary and bonus) spending increased every year from 1970 to 2015 except in 1976 and 1997:

Government Emoluments Spending by Year
Kadir claimed government saved a lot of money but from 1980 to 1997 emolument spending kept increasing every single year and in fact operating expenditure kept increasing after the economic crisis from 1985 to 1986:

Government Budget from 1981 to 1990
Logically, if government saved any money, it should have come from operating expenditure not development expenditure because emoluments is categorized under the former not the latter.
Even after government revenue started to fall in 1986, operating expenditure kept increasing and this clearly showed that government didn’t really save any money from the publicity “stunt” of slashing ministers” salary and the freeze in civil servant’s hiring.
Much of the success after the economic recession in 1985–1986 was attributed to the privatization of public enterprises, investment liberalization by promoting foreign direct investment (FDI) and the overseas relocation of production bases by export-oriented firms in Japan, South Korea, Taiwan and Hong Kong that started in the late 1980s.
The appreciation of Japanese Yen against the US Dollar following the Plaza Accord has made Malaysia one of the most  preferred destinations by Japanese firms to relocate their production bases.
Malaysia benefitted from external factors as much as internal factors i.e. government policy.
Not many people realize that the rapid liberalization of investment regimes post-1986 sowed the seeds of the economy’s vulnerability to the Asian Financial Crisis in the late ‘90s.
In the early ’90s, government removed some restrictions on short-term capital inflows (portfolio inflows), foreign shareholdings in local brokerage firms and bank lending to non-residents.
Apart from the removal of those restrictions, government also announced a wide-ranging package of incentives to attract foreign fund managers and institutional investors to promote Kuala Lumpur as a global financial center.
Capital market liberalization in the early 1990s was followed by a significant increase in the net inflow of portfolio investment:

Short Term Portfolio Investment Flow
Foreign investments in equity increased rapidly which then fuelled a stock market boom.
In the mid 90's the Kuala Lumpur Stock Exchange (KLSE) with a market capitalization around US$200 billion, was the third largest stock market in the Asian and Pacific region after those in Tokyo and Hong Kong.
The market cap of KLSE at that time was 3 times bigger than Malaysia’s GDP.
The stock market boom changed the way the domestic banks operate as lending for equity market activities became a major source of credit expansion.
Poor corporate governance and weakness in the financial sector were the two main fundamental sources of economic vulnerability despite Kadir’s claim that government has rebuilt and strengthened the financial sector after the 1985–1986 economic crisis.
In the first half of 1990s, outstanding domestic credits in the banking system rose substantially, with a heavy exposure to the property sector which include share trading and real estate sector.
The annual growth of bank credit to private sector increased by 12% during 1990–1994 to over 26% during 1994–1996.
Outstanding credit to GDP ratio rose from an average of 85% during 1985–1989 to 120% in 1994 and then to over 160% in 1996 when the financial crisis started in mid 1997 which was the highest credit expansion among the economies of East Asia.
By the end of 1996, total credit to property sector accounted for around 55% of total outstanding bank credit.
The high exposure to the property sector further weakened the financial position of the banking system.
Ringgit was under heavy selling pressure after the speculative attack on Thai Baht in mid May 1997; from July 1997 to January 1998, the Ringgit depreciated against US Dollar by almost 50%:

USDMYR Exchange Rate from 1997 to 1998
There were massive reversal of portfolio capital flows started in the second quarter of 1997 which reflected on the KLSE Index (KLCI) that dropped by more than 50% from the pre-crisis level wiping almost $225 billion share value.
Unlike the other ASEAN counterparts in Thailand and Indonesia who had to ask monetary assistance from the IMF, Malaysian government was able to go on without asking for an assistance from IMF because of its low foreign debt exposure of domestic financial institutions.
By August 1998, the economy had entered a recession period.
The economic output (GDP) contracted by -6.7% in 1998, almost 100,000 workers in manufacturing sector were retrenched and the inflation rate spiked to 6.2% surpassing the previous peak of 5.3% recorded in 1991:

Employed Persons in Manufacturing Sector
Among government responses to the crisis were the immediate ban on offshore trading of shares of Malaysian companies which froze over-the-counter share trading in the Central Limit Order Book (CLOB) market in Singapore, the imposition of capital control over short-term capital (out)flows, currency control which fixed the USD/MYR exchange rate at RM3.80 per USD1, bans on Ringgit trading in overseas markets (mainly Singapore) and stringent limits on the approval of foreign exchange for overseas travel and investment by Malaysians.
The government embarked an expansionary fiscal policy which resulted in an increase of government expenditure and turned a budget surplus to budget deficit from a surplus of RM6.6 billion in 1997 which was 2.4% to GDP to a deficit of of RM20 billion or -5.5% in relative to GDP:

Government Budget from 1991 to 2003
For me, the currency control (Ringgit-Dollar peg) wasn’t really necessary because by the time the fixed exchange rate was introduced, US Dollar has already depreciated (and Ringgit strengthened) after the Federal Reserve of the USA eased their monetary conditions by lowering benchmark interest rates to counter the domino effect of Long Term Capital Management (LTCM) that nearly went bankrupt in the September of 1998.
That’s also the reason why IMF-assisted nations like South Korea, Thailand and Indonesia recovered earlier than Malaysia did.
Kadir’s exaggerated by calling it a crisis.
Unlike 1985–1986 and 1997–1998 we are not in a recession presently.
Economic output or GDP is still growing although at slower rate but that’s understandable because of the plunge in commodities price since mid-2014, uncertainties in global economies, China’s slowdown and volatility in global markets.
Kadir rhetorically asked what is government doing about it? He said the rakyat don’t feel that their hardship being eased.
He went on and said subsidy were reduced and abolished in order to make government finance looks good.
First of all, government under Najib, doesn’t reduce or abolish subsidies to burden the people.
Instead, the government reduced or abolished subsidies to redirect the subsidies to the people who actually needed and deserved the subsidy.
Blanket subsidy policy that has been practiced since Mahathir’s time was counter-productive and exposed to wastages, fraud and abuse.
It made the rich became richer and the poor received only small part of the subsidy.
Take petrol subsidy for example, the rich who drive sporty and luxury cars filled their tanks with subsidized petrol while the poor who don’t own any vehicle or ride a motorcycle received only small part of the multi-billion fuel subsidy.
Subsidy for basic goods such as sugar and flour should have long be abolished because it led to smuggling and shortages in the market.
Only Najib has the political will to abolish the said subsidy and replaced it in the form of cash transfer program i.e. BR1M.
Funny thing is, under Mahathir administration, he had also reduced subsidy expenditure couple of times:

Federal Government Subsidy Expenditure 1981–2003
From 1984 throughout the economic crisis until 1987, Mahathir’s administration cut subsidy expenditure from RM1.13 billion in 1983 to just RM271 million in 1986.
Didn’t Kadir just say that government took care of the people during the 1980’s economic crisis?
I won’t write anything about GST on this post because I have addressed the issue of rising prices (in Malay) here and the benefits of GST here — feel free to read them.
The situation during 1985–1986 is different than the current situation.
Commodities prices plunged in the 80’s and our economy entered a recession period because our wasn't diversified while our economy now is still growing albeit at slower rate because the economy currently is more diversified than it was 30 years ago.
Our GDP growth is declining, yes, but it’s expected in the backdrop of challenging global situation.
Our GDP growth is slower than most developing Asian countries, of course! It’s because Malaysia is among the advanced developing economy among its ASEAN peers.
Indonesia, Philippines, Vietnam, Myanmar all grew faster than Malaysia economically now because of convergence and diminishing returns.
As I explained here:
"In economics there’s this hypothesis called “convergence” of which the idea is that poorer (developing) economies tend to record faster economic growth rates than the richer (developed) economies.
This is because developing economies started from a low base, small economic size and they have low diminishing returns to capital compared to developed economies.
That’s why most countries in Africa, some countries in Southeast Asia like Myanmar, Laos, Cambodia grew at faster rate than say Singapore, Japan, Hong Kong etc.
That’s also why Singapore has slower growth rate than Malaysia and those frontier newly developing economies in ASEAN are growing faster than Malaysia."

Kadir was so eager to attack Najib’s administration he didn’t realize that the jump in external debt figures was because redefinition of the term external debt by Bank Negara in the first quarter of 2014.
I don’t want to spoon feed Kadir, he can just read from here in the BNM Quarterly Bulletin:

External Debt Redefinition: Bank Negara
With the redefinition of external debt, external debt figures stood at RM700.1 billion compared to RM327.9 billion under the previous definition in the first quarter of 2014.
It’s not that Malaysia has accumulated RM370 billion external debt in a matter of a quarter but it’s rather the redefinition of external debt according to IMF definition which is an international benchmark.
That’s why external debt figures stood at RM800 billion plus in the first half of 2016 as stated by Kadir as opposed to average of RM186.05 billion from 1990 to 2016.
It’s because the redefinition of external debt by Bank Negara.
Read up will you Kadir?
Next Kadir was talking about government debt which stood at RM655 billion or 53.4% to GDP.
Never mind that during Mahathir’s time, government debt reached as high as 100% to GDP ratio:

Government Debt to GDP Ratio
Kadir said we cannot be sure of the true situation because government under Najib has resorted to juggling with the figures to show positive development.
Let’s take a look into debt guaranteed by federal government under Mahathir’s administration.
Yes, Mahathir also “juggled” with the figures of contingent liabilities:

Debt Guaranteed by Government from 1995 to 2003
From 1995 (earliest available data) to 2003, debt guaranteed by federal government rose from RM12.3 billion to RM52.6 billion.
The ratios of guaranteed debt to GDP after Asian Financial Crisis were above 12% and below 16%.

How about debt guaranteed by government under Najib’s admin?

Debt Guaranteed by Government from 2009 to 2015
From 2009 to 2015,debt guaranteed by federal government increased from RM84.3 billion to RM177.7 billion.
The ratio of guaranteed debt to GDP were above 12% and below 16% just like during Mahathir’s tenure as PM.
So if Kadir accused Najib as juggling with the number, he should also said the same thing to his idol, Mahathir because the ratio of debt guaranteed by government to GDP of both men were similar.
How now brown cow?
And, Kadir being Kadir kept recycling the same point over and over again which is freeze of salary increment and the “bloated” civil service.
As I have showed from the chart above, despite the claim that government froze civil servants’ annual salary increment, the data showed that emoluments spending were increasing throughout the 80s.
Logically if there was actually a freeze on increments, emolument spending should’ve dropped or remained unchanged not increased.
Kadir needs to reveal and present his data.
I want a statistical evidence not anecdotal evidence.
And what about this bloated civil service that Kadir often repeats?
The best way to measure whether civil service is bloated or not is to measure emoluments spending to government operating expenditure ratio.
I’ve also added emoluments spending to GDP ratio for additional info:

Emoluments Spending to OPEX and GDP Ratio
The ratio of emoluments spending to OPEX have always been around 25% to 35% from Mahathir’s time as PM until Najib’s.
There’s no such thing as bloated civil service in Malaysia.
If it’s bloated, ratio of emoluments spending to OPEX should be higher than in the previous years.
Kadir touched on indebtness of household again and again I have explained in the previous post here, Malaysia’s household debt to GDP is around 89% but its financial assets to GDP is 182.9% which is almost doubled from the debt ratio.
Stop harping on something that cannot stick Kadir.
You wrote tha rakyat are not concerned with the economic statistics but in many of your posts and columns in Sinar Harian you keep repeating this economic statistics despite misunderstanding the context of those stats and misinterpreting the stats.
You need to stop misleading the Malaysians. Period.
p.s. To students of economics, finance and politics please refer to the official source like Bank Negara, Department of Statistics, EPU etc not some political blog.

Thursday, 29 September 2016

How GST Saved The Economy

GST has been a hot topic among Malaysians for a while now.
We often hear talk of how goods and services are getting expensive because of GST, how GST has been a drag to the economy and how GST is burdensome to businesses and consumers and so on.
But we often missed the bigger picture of the benefits that GST has brought to the government, the people and the economy as a whole.
As you may well already know, crude oil prices had plunged from its peak of $114 per barrel in June 2014 to as low as $29 per barrel in January earlier this year before it recovered to $48 per barrel presently.

Brent Crude Oil
As a result government petroleum related revenue decreased sharply last year:

Government Petroleum Related Revenue
In absolute term, government petroleum revenue dropped by RM20 billion in 2015 compared to 2014.

In relative term to Malaysia’s government total revenue, petro-revenue dropped from 34% of total revenue in 2010 to 19.90% of total revenue last year:

Government Petroleum Related Revenue
The most visible drop in petro-revenue was the Petroleum Income Tax (PITA) which is charged to income derived from upstream operations at the rate of 38%.
Petroleum Income Tax (PITA) Collection (Annually)
Last year, government collected PITA amounting to RM11.55 billion as opposed to RM27 billion collected in 2014, a drop of almost 60% year on year.

Petroleum Income Tax (PITA) Collection (Half Yearly)
In the first half of 2016 (Jan-Jun 2016), PITA collection dropped by 52% compared to the same period last year (Jan-Jun 2015) and dropped by 76% compared to the first half of 2014.
RM20 billion loss of revenue in 2015 is amounting to 10% of total government revenue.
That’s a significant amount as RM20 billion is almost half the size of Ministry of Education annual operating budget.
Now let’s take a look into government indirect tax collection particularly consumption tax which are sales tax, service tax and GST that replaced the former two taxes:

Consumption Tax Collection
Pre-GST era, collection of both sales tax and service tax was around RM12 billion in 2010 to RM17 billion in 2014.
In 2015, the amount of consumption tax collected by the government jumped sharply to RM35 billion after the implementation of GST (3 months of sales and service tax and 9 months of GST):

Consumption Tax Revenue to Total Government Revenue Ratio
Percentage of consumption tax to total government revenue also jumped from average 8% (from 2010 to 2014) to 16% in 2015.
GST brought in RM18 billion extra revenue on top of what was collected (SST) before it was implemented in April 2015.
The amount of GST collected by the government, has almost offset the RM20 billion loss in petro-revenue:

Petroleum and Consumption Tax Revenue
As you can see from the chart above, petro-revenue dropped to RM43.6 billion in 2015 from RM64.06 billion in 2014 while consumption tax (SST and GST) revenue increased from RM17.2 billion in 2014 to RM35.27 billion in 2015.
Sales and service tax which are a single-stage tax wouldn’t have offset the RM20 billion loss in petro-revenue.
Had GST not implemented last year, government would have a shortfall of RM20 billion in revenue.
Government budget deficit would have shot up to RM57 billion instead of RM37 billion recorded last year and deficit to GDP ratio would have been 6% instead of 3.2% had it not for GST implementation.
It’s as clear as a bell that GST has saved the government finance but how did GST save our economy?
Economic activity or economy size or GDP consists of private consumption, government consumption, gross fixed capital formation (public and private investments), changes in inventories and net exports (exports minus imports):

GDP by Expenditure Components
Malaysia’s government consumption expenditure consists of 13.5% or RM143 billion of GDP in 2015.
If GST hadn’t been implemented, government consumption expenditure would have contracted and SMALL percentage point of GDP would have been shaved off because of the loss in petro-revenue.
Malaysia's government is practicing unwritten law that government operating expenditure (government staff salary, pension, subsidy, debt service charges, asset acquisitions, grants, transfers etc) must be financed by government revenue which means government would not borrow to fund its operating expenditure.

The last time government annual revenue could not cover annual operating expenditure was during the 1985-1986 economic crisis caused by sharp plunge in commodity prices.

While development expenditure (investments) is funded by borrowings (issuance of government securities).
Contraction in government revenue would mean a reduction in operating expenditure.
If GST wasn’t implemented, government would have to cut its operating expenditure more than it had cut last year and this year.
That means, less subsidy, less cash transfers, no bonuses or salary hike for government staff and many more cuts in budget which would also result in slower economic activity or GDP growth.
GST has been proven as a saviour of the government finance and also the Malaysia’s economy.
GST collected by the government was spent for the people and flowed back to the people in the form of cash transfers (BR1M), healthcare subsidy (government hospitals and clinics), education (public schools and universities) and many more.
GST hasn’t really burdened the masses as alleged by certain quarters because most of the basic goods, services and amenities are charged at zero-rate and exempted by the government.
GST is also a form of re-distribution policy, from the top income group to the bottom and middle income group.

The rich spend more money on luxury and imported items while the low and middle income group spend more on basic necessities which as I stated earlier are zero-rated and exempted from GST.
We always complain about how GST has burdened us all, made us poorer and all that we overlooked the benefits that GST has brought to our economy.
Even the complaint that GST has made goods and services become more expensive is not entirely accurate as I explained (in Malay) here.
Nobody could have predicted that oil prices would fall by more than 70% and The Prime Minister and the government were right to implement the GST despite of its unpopularity among Malaysians.
GST implementation was timely and might have prevented a deeper economic slowdown in our country.
I’m not asking all of us to be grateful or to praise the government but we need to be fair and at least acknowledge the fact that GST has brought more good than harm to us, the government and the economy.

1. Malaysia Government Revenue - Bank Negara Monthly Statistical Bulletin
2. National Account - Bank Negara Monthly Statistical Bulletin