The Carry Trade: Hot Bubble,Double Trouble!

The Asian Development Bank (ADB) circa Nov 25 has raised red flags that Southeast Asian countries may suffer asset bubbles if hot money continues to flow in.

The Business Times Singapore reported that Noritaka Akamatsu, senior adviser at ADB’s Office of Regional Economic Integration, has said that some regional governments are thinking of limiting capital inflows in the “short-term, liquid side of the market”. This could destabilise financial systems.

“They are clear about the benefits of long-term inflows such as foreign direct investments, but there is concern about the short-term money,” he said.

Last week, Indonesia’s central bank said that it was “studying” possible limits on foreign ownership of short-term debt but has no plans for controls on capital or the currency.

Meanwhile, within Asia, the South Korean government plans to hold talks on what can be done to handle inflows financed with cheap US-dollar loans — the so-called carry trades.

The strong inflows into the region result partly from the yield differential between Asian economies and Western markets. The US has slashed its benchmark rate to near zero, and it is not clear if there will be a rate rise soon.

As a result, global investors seeking higher returns on their money are parking capital in regional assets — and driving up regional currencies against the greenback.

Akamatsu warned that the stronger currencies may crimp Asian exports growth to the West, as most South-east Asian economies are still run on export-oriented growth models.

To sterilise the effect on currency values, central banks typically raise the supply of domestic units, but this can potentially fuel domestic inflation.

And if central banks mop up the added liquidity in their systems by selling government bonds, this may leave them with higher debt on their books, and raises concerns about whether central banks are sufficiently capitalised to take on higher interest expenses.

Akamatsu also said yesterday that the ADB was working with the Chinese authorities to issue a yuan-denominated “panda bond” — a second tranche since 2005.

The money would be used to finance development projects in China, but he declined to disclose the amount or the timing of the issue, citing price sensitivity.

According to ADB’s Asia Bond Monitor, East Asia’s local-currency bond markets grew 15 per cent in the third quarter of 2009 from a year earlier, as governments and corporations took advantage of lower interest rates to fund spending.

So will Malaysian assets and stocks go up soon on this "hot air" money?

Bank Negara.: The Rate Stays!

For the sixth time, Bank Negara Malaysia kept the interest rates steady at 2.0 per cent,saying inflation will remain modest in 2010 as the economy revives.

Analysts said that the central bank appeared in no hurry to hike rates, in sharp contrast with some other central banks in region, and the bank said current monetary policy was “appropriate” and would continue to support economic activity.

The decision comes as Asia’s third-most trade dependent economy is recovering from an economic slump triggered by the global financial crisis. A pick-up in domestic demand helped the economy to contract less-than-expected 1.2 per cent in the third quarter.

“If there are any rate hikes, we think it will be in the second half of next year in the small magnitude of 25 to 50 basis points,” said Julia Goh, an economist with CIMB in Kuala Lumpur.

The Malaysian government kicked in with a RM67 billion ringgit stimulus package to cushion the impact of global slowdown, which the central bank said was helping the recovery.

The central bank noted that the private consumption and public sector spending would lend support to the economic growth going forward. While that was expected to turn inflation positive in the coming months, the central bank was not alarmed about price pressures building up in the economy.

“In the absence of further unanticipated price adjustments and external influences, inflation is expected to remain modest in 2010,” the central bank said in a statement.

The central bank said it would only hold six rate setting meetings from 2010 onwards, down from eight up until now, in accordance with a new act.

“As price pressures and inflation expectations are expected to remain contained going forward, the assessment is that the current monetary policy stance is appropriate and will continue to provide support for economic activity,” the statement added.

A Reuters poll showed 15 economists saying rates would be held at 2 per cent with the earliest sign of a hike coming after the first half of next year.

The central bank has cut the benchmark OPR by a total of 150 basis points since November in an attempt to reduce the impact of the global downturn on the local economy.

It stopped easing in April and has repeatedly said that rates are “appropriate” and that rate cuts had been “frontloaded”.

Inflation is not a worry as consumer prices have turned negative. It was a negative 2 per cent in September and inflation is not expected to return until the fourth quarter.

Bilingualism in both English and Mandarin is Better

This is an interesting article. It may yet pave the way for Malaysia to be more serious about developing English language skills then be hung out to dry in a deeply globalised world of intense global economic competitiveness.

This mysinchew.com article is appended.

NOV 24 – Unlike their ancestors, young generations from Johor Baru and Singapore do not emphasise family ties. Even though they are still maintaining certain blood relations, the sense of alienation becomes greater and greater as time goes by.

Sometimes, these young people will look down on each other but inevitably, they also reveal their sense of inferiority in front of each other.

When young people from Johor Baru go to Singapore, they will find that their command of English is terrible and, thus, they dare not speak English.

Similarly, when Singaporean young people come to Johor Baru, they always say, shyly: “I’m sorry, my Chinese is not good.”

Young people in Johor Baru (more appropriately, Malaysia) speak broken English while young Singaporeans speak terrible Chinese. This is the inevitable result of different education policies in the two countries, as well as a fact that must be accepted by the two governments.

Interestingly, after a few decades of bilingual education policy, Singapore found that the English standard of its young generation is fine but the Chinese standard is poor.

It may even affect their competitiveness in the future. Its Minister Mentor Lee Kuan Yew admitted that Singapore was headed in the wrong direction and he vowed to spend the rest of his life correcting the mistake.

After neglecting English for over 30 years, former Prime Minister Tun Dr Mahathir Mohamad realised the reality that English is, after all, the international language. Therefore, he made a sharp about turn before his resignation and implemented the policy of teaching Science and Mathematics in English.

When Prime Minister Datuk Seri Najib Tun Razak took the office, he decided to gradually stop the policy that was hastily implemented in the past. However, it is still a major educational goal for the Malaysian government.

Malaysia and Singapore, with interrelated historical and cultural backgrounds, have to bear the consequences of educational deviations.

As Malaysia had neglected English, its young generation is not able to make good use of English in learning and communications. As a result, the country can only cultivate “kampung champions” who are unable to walk out from their local communities.

As Singapore had neglected Chinese, English has become the “mother tongue” of its younger generation (primary school first year students from English-speaking families have increased to the current 60% from the 10% in 1982). It does not conform to its national interests as Singapore has targeted China’s vast economic market.

In fact, we are committed to enhance our English standard while Singapore is committed to enhance its Chinese standard based on a common objective: a better integration with the world and compete in the international market.

It is going to become a bilingual world. It will be a greater advantage if we can master more languages. But when will our young people be no longer afraid to communicate in English and Singaporean young people, to speak Chinese? 10 years? 20 years? Or 30 years?

Malaysia: Maid Exporter?

This news article by Lee Wei Lian in the Malaysian Insider is worrisome.

With the current educational issues as yet unsettled and where runaway blind language nationalism seems to be winning all the way up to the tertiary level,your worse nightmare of not only a brain drain but now also a brawn drain is fast becoming imminent. Do not look down on the likes of Bangladeshis and Indonesians coming to work in Malaysia. Malaysian may soon be in the same situation if the current crop of politicians in power do not mend their ways!

Let us read Wei Lian's report circa November 24, 2009.

The nation’s mismanagement of talent could have serious repercussions not only on its ambitions to become a high income economy on par with that of developed nations but could also lead it to fall further behind even its counterparts in the region.

Head of research at Corston-Smith Asset Management, Lim Tze Cheng, recently did a tour of South East Asian countries and came away sufficiently impressed that he feels Malaysia may soon be found lagging behind its neighbours that it was once ahead of.

He cited a recent visit to the Philippines, a current major supplier of maids, where he visited a company, International Container Terminal Services Inc (ICTSI) and he drew comparisons to local port champions Westport and Port of Tanjung Pelepas.

He said that ICTS now draws 50 per cent of its revenue from eight profitable ports outside the Philippines, and noted that no Malaysian port company can boast of similar achievements.


“I give it a 70 per cent chance that Malaysia will be exporting maids in 20 years. I wouldn’t be surprised if that happens unless we get our act together,” he said.

Lim says that the issues plaguing Malaysia includes its “problematic” education system and distressingly low ability to retain talent.

“Whoever manages to excel in our education system will be courted by Singapore,” he points out.

Lim is not the only one who is worried about Malaysia’s talent issues and there has been warnings from other parties as well including the World Bank and the Malaysian Employers Federation (MEF).

MEF executive director Haji Shamsuddin Bardan says that Malaysia is currently a net exporter of talent with outflows exceeding inflows.

According to Haji Shamsuddin, Malaysia has only about 38,000 expatriates as compared with seventy to eighty thousand in the 1990s even while some 785,000 Malaysians are working abroad, two out of three of which are professionals.

“Our ability to attract expatriates is quite challenged,” he said.

If Malaysia falls further behind our neighbours in the next twenty years, it wil be a case of history repeating itself.

Lim points out that Malaysia in the 1970’s was once economically on par with Korea.

“Electronics will be dominated by Thailand and Philippines, plantations by Indonesia, financial services by Singapore and our oil could be depleted in 20 years,” Lim predicts.

[Malaysia’s future? Bangladeshi workers wait at an airport carpark turned immigration depot in KLIA. — Reuters pic]

Malaysia’s future? Bangladeshi workers wait at an airport carpark turned immigration depot in KLIA. — Reuters pic
“The (Malaysian) economy seems to be caught in a middle-income trap - unable to remain competitive as a high-volume, low-cost producer, yet unable to move up the value chain and achieve rapid growth by breaking into fast growing markets for knowledge and innovation-based products and services,” the World Bank said recently.

Prime Minister Datuk Seri Najib Razak appears aware of the problem and has been stressing the need for the country to embrace innovation to escape the “middle-income trap” as well as attract overseas talent, Malaysian or otherwise.

He noted recently as an anecdote that half of the medical specialists working at the Mt Elizabeth hospital in Singapore were Malaysians and two weeks ago hosted a dinner for about 100 Malaysians in Singapore and told them that the government would make Malaysia a better place to live and work in, to bring back its citizens who are residing overseas and also attract global talent to the country.

“We will create more opportunities, more excitement and more buzz in Malaysia to attract the Malaysian diaspora and expatriates to the country,” said Najib.

Lim says that revamping the education system could take years and one fast way to lure talent was to open the Malaysia My Second Home programme to talented individuals such as scientists and researchers instead of limiting it to just retirees.

Haji Shamsuddin says that the government needs to put in place the right policies and structures to retain local talent.

“Otherwise, we become a training ground for others,” he said.

Are those in power deaf, blind and brain dead?