Malaysia’s inflation woes

by Erin.

Malaysia’s ringgit slumped to its lowest point in more than seven weeks after the country’s central bank unexpectedly refrained from raising interest rates amid the fastest-growing inflation rate in 26 years. 

Bank Negara Malaysia on Friday kept its overnight policy rate at 3.5 per cent, which is the same rate it has kept since April, 2006, holding off from raising rates even as a June 5 increase in the price of fuel brought inflation to 7.7 per cent, the fastest it has increased since 1982, according to Bloomberg. Bank Negara also raised its inflation forecast for this year to as much as 6 per cent. The Malaysian ringgit’s slump happened on Monday, the same day the Bank of Thailand announced that Thai inflation had hit an 11-year high. The central bank forecast that headline inflation would reach 7.5 to 8.8 per cent this year. The central bank attributed rising inflation to higher oil prices.

The Bank of Negara said that the central bank’s decision was based on the calculation of two risks – that of higher inflation and that of slower growth. The Malaysian central bank calculated that rising interest rates might not be the best option for the country.

In Thailand, there are certain economists who would prefer the Malaysian approach – that is to leave the rate unchanged to promote economic growth. Finance Minister Surapong Suebwonglee earlier expressed his disagreement with the Bank of Thailand’s decision to raise the policy rate by 25 basis points. Malaysia may have room to maintain low-interest rates due to certain advantages it has. For instance, the country has oil reserves, while Thailand is a net importer of oil. However, the Malaysian central bank will still face the dilemma of whether to raise the rate in the near future. The recent sell-off of the ringgit reflects the market’s disappointment with the decision.

Surapong said that time would tell if the Bank of Thailand’s decision to raise the interest rate would bode well for  the economy in the long term. But the way things stand now, it seems that the central bank made the right decision, as choosing to maintain the rate as it was might have affected the currency and asset prices.

Malaysia Economy Is Falling

By ruyom.

Despite Malaysia pretty economic growth over these past few months, something just doesn’t seem to be right. It is almost as if the GDP growth figures were manipulated or spiced up.

Well, they weren’t. Contrary to popular belief, the government does not really “jack up” economic figures. It just found clever ways to “spice up” growth figures. That is all.

Let us use last year as an example. Abdullah found out that the economic figures were not good, and it couldn’t have been at a worse time. Elections were just around the corner and he didn’t want the economy to appear weak.

So he did something very clever – he increased the wages of civil servants. This of course, leads to higher spending. And as we know, spending helps boost the economy.

I am not saying that civil servants do not deserve a pay rise. But the reason why they were given one couldn’t be any worse. Yes, Malaysia is actually a failing economy. China and India are fast replacing Malaysia as manufacturing powerhouses. Half of Malaysia GDP figure comes from the manufacturing sector.

If oil and palm oil prices did not increase last year by a mile, Malaysia would have registered an economic growth of somewhere near 3.5%. This is a measly figure for a developing country.

By 2014, Malaysia will no longer be a net exporter of oil. In turn, this translates to losses for every sen oil prices go up.

To achieve developed status by 2020, Malaysia should have registered at least an 8% economic growth annually since 1995 (a developed country should have Purchasing Power Parity of at least RM25000, and GDP per capita should be close to PPP figures).

Right now, Malaysia has PPP of RM14700 and a GDP per capita of RM6500.

We have only done an average of 5% increase in GDP growth from 1995- 2007. So Vision 2020 will not be achieved despite what the government might claim. Furthermore, for Malaysia to move up the value chain (I define this as a country that is able to innovate and produce high-quality products, e.g. companies such as LG, Samsung from Korea), large amounts of foreign direct investments (FDI) are needed.

To show you how low our FDI is, Malaysia has a pathetic RM7 billion of FDI annually while Singapore, a country 100 times smaller than Malaysia, has FDI of RM55 billion annually. Last year, nearly 50% of our FDI went into the Iskandar Development Region.

This, in my opinion, is a project bound to be a major failure. When Singaporeans were invited to invest, they did. But when they started to invest, our smart politicians said this would chase the malays into the jungles.

To summarise everything up:

(1) All the people tax money is being used for stupid subsidies and unnecessary mega-projects.

(2) Immigrants from Indonesia, Philippines are causing wages to remain stagnant.

(3) Malaysia economic growth is now based on oil and palm oil prices. (Malaysia will soon be a net importer of oil, and palm oil prices have reached their peak, meaning it will be downhill from here on.)

(4) Malaysia is suffering from a “brain drain”. No qualified professionals want to work in Malaysia anymore.

(5) Malaysia manufacturing sector is shrinking, thus unemployment rates will go up.