Behind crazy rich Singapore’s mask, a growing class divide


Inequality bites: In Singapore, households with accumulated wealth and connections over past generations, like the hit movie’s protagonist Nick Young’s family and friends, can pass on advantages to their offspring. — AP
Inequality bites: In Singapore, households with accumulated wealth and connections over past generations, like the
hit movie’s protagonist Nick Young’s family and friends, can pass on advantages to their offspring. —AP
Two Singapores: Poverty has always existed in the cosmopolitan city state, but the setting of the hit movie ‘Crazy
Rich Asians’ has seen a widening income gap in the past few years. —Reuters

 There is another side to the Lion City’s fabled wealth: a widening gap between rich and poor that is forcing its citizens to question whether their home is really the land of opportunity they once thought.

IN the background, a luxury goods shop, a stooped elderly cleaner sweeping its storefront; on one side of the bridge sits expensive condominiums, bars and restaurants, on the other, rental flats housing Singapore’s poorest.

These scenes unfolded in a documentary titled Regardless of Class by Channel News Asia released on Oct 1, with a security guard revealing he felt as though he was not treated like a person. A cleaner said: “I know I’m invisible. I have to get used to this, and learn to stop caring.”

Poverty and inequality in the city state – the setting of the hit movie Crazy Rich Asians and where the per capita income is among the highest in the world, hitting US$55,000 (RM228,494) last year – has always existed.

But in the last year, Singaporeans have been confronted with discomfiting evidence of growing social stratification, shaking to the core a belief that meritocracy can smooth out unequal beginnings and lead to more equal outcomes.

Sociologist Tan Ern Ser from the National University of Singapore said class origin or background now had a greater influence on opportunity and social mobility, as the country faced slowing growth, job losses and obsolescence and an ageing population.

Singapore’s Gini coefficient, a measurement of income inequality from zero to one – with zero being most equal – has fluctuated above 0.40 since 1980 before adjusting for taxes and transfers. It was 0.417 last year. In the United Kingdom, it was 0.52 in 2015, the United States was at 0.506, and Hong Kong reached a record high of 0.539 in 2016.

Experts say inequality in itself is not worrying – sociologist Tan said it could even “be good for motivating people to want to do better”.

But in Singapore’s case, it has allowed households with accumulated wealth and connections over past generations to pass on advantages to their offspring, helping them to shine, while those without the same social capital and safety nets are forced to toil harder to do the same.

As Singapore University of Social Sciences economist and nominated Member of Parliament Walter Theseira put it: “If you can buy advantages for your child, such as tuition and enrichment, they are going to end up doing better in terms of meritocratic assessments.”

Donald Low, associate partner at Centennial Asia Advisors and the former associate dean at Lee Kuan Yew School of Public Policy, said Singapore’s meritocratic and universal education system for the past 50 years led to a great deal of social mobility initially, but society would “settle” after a few decades.

“This is amplified by marriage sorting. That is the well-educated marrying one another and passing on their advantages to their children,” Low said.

A paper published last December by local think-tank Institute of Policy Studies, which demonstrated the sharpest social divisions were based on class, not race or religion, started the latest debate on the impact of inequality.

The report, co-authored by sociologist Tan, showed low interaction between students who attended elite and regular schools, and between Singaporeans living in private and public housing.

This was followed by a bestselling book by Nanyang Technological University sociologist Teo You Yenn titled This is What Inequality Looks Like, which told of the experiences of the low income group, and the systemic issues keeping them poor.

In early October, a six-minute clip on Facebook of the Regardless of Class documentary sparked feelings of discomfort, guilt and self-reflection among Singaporeans – possibly from realising “there may well be two Singapores in our midst”, said former nominated Member of Parliament Eugene Tan, a law don at Singapore Management University.

In it, six students from different education streams talked about their dreams and school experiences.

Some were aiming for an overseas degree and a minimum of A’s; others just wanted to pass their examinations.

When presenter Janil Puthucheary, a Cabinet member, mooted putting students of mixed abilities together in one classroom, a girl from the higher education stream said it was not viable, as “it might even increase the gap if these students feel like they can’t cope so they just give up completely”.

Puthucheary asked if the conversation was awkward.

One boy from the lower education stream said: “The way they speak and the way I speak (are) different, I feel like.

Another student completed the sentence: “Like they are high class and we are not.”

Seetoh Huixia, a social worker for 13 years who is assistant director of AWWA Family Services, said she had seen this sort of low self esteem in the people she works with. “The sense of us versus them, the inferiority complex, that they’re not good enough,” she said.

The Straits Times opinion editor Chua Mui Hoong wrote: “It got me thinking; how did we become a society that looks down on people for the work they do or the grades they get? Are we all complicit in this? Can anything be done to turn our society inside out so that we are all less disdainful, more respectful, of one other?”

Academics felt the documentary was a good conversation starter, but urged Singaporeans to look at the underlying causes of this class divide.

Low said the documentary was problematic because “the root causes of economic inequality, an elitist education system and the government’s anti-welfarism are not interrogated, and that a complex issue (of structural inequality) is reduced to people not having enough empathy or being snobbish”.

“All this class consciousness and implicit bias is a function of our systems and policies,” he added.

Teo urged Singaporeans to look beyond attitudes and focus on the inequality that had led to the divide.

“We must not focus on perceptions – whether of ourselves or others – at the expense of real differences in daily struggles and well-being. The perceptions exist in response to those differences. Just as thinking about gravity differently would not stop a ball rolling downhill, pretending differences don’t exist isn’t going to magically make the differences disappear,” she said.

Sociologist Tan said structural changes through policies would be critical. “It can’t be just about telling people to be nice and respectful toward one another.”

Experts have in the last decade proposed ways in which Singapore can mitigate gnawing income inequality, ranging from policy changes in the areas of wages, taxes on wealth, social spending, housing and education.

The government has responded by increasing its social spending — supplementing the income of low-wage workers, introducing a universal health insurance scheme, increased personal income tax rates for high earners. It has also expanded its network of social service touchpoints and just in September tweaked the education system to reduce the emphasis on examinations.

But its social spending is still lower than Nordic countries and personal income taxes remain competitive to attract talent, leading developmental charity Oxfam and non-profit research group Development Finance International to this month call out the government for “harmful tax practices”, low public social spending, no equal pay or non-discrimination laws for women and lack of a minimum wage.

They ranked Singapore in the bottom 10 of 157 governments (at 149th place), ranked on how they were tackling the growing gap between rich and poor.

The government staunchly disagreed with the report, with Minister for Social and Family Development Desmond Lee saying Singapore’s outcomes in health care, education and housing were better than most countries despite spending less. The World Bank’s Human Capital Index, leaders noted, placed Singapore top for helping people realise their full potential.

One area experts agree on is that more tweaks are needed to the education system.

Singapore Management University’s Tan said apart from higher wealth taxes, “the education system needs to ensure not just equal opportunities but endeavour to provide for equal access to opportunities. There is a world of difference between the two. We may have focused on the former but not enough on the latter”.

Low said the education system needed to be “truly egalitarian”.

He suggested the state funds a national early childhood education system for children aged four onwards to remove segmentation from the get-go, to remove the national exam sat by 12-year-olds in Singapore and have schools run for the entire day so parents do not fill their children’s afternoons with tuition.

Theseira had a more novel solution: affirmative action that accords favours to the disadvantaged.

“It basically says that somebody from a disadvantaged background who achieves the same thing as somebody from a privileged background should be given much more credit because that is actually a much bigger achievement given the starting point,” he said.

“Are we willing to contemplate that? I don’t think we are at the moment but it’s a very obvious policy that addresses this problem with the definition of meritocracy.”

There must be a sense that a class divide is harmful for everyone, especially among those who have thrived under the current system, Eugene Tan said.

“A class divide could threaten Singapore’s existence because it would pit Singaporeans against Singaporeans. The divide would render Singapore to be rife with populism and to be consumed by sub-national identities. The class divide is also likely to reinforce existing cleavages based on race, religion and language.” — South China Morning Post by kok xing hui

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China leads the way as world’s billionaires get even richer


The United States created 53 new billionaires in 2017, down from 87 five years ago
China produced around
two new billionaires a week last year as the fortunes of the world’s
ultra-rich soared by a record amount, a report said Friday.Read more at: https://phys.org/news/2018-10-china-world-billionaires-richer.html#jCp
China produced two new billionaires a week last year as the fortunes of the world’s ultra-rich soared by a record amount – AFP

China produced around two new billionaires a week last year as the fortunes of the world’s ultra-rich soared by a record amount, Swiss banking giant UBS and auditors PwC said.

Billionaires’ wealth enjoyed its “greatest-ever” increase in 2017, rising 19 percent to $8.9 trillion ($7.8 billion euros) shared among 2,158 individuals, said the report by Swiss banking giant UBS and auditors PwC.

But Chinese billionaires expanded their wealth at nearly double that pace, growing by 39 percent to $1.12 trillion.

“Over the last decade, Chinese billionaires have created some of the world’s largest and most successful companies, raised living standards,” said Josef Stadler, head of Ultra High Net Worth at UBS Global Wealth Management.

“But this is just the beginning. China’s vast population, technology innovation and productivity growth combined with government support, are providing unprecedented opportunities for individuals not only to build businesses but also to change people’s lives for the better.”

The report said China minted two new billionaires a week in 2017, among more than three a week created in Asia.

In the Americas region, the wealth of billionaires increased at a slower rate of 12 percent, to $3.6 trillion, with the United States creating 53 new billionaires in 2017 compared to 87 five years ago.

Currency appreciation saw European billionaires’ wealth grow 19 percent although the number of billionaires rose by just 4.0 percent to 414.

Wealth transition from just five families accounted for 30 percent of the continent’s wealth expansion, the study said.

It warned of lower economic growth in the United States and China if the trade war between the two countries escalates.

“US and Asia ex-Japan equities could fall by 20 percent from their mid-summer 2018 levels.”

Asia challenging US dominance

For China’s young billionaires “the country’s fundamentals of a huge population and rising technology will continue to offer fertile conditions for entrepreneurs to grow their businesses,” the study said.

It there were only 16 Chinese billionaires as recently as 2006.

“Today, only 30 years after the country’s government first allowed private enterprise, they number 373 – nearly one in five of the global total.”

It said 97 percent of them are self-made, many of them in sectors such as technology and retail.

Billionaires from Asia, especially in the Chinese city of Shenzhen, are now challenging the traditional dominance of Americans as technology entrepreneurs.

“In 2017, they equalled America’s level of venture capital funding for start-ups, registered four times as many Artificial-Intelligence-related patents and three times as many blockchain and crypto-related patents as their US counterparts.”

Ravi Raju, head of Asia Pacific Ultra High Net Worth at UBS Global Wealth Management, said Asia’s billionaires “are young and relentless. They are constantly transforming their companies, developing new business models and shifting rapidly into new sectors.”

The report said that globally, self-made billionaires have driven 80 percent of the 40 main breakthrough innovations over the last 40 years.
UP AND OUT OF POVERTY – Xi Jinping https://youtu.be/SYWz2bwCUEE

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Explore further:
© 2018 AFP /Phys.org

Asia’s billionaires see fastest wealth growth: report 
September 17, 2014 

 

 Asia’s billionaires see fastest wealth growth: report

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Asia’s billionaires see fastest wealth growth: report



September 17, 2014

Asia’s billionaires led by Chinese tycoons enjoyed the
fastest increase in their wealth this year compared to their peers in
the rest of the world, a report said Wednesday.

Read more at: https://phys.org/news/2018-10-china-world-billionaires-richer.html#jCp

 

Malaysia’s widening income gap between rich and the poor has only RM76 a month after expenses


 

The State of Households – Khazanah Research Institute

 

Launch of State of Households 2018: Different Realities. From left to right: Datuk Hisham Hamdan, Dr Nungsari Ahmad Radhi, Allen Ng, Dr Suraya Ismail, Junaidi Mansor.

Malaysia’s widening income gap

KUALA LUMPUR: The gap in income between the rich, middle class and poor in Malaysia has widened since 2008, according to a study by Khazanah Research Institute (KRI).

In its “The State of Households 2018” report, the research outfit of sovereign wealth fund Khazanah Nasional Bhd noted that the gap in the real average income between the top-20% households (T20) and the middle-40% (M40) and bottom-40% (B40) households in Malaysia has almost doubled compared to two decades ago.

The report, entitled “Different Realities”, pointed out that while previous economic crises in 1987 and the 1997/98 Asian Financial Crisis saw a reduction in the income gap between the T20 and B40/M40, post 2008/09 Global Financial Crisis (GFC), those disparities were not reduced.

But the Gini coefficient, which measures income inequality in the country, had declined from 0.513 in 1970 to 0.399 in 2016, denoting improvement in income inequality in Malaysia over the past 46 years.

Explaining the phenomenon, Allen Ng, who is the lead author of the KRI report, said income of the T20 households had continued to grow, albeit at a slower pace than that of the M40 and B40 since 2010.

“However, because they (the T20) started at a higher base, the income gap between the T20 and M40/B40 had continued to grow despite the fact that the relative (income growth) is actually narrowing post-GFC,” Ng explained at a press conference after the launch of the report here yesterday.

On that note, Ng calls for greater emphasis and investment in human capital to address the income disparities in the country.

“Human capital is the lynchpin that will help us in the next mile of development,” Ng said.

“Based on the work that we have done, and the way we read the issue, the most important equaliser in terms of income inequality is actually human capital. If we don’t address the quality of our education system, we will not be able to solve the problem of income inequality,” he added.

Among the many key issues highlighted in the report, the state of human capital development in Malaysia was noted as a crucial element to complement the country’s transition towards a knowledge-based economy.

“To complement the knowledge-based economy, the state of human capital development in this country – of which 20% of government expenditure goes to education – has plenty of room for improvement,” the report stated.

Worryingly, the report noted that despite Malaysians receiving 12 years of schooling, they receive only nine years’ worth of schooling after adjusting for education quality.

“The central issue of generating high-quality human capital in this country is an important one as the transition to a high-income nation requires human capital levels that continuously improve productivity, sustain growth and are able to create or utilise technological advancements rather than being substituted by it,” the report said.

Meanwhile, KRI also noted that despite the improvement in income inequality and declining poverty rates in Malaysia, poverty in the country remained rampant.

“While the absolute poverty rate has been steadily declining, it is estimated that an additional one million households lived in ‘relative poverty’ in 2016 compared to two decades ago,” it said in its report.-  The Star

Malaysia’s Lower Income Group Only Has RM76 To Spend A Month After Expenses

Shocking.
Some numbers for your soul.- PIC: Department of Statistics Malaysia

According to The Star Online, these households — categorised under the bottom 40% (B40) income group in the country because they are earning less than RM2,000 a month — only have RM76 to spare, after deductions, in 2016.

As comparison, these households have a residual income of RM124 in 2014.

The reason for the sharp decline? They were forced to spend more of their income on household items.

The study revealed that these households are spending 95 per cent of their total  income on consumption items in 2016 compared to 2014, when the same households spend ‘only’ 92 per cent of their income on daily items.
So, what’s the cause behind this worrying trend?

The report indicated that the rising cost of living is mainly to be blamed for the increase in household expenditure, so #ThanksNajib.

In fact, the report revealed that the high cost of living has affected not only the B40, but all income groups as well.

The real residual household income has, according to the report, reduced
for all income classes. For example, households earning above RM15,000
has a real resi­dual income of RM13,100 in 2016, down from RM14,458 in
2014.

Sigh, we guess we just have to spend our money wisely from now on. No more RM16 Caramel Frappuccino® from Starbucks from now on.

Money, where did you go?

We know we keep saying that we’re broke, but after reading this report, we found out that there are a lot of people out there who are having it worse than us.

A recent Khazanah Research Insti­tute (KRI) study revealed that every month, the average lower-income household in Malaysia has barely enough to survive after household expenses are deducted.

It’s, like, really, really bad!
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Trump’s tariffs won’t restore U.S. jobs



The sewing lines at Bernhard Furniture Company which where skilled craft
jobs are growing without the help of tariffs, and company officials

Related image

Trump’s tariffs won’t restore U.S. furniture jobs :
https://www.reuters.tv/v/PvWi/2018/09/27/trump-s-tariffs-won-t-restore-u-s-furniture-jobs

In a town where a 30-feet tall chair is the chief landmark, and which is synonymous with a U.S. furniture industry decimated over the years by imports from China, many greet the possibility of tariffs on Chinese goods with a shrug.

No wonder. Of three once bustling Thomasville furniture plants in the city limits, one is being demolished and cleared for parkland, another may become the site of a new police station, and a third is being converted into apartments.

President Donald Trump is threatening to levy tariffs of up to 25 percent on $500 billion of goods imported from China each year, including roughly $20 billion of furniture, as a way to bring back hundreds of thousands of manufacturing jobs lost to China and other low-cost competitors.

Yet, the transformation of U.S. industries since China’s emergence as the world’s low-cost producer almost two decades ago means many no longer directly compete with Chinese imports, so tariffs may not translate so easily into more U.S. jobs.

At family-owned Bernhardt Furniture in Lenoir, some 90 miles west of Thomasville, executives say it would take about $30 million in capital investment – some 10 percent of annual sales – to resurrect standard wood furniture lines now mainly made in countries like China and Vietnam.

That is too much to commit based on a policy that a future administration could reverse.

“The theory is you turn (imports) off, the jobs come back. That’s not really true… The buildings don’t exist. The people don’t exist. The machinery does not exist,” to make the sorts of furniture that now gets imported, said Alex Bernhardt Jr., chief executive and the company founder’s great grandson.

What the company needs now, executives say, is the open markets and steady economy that have allowed it to grow its workforce from below 800 at the end of the 2007-2009 recession to almost 1,500 today – partly on the basis of exports to China.

DIFFERENT COMPANY

That growth has been largely driven by demand for more customized, higher end furniture. In expanding, the 129-year-old company has been hiring not only factory workers, but also designers, marketing experts and other professionals.

In all, it is a different firm from what it was three decades ago when it first began dividing product lines between the United States and Asia.

Economists say the same is true across much of U.S. manufacturing. To invest and hire more workers, executives would need certainty, for example, that consumers would prefer U.S.-made products at a potentially higher price. They would need confidence that tariffs would last beyond the Trump administration and that production could not be shifted to other more cost-competitive countries.

Even then, there may be little incentive to go back to old product lines for industries that have changed dramatically because of globalization.

Across the Rust Belt and the former factory towns of the south, the transformation is apparent. In Buffalo, an old steel mill is now a solar panel factory, and a retail goods manufacturer now houses an office and restaurant park. Near Dayton, Ohio, a shuttered GM plant has reopened as a Chinese-owned auto glass company. Abandoned factories throughout North Carolina have landed on the Environmental Protection Agency’s list of “brownfield” sites that need cleanup.

Some companies are considering moving production from China as a result of the tariffs, but the jobs are unlikely to head home.

Illinois-based CCTY Bearing, for example, said it planned to move U.S.-bound production from Zhenjiang, China, to a new plant near Mumbai in India to keep labor costs down.

JLab Audio’s China-made Bluetooth products are not being taxed yet, but its chief executive Win Cramer had been scouting for suppliers in Vietnam and Mexico.

“I would love to build products onshore, but consumers have proven time and time again that “Made in America” isn’t as valuable a statement as it once was,” Cramer said. “They make decisions based on the cost.”

The price of, say, its Bluetooth earbud would jump from $20 to as much as $50 if it was made in the United States, Cramer said, far more than what tariffs would add to the cost of imports.

To be sure, early reactions suggest that foreign companies that make U.S.-bound goods in China may move some of that production to the United States. Still, countries such as Vietnam may ultimately benefit the most from Trump’s tariffs.

Japanese construction and mining equipment maker Komatsu Ltd < 6301.T > has said it has already shifted some of its production of parts for U.S.-built excavators from China. Part of that production moved to the United States, but some also went to Mexico and Japan.

In South Korea, LG Electronics <066570 .ks=””> and its rival Samsung Electronics <005930 .ks=””> are considering moving parts of U.S.-bound refrigerator and air conditioner production to Mexico, Vietnam or back home, but not to the United States, according to company sources and local media.

STEADY RECOVERY

The responses to Trump’s tariffs on steel and aluminum show how such steps create both winners and losers.

Producers such as U.S. Steel and Century Aluminum have said they will add at least several hundred jobs as a result of the higher prices they can charge.

Mid-Continental Nail, however, laid off 130 workers because of those higher steel prices, and furniture parts maker Leggett & Platt has warned that rising metal prices would prompt it to shift production abroad.

So far, Washington has imposed duties on $250 billion of Chinese imports and Trump has threatened to slap tariffs on all Chinese goods.

Many economists project new tariffs would on balance either slow down hiring or cause job losses in a manufacturing sector where employment has grown by 10 percent over the past eight years without special protection.

(Graphic: https://tmsnrt.rs/2Q1AFUW)

The furniture industry, among the hardest hit by Chinese imports, has added 43,000 jobs since its employment hit a low of 350,000 in 2011, helped by the recovering housing market and strong consumer demand.

Industry officials say skilled upholsterers and other workers are hard to find, echoing the Federal Reserve’s concern about the impact of worker shortages on the U.S. economy.

In Thomasville, few expect that tariffs will bring furniture manufacturing back to its heyday, nor does the community need it, says city manager Kelly Craver, whose parents worked in the furniture and textile industries.

Since the recession, Thomasville has become a residential hub for growing nearby cities such as Greensboro and Charlotte. It also has its own mix of manufacturing and white collar jobs.

Mohawk Industries recently expanded its Thomasville laminate flooring facility while the Old Dominion Freight Line transportation firm and the fast-growing Cook Out burger chain have corporate headquarters there.

“We, for the very first time in this city’s existence, are going to have a diversified economy,” Craver said.

By Howard Schneider, Reuters

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Vanishing Jobs Growth Spells Deep Trouble for South Korea


 

 
Not-so-nice figures: Moon has seen his popularity slide amid criticism that he’s hurting employment by
aggressively increasing the minimum wage. — AP

Unemployment and jobs growth in South Korea haven’t looked so bad since the wake of the global financial crisis, undermining President Moon Jae-in’s economic agenda.

Data released Wednesday show the unemployment rate jumping to 4.2 percent, the highest since early 2010, and much greater than any economists forecast. Jobs growth slumped to just 3,000 last month, also the worst figure in more than eight years.

Moon, who came into office pledging to create jobs and raise incomes for regular workers, has seen his popularity slide amid criticism that he’s hurting employment by aggressively increasing the minimum wage.

While pay hikes planned for this year and 2019 are here to stay, Finance Minister Kim Dong-yeon said the government would consider adjusting some policies.

He conceded that the jobs market wouldn’t improve much anytime soon.

Disappearing Jobs Growth

  • Number of jobs added: South Korea added just 3,000 jobs in August, the least since 2010

Source: Statistics Korea

Moon’s administration points to the fallout from corporate restructuring and the shrinking working-age population as the source of the problems in the labour market. Businesses counter that hiking the minimum wage 16% this year, with another bump of almost 11% to come next year, has made job layoffs inevitable.

Small business owners in particular, from convenience stores to fast-food franchises, have shed workers.

Adding to the economic unease in South Korea is the risk that US President Donald Trump may hit car exporters with auto tariffs, even after Seoul agreed to renegotiate its trade deal with the US.

Unemployment Spike

South Korea’s unemployment rate in August reached the highest since 2010
  • Seasonally adjusted unemployment rate
Source: Statistics Korea

South Korean bonds climbed and the won fell after jobs figures, which appeared to squash any near-term prospect of the central bank raising interest rates.

The finance minister said economic policies that are geared toward wage-based growth are moving in the “right direction”. Yet the government also acknowledged the need for more communication and market analysis in order to gain trust from companies and the people, he said.

The presidential office described the recent increase in unemployment as inevitable pain that accompanies a change in the structure of the economy, Yonhap News reported.

Like many other countries, South Korea is experiencing a widening gap between the rich and the poor. It’s confounding policy makers and exacerbating political divisions. — Bloomberg

The Damocles index by Nomura warns of fiscal tension in Malaysia, score accross coountries, the hits and misses 1996~20118


PETALING JAYA: Allowing a larger fiscal deficit and running the risk of a sovereign credit rating downgrade in 2019 could cause balance of payments stress, given Malaysia’s high short-term external debts and low foreign exchange (forex) reserves, said Nomura.

Following the reversal of fiscal reforms like goods and services tax (GST) and the removal of fuel subsidies, the new government now faces the tough choice of either cutting spending at the cost of growth, or allowing a larger fiscal deficit and the risk of a sovereign credit rating downgrade in 2019.

According to a Nomura global research report, Malaysia’s Damocles score in July 2018 was 86.9, below the 100 threshold.

The Damocles index by Nomura summarises macroeconomic and financial variables into a single measure to assess an economy’s vulnerability to a currency crisis.

The oil price slump of 2014 to 2016 was a major shock for Malaysia, one of the few net-oil and gas exporters in Asia.

“While Bank Negara initially expanded forex reserves to defend the ringgit, it eventually allowed a sharp depreciation in 2015 which boosted export competitiveness.

“Malaysia has proved resilient and its current account remained in surplus, benefiting from a diversified economy and fiscal reforms,” said Nomura.

Three countries in the region, namely, Thailand, Indonesia, and the Philippines, have a Damocles score of zero, while Vietnam has a moderate Damocles score of 35.

The Bank of Thailand is signalling policy normalisation to build policy space and reduce financial stability risks following a prolonged period of exceptionally low interest rates. This is as headline consumer price index (CPI) inflation returned to within the 1% to 4% inflation target and economy growing at potential.

Thailand’s current account surplus as a percentage of gross domestic product (GDP) has been sizeable since 2015, driven by weak domestic demand and, more recently, growing tourism revenues as well as an export recovery.

“Over this period, forex reserves rose sharply, and they are now at very favourable adequacy levels relative to both imports and short-term external debts.

“The fiscal deficit is expected to widen slightly in 2018, as the government increases spending to support populist policies targeting low-income earners, in the run-up to the election in early 2019,” said Nomura, adding that real interest rates are falling gradually and remain marginally positive, as inflationary pressures have been stubbornly weak.

Over in Indonesia, a negative terms-of-trade shock in 2014 raised the Damocles score in 2014 to 2016, but it has fallen back to zero due to Bank Indonesia’s build-up of forex reserve buffers and government reforms that improved foreign direct investment (FDI) inflows.

While depreciation pressures have risen again in 2018, BI has acted decisively with 125 basis points in policy rate hikes to date.

“We expect another 25 basis points, with the risk of more.

“Bank Indonesia maintains a flexible forex regime and a dual-intervention framework in forex and bond markets, as well as introduced macro-prudential measures, like requiring residents to hedge external exposure,” said Nomura.

The research house added that Bank Indonesia has also strengthened policy coordination with the Finance Ministry, which is implementing policies to reduce the current account deficit, while prioritising a credible 2019 budget despite upcoming presidential elections.

Sword of Damocles hangs over Sri Lanka

PETALING JAYA: Sri Lanka is at risk of an exchange rate crisis mainly due to its still-weak fiscal finances and a fragile external position.

Sri Lanka charted the highest Damocles score of 175, among 30 emerging market (EM) economies.

The Damocles index by Nomura summarises macroeconomic and financial variables into a single measure to assess an economy’s vulnerability to a currency crisis.

A score above 100 suggests a country is vulnerable to an exchange rate crisis in the next 12 months, while a reading above 150 signals that a crisis could erupt at any time.

Sri Lanka has large refinancing needs, with foreign exchange (forex) reserves of less than five months of import cover and high short-term external debt of US$ 7.5bil.

“Political stability also remains an issue, as recent resignations have weakened the government (its term ends mid-2020) and despite retaining a simple majority, complicates the task of continuing to implement International Monetary Fund (IMF)-induced reforms.

“However, without IMF support, the risk of a currency crisis would be higher,” said Nomura in its global research report.

Meanwhile, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine are currently vulnerable to an exchange rate crisis, having Damocles scores of more than 100.

“Based on our definition, Argentina and Turkey are experiencing currency crises, while Argentina, Egypt, Sri Lanka and Ukraine have turned to the IMF for assistance, leaving Pakistan and South Africa as the standouts.

“As investors focus more on risk, it is important not to lump all EMs together as one homogeneous group; Damocles highlights a long list of countries with very low risk of currency crises,” said Nomura.

Eight countries, namely, Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand, have Damocles scores of zero.

It is notable that China’s Damocles index has maintained since dropping to 36.9 in late 2017 from 62.4 in October 2017.

The index far below the 100 threshold suggests that the risk of an exchange rate crisis in China is limited.

Nomura concurred that China’s balance of payment position remains healthy, given it has the world’s largest foreign exchange reserves at US$3.1 trillion, as of July 2018.

“However, we highlight that its pockets are not as deep as they once were, given that current account deficits at minus 0.4% of gross domestic product (GDP) in the first half of 2018 may occur more frequently, net direct investment inflows may moderate further, and external debt has risen significantly.

“Moreover, we see domestic challenges from weakening aggregate demand and other fundamental problems, and external risks from the escalation in China-US trade tensions and trade protectionism,” said Nomura.

As for India, its Damocles score has fallen to 25 in the third quarter of 2018, from 56 during 2012 to 2013.

India’s most recent currency crisis occurred in 2013 and was due to weak domestic macro fundamentals and worsening external funding conditions. Since then, consumer price index (CPI) inflation has moderated to about 4.5% in 2018 from 9.7% in 2012, as has the current account deficit at an estimated -2.5% of GDP, compared to minus 5% in 2012. Furthermore, India’s central bank has a sufficient forex reserve buffer of 9.3 months of import cover versus 6.4 in 2012.

“However, given India runs a current account deficit, it remains vulnerable to bouts of global risk aversion. Higher oil prices and portfolio outflows are its key external vulnerabilities.

“Aside from these, the key risks stem from the government turning more populist ahead of the 2019 general elections (worsening domestic fundamentals) and a sharper-than-expected domestic growth slowdown (triggering equity outflows),” said Nomura.

The Damocles index comprises eight indicators that are found to be the best predictors of exchange rate crises in the 30-country sample, in which there have been 54 crises since 1996. It includes five single indicators which are import cover, short-term external debt or exports, forex reserves or short-term external debt, broad money or forex reserves and real short-term interest rate.

On the other hand, the three joint indicators are non-foreign direct investment (FDI) gross inflows of one-year and three-year, fiscal and current account, as well as current account and real effective exchange rate deviation. To date, Damocles has correctly signalled 67% of the past 54 crises in Nomura’s sample, including the Asian financial crisis (1997 to 1998), Russian financial crisis (1998) and the 2018 EM currency crises in Argentina and Turkey.

“The advantage of Damocles lies in its objective nature in letting the data speak, not clouded by conventional misperceptions or biases based on past experiences. While the results achieved are encouraging, but given the inherent limitations of any early warning system, it would be foolish to make any exaggerated claims.

“For instance, Brazil’s Damocles score of zero implies very low external vulnerability; yet the Brazilian real (BRL) has depreciated more than 10% in August alone due to an uncertain presidential election outlook,” said Nomura. – The Star

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“It would not be profitable to build the Focus Active in the U.S. given an expected annual sales volume of fewer than 50,000 units,” automaker Ford Motor Company said in a statement on Sunday.

US President Donald Trump tweeted earlier on Sunday that “‘Ford has abruptly killed a plan to sell a Chinese-made small vehicle in the US because of the prospect of higher US Tariffs.’ CNBC. This is just the beginning. This car can now be built in the USA and Ford will pay no tariffs!” Ford quickly clarified the facts, evidently rebuffing Trump’s tweet.

Likewise, tech giant Apple Inc. wrote a letter to US Trade Representative Robert Lighthizer, saying that a proposed 25 percent tariff on $200 billion of Chinese imports would cover a “wide range of Apple products.”

In another tweet, Trump told Apple to make their products in the US instead of China. Apple hasn’t responded.

According to the US media, the price of iPhone may increase to $2,000 if the company does as told.

The multinational companies that produce automobile and mobile phones have different manufacturing and sales layouts. Car manufacturers tend to produce their products where they are sold, while mobile phone manufacturers optimize their production chain costs worldwide. That’s the natural law of economic globalization which can’t be easily changed by a country’s government.

The White House lacks understanding of the global production and value chains. “Make your products in the United States instead of China” seems naive. Instead of coercing companies to follow demands, imposing tariffs will only scare them off.

Simply making US companies produce in the US can’t deal with the complicated global industry today. We have also learnt from history that neither side will gain in a trade war.

China is the world’s largest automobile and mobile phone market. Setting tariff barriers between Beijing and Washington won’t make US companies give up on China for the sake of their own country. As long as China doesn’t make things hard for US companies, it’s unavoidable that they will place production operations in China. The Chinese market can help them make money, but the White House can’t.

Most American high-tech companies will face difficulties if they leave China. The larger the market is, the higher return the companies will get from their research and development. High-tech companies, if they can’t grow to be giant, don’t usually survive for long, and it would be fatal for many of them to lose the Chinese market.

There hasn’t been a previous US government that dares to instruct multinational companies in production layouts, and the current administration has overestimated its executive power. The global industrial chain today is formed by market rules established over decades and can’t be easily changed by one government.

It would be the White House’s dream to expect that the US is not only the world’s technology and financial center, but also the world’s factory that sells its products globally. If the US doesn’t want to wake up from this dream, then the outside world has to step in and rouse Washington.

Source:Global Times

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