Friday, October 13, 2017

Effective Exchange Rate Indexes: September 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


September was a turnaround month for the Ringgit. The year on year changes are still negative, but all six indices posted gains on the month, and the best positive performance since May-17. Capital inflows were apparently the main reason. The Broad Nominal index rose 1.26%, while the Broad Real index rose 1.04%.

On a bilateral basis, the Ringgit rose against 14 out of 15 currencies. The biggest gains were against the JPY (+2.66%), the INR (+2.49%), the KRW (+1.86%), the USD (+1.72%), and the PHP (+1.70%). The only drop recorded was against the GBP (-1.22%).



  1. Indexes have been updated to September 2017
  2. CPI deflators and forecasts have been updated for August/September 2017

Thursday, October 5, 2017

Central Banks Can’t Go Bankrupt

Continuing on the FX theme and the recent RCI, something’s puzzled me for quite a few years. Why did BNM and/or the government decide to “amortise” the FX losses, rather than take them on BNM’s balance sheet at once?

For the uninitiated, BNM’s losses of approximately RM31.4b in the early 1990s were progressively “written-off” on a gradual basis over a period of 10 years beginning in 1993. My memory on this is a bit hazy, but my understanding was that the losses were carried as memo items, and periodically written off against the Bank’s annual profits (and euphemistically carried as “deferred expenditure” on the asset side of the Bank’s balance sheet).

The main effect of this clever piece of accounting, or boondoggle depending on your perspective, is that it preserved the illusion that BNM’s equity base remained in the black. Writing off the lossses at one go would have wiped out BNM’s equity and accumulated reserves (not to be confused with FX reserves) of about RM13.6b (at the end of 1991), resulting in the central bank being technically insolvent, or more vulgarly, bankrupt.

Wednesday, October 4, 2017

Chart of the Week: Valuing the Ringgit

I’ve done this exercise once before (see here), but this way is probably a lot more intuitive for most people. The TL:DR version – the Ringgit is undervalued, but not by much:


The chart above has the USDMYR exchange rate on the right, and the Fed’s USD broad nominal effective exchange rate on the left, from 2005 to the present. The correlation is very close – better than 95%. In other words, almost all the variation in the MYR exchange rate has come from movements in the USD rather than factors idiosyncratic to the MYR.

I won’t say that the gaps between the lines are good measures of the MYR’s over- or under-valuation, but they are indicative. In the MYR’s recent history, there’s been two episodes of obvious misalignment, roughly from mid-2015 to early-2016, and from the end of 2016 to the present.

The first you can probably call the 1MDB effect, and just like in my previous exercise, you can say it was indeed a factor in pushing down the MYR. However, the effect was short-lived, again roughly coinciding with the sale of Edra Energy.So to the idea that 1MDB, and Malaysian governance generally, has any bearing on the Ringgit exchange rate: please go away. You’re not relevant anymore.

The second coincided with the US elections and probably more pertinently, BNM’s reaction to the change in global capital flows it triggered. I’d call this the fear-of-capital-controls effect. It’s still persisting, and I’d call it a roughly 5% deviation from where the MYR should be (around RM4.00 to the USD).

The bottom line is: Yes, the Ringgit is undervalued, but probably not as much as people think.

Wednesday, September 20, 2017

Historical Revisionism: The MYR and SGD in the 1980s

I came across this a couple of weeks ago, but didn’t have time to address it then (excerpt):

A kleptocracy premium for the ringgit
P Gunasegaram

A QUESTION OF BUSINESS | Without a doubt the ringgit is historically rather weak even if the economy still continues to grow at a relatively healthy pace – the latest figures show a good growth of 5.8% for the second quarter of the year….

…So why does the ringgit remain weak, trading at levels which are weaker than at the height of the 1997/98 Asian financial crisis? What is it that is happening that keeps the ringgit level depressed? Perhaps it is due to a risk premium on the ringgit following the emergence of kleptocracy (re: 1MDB where as much as RM40 billion could be at risk, as thieves dip their fingers into money borrowed by a government company via bond issues) or apprehension over the ongoing spate of mega projects (re: the RM55 billion East Coast Rail Link whose cost may go to over RM100 billion….

Thursday, September 14, 2017

Housing, Inflation and the Cost of Living

I came across a couple of really good articles over the last couple of days on the subject of housing, inflation and GDP that I wanted to share (jump to the end for a summary of both articles).

First, the treatment of housing in the construction of the Consumer Price Index, which is commonly used to measure inflation (excerpt):

Headline inflation measures shouldn’t ignore costs of home ownership
Mojmir Hampl, Tomas Havranek 12 September 2017

Statistical offices of many countries measure the costs of home ownership by computing imputed rents, which are then included in headline inflation measures. This is the case for the US, Japan, and Switzerland, among others. In contrast, the harmonised index of consumer prices (HICP) – the EU’s most important inflation statistic – excludes owner-occupied housing, for the technical reason that imputed transactions are inconsistent with the definition of the HICP, and a more complex approach based on net acquisitions would be required (Eurostat 2012, 2013).….

…Because house purchases involve a substantial investment component, their inclusion in headline inflation makes many statisticians uneasy. Conceptually, however, homes are a special case of durable goods, because they provide a claim on a stream of future services. Cecchetti (2007), for example, showed the long-term capital gain from home ownership is very small….

Friday, September 8, 2017

Effective Exchange Rate Indexes: August 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.


August was not a good month for the Ringgit, with drops posted across all six indices. Most of the losses were due to safe haven buying of the JPY and EUR, along with skepticism over the trajectory of US policy, both fiscal and monetary. The result was a -1.21% mom decline in the Narrow Nominal Index and a –1.17% drop in the Real Narrow Index.

On a bilateral basis it was a mixed bag, with gains recorded against 7 out of 15 currencies. The biggest drops were against the EUR (-2.31%), the JPY (-2.21%), the CNY (-1.42%), the AUD (-1.30%), and the THB (-1.26%). The largest gains were against the PHP (+0.84%) and the GBP (+0.47%).



  1. Indexes have been updated to August 2017
  2. CPI deflators and forecasts have been updated for July/August 2017
  3. Trade weights have been updated to 2Q2017, which entails revisions for Mar-Jul 2017

Wednesday, September 6, 2017

Guys, This Argument Is A Total Waste Of Time

YB Rafizi Ramli is claiming that income tax collection has exceeded the rate of growth of the economy (excerpt, emphasis added):


…Maknanya, dalam tahun 2017 ini pentadbiran Dato’ Seri Najib dijangka akan mengutip hampir sekali ganda lebih banyak cukai pendapatan (pada jumlah RM112 bilion) berbanding kutipan tujuh tahun lalu iaitu 2010 semasa beliau mula-mula menjadi Perdana Menteri (pada jumlah RM60.3 bilion).

Malah, kenaikan purata tahunan sepanjang tempoh 2010 ke 2017 (disebut cumulative annual growth rate atau CAGR) adalah 11%, iaitu kadar bertambahnya kutipan cukai tahunan secara purata di antara 2010 ke 2017 sebanyak 11% setiap tahun….

…1. Pertumbuhan ekonomi negara hanyalah sekitar 5% sahaja dalam tempoh yang sama. Jika ekonomi tumbuh hanya 5%, maknanya rakyat tidak merasa kenaikan gaji yang mendadak dan peniaga juga tidak merasa keuntungan yang mendadak yang membolehkan LHDN mengutip cukai yang lebih tinggi

Tuesday, September 5, 2017

Teaching Moments

Angst over GST seems to be rising, or at least being more deliberately aired. I’m feeling like a broken record (for those under the age of 40, this is what that phrase means).

First up (except):

On Bruce Gale’s Najibnomics
By TK Chua

…The author wrote as if 1MDB, FGV and the controversial Arab donation are trivial matters. Are these not matters closely related to the poor governance, malfeasance and lack of confidence that the country is facing now? How else is the management of an economy perceived to be in good hands if not through the manner in which public finance is managed?

The author talked about “inherited” problems, such as public debt, which is strictly not the fault of the current administration. It was due to a single year’s pump priming in 2009 when the present prime minister first assumed office.

Perhaps it is time for the author to look further afield – at off budget agencies, public enterprises and GLCs, the massive loans of which are guaranteed by the federal government. Perhaps he should also look at new loans to be disbursed soon on new mega projects such as the ECRL and other gateways, the viability of which are deemed doubtful by many….

Monday, August 21, 2017

The (Un)affordability of Housing

I’ve been planning on posting this for a while now, but came across this article this past weekend, which provides the perfect entree (excerpt):

Property market bubble set to burst, says think tank

PETALING JAYA: The property bubble in Malaysia is set to burst, but the government must resist the temptation to intervene and allow market forces to coordinate supply and demand, says a think tank.

In an interview with FMT, the Institute for Democracy and Economic Affairs’ (IDEAS) senior fellow, Carmelo Ferlito explained the two “economic dynamics” which have resulted in the current property situation in the country, where the prices of homes are beyond the reach of most and the oversupply of such homes, has led to many being left unsold.

Figures from the National Property Information Centre (Napic) have indicated that as of the first quarter of 2017, some RM10.08 billion worth of residential units are unsold in Malaysia. This figure does not include serviced apartments, which have since 2015, been classified as commercial properties.

Friday, August 18, 2017

Housing Watch

BNM has a new microsite dedicated to providing info on the housing market, including info on the market, financing stats, and policy measures. Check it out here.

Chart of the Week: Healthcare Costs

The Edge has an article on medical inflation, citing a source claiming it will rise at a double digit pace this year. I hate to break it to people, but this has been the norm, both for Malaysia as well as globally.

Here’s the data, up to 2014 (in RM):


Monday, August 14, 2017

The Costs and Benefits of Immigration

Nick Rowe provides a concise framework for thinking through the issues (excerpt):

Thinking about Costs and Benefits of Immigration

I find this a useful way to organise my thoughts about the costs and benefits of immigration. It may work for you too. I start out with a neutral benchmark, where immigration has neither costs nor benefits for the original population. Then I think of different ways in which that neutral benchmark could be wrong. This post is just a list (no doubt incomplete) of things that might create costs or benefits from immigration. I make no attempt to say which is bigger. It depends.

I am writing this mostly for non-economists. I should warn you that the economics of migration is not my area. I'm a macroeconomist, and most economists who specialise in immigration are microeconomists. This may give me a different perspective.

In case you think it matters: I migrated to Canada from the UK 40 years ago (and to Quebec from Ontario 30 years ago). This may influence my perspective.

And for what it's worth: I think that Canadian immigration policy is probably in the same ballpark as the right immigration policy for Canada. Though it is probably different for different countries….

The situation in Malaysia is a little different – we have mainly guest workers, rather than immigrants, though this nuance requires little modification to the framework offered above. Worth a read.