Doldrum Oil Prices

Crude Gold No More?

It's approaching the end of January 2015 and yet there is no respite.

OPEC has met and refused to cut production and shale oil is still rattling the market.

The Saudi King has changed and King Salman is in charge.

So, what is the crude oil position today(29 January)?

As expected, oil prices opened up weak in Asia after record US stockpiles sent it tumbling to near six year lows in the previous session.

To most analysts, the outlook truly looks bleak.

On Wednesday, the US reported record high inventories elevating further anxieties in the market.

According to the US Energy Information Administration (EIA), domestic crude oil stocks rose by almost 9 million barrels last week to reach nearly 407 million, their highest since the government began keeping records in 1982.

"The market expects stockpiles to keep rising, pushing front-month prices further down as refineries enter maintenance season and are likely run at lower utilisation rates," ANZ said in a morning note on Thursday.

Brent crude traded at US$48.60 (RM176) a barrel at 0131 GMT (9.31am Malaysian time) while US crude was at US$44.43 a barrel, both close to six year lows.

As a corollary, Swiss bank UBS said in a note on Thursday that cheap oil would not have a major boosting impact on Asian economic growth.

"Big, big drops in oil; small effects on economies... Cheap oil should give a small boost to Asian GDP, but not really enough to warrant major changes in growth forecasts," it said.

Researchers at Energy Aspects said in a note to expect a "a new normal  in the making for China-slower and less oil intensive growth".

They added that "oil consumption in China will become more efficient, leading to slower demand growth of around 0.2-0.3 mb/d (million barrels per day) compared to expectations of above 0.5 mb/d."

So, for the whole year of 2015, what can you see through the looking glass, Alice?"

Malaysia: The Debt Stranglehold

Warning Bell

This article was written by a UK based economist,Sarah Fowler from Oxford Economic. It was carried in the Malaysia Insider today (9 June 2014)

In her article she sounded a warning call for Malaysia.

Let us read the premises and parameters of her economic analysis and judgment.

Sarah saw the Malaysian economy contracting and losing its global market share in key export sectors in the event it fails to tackle its high levels of public and rising external debts.

While the nation's shrinking current account surplus was not a major concern as it was expected to stay in excess in the next few years, there are worries over Malaysia's capital account due to rising external debt, which has shot up close to 40% of its gross domestic product (GDP) in recent years.

The country's public debt-to-GDP ratio has been hovering at an all-time high of more than 50% since 2010 because of large fiscal deficits incurred when an aggressive stimulus package was launched to bolster the country’s economy during the global financial crisis.

"Addressing the concerns would enable Malaysia to achieve a higher growth path, reaching a higher per capita income sooner. We expect the economy to grow by just more than 4% over the next five years but if the concerns were addressed growth could exceed 4.5%," she told The Malaysian Insider in an email.

Fowler produced a report on "Why Malaysia is now a more risky prospect than Indonesia" which was highlighted by global financial news site Bloomberg's columnist William Pasek last week. She based it on 17 indicators to develop a scorecard to assess emerging market vulnerability to external economic and financial shocks.

Among the indicators are capital inflows, external financing, the current account and budget balances, credit markets and the economy.

"Our scorecard assesses Malaysia as a more vulnerable economy than Indonesia, Thailand or India," she wrote.

Touching on external debt, Fowler had reported that non-foreign direct investment capital inflows averaged 6.6% of GDP a year between 2009 and 2012, the highest in their sample of 13 emerging markets and more than Indonesia's average of 2.2%.

"More than half of all portfolio investment in Malaysia went into debt securities between 2010 and 2012, up from close to a third between 2005 and 2009.”

She had also noted in her report that the short-term component of external debt was also increasing, which is risky as it requires repaying or rolling over earlier.

Short-term debt as a share of GDP reached 15.2% by the end of last year, up from 10% in 2007.

In contrast, India’s and Indonesia’s short-term debt accounted for less than 5% of their GDP.

On overall, external indebtedness in Malaysia is low relative to exports, which meant that funding the debt may not be a problem.

But Malaysia has an unusually open economy; exports are equivalent to more than 80% of GDP, lower only than in Singapore and Hong Kong.

On public debt, Fowler said although Putrajaya has reduced its fiscal deficit as a share of GDP from 6.5% in 2009 to 3% last year, there was a need to continue to manage the public finances carefully to trim the deficit further.

This, she said, could be done by broadening the tax revenue base in order to try and raise revenues.

"Public debt has risen in recent years and reducing this would be good because money that currently has to be spent paying the interest on the debt could be spent in more productive areas."

However, Fowler expects the public debt to GDP ratio to remain above 50% for the next five years, saying Indonesia’s, Thailand‘s and Korea's public debts amount to no more than a third of their respective GDP.

Fowler is not the first person to sound the alarm bells on Malaysia's economy.

In October last year, financial analyst Jesse Colombo warned that Malaysia's economic bubble will burst after China's economy takes a tumble and global and local interest rates continue to rise.

Writing in Forbes online magazine, Colombo said: "Malaysia’s bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place.

"The resumption of the US Federal Reserve’s QE taper plans may put pressure on Malaysia’s financial markets in the near future. Malaysia’s rapidly deteriorating current account surplus due to weaker exports is another worrisome development.” – June 9, 2014.

Losing Out

PLAY TO LOSE GAME?

Going Nowhere

The sober warning bells are ringing no end.

Yet they fell on deaf ears because the one political ring rules them all in Bolehland Malaysia.

How sad, too bad, grand-dad!

I thought this article is god-sent. 

A great scenario builder is this writer; so says Yoda!

Do read to the very end.

“Are we better off than we were 10 years ago? I am sure the majority of us will answer with a resounding ‘No!" 

Why is this so? There are many reasons that contributed to this, among them are the following.

• Increased in income inequality

• Rising costs of living

• Income not catching up with inflation

• Longer working hours and less recreation

• More indebted than before

• Less opportunity for self-improvement due to time constraint

• Society is getting more competitive

• Crime on the rise

Wonder what caused the above? Listed above are the consequences or the price of economic development that were caused by forces that has misshaped [negative alteration is mine] our social economic fabric.

We are living in a world where resources such as land, labor and natural resources are in limited supply or scarce. To maximize the usage we not only have to limit wastage but also need to efficiently allocate these scarce resources strategically (addition, mine) to the most important part of the economy.

In a free market economy as we have today, the distribution of resources will be led by the forces of supply and demand created by the ‘invisible hand as known to Adam Smith’. 

However, no matter how efficiently resources are allocated there are bound to be situations where inequality exists. Thus, we are confronted with a trade-off between inequality in the distribution of resources and economic development.

Unequal Economic and Wages Growth

When an economy grows there will always be inequality in resource distribution because some people are better equipped to capture a larger share of the economic pie.

These qualities include education level, talent, creativity, hard work and the willingness to take risk and will inadvertently (word is mine) affect the wages and profits which accrue to different actors in the economy. Thus some people will be left out by the progress of the economy and below I present to you an analysis on the extent of the inequality.

The following chart on GDP growth shows that our economy prospered throughout the years.

As can be seen from above our GDP grew from $124.75 in 2004 to $303.53 in 2012. This represents a 145% growth during that period. But has our income/wages kept up with the economic growth? To find out I present to you below the chart on the growth of wages in the manufacturing sector. The manufacturing sector was selected as it employs the most people and thus provides a better representation.

The average manufacturing salary in 2004 was around RM 17,000 per annum and went up to RM 28,000 in 2012. Thus our wages only grew 65% (28000 – 17000 / 17000) during this period. Hence, we can conclude that our wages has not been rising proportionately to economic growth during the period of study (2004-2012). This inequality can best be described in one chart as follows.

GDP as a metric not only used to measure economic growth but also reflects the standard of living of a country. In this case it shows that the rise in our standard of living has not been accompanied by the rise in wages. Obviously this is not good news because the longer this goes on the wider will be the disparity. Since the distribution of income is a zero sum game consequently there will be gainers and losers. So who are the gainers and losers?

The losers will be the workers and the gainers will be the top 10% of the population that controls 35% of our nation’s wealth. The top 10% of the population are folks that make up of shareholders, stakeholders, directors, high level management and so on. Hence, they are the ones that are benefiting from the GDP growth because they are residing at the very top of the food chain. Trickle-down economics indicates that any benefits derived from economic growth such as profits and dividends will have to flow from the top layer of the pyramid. Thus it is not surprising to note that the majority of the gains from GDP growth stop right at the top level of the pyramid while the spillover went to 90% of the population. The extent of the income inequality in Malaysia has grown from bad to worse as we now ranked third in Asia Pacific

Region.

A summary with no comments can be seen from the graph below.

 Source : World Bank

Income inequality can be measured by a statistical approach called Gini coefficient or index. The Gini index is used to measure the gap between the poor and the rich.

The higher the reading the higher is the inequality. High income inequality means higher proportion of the nation’s wealth held by a smaller group of individuals. This also implied that any benefits that derived from economic growth will flow to the higher income group instead of the lower income.

Our next question is how much wealth held by the ‘elite’ top 10% and bottom 10% of the population? It can best be describe with the following two charts.

Source: Compiled from World Bank Data

As can be seen, the wealth held by the top 10% of the population increased from 28.77% in 2003 to 34.65% in 2009. At the other end of the spectrum, the wealth held by the bottom 10% of the population decreased from 2.67% in 2003 to 1.78% in 2009. This shows that the wealth held by the bottom 10% dropped by one third or 33.33% (2.67-1.78/2.67) whereas the top 10% increased their wealth by 20.4% (34.65-28.77/28.77) from 2003-2009. So what caused such a great disparity in our income distribution?

What causes the inequality?

Some factors put forward include education level, intelligence, hard work, higher productivity, experience and talent. It may be true because collectively they formed the forces that helped create a ‘Winner Take-All’ market.

What is a Winner Take-All market?

In sports, what do Rafael Nadal, Lee Chong Wei and Nicol David have in common? They are the world champions in tennis, badminton and squash respectively and operate in a very niche market called Winner Take-All. As its name implies Winner Take-All gets most of the reward and leaves little to the rest. They operate in an extremely competitive environment with thousands of players all eyeing for the top position. Top players are rewarded with endorsement fees and advertisement contracts which are extremely lucrative. Those lower ranked will be lesser known and earn much lower fees. To prove it, does anyone know the current second ranked men badminton or women squash player in the world?  Other than sports, Winner Take-All market also exists in other sectors of the economy.

In the corporate world where competition is fierce any slight advantage may cause a big improvement in the bottom line. Due to the pressure to perform, bidding for talented executives has gotten more intense. This led to an explosion in the salaries of top executives in the corporate world. Companies are increasingly dependent on outsiders rather than executives within their company to run their operations. The surge in income among the top managers further heightened the disparity in income between those at the top and bottom within a company’s hierarchy.

In politics, various political parties also engage in Winner Take-All market. Whenever the federal announces a project, various State Governments will compete and try to outdo each other in order to convince the authority to relocate the project to their state. Thus there will be demand for political strategist, lobbyist, fund raisers and a whole host of other workers that involve in the political machinery. When they successfully persuade the authority to relocate a project to a particular state then there will be a trickle down of economic benefits such as more job and business opportunities for the local population.

Around the world, countries also engaged in Winner Take-All market competition. In today’s competitive world human resource plays an important role in the development of a country’s economy. We need the right people to do the right job such as people with background in economics and finance to run our finance ministry or people who are good in management skills to run our Government Linked Companies. What will happen when we lacked talented people to fill those positions?  We have to source it elsewhere. We will attract talents from other countries by offering higher wages and better benefits or in other words we encourage ‘Brain Gain’. If we are not doing it then someone else will and this will lead to ‘Brain Drain’.

Another flip-flop policy implementation is the reversion the use of English from our school syllabus to Bahasa Malaysia. After 5 years of implementation only we found out that we are producing non-marketable graduates due to the lack of skills in English.  English can be considered the de facto language for business in both the private and public sector in more than 50 countries. More than 15% of the world population speaks English and 80% of the information stored in computers is in English.

The growing importance of English also helped give rise to winner take-all market by reducing the costs of information (no need to translate) and also increasing the networking of people around the world. Thus with the efficient flow of information on prices and cost of transportation plus an enlarge audience of suppliers and customers, it helped intensify the competition.

However, according to a report by The Straits Times’s Asia Report in Oct 2013, almost a quarter of the 470,000 Form Five students failed English in 2012. And according to the education ministry 70% of the 70,000 English teachers failed a competency test to teach English. In the 2009, Malaysians students ranked third from the bottom out of 74 countries in the PISA assessment. The results show that our ‘flip flop public policies’ are taking its toll on student performances.

In education, universities also engaged in the Winner take-all market. For the past decade or so, the quality of our education system has gone anywhere,everywhere but up.

Evidence can be seen from the absence of our Public Universities from Times Higher Education ranking. Times Higher Education can be considered the authority in University Ranking where they are judged according to 13 performance indicators from five areas – teaching, research, knowledge transfer and international outlook.

According to Times Higher Education World University Ranking 2012-2013, Malaysian universities failed consecutively for two years to enter into the top 400 spot. To add salt to injury there are 81 universities from the Asia Pacific region which made it to the top 400!

So what cause the decadence in our Education System? 

One major factor overlooked by our authority is the existence of winner take-all market in our education system. How will the Winner Take-All market in our education system lead to erosion of quality in our public universities?

Winner Take-All Market

Why the standards of our Public universities are dropping drastically in recent years? Due to increasing competition in the labour market, academic credentials have become more crucial in determining the marketability of a student in the job market. Good academic credential is also important for students seeking acceptance into post graduate courses in reputable universities.

Top jobs and Top schools

World class Management Consulting companies like McKinsey & Company and the Boston Consulting Group are known to be a magnet for most talented professionals. A survey was done by Fortune magazine in 1990 to determine the relationship between top jobs in the business world and elite schools. What they found is that out of the 1500 respondents almost 93% of them graduated from Ivy League universities such as Harvard, Yale, Princeton, Stanford and so on. In addition, the number of CEOs graduated from the Ivy League universities also increased from 15% to 19%.

Thus, it is no surprise that students are now more selective in choosing which universities to attend when they graduate from high schools and colleges. Hence, there will be competition among universities to upgrade their facilities and faculties or they will risk losing top students. To upgrade their faculties, universities are forced to compete for able and famous professors. Thus this helped gave rise to a winner take-all market in education. As a result, salaries for well-known professors and administrative staffs have risen substantially. Public universities that are not keeping up will risk losing many of their top academicians to private universities. In fact many of our public universities are already suffering from this ‘Brain Drain’ syndrome in recent years.

A good example is the recent fiasco in University Sains Malaysia’s medical faculty in Kelantan. Due to low pay and lack of meritocracy that prohibited promotions, many of its teaching staffs have left for greener pastures in local and foreign universities. The once well-known and vibrant medical faculty is a shadow of its past and now it is at the verge of closing down.

Increase in Top 20% Household Wealth

Another factor that causes our public universities to lose students is the rise of the income of the top 20% household. As seen below the top 20% household in Malaysia now controls 51.45% of our country’s wealth.

Source : World Bank

Tuition fees in private universities have risen in tandem with increased demand in recent years. Fortunately, due to the increase in income for the top 20%, more parents are able to send their children to study in private universities. To capture the growth in student intake, private universities are also expanding their faculties. Thus this also helped to cater to the increasing number of students seeking education in elite private universities.

Success begets Success

Academic excellence feedback loop also plays an important part in attracting top students. In simple terms, academic excellence feedback loop refers to a situation where better students attract better students. As mentioned earlier having an excellent faculty is important in attracting students. But on the other end, having good students also tend to attract a better faculty in terms of teaching staff. This is because faculty members are more incentivized to teach in a prestigious institution with good passing grades than a less prestigious one.

The quality of a faculty is measured by the amount of research being done and articles publish in their respective journals. Being associated with better known universities, professors are assured of research funds, increase demand for books written by them and better opportunities for landing a consulting job. The reputation of a university will further enhance when it has an excellent team of academia. Thus, to be on the top universities will need an eco-system of good students and faculty because they reinforce each other. This also helped explain why certain universities go to the length of providing financial aid such as scholarships and loans so as to attract the best students.

Employers and Students feedback loop

Another pull factor that makes students more attracted to private universities is the increased number of top companies having their on-campus recruitment there. The reason for top companies doing their on-campus recruitment in private universities is due to their concentration of top students. Hence, there exist another feedback loop between top students and top employers. In the end, private universities tend to gain from the concentration of top students because employers will also concentrate their recruitment drive there. We will be seeing more of this ‘jobs go to the people’ phenomenon in the future as our economy gets more creative.  Another benefit students can derive from concentration of top students is the networking of students within the alumni. When they start work later in life it will be a boon for them to know who’s who in the market.

Changing Demographics

Demographics also played an important part in giving rise to winner take-all market in education. Unknown to many, although our population is growing, our country is also heading into a demographic crisis. Why is this so? Let me present you the following two charts. The first one depicts the percentage of our population aged between 0-14 years old. The second shows the percentage of our population aged above 65 years old.

Source: Department of Statistics Malaysia

I hope you are able to notice the diverging trend in our population composition. The percentage of Malaysians aged above 65 years old has increased from 4.54% to 5.12%. What this means is that our population is aging fast . This is not a good sign for the economy because our government will have to increase its spending on healthcare to support this group of people in the future. Since our government has been running budget deficits then increase spending on other social programs like education and disability will become a bigger challenge.

Further, as you noticed the percentage of Malaysians aged between 0-14 years old has decreased from 31.2% to 29.5%. What does this tells us? It tells us that in future there will be a decline in students going to schools which also will result in lesser students entering universities. Thus, colleges and universities will have to buck up and spend more on attracting and recruiting students in future. This inadvertently will lead to a winner take-all market because universities will have to outdo each other in attracting students. Again the loser will be the public universities if they are unable to stand up to the challenge. The search for top educators and faculty staffs again will lead to an likely explosion in salaries.

Wrapping Up

Thus, it can be seen that the battle of education supremacy has led to many negative developments such as rising salaries of lecturers and professors, growing faculty members, more expensive laboratories and libraries. In sum, all these have led to increasing pressure on university budgets. The only way out is by increasing  tuition fees.

As evident from above, improvements in the private universities will only benefit the top 20% of the population. Students who cannot afford the high fees in private universities will have to contend with public universities whose standards are affected by the ‘Brain Drain’ of their academic staffs.

Another implication is that whichever university reacted first on the information above will be in an advantageous position in the future. We know the following,

• Increased household income of the top 20%

• Fewer students enrollment in high schools in coming years

• Less funding on education by the authorities

• Student and Faculty feedback loop

• Student and Employer feedback loop

Thus according to the Game Theory, whichever party or parties which are quick to act as early movers on the information will always be at the forefront and ahead of the game. The Game Theory that I am referring to here has nothing to do with the Safari in Africa but a study on strategies on how to out-maneuver your opponents. Understanding Game Theory will equip us with tools to not only predict the future outcome but also to overcome competitor strategies. Game theory is also used extensively in politics especially in Western Countries not only to strategize but also to knock out the opponents. 

A strategic adviser utilizing the theoretical game strategy called ‘look ahead and reason back’ must already be equipped with a visionary plan to ensure his university is the best and second to no one. As such, he must set the ball rolling to ready  top-notch education programmes with the best teaching staff at his university so that good students will pre-select his university or college of eminence to pursue their tertiary education. 

The author is also the Economic Advisor to the National Union of Bank Employees. "

A Sober Prediction of Malaysian Competitiveness

Growing Pains

Putrajaya’s one-party policy and its 40-year-old pro-Malay affirmative action program will spell trouble for the country’s economy, effectively turning Malaysia into the weakest link in Asia, a Bloomberg columnist said today.

Citing Putrajaya’s poor handling of opposition politicians and the search for MH370, William Pesek said Malaysia will continue to don headlines for all the wrong reasons if Putrajaya continues to be complacent in economic matters.

“Its 40-year-old, pro-Malay affirmative-action program chips away at the country's competitiveness more and more each passing year.

Quota System and a Unruly Taximen Protest

“The scheme, which disenfranchises Malaysia's Chinese and Indian minorities, is a productivity and innovation killer. It also has a corrupting influence on the political and business culture,” Pesek said.

Pesek based his observations on a new report from Sarah Fowler of UK-based Oxford Economics, which ranks Malaysia the "riskiest country in Asia of those we consider," more so than India, Indonesia and even coup-ridden Thailand.

In the report, Fowler said: “Prompted by its high levels of public debt, rising external debt and shrinking current account surplus, there has been a shift in the perception of risks towards Malaysia and away from Indonesia”

Pesek added that current-account surplus is dwindling, from 16 percent of GDP in 2008 to 3.7% last year, while household debt, according to Fowler, is "worryingly high" at more than 80% of GDP compared to less than 60% in 2008.

Fowler’s also wrote that Putrajaya’s “climate of entitlement amongst the Malay community limits entrepreneurialism and vested interests within the UMNO still resist change.”

Pesek said that the only thing holding Malaysia back is its insular political culture.

“The government's handling of Malaysia Airlines flight 370 said it all. Its deer-in-the-headlights response to the plane's disappearance was the product of an insular political culture.

“The trouble is, that insularity is holding back a resource-rich economy that should be among Asia's superstars, not its weakest links.” – June 5, 2014.

Foreign Worker Dormitories

Laugh no more. It's real!

Foreign workers particularly from Bangladesh are now staying in commercial areas.

Investors who thought they can make big bucks renting out commercial premises were stuck with such units.

So, instead of leaving their units vacant, they decided to rent these units out to developers and contractors to house their workers on the cheap. In fact, such dormitories or workers hostels  are oftentimes near the site of work or the workers were bused in and out if it is a distant away.

Apart from Kota Damansara and other areas where the KL MRT project is slowly being implemented, Aman Perdana in Meru  is one such enclave for the housing of foreign workers.

These photos tells a million words.

Bused in and bused out

Sundry washings on the Stairways

24 Hours Sleep-in Beds

These are the shop-lots which you will pass as you drive into Aman Perdana. Things are dull during the day.

Then the workers come back in the evening from their factories and work-sites.

A hive of activity has just begun.

They played football and badminton on the road and interestingly like to play " Where is the Queen?" which is a sleigh of hand trick game.

Workers lived on the ground floors as well as the upper floors of the multiple shop-lots built just outside the guarded and gated elite residencies of  Aman Perdana.

Most of the 150 lots have been rented out to house these Bangladeshi workers. Their living conditions are less than conducive.

On the other hand, the Aman Perdana residents  mostly stay in bungalows and Semi-Ds with two lovely lakes running through their neighbourhood. Guards are  at stationed at entry and exit points and boom gates to ensure that visitors are checked before leaving the neighbourhood.

What a contrast!

To Buy or To Rent?

The Better Option

Buying a house has been the talk of would-be-buyers since the imposition of 30% RPGT  coupled with the clampdown loan criteria imposed by BNM way back in 2013.

Expectations are such that there is a strong belief that the price of houses will slowly decline to be within the reach of the common wage earner once more.

Is that so? Any early indications? Can you but an affordable unit anytime soon as we reach the mid-year mark of 2014?

Then there is the other school of thought.

Why buy when you can comfortably rent so that it will not create a dent on your savings and life-style.

Let us look at the pros and cons of renting a house.

On the surface, renting a house or an apartment seems to be the more economical of the two choices. With only having to pay the monthly cost of rent and basic utility bills, people need not concern themselves with the details that come with housing loans and avoid a lot of the risks that comes with the possibility of not having the capability of paying off those mortgages. It is certainly a far less complicated scenario.

Another advantage of renting a home is the mobility it provides. Considering how it is very likely that one will encounter a situation wherein packing up and leaving on relatively short notice (like a job opportunity in a far away land), merely renting a home makes it simpler to change addresses without having to sell the house or find someone who would take care of the house.

Renting, particularly an apartment, makes sure that certain small problems are taken care of. When the need for repairs and maintenance occurs, the responsibility usually falls on the landlord, instead of the tenant, to take care of such matters.

There are also a few disadvantages to renting. The lack of security is one of the most glaring of those disadvantages. At the end of the day, the house you live in is not yours. There is also the regular increase in the price of rent that regularly occurs. This would throw you off budget or prompt you to look for other lower rental  neighbourhoods to live that commensurate with your financial capabilities .

Let us now look at the pros and cons of owning a house.

Having your own home is a benefit in itself. While there are going to be financial obligations that come with purchasing your own home, the one thing to take away here is that you will end up owning the house you live in, giving you peace of mind, and a paid up property at the end of the day.

One thing you can do with an owned house, which you generally cannot do with a rented one, is to  to have a go at home improvements that suits you. Since you own the house, barring local building by-laws, you can basically do with it whatever you please.

Having your own home also guarantees that you can leave behind a legacy for your kids, which is a big deal these days. If you have a family, then living in your own house ensures that your kids will have somewhere to go to whenever they need it. Essentially, you guarantee that you and your family have a roof over your head for the foreseeable future.

The disadvantages of owning a house are also several. As alluded to earlier, having your own home makes moving out complicated and difficult. Sometimes, it can be immobilising, having to choose between an owned home and a career opportunity.

Funding your own home may also take a long time, thus the enjoyment of owning a home may come after years and years of paying it off.

So what is your verdict?

With both housing options brandishing their own set of pros and cons, it is really up to which one fits your lifestyle more. If you are a mover, rent. If not, plant your roots in your own home.

Quite a simplistic evaluation, don't you think?

Impending Mortgage Payment Upheaval!

July 10 Decision on OPR

The impending increase in interest rate is imminent.This may likely be decided at the next BNM meeting on July 10.

So for those having banking loans,personal loans and credit card charges, brace yourself for more pain.

Loan installments will go up and there is also the possibility of overdraft charges,hire purchase rates and credit cut interest moving north.

This will impact directly on disposable income caused by collateral inflation thus further straining the pocket book of the working class .

The imminent increase in interest rates has caused anxiety among some Malaysian households, as the prospects of higher repayments for their outstanding loans will likely put further strain on their spending power.

While the impact on those earning between RM 4,000 to RM 7,000 (40%) can possibly be contained; salaried workers earning less than RM 4,000 will certainly be disadvantaged. 

A sobering effect to be considered is that 80% of Malaysian households fell into the income bracket earning less than RM 4,000. This was confirmed by PEMANDU of the PM's Department.

The sad thing about inflation is that the government and its agencies unsympathetically raised all their tariffs at about the same time and the people have to bear the full brunt of it, all at one go!

To say that the poor are cushioned by the BRIM hand-outs is again elusive as not all has been given this financial support. 

Oftentimes, legitimate applicants are denied this assistance by the Internal Revenue Board due to technical reasons, unreasonably refining the concept of household income in a straight-jacket fashion, with the fact that family members or even married couples who  stay at separate addresses are not getting nothing from the BRIM hand-outs. In fact, it is true that some who eat out at shops before coming home have  their income included into household income to inflate it unjustifiably.

As for the tax-paying middle income group, they are as usual, left out on the lurch, from the benefits of the social safety nets! 

Characteristically they take out more housing loans from banking institutions than the lower income group, which makes up another 40% of the Malaysian population.

Another thing to take note is the heavy indebtedness of Malaysian households. Malaysian households have turned out to be one of the most heavily indebted in the South-east Asian region. At 86.8% of the country’s gross domestic product (GDP), Malaysia’s household debt level is the highest in Asia, slightly ahead of South Korea’s household debt level at 86% of its GDP, and Singapore’s 77% of GDP.

Bank Negara concedes that Malaysia’s household debt level is not likely to come down anytime soon, as demand for credit is expected to remain strong over the next few years, driven by the spending pattern of a young consumption prone labour force and increasingly affluent urban population.

Statistics show the bulk of Malaysia’s household debt is made of home-mortgage loans, as households take advantage of the current prevailing low interest rates to buy properties, leading to increased demand, and eventually, the significant ramped-up in property prices in the country in recent years.

By and large, the looming interest rate increase will have negative implications for most consumers, as mortgage rates, which in Malaysia is pegged to the base lending rate (BLR), will rise as will future hire-purchase and personal loan rates.

The expectations of an interest rate hike have been rising since BNM sent out the clearest signal early this month that it might have to adjust the degree of monetary accommodation to address the continued build-up of economic and financial imbalances in the country so that these risks do not undermine Malaysia’s growth prospects.

Most economists expect the overnight policy rate (OPR) hike to take place when BNM’s Monetary Policy Committee (MPC) convenes its next meeting on July 10.

BNM has left the OPR unchanged for the past two years. The last revision took place in May 2011, when the MPC decided to increase the OPR by 25 basis points (bp) to 3%.

According to economists, the impact of an interest rate hike on households will ultimately depend on the quantum of the rate increase.

A 25 bp increase to the benchmark OPR from the current 3% to 3.25% – which is what is widely expected by the financial community – is unlikely to cause any serious dent, economists argue.

“Based on our assessment, many households will likely be able to absorb any increases in debt obligations arising from a 25 bp increase without experiencing any severe circumstances,” Manokaran says.

“And at a higher rate of 3.25%, we think the OPR is still accommodative to growth,” he adds.
Zahidi concurs, saying, “The impact will not be that significant although consumers will still end up paying slightly more for their mortgages and future hire purchases.”

“But if another hike takes place, pushing the OPR up by 50 bp (from the current level), then the impact on consumers will likely be more pronounced and this may lead to further moderation in private consumption growth,” Zahidi argues.

Economists in general do not expect BNM to take a too aggressive stance on its monetary policy, given the negative implication on the country’s economic growth as a whole.

Expecting BNN to make only gradual adjustments to the country’s policy rate, RAM Ratings head of research Kristina Fong notes that “BNM has embarked on a very holistic approach to their policy rate decision.”

“Any decision made by BNM would have been well assessed so as to avoid any adverse impact on growth sustainability,” she argues.

Sharing the same sentiment, Bank Islam Malaysia chief economist Afzanizam Abdul Rashid says: “We do not subscribe to the idea that the central bank would aggressively tighten its monetary stance. A 25 bp hike would be sufficient enough at this juncture since growth in the second half of the year is expected to moderate on account of the implementation of subsidy rationalisation.”

Economists reckon that the prolonged period of low interest rates in Malaysia is a major driver of rising household debts in the country. The low borrowing costs have also encouraged many households to use borrowed funds to invest in speculative activities to seek higher returns, as partly evidenced by the significant increase in asset and property prices in the country in recent years.

“The adjustment in OPR is necessary to avoid risks of financial imbalances becoming more entrenched as the existing macro prudential measures have yet to exhibit significant slowdown in lending to households,” Afzanizam explains.

Drawing an example from the collapse in the US sub-prime mortgage, which subsequently led to the 2008/09 global financial crisis,  Afzanizam argues that there are always dire consequences of keeping interest rates too low for too long.

“The recent upturn of GDP growth data clearly suggests that Malaysia’s economy is on firmer footing, and therefore, any form of economic stimulus (which include low levels of interest rates) should be withdrawn in order to ensure growth remain sustainable,” Afzanizam says.

So, let us wait with baited breath whether BNM will increase the overnight OPR. 

If it does, expect a big bite on your pocketbook for mortgages and all sundry loans!

The Bandar Utama-Kelana Jaya-Klang LRT

Snaking its way to Klang

PETALING JAYA (12 May 2014):  Syarikat Prasarana Negara (SPN) has completed the feasibility study on the third light rail transit line (LRT 3) covering 36km from Bandar Utama in Damansara to Klang,

Apparently, SPN had submitted the study and recommendations to the Land Public Transport Commission (SPAD) for the construction of the new LRT line recently.

Chances are good that “the Government will give the go-ahead for the project as this line will cover some important areas of Selangor. It comes to RM250mil per km – all inclusive except for land acquisition cost,” StarBiz was told.

SPAD will review and approve  the feasibility study.

“If approved, work could begin as early as the first quarter of next year,” said a source.

The LRT 3 would start in Bandar Utama and intersect with the mass rapid transport system and go on to Centre Point before cutting across to Kelana Jaya.

“The Bandar Utama MRT station will be a transportation hub in that part of Selangor,” said the source.

Prasarana group managing director Datuk Seri Shahril Mokhtar was previously quoted as saying that Shah Alam was in dire need of the LRT service and it was acknowledged by the Government. He said the plan had been incorporated into the Klang Valley Public Transport Masterplan.

A Tolerable Household Debt Threshold

The Burden of Excess Debt

Seriously, how much debt should a Malaysian household have?

Since the late 2000s, the actual household debt of the average Malaysian household has been on the uptick.

A recent report  this month recorded an average Malaysian's household debt for year 2013 to a shockingly new high of 86.8% of gross domestic product (GDP) from 80.5% for 2012. OMG! This makes it the highest in Asia.

It is conceivable that if such a trend continues, it would affect the general economic state of the country more than merely financially burdening the household of countless Malaysians.

Concrete steps must be taken to combat this rising debt problem.

The dictum of many financial institutions is that you should not have more than 40% household debt. More will be painfully unmanageable. The less of your income that goes towards debt, the better.

However, if it does exceed that 40%; meaning your consolidated debt payments eat up almost half or more of your income, then you owe way too much.

And it does not matter how much you make, or how comfortably you live with amount of money you actually take home.

Having that much debt will become a burgeoning burden especially in the future, in the event interest rates start rising.

Another strong sign that your household has way too much debt is the amount of compromises that you make financially.

Even if you do manage to pay your debts on time on a regular basis, examine the rest of your finances.

Does paying your debts lead to you sacrificing some of your other financial commitments?

For instance, if you pay your credit card bill now, would that technically mean a trade-off- the late payment on your car loan?

Or even if you do meet the requirements of all your financial obligations,do examine your type of lifestyle.

Can your lifestyle be considered lower that does not commensurate with your pay?

Financial compromises are often necessary, but when the amount of compromise you make is too great, then that means your debts are taking a toll on your financial health.

Identifying the problem is simply the first step towards a long process of lowering your debt, but it is a very important one.

If you do have that much debt, then it is prudent to start coming up with ways to address that problem.

Taking care of a massive debt means paying off or significantly lowering the debt in as short a time as possible.

This means a great deal of financial adjustment and foresight.

Planning a course of action to fix your household debt problem begins with assessment.

Assessing your household's finances means conducting an audit of every single aspect and financial activity you make.

How much money is being made? How much money comes out, and why?

Examine your spending habits, your regular income, and your financial commitments thoroughly.

Remember that there is no negligible amount here. Even the smallest expenditure needs to be considered.

Once you have a firm grasp of your household's financial activities, then comes the time to make adjustments.

In what specific areas can you spend less money on? Where exactly can you save on? How much money can you add towards debt payment?

What specific debt payment comes first? Always make sure your decisions are in line with the main objective: the elimination of debt.

If you are an average Malaysian, making ends meet do take a lot of doing and personal sacrifice.

This is why it is vital to make financial plans, ones that take the long term into consideration.

Debt is a burden that affects most of us, not just on a financial level but on a personal and mental on too.

The amount of stress that comes with knowing a huge chunk of our hard earned money does not even reach our pockets is staggering; and certainly psychologically defeating!

To be more assured and for a sounder and better financial future, let us start teaching ourselves to aim for much lower than 40% household debt for now.

Written by CompareHero 

Bootstrap Living for New Job Entrants in Malaysia

Ultra competitive job market with Insufficient Pay

The runaway inflation unleashed by the simultaneous removal of oil and sugar subsidies and the increase in power tariffs and minimum wages in late 2013; and the the beginning of 2014 is indeed killing new entrants into the job market.

The latest study by on-line recruitment company, Jobstreet.com revealed the plight of these new entrants wandering into the job market.

Earning a meager starting pay of an average of RM 2,500, graduates in the job market are struggling to make ends meet, so revealed this poll.

Some 2,062 of the new workforce in various industries participated in this poll. They were asked about their income and expenditure.

Jobstreet reported that 77% of the respondents did not have any savings after spending on essentials. Essentials here would include car loans and mandatory payback on study loans as the major commitments.

Because of higher fuel prices, transportation costs were among the top expenses. Some RM 1,500 of their salary go towards essentials.

Fortunately, some of these graduates had the safety net of their parents to rely upon. The study found that 50% of these graduates lived with their parents while 30% co-rented out houses with friends and colleagues. The balance had to live on their own.

For 87% of them, they have only one job and salary source. As such, do not be surprised when fresh graduate interviewees brazenly asked for above market rates from RM 3,500 to RM 6,500 for their start-up jobs.

However, sadly most employers were only prepared to offer fresh graduates salaries from RM 2,500 to RM 2,800 monthly. As such, its no wonder that fresh graduates, trying to cope with increasing living costs,are always on the look-out for better paying jobs, causing high turnovers in some industries, reported some 66% of of employers interviewed.

So, for those joining the job market soon, be ready to face the bleakness of working life--high inflation rates,lower standards of living, possibly more debts and utter depression as your lunch and dinner budgets continue shrinking.

Come next April 2014, it could be certainly be worse with the implementation of GST.

So do not hesitate to cry, won't you?