Malaysia must retool education, skills to adapt to knowledge economy


KUALA LUMPUR: Malaysia needs to reinvent its education system to adapt to the knowledge economy, which has led to a sharp reduction in unskilled jobs and spike in demand for data analysts.

Tan Sri Andrew Sheng, Distinguished Fellow of Asia Global Institute, University of Hong Kong, said Malaysia needs to retool its education and skills, and experiment across the spectrum, in positioning itself in the new economy.

“Formal education is outdated because of the speed of new knowledge. Companies do not spend on ‘on the job’ training, because of cost cuts and staff turnover,” he said during his presentation at the NCCIM Economic Forum 2017 yesterday.

Between 2007 and 2015, the loss of unskilled jobs was 55% relative to other jobs while demand for data analysts over the last five years has increased 372%.

In the global supply chain, old economy companies are quickly losing their edge as digitisation moves faster than physical goods while unskilled jobs will be quickly replaced by robotics due to the fast adoption of artificial intelligence (AI).

“Moving up the global value chain is about moving up knowledge intensity. If you don’t get smarter you won’t get the business.

“We are already plugged into the global value chain. We are very successful in that area but we cannot stay where we are. Remaining still is no longer an option. We need to move from tasks to value added growth to high value added production. In order to do that, we need to learn to learn.”

Sheng said the Malaysian economy is doing well but faces many challenges, including subdued energy prices, growing trade protectionism, geopolitical tensions and is still very reliant on foreign labour.

“Are we ready for the new economy? The way trade is growing is phenomenal but the new economy’s challenges are great and very complicated politically because technology is great for us as it gives us whatever we want but at the cost of our jobs,” he said.

When education fails to keep pace with technology, the result is inequality, populism and major political upheaval.

“What the new economy tells us is that robotics or AI (artificial intelligence) calls for Education 4.0, which means that we have to learn for life,” he said.

Sheng noted that Malaysia has successfully moved quietly into education services, medical tourism, higher quality foods, all through upgrading skills, branding and marketing.

“But formal education has become bureaucratised, whereas we are not spending enough on upgrading our labour force, prefering to hire imported labour,” he said.

Although Malaysia cannot compete in terms of scale and speed, especially against giants such as China, it can compete in terms of scope with strength in diversity, soft skills and adaptability.

“We are winners … but have we got the mindset?” Sheng questioned.

He said Malaysia must upgrade its physical technology through research and development, harness its unique social technology and digitise its business model in order to create wealth.

While the government can help, he added, true success comes from community self-help irrespective of race or creed, and retired baby boomers who have wealth of experience must mentor the youth to start thinking about the new economy.

Eva Yeong, sunbiz@thesundaily.com
Related Links:

 Andrew Sheng – Institute for New Economic Thinking

Andrew Sheng
is a distinguished fellow at Fung Global Institute, chief adviser …
member of Khazanah Nasional Berhad, the sovereign wealth fund of Malaysia.

MALAYSIA should leverage on social technology, which is its true strength, … Tan Sri Andrew Sheng, who is a distinguished fellow at Asia Global Institute, … the new economy as it involves lifelong learning to adapt, innovate and create. … To enhance the skills of the civil service, he pointed out Singapore’s …

Andrew Sheng – Project Syndicate

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The Asian financial crisis – 20 years later




East Asian Economies Remain Diverse

 

It is useful to reflect on whether lessons have been learnt and if the countries are vulnerable to new crises.

IT’S been 20 years since the Asian financial crisis struck in July 1997. Since then, there has been an even bigger global financial crisis, starting in 2008. Will there be another crisis?

The Asian crisis began when speculators brought down the Thai baht. Within months, the currencies of Indonesia, South Korea and Malaysia were also affected. The East Asian Miracle turned into an Asian Financial Nightmare.

Despite the affected countries receiving only praise before the crisis, weaknesses had built up, including current account deficits, low foreign reserves and high external debt.

In particular, the countries had recently liberalised their financial system in line with international advice. This enabled local private companies to freely borrow from abroad, mainly in US dollars. Companies and banks in Korea, Indonesia and Thailand had in each country rapidly accumulated over a hundred billion dollars of external loans. This was the Achilles heel that led their countries to crisis.

These weaknesses made the countries ripe for speculators to bet against their currencies. When the governments used up their reserves in a vain attempt to stem the currency fall, three of the countries ran out of foreign exchange.

They went to the International Monetary Fund (IMF) for bailout loans that carried draconian conditions that worsened their economic situation.

Malaysia was fortunate. It did not seek IMF loans. The foreign reserves had become dangerously low but were just about adequate. If the ringgit had fallen a bit further, the danger line would have been breached.

After a year of self-imposed austerity measures, Malaysia dramatically switched course and introduced a set of unorthodox policies.

These included pegging the ringgit to the dollar, selective capital controls to prevent short-term funds from exiting, lowering interest rates, increasing government spending and rescuing failing companies and banks.

This was the opposite of orthodoxy and the IMF policies. The global establishment predicted the sure collapse of the Malaysian economy.

But surprisingly, the economy recovered even faster and with fewer losses than the other countries. Today, the Malaysian measures are often cited as a successful anti-crisis strategy.

The IMF itself has changed a little. It now includes some capital controls as part of legitimate policy measures.

The Asian countries, vowing never to go to the IMF again, built up strong current account surpluses and foreign reserves to protect against bad years and keep off speculators. The economies recovered, but never back to the spectacular 7% to 10% pre-crisis growth rates.

Then in 2008, the global financial crisis erupted with the United States as its epicentre. The tip of the iceberg was the collapse of Lehman Brothers and the massive loans given out to non-credit-worthy house-buyers.

The underlying cause was the deregulation of US finance and the freedom with which financial institutions could devise all kinds of manipulative schemes and “financial products” to draw in unsuspecting customers. They made billions of dollars but the house of cards came tumbling down.

To fight the crisis, the US, under President Barack Obama, embarked first on expanding government spending and then on financial policies of near-zero interest rates and “quantitative easing”, with the Federal Reserve pumping trillions of dollars into the US banks.

It was hoped the cheap credit would get consumers and businesses to spend and lift the economy. But instead, a significant portion of the trillions went via investors into speculative activities, including abroad to emerging economies.

Europe, on the verge of recession, followed the US with near zero interest rates and large quantitative easing, with limited results.

The US-Europe financial crisis affected Asian countries in a limited way through declines in export growth and commodity prices. The large foreign reserves built up after the Asian crisis, plus the current account surplus situation, acted as buffers against external debt problems and kept speculators at bay.

Just as important, hundreds of billions of funds from the US and Europe poured into Asia yearly in search of higher yields. These massive capital inflows helped to boost Asian countries’ growth, but could cause their own problems.

First, they led to asset bubbles or rapid price increases of houses and the stock markets, and the bubbles may burst when they are over-ripe.

Second, many of the portfolio investors are short-term funds looking for quick profit, and they can be expected to leave when conditions change.

Third, the countries receiving capital inflows become vulnerable to financial volatility and economic instability.

If and when investors pull some or a lot of their money out, there may be price declines, inadequate replenishment of bonds, and a fall in the levels of currency and foreign reserves.

A few countries may face a new financial crisis.

A new vulnerability in many emerging economies is the rapid build-up of external debt in the form of bonds denominated in the local currency.

The Asian crisis two decades ago taught that over-borrowing in foreign currency can create difficulties in debt repayment should the local currency level fall.

To avoid this, many countries sold bonds denominated in the local currency to foreign investors.

However, if the bonds held by foreigners are large in value, the country will still be vulnerable to the effects of a withdrawal.

As an example, almost half of Malaysian government securities, denominated in ringgit, are held by foreigners.

Though the country does not face the risk of having to pay more in ringgit if there is a fall in the local currency, it may have other difficulties if foreigners withdraw their bonds.

What is the state of the world economy, what are the chances of a new financial crisis, and how would the Asian countries like Malaysia fare?

These are big and relevant questions to ponder 20 years after the start of the Asian crisis and nine years after the global crisis.

But we will have to consider them in another article.

By Martin Khor Global Trend

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.
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SINGAPORE: One of Rachel Lau’s strongest childhood memories is the smell of newspaper. Her father, driving her to school each day in Kuala Lumpur, would make his sleepy daughter open the paper, go through stock quotes and do mental math.

“He would be, like, How did KLK do today? OK, if it’s up four sen and I’ve got 89,000 shares, how much did I make?” Lau recalled. The daily ritual continued through her teenage years. Her father Lau Boon Ann built his fortune in real estate and by investing in companies like Top Glove Corp Bhd, which became the world’s biggest rubber-glove maker.

Some days, he would stand in front of an empty lot with his young daughter and challenge her to imagine a building there rather than watching the chickens running around.

Lau, now 31, is one of the three millennial co-founders of RHL Ventures, along with Raja Hamzah Abidin, 29, son of prominent Malaysian politician and businessman Datuk Seri Utama Raja Nong Chik Raja Zainal Abidin and Lionel Leong, also 29, the son of property tycoon Tan Sri Leong Hoy Kum.

They set up RHL using the wealth of their families with a plan to attract outside capital and build the firm into South-East Asia’s leading independent investment group.

“We look at South-East Asia and there is no brand that stands out – there is no KKR, there is no Fidelity,” Lau said. “Eventually we want to be a fund house with multiple products. Venture capital is going to be our first step.”

RHL has backed two startups since its debut last year. One is Singapore-based Perx, which has morphed from a retail rewards app to provide corporate clients with data and analysis on consumer behaviour. Lau is a member of Perx’s board, whose chairman is Facebook Inc co-founder Eduardo Saverin.

In January, the firm invested an undisclosed amount in Sidestep, a Los Angeles-based startup that’s also backed by pop-music artists Beyonce and Adele. Sidestep is an app that allows fans to buy concert memorabilia online and either have it shipped to their home or collect it at the show without having to wait in line.

“RHL guys are really smart investors who are taking their family offices to a new play,” said Trevor Thomas who co-founded Cross Culture Ventures – a backer of Sidestep, together with former Lady Gaga manager Troy Carter. “What attracted the founders of Sidestep to RHL was their deep network in South-East Asia.”

A lot of startup founders in the United States want to access the Asian market, said Thomas, but they often overlook the huge South-East Asian markets and only focus on China. “Rachel and the team did a great job of explaining the value of that vision and providing really great access to early-stage US companies,” he said.

In South-East Asia, RHL has positioned itself between early-stage venture capitalists and large institutional investors such as Temasek Holdings Pte. Hamzah said they want to fill a gap in the region for the subsequent rounds of funding – series B, C and D. “We want to play in that space because you get to cherry pick,” he said.

RHL’s strategy is to take a chunk of equity and a board seat in a startup that has earned its stripes operationally for at least a year, and see the company through to an initial public offering.

Summer camp

RHL’s partners represent a new generation of wealthy Asians who are breaking away from the traditional family business to make their own mark. They include billionaire palm-oil tycoon Kuok Khoon Hong’s son Kuok Meng Ru, whose BandLab Technologies is building a music business.

RHL’s story begins in 2003 at a summer camp in Melbourne. During a month of activities such as horse riding and playing the stock market, Lau struck up a friendship with Hamzah, unaware that their parents knew each other well.

Their paths crossed again in London, Sydney, New York and Hong Kong as they went to college and forged careers in finance – Lau at NN Investment Partners and Heitman Investment Management, where she currently helps manage a US$4bil equity fund; and Hamzah at Goldman Sachs Asset Management and Guoco Management Co. Together with their mutual childhood friend Leong, the trio would joke about all returning to Malaysia one day to start a business together.

That day came in 2015 when Hamzah called up Lau in Hong Kong and said: “Yo! I’ve moved back. When are you coming back? You haven’t lied to me for 15 years, have you?”

They decided their common trait was investing.

Hamzah shares Lau’s passion for spotting mispriced assets by analysing valuations. Lau says she trawls through 100-page prospectuses for fun and values strong free cash flow – the cash a company generates from its operations after capital expenditures. Leong helped structure debt products at Hong Leong Investment Bank before joining his family’s real-estate business to learn about allocating capital to strategic projects.

In February 2016, they started RHL Ventures – an acronym for Rachel, Hamzah, Lionel – with their own money. When their families found out about the plan, they were eager to jump in, said Lau. Now they aim to raise US$100mil more from outside investors.

The partners have roped in their family and hedge-fund experts as advisers. “We recognise that we are young and still learning,” Lau said. “There is no point pretending otherwise.”

Leong’s father runs Mah Sing Group, Malaysia’s largest non-government-linked property developer. Hamzah’s father, chairman of mechanical and electrical business Rasma Corp, is a former Federal Territories and Urban Wellbeing Minister. Top Glove chairman Tan Sri Lim Wee Chai is also an adviser, in place of Lau’s father, who died in 2008.

The other two advisers are Marlon Sanchez, Deutsche Bank’s head of global prime finance distribution in Asia-Pacific, and Francesco Barrai, senior vice-president at DE Shaw, a hedge fund with more than US$40bil in investment capital.

RHL added a fourth partner last month, John Ng Pangilinan, a grandson of billionaire property tycoon Ng Teng Fong, who built Far East Organisation Pte and Sino Group.

Ng, 37, has founded some 10 ventures, including Makan Bus, a service that allows tourists to explore off-the-beaten-track eateries in Singapore.

As well as their family fortunes, the four partners bring experience of upbringings in dynasties that valued hard work, tradition and dedication.

Ng recalls his grandfather, Singapore’s richest man when he died in 2010, would always visit a property he was interested in buying with his wife.

After driving around the area, they would sit on a bench and observe it from a distance. Then they would return to the same spot after dark.

“He said to us, ‘What you see during the day can look very different at night,’” Ng said.

Hamzah, whose great-grandfather Mustapha Albakri was the first chairman of Malaysia’s Election Commission, remembers his father’s lessons in frugality – one time in London he refused to buy a £2 (US$2.50) umbrella when it started raining as they had plenty of umbrellas at home.

Leong, scion of Mah Sing Group, grew up listening to tales of how his family business overcame tough times by consolidating and reinventing itself from its roots as a plastic trader. “It made me realise that we have to be focused,” he said.

“So with every deal we do, we have to put in that same energy and tenacity.”

Lau was a competitive gymnast as a child but quit the sport when she failed to win gold at a championship event.

“It’s one thing I regret. In hindsight, I don’t think I should have given up,” said Lau. “The ultimate champion is the person who doesn’t give up.”

One old habit however remains. When Lau picks up a newspaper, she goes straight to the business section. “It’s still the only thing I read,” she said. – Bloomberg/The Star by Yoolim Yee

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TPPA in danger of collapse after its biggest critic wins US presidency


KUALA LUMPUR: The Trans Pacific Partnership Agreement (TPPA) faces its biggest challenge with the election of its major critic Donald Trump as US president. The agreement will collapse without the participation of United States, said its prime mover in Malaysia, Datuk Seri Mustapa Mohamed.

The International Trade and In­­dus­try Minister explained that for TPPA to be ratified, it needs at least six countries, accounting for 85% of the combined gross domestic product of the 12 signatories.

“Without the United States, there will be no TPPA,” he said when met in Parliament yesterday.

He added that failure to carry out TPPA may affect the Malaysian economy.

“We went into TPPA for the overall interest of Malaysia. To be a part of this process, to do more trading, as we believe that this will help trade and investment for Malaysia.

“Among the reasons why we joined was to get access to Mexico and Canada, countries that we haven’t gotten access to,” he said.

He, however, was quick to add that it was too soon to make an analysis on the matter.

Trump’s shock victory stunned capital markets around the world with investors seeking safe haven assets such as gold to brace the period of uncertainties.

In an immediate after-effect Asian stock markets fell, with Bursa Malaysia performing relatively better than most other markets, shedding less than 1%.

The US dollar index, which measures the strength of the currency against a basket of currencies, spiked to more than 1,207, largely due to the weakening of emerging market currencies and strengthening of safe-haven currencies such as the Yen and Swiss francs.

The ringgit fell to RM4.224 against the greenback, a nine-month low since Feb 25. Gold spot prices went up by almost 5% to US$1,337 (RM5,645) as investors sought shelter in safe haven assets in the period of uncertainty.

Ministers and chief negotiators of TTPA countries are expected to meet in Peru soon to take stock on the fate of the agreement.

International Trade and Industry secretary-general Datuk J. Jayasiri, who was Malaysia’s chief TPPA negotiator, said there was no indication so far that Washington under President Barack Obama would not table the Bill in the US Congress for ratification.

“All indications from US Trade Representative Michael Froman is that they are working hard to table it. The US has its own domestic process and for Malaysia we will continue the process of amending our laws,” he said.

Peru will host the annual Asia Pacific Economic Cooperaton (Apec) summit on Nov 19 to be attended by Prime Minister Datuk Seri Najib Razak. Obama is also expected to attend.

American Malaysia Chamber of Commerce (Amcham) executive director Siobhan Das said US business investments would continue to find a home in Malaysia.

“Amcham supports all efforts that enable free and fair trade between all parties, and looks forward to working with the new administration to grow US business interests in Malaysia,” said Das.

Malaysian Association for Ame­ri­can Studies (MAAS) President Prof Dr K.S. Nathan believed that Trump would try to fine tune but would not scrap the agreement.

“They may renegotiate some aspects of it but I don’t see Trump pulling back on the TPPA or even the North American Free Trade Agreement”.

The US Embassy’s charge d’affaires Edgard Kagan explained it was still possible that TPPA would be approved by US lawmakers.

“There are different views on trade in the US. President Obama is committed to the TPPA and we will just have to see what happens,” he said.

In theory, the TPPA could still be ratified by Congress during its “lame duck” session.

This is the session which takes places after the US presidential election but before the inauguration on Jan 20 next year.

BY Razak ahmad, Neville spykerman, Mergawati zulfakar, Loshana k shagar, Hemananthani sivanandam, Rahimy rahim, Martin carvalho, andd. Kanyakumari The Star/ANN

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Bizarre world of new debt, low, even negative interest rates a threat to global stability


New debt crisis a threat to global stability

 

Global debt has jumped alarmingly to RM631tril and as capital flows out from developing countries, some are facing new debt crises.

DEBT worldwide has grown to unprecedentedly high levels and has to be brought down to prevent another financial crisis.

This was highlighted by the Inter­national Monetary Fund at its annual meeting in Washington last week.

Other problems facing the global economy include the stagnation in world trade, a decline in commodity prices and the reversal of capital flows to developing countries.

A recently released United Nations report has analysed the situation as a third phase in the global crisis that began with the United States in 2008, then spread in a second wave to Europe, and is now moving on to the developing countries.

The IMF said that world debt had reached US$152tril (RM631tril), a record level. It was 200% of the value of global gross domestic product in 2002, but has risen to 225% in 2015. The private sector holds two thirds of the total, but government debt has also risen fast, and the IMF warned about the risk of another financial crisis.

“Excessive private debt is a major headwind against global recovery and a risk to financial stability,” said Vitor Gaspar, IMF director of fiscal affairs. “Rapid increases in private debt often end up in financial crises.”

Most of this global debt is concentrated in developed countries. The huge jump there has been due to policies of easy money and low, zero or even negative interest rates, and especially to quantitative easing in which Central Banks bought bonds and pumped trillions of dollars into the banking system.

 

It was hoped that this massive infusion would cause the banks to increase lending to consumers and businesses and thus stimulate economic growth.

However, the real economy did not benefit much. Instead, most of the money went into the equity markets, boosting prices, and to the developing economies as investors searched for higher yield, and this helped to fuel the growth of their debt.

The debt of non-financial corporations in emerging economies jumped from US$9tril (RM37tril) at end-2008 to over US$25tril (RM104tril) by end-2015, or from 57% to 104% of their GDP.

Foreigners now own unprecedentedly high shares of bonds and equities in developing countries, which have become vulnerable to investor-mood swings and funds, resulting in financial crises.

When market sentiment or conditions change, the massive inflows can turn into equally large outflows. Indeed, the boom-bust cycle of capital flows has gone through many turns through the years.

Huge amounts left developing countries in the fourth quarter of 2015, and for that year as a whole there was a net outflow of US$656bil (RM2.7tril) or 2.7% of their Gross Domestic Product, according to the UN Conference on Trade and Development (UNCTAD).

This was a big change from a net inflow of 1.3% of GDP in 2013. This turnaround of 4.4% is much larger than the reversals of capital flows in 1981-83, 1996-98 and 2007-08.

But in recent months the cycle turned again, with the return of fund investors to emerging economies. For example, in Malaysia, after suffering large outflows in 2015, there have been net inflows of funds into the equity and bond markets in the past few months.

Going through these cycles, the debt of developing countries has grown. “Easy access to cheap credit in boom times has led to growing debt levels across the developing world,” says UNCTAD’s Trade and Development Report 2016.

Developing countries’ external debt rose from US$2.1tril (RM9tril) in 2000 to US$6.8tril (RM28tril) in 2015. Overall debt (foreign and domestic) jumped by over US$31tril (RM129tril) with total debt-to-GDP ratios reaching over 120% in many countries and over 200% in some others.

Now a nightmare scenario is emerging. For many countries, the tide is turning and access to cheap credit has begun to dry up. Says UNCTAD: “Against the backdrop of falling commodity prices and weakening growth in developed economies, borrowing costs have been driven up very quickly, turning what seemed reasonable debt burdens under favourable conditions into largely unsustainable debt.”

In some countries, the problem is compounded by currency devaluation (which increases the value of external debt) and lower commodity prices.

These countries are thus hit by multiple whammies – lower commodity prices and export earnings, net outflow of funds, devaluation (which causes their foreign debt to increase), a higher cost of servicing debt, and economic slowdown.

More and more low-income countries are in a downward economic spiral that has led them into a new debt crisis. They have had to turn to institutions like the IMF and World Bank for bailouts. UNCTAD lists Angola, Azerbaijan, Ghana, Kenya, Mozambique, Nigeria, Zam­bia and Zimbabwe as countries that have already asked for financial assistance or are in talks to do so.

This points to a shortfall in the international financial system – the lack of an orderly and fair debt mechanism which countries facing a debt crisis can have recourse to.

At the national level, the developed countries and some developing countries have corporate bankruptcy laws, aimed at helping companies to recover from a debt crisis through an orderly debt workout.

But there is no such debt workout mechanism, with fair burden sharing between debtor and creditors, when countries fall into a debt crisis.

In its absence, indebted countries often face many years of austerity and recessionary conditions im­­posed by the creditors and rescuing agencies, and with no guarantee that their debt level will even decrease.

With the present level of worldwide debt and the emergence of a new debt crisis in several countries, especially poor ones, it is time to consider smarter policies that prevent debt crises, and to manage them properly when they happen.

Global Trends By Martin Khor Global Trend The Star/ANN

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.

The bizarre world of low, even negative, interest rates

Draghi’s point: ECB president Mario Draghi speaks during a news conference in Berlin. He vigorously defended his stimulus policies to critical lawmakers in Berlin, while reaffirming the urgency to step up structural reforms. – Bloomberg


INTEREST rate is the price of money
.

It sets the benchmark as it serves to oil the financial system’s engine, helping capital to flow freely and effectively in the global economy. Rates have been positive for the past three centuries despite world wars and the Great Depression. The system is not designed for a world of ultra-low, let alone negative rates.

The traditional business of banking, as we know it, is to take money from savers (in the form of deposits – representing banks’ liabilities) and lend it, at higher rates and over longer periods, to borrowers (investors, whose loans become their assets). Essentially, banks borrow short and lend long.

So the shape of the yield curve (chart of interest rates reflecting their term structure) is critical as it drives profits. The smaller the margin (gap) between short and long-term rates (i.e. the flatter the yield curve in economists’ jargon), the tighter banks’ profits are squeezed. The problem becomes even more difficult as interest rates or bond yields move near or to zero or worse, get negative.

Negative world

Negative rates invert the norms of banking. Strangely, borrowers are paid for taking money, while savers pay to hand over their deposits. Banks already face resistance from depositors who won’t pay to save with them. Even as the return on their assets falls, banks find it hard to reduce the cost of their liabilities. When central banks impose rates on the reserves kept by banks with them – as is done at the European Central Bank (ECB) and Bank of Japan (BoJ) – it’s difficult for the banks to pass on this cost.

Indeed, negative rates act as a tax on bank profits. Banks also own government bonds, partly because regulators require them to keep a portfolio of liquid assets. Revenue here is a handy source of income. But as the older, high-yielding bonds mature, their replacements are now much lower yielding, thus eating into banks’ profits.

So banks look for other ways to re-coup, resorting to fees for services. Indeed, wealthy clients of private banking are starting to wake up to the impact of fees.

Insurance companies are also badly affected. They buy bonds to match assets with their long liabilities. But insurance companies in Germany and Switzerland are stuck with savings products they had sold in happier times, which guarantee returns well above current yields. A similar problem hit Japan in the 1990s and 2000s. Those with asset management arms have some protection, where returns are linked to the markets. But the impact of low returns is slowly but surely squeezing them too.

Impact

The underlying economic problem today remains inadequate global demand. In response, ECB has since stepped up its stimulus activities, joining BoJ and others in breaching the “zero lower bound” (inability of interest rates to get negative). So far, the impact on growth and employment has been dismal – simply because there is so much excess capacity worldwide.

Lower rates (even going negative) don’t appear to work. Lending has become more risky and banks today, as I see it, have neither the appetite nor enthusiasm to lend. Negative interest rates (NIRs) hurt banks’ balance sheets.

Other problems: NIRs (i) encourage investment in capital-intensive and disruptive technologies; (ii) perversely encourage savings – as fixed, interest-dependent income earners dampen consumption; (iii) curb a bank’s ability to lend; (iv) distort financial markets; and (v) shift portfolios to riskier assets in search of higher yields. In the longer run, NIRs compel businesses and individuals to disengage from a financial system that now taxes their saving.

Short-term rate and government bond yields represent the risk-free rate that forms the basis of return in finance. The expected return on equities comprises this risk-free rate plus a premium to allow for stock volatility and risk of capital loss. A good chunk of income of service providers is the “cut” they take. Today, there is simply much less return to go around.

Global trading in government bonds had exceeded US$10 trillion, a testament to just how hard central bankers are pushing yields down to spur households and businesses to spend. US 10-year Treasury now yields below 1.7%. Returns on comparable bonds in Germany and Japan are negative. Falling rates promise limited relief for consumers and businesses because inflation is falling too. For many in Europe and Japan, even record low rates don’t translate into easier borrowing terms on a real, or inflation adjusted, basis. For example, 10-year Japanese bonds return a -0.07%; but consumer prices fell 0.3%, yielding a +0.23% at 10 years, a key rate for most Japanese. NIRs don’t appear to have helped boost inflation in Europe either. The real case against NIRs is the folly of relying on monetary policy alone to rescue economies from depressed conditions.

Scandinavian experience

Among Scandinavian nations, Denmark already has four years of NIRs. Its central bank benchmark rate now stands at -0.65% (mortgage rate, excluding fees, being at negative 0.0562%). Neighbour Sweden’s is -0.5% (below zero for 14 months). In Norway, rates can go negative to prop-up an economy hard hit by low oil prices. ECB and BoJ are using sub-zero rates to stimulate growth with little success.

Meanwhile, Switzerland, Sweden and Denmark are trying NIRs to keep their currencies in line with the struggling euro. Their experience points to concerns about undesirable side-effects, including: (i) savers pay the price of getting no interest; even so, bank profitability is squeezed; (ii) excessive investment in real estate; (iii) households gorging up mortgages they can’t afford to repay when rates rise or real estate values fall.

Sweden’s household debt to disposable income ratio is at an unsustainable 175% (90% in mid-1990s); and (iv) run to physical cash by savers. The flip-side points to success in keeping the currency in check, holding steady against the euro to protect euro-trade and competitiveness.

In Denmark, despite NIRs, private saving is rising (26% of GDP, against 21% before 2012 when rates were positive) to protect future purchasing power. But, investments fell (16% of GDP against 18.1% in 1990-2012). So, NIRs appear to be counterproductive. This chorus of discontent is spreading to other parts of Europe.

NIRs have pushed up savings and done little for corporate investment, while eviscerating pension plans. Politically, in Europe’s sclerotic economy, in the face of high unemployment (double the US rate) and an uncertain outlook, NIRs can be even more toxic, driving voters to support populist causes.

Japan

BoJ took radical measures for 3½ years to reflate the country’s sagging economy, resorting this January to NIRs. Yet growth and inflation remain elusive. Core-inflation is at minus 0.5%, far below BoJ’s 2% target. Prices today are still lower than they were in 1997. BoJ’s primary method to raise consumer expectations has been buying assets, mostly government bonds but also real estate and equities.

As a result, Japan’s monetary base tripled to US$4 trillion (80% of GDP). Investors’ patience is fraying. In a bold move to deepen the yield curve, BoJ on Sept 21: (i) capped the 10-year government bond rate at 0%, vowing to overshoot its 2% inflation target; and (ii) maintained its existing policy to purchase 80 trillion yen (US$78bil) of assets a year. Both these goals are incompatible. They pose a dilemma – in the event demand for government bonds collapses, BoJ will need to buy more and more to keep yields at zero. Similarly, strong demand may even make it unnecessary to buy any.

As I see it, the new approach is a sensible response to market realities. BoJ had conceded real difficulties in shifting price expectations towards the inflation target. Besides, the flattening yield curve is eating into banks’ profits.

By targeting its future purchases at the shorter-end (rather than buy longer bonds as now), BoJ is expected to tolerate a steeper yield curve. The yield cap should make NIRs more effective. Indeed, it allows BoJ to further test the bounds of its NIRs policy. In essence, the new approach shifts focus to interest rates, a retreat from the unpopular quantitative easing (QE). For investors, there is no longer a willing buyer. Instead, a price setter – adding uncertainty. Its pledge to overshoot the inflation target as soon as possible is designed to raise future price expectations more forcefully.

Whether BoJ can shake off deflation depends on whether domestic demand can revive to rekindle the still elusive price expectations. QE needs to be accompanied by more purposeful fiscal stimulus – including even a last ditch effort to issue “helicopter money” – to directly underwrite government spending by BoJ.

In search of yields

With NIRs, some of the world’s un-venturesome investors – the Japanese – are going abroad at an unprecedented rate this year: up to US$500bil being invested so far in foreign securities. For the risk taker, Venezuela bonds earned as much as 27% return over the past year. However, most prefer to just take “duration” risk: measured on when the investor gets his money back.

Longer bonds have higher duration risk – as do bonds with low coupons (more waiting time). Rule of thumb: 1 percentage point change in the rate changes the bond price equal to the duration. The price of 25-year bonds will jump 25% if rates fell by 1 percentage point; and falls 25% if rates rose 1 percentage point. As duration gets longer, risk mounts. For example: last year, 40-year Japanese bonds carried a 1.4% coupon. Rates have since turned negative; so the price rose by as much as 34%.

What then, are we to do

It is startling that the total volume of sovereign and corporate bonds with NIRs now exceeds one-half of all western debt. It’s equally amazing how investors continue to gobble up these bonds even though they are likely to get back less than what was invested.

Just as astonishing is the rising demand for cash – the world’s largest asset managers now hold 5.8% of their assets in cash! Why? Points to investors and fund managers being downbeat on the ability of central bankers to raise inflation in the face of growing pessimism about growth prospects (17% of them expect a global recession, and as many as 39% expect “helicopter money” to be handed out). Most fear the policy landscape will become weirder.

QE appears broken. This playbook has limited success in US and is patchy at best in Europe and Japan. Frankly, US bankers and economists are growing increasingly uncomfortable with the cycle of QE infinity and more aware of its collateral effects, including keeping US dollar cheap.

But consumers and businesses have been saving rather than spending, with stagnant unemployment overshadowing the windfall from rising asset prices. European banks have been hit by low interest rates, tighter regulation and rising non-performing loans that have hurt profitability. Policymakers are today rethinking strategies. Mario Draghi is, and Haruhiko Kuroda has had a recent relook. The key question remains: how to regain policy effectiveness. That’s where the focus should be – adopt pro-growth structural reforms to make the economies more competitive, and to enhance fiscal creditability.

Sure, BoJ has to make people believe in inflation. Inflationary expectations won’t materialise until BoJ is credible. Credibility – that’s what makes our world in 2016. In the US, both presidential candidates have pledged fiscal stimulus. Hopefully, by next year (after elections in Spain, Germany and France), a more balanced application of softer QE and aggressive fiscal stimulus can turn Europe from a good trade into a good investment.

What are we to do?

By Lin See Yan

Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015). Feedback is most welcome; email: starbiz@thestar.com.my.
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Why the US dollar will remain strong despite cheap money at near zero interest rates?


THE Fed failed to raise interest rates on Sept 21, giving many markets and fund managers a sigh of relief.

Fed chairman Janet Yellen said the case for an increase has strengthened, but decided for the time being to wait for further evidence of continued progress toward the Fed objectives of maximum employment and price stability. Some analysts felt that any Fed rate increases would be seen as favouring one party in the US Presidential elections.

Caution having over-ridden valour, overall stock markets rallied somewhat, while currency markets moved sideways. Going forward, the futures market think that there is a 60% chance of the Fed raising interest rates in December, after the November Presidential elections.

The key question is whether the dollar will strengthen. So far, the US dollar has been strong against emerging market currencies, flat against the euro and weakened relative to the yen.

There are hoards of analysts trying to forecast short-term and long-term exchange rate movements. Exchange rates are determined by the supply and demand in currency pairs, usually between the dollar and the most traded currencies, such as euro, sterling, yen and other liquid currencies (Australian dollar etc). In turn, the supply and demand for foreign exchange would depend on the current account (trade flows) and capital account (financial flows) of the balance of payments.

If one only looked at trade flows, then exchange rate expectations would depend on whether countries are running large current account surpluses or not, on the basis that a surplus country’s currency would strength. On that basis, one would expect that the Euro should strengthen, because the eurozone is now overall running a current surplus of roughly 3% of GDP. Germany alone is runnng a current account surplus equivalent to 8% of German GDP. However, investor nervousness about the sluggish outlook for the eurozone has keep the euro on the weak side.

One reason is that capital flows are now driving the exchange rate, due to large portfolio flows in search of yield and total returns, as financial assets become more globalised. Theoretically, portfolio flows should be driven by covered interest rate parity, meaning that foreign exchange traders arbitrage in spot, forward and futures markets to equalise risk-adjusted interest rates between countries. Hence, expectations of interest rate differentials between countries matter in shaping exchange rate behaviour.

Interest rate behaviour is determined today largely by monetary policy, which is why global markets are particularly nervous about US Fed interest rate adjustments. Since the US dollar is the world’s benchmark currency, with roughly two thirds of global financial assets measured against the dollar, global financial markets move in expectations of future Fed interest rate increases.

The US remains the dominant military and economic power and is consequently the safe-haven currency. Whenever geo-politics become tense, as is the situation currently, the flight is always towards the dollar.

Furthermore, all signs point towards the US economy performing best amongst the advanced economies, despite overall slower growth post-crisis.

There is enough evidence that the US is already reaching full employment levels at 4.9% unemployment rate, with anecdotal evidence that companies are hiring in anticipation of growing consumer confidence.

There is however a disconnect between US recovery and trade growth. The US consumption pattern has changed from consuming durables towards spending on services, such as new apps and digital entertainment. A partial shift towards manufacturing at home also explains why exports to the US have not increased substantially. With global trade growing slower than GDP, emerging markets are not growing due to the traditional cyclical uptick in exports.

The bad news is that historically, a strong dollar has been associated with slower global growth and vice versa. The explanation is that when the dollar is weak, capital flows out to the emerging markets, stimulating trade and investments. When the dollar is strong, capital flows back to the US and if the US is unable to recycle these flows, global growth weakens.

As the taper tantrum in 2013 showed, when the Fed signalled an increase in interest rates, emerging markets suffered huge turmoil of capital outflows, leading to either interest rate increases or sharp devaluations.

The power of the US to recycle global capital flows is critical to global recovery. Unconventional monetary policy in the US, in the form of near zero interest rates, is not working because the transmission mechanism of cheap money to the real economy is not working. Liquidity remains within the central bank-financial market nexus, with relatively slow lending to finance private sector long-term investments. The private sector is also not confident about the future until there are stronger signs of sustained consumer spending. Furthermore, much-needed public sector investments in infrastructure are being constrained by the large debt overhang and toxic politics.

In short, global capital flight to the dollar, with near zero interest rates, will mean global secular deflation. The reason is that zero interest rate dollar holdings have the same deflationary role as gold in the 1930s. Holding gold was deflationary because spending stops as more and more gold hoarding drained liquidity from the market.

Wait a minute. If the Chinese economy is still growing three times faster than the US in GDP terms (6.7% versus 1.8%), shouldn’t the yuan appreciate? Yes, China is running a current account surplus, but capital outflows are currently running about the same level as trade surpluses, so foreign exchange reserves are flat. Many people think that capital outflows indicate that the yuan will remain weak against the dollar until private sector confidence recovers.

The European and Japanese central banks are running negative interest rate policies precisely because with interest rates relatively lower than the dollar, capital flows will induce lower exchange rates, which will hopefully reflate their economies. The Fed has exactly the same fear as the People’s Bank of China in 2009 when China was growing at more than 10% per year.

Higher Fed interest rates would attract higher capital inflows, pushing up the dollar and inducing even higher asset bubbles, with no inflation in sight.

In sum, much will depend whether the US will use more fiscal stimulative policies and less of unconventional monetary policy to revive productivity growth. It looks as if we will have to wait for a new President to make that strategic call. We will know by November,

By Andrew Sheng

Tan Sri Andrew Sheng is Distinguished Fellow, Asia Global Institute, University of Hong Kong.

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Wira Dani, son of former Finance Minister Daim, declared a bankrupt


PETALING JAYA: Datuk Md Wira Dani Abdul Daim, who just recently got appointed as Reliance Pacific Bhd executive director, has been declared a bankrupt by the high court of Singapore.

According to reports, the son of former finance minister Tun Daim Zainuddin failed to settle some S$1.65mil (RM4.9mil) in debts that he owed Maybank Kim Eng Securities.

Following the court order, Wira Dani stepped down as non-independent and non-executive director of Singapore-based gold company LionGold Corp Ltd.

He had also ceased to be the executive chairman of investment and investment advisory firm ISR Capital Ltd since Monday.

In a statement filed with the Singapore Exchange, Wira Dani indicated that he intended to settle personal affairs following the court bankruptcy order, which he intends to resolve within the next 30 days.

Maybank secured a high court judgment against Wira Dani in March to reclaim a debt of $2.459mil (RM7.3mil) that he owed.

This was said to have been borrowed by him to buy LionGold shares on a leveraged account.

Wira Dani, together with Daim’s wife Toh Puan Mahani Idris, emerged as substantial shareholders of Reliance Pacific, which operates the famous Avillion Hotel in Port Dickson, at end-July 2016 through their private vehicle Ibu Kota Developments Sdn Bhd.

Ibu Kota owns a 30.96% stake in the company that has extensive interest in the tourism, property development and hospitality sectors.

Wira Dani was named the executive director of Reliance Pacific on July 27.

At present, he is also a non-executive director of GCM Resources PLC, a company listed on the London Stock Exchange and chairman of Astute Capital Ltd, a company incorporated in the British Virgin Islands.

LionGold was among the three companies whose drastic decline in share prices in October 2013 wiped out some S$6.9bil of their market capitalisation in three days.

The event led to an official probe on suspected irregularities, and lawsuits were filed by various parties.

LionGold and the other two companies, namely Blumont Group and Asiasons Capital, claimed they were unaware of the reasons for the plunge of their shares.

LionGold’s market cap stood at S$26.9mil as of June 2015, compared with S$1.59bil at its peak in August 2013.

Wira Dani had reportedly agreed to pay the bank via instalments. However, by August 2014, he had repaid only S$100,000.

Maybank in April accepted the offer from his lawyer, Woo Tchi Chu, to settle the debt, with S$1mil to be paid in two tranches within the month and the rest by end-June.

Maybank’s Allen & Gledhill lawyer Vincent Leow had made clear that bankruptcy was an option in the event of a default by Wira Dani.

In the event, Maybank received only about S$835,950, leaving a shortfall of S$1.65mil and triggering the bankruptcy move.

Wira Dani is said to have property in Singapore, according to court documents filed.

Maybank refused to comment when contacted last night, citing client confidentiality.

– The Star/Asia News Network

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