Ringgit, government bond yields up on rates hike

KUALA LUMPUR: The hike in interest rates, which the market now expects to be the last for the year, drove the ringgit up and saw a rise in yields of short-term government bonds.

The ringgit appreciated against the dollar yesterday following the 25-basis-point rise in Bank Negara’s overnight policy rate (OPR) to 2.75%, with traders now expecting the local currency to continue to strengthen in the short term.

CIMB Investment Bank regional rates and foreign exchange strategist Suresh Kumar Ramanathan said the ringgit, which rose to 3.19 against the dollar yesterday, was pointing towards further strengthening.

He said the hike in interest rates made the ringgit an interesting carry-trade proposition for traders.
“Interest rates are pretty high to attract more capital flows into the market,’’ he said.

The monetary policy statement on Thursday was dissected by the market and the general consensus is that Bank Negara would most likely stand still now after raising domestic interest rates by 75 basis points this year.

Analysts said the previous statement, which alluded to further normalisation of interest rates, was omitted this time around.

They said this was replaced by a fresh stance whereby the Monetary Policy Committee (MPC) now considered the new level of the OPR to be appropriate and consistent with the current assessment of growth and inflation prospects.

“Taken together, these signals suggest that rate hikes are unlikely to come through in the future,’’ said Barclays Capital in a note yesterday.

“It appears that Bank Negara has created enough monetary policy buffer to respond to any downside risks.”
While the MPC’s assessment is for the global recovery to continue, it noted that there was increased risk that the global growth momentum could moderate.

But it pointed out that for the domestic economy, recent trends in key economic indicators such as industrial production, financing activity, labour market and external trade showed that economic activity had remained robust in the second quarter.

“While external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvement in private consumption and investment, and augmented by public investment spending,’’ MPC said.

Barclays Capital said the statement noted that recent economic indicators and trends would remain strong despite the recent gains in the ringgit. “This suggests that they are comfortable with the recent normalisation in the currency and would not stand in the way of further appreciation, provided this is fundamentally dictated,’’ it said.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng believes the strong domestic economic indicators might have pipped Bank Negara’s decision to let interest rates go up for the third time.

The market was divided over the prospects for such a hike, given the economic situation globally.

“The central bank is confident that domestic growth momentum can be sustained despite the slowdown in the second half-year in the European Union economies,” Yeah said.

Although the current level was still below the historical average, Yeah called it the “new normal” considering the benign inflationary concerns and the weak economic condition globally.

He felt that the hike was important to nip asset price inflation, especially in the property sector which was driven by super-low interest rates, before it got out of hand.

“The double-digit increase in some property segments is of some concern,’’ he said.

While households have seen a debt build-up in recent years to levels considered high for Malaysia, Yeah said the current level of interest rates was seen as a balance between what households could shoulder and what the business sector found it could live with.

“It’s a fine line. We believe this level will stay for the rest of the year,” he said.

Should interest rates plateau at this level, Maybank Investment Bank head of debt capital markets Michael Oh-Lau said the rally in the bond market, which had seen yields dropping as a result of foreign buying of Malaysian Government Securities, should continue.

The impact on the bond market is expected to be positive but Oh-Lau said one risk that could emerge from interest rates remaining stagnant was a rotation of money out of the Malaysian capital markets to other countries that had not raised their rates. “There might be some risk of the exit of foreign investors if this is the last hike,’’ he said.

With interest rates now projected to remain firm for the rest of the year, analysts said all eyes would now be on the yuan and its movement against major currencies.

“The ringgit is seen as a close proxy to the yuan and further strengthening of the ringgit will come from the pace of strengthening of the yuan,” said Yeah. “This will fit in nicely for Malaysia getting a slower pace of strengthening.’’

By JAGDEV SINGH SIDHU

jagdev@thestar.com.my

Is Malaysia in danger of going bankrupt?

If Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we will have fewer worries

IN a recent speech, Datuk Seri Idris Jala warned that Malaysia could in 2019 end up bankrupt like Greece if the RM74bil annual subsidies are not slashed. That speech attracted a lot of flak, and has been dismissed as more of a “scare tactic” to jolt “us to not live beyond our means”. More of that later.

What are the causes of national bankruptcy? A country can go bankrupt if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.

Greece has been in the spotlight with its debt problems. Though it didn’t actually default on its public debt, it is as good as bankrupt, as far as a lot of people are concerned. The European Union and the IMF kept the embattled Greek economy afloat by agreeing to a US$1 trillion loan package.

The crisis began when investors started getting nervous about Greece’s ability to refinance almost 17 billion euro of bonds (about US$23bil) maturing in April and May this year.

Greece certainly did not endear itself to investors when it was revealed in early 2010 that since 2001, it had help from Wall Street firms to quietly borrow so that it could continue to spend beyond its means while meeting the euro-zone’s deficit rules.

The Greek government hasn’t balanced a budget in nearly 40 years. Its profligate and irresponsible spending had resulted in its public debt ballooning to a forecast 125% of GDP in 2010. Measures to tackle its public finances problems are expected to cut its 2010 deficit to 9.3% of GDP, an improvement from 2009’s 12.7%.

Years of socialism have also resulted in an oversized government that has systematically crowded out the private sector and driven them underground. In fact, one third of Greeks work for the government where their jobs are guaranteed for life.

But the key cause of Greece’s debt crisis is corruption and impunity, which the Greek Prime Minister himself readily admits. Tax evasion, a way of life in Greece, could be costing the Greek government as much as US$30bil a year. According to Transparency International’s (TI) Corruption Perceptions Index 2009, which measures the perceived levels of public sector corruption in 180 countries and territories, Greece scored 3.8 points out of a possible 10 (with 10 being perceived as having low levels of corruption) and was ranked number 71.

While Japan hasn’t yet run into the kind of solvency problems faced by Greece, some commentators have already started predicting that it could end up being the world’s largest national bankruptcy. That’s because Japan’s public debt mountain is bigger than that of any other industrialised nation.

Japan’s public debt is a legacy of massive half-baked economic stimulus packages during the “lost decade” of the 1990s, as well as during the recession that began in 2008. It is expected to hit 200% of GDP within 2010 as the government tries to spend its way out of the economic doldrums against a backdrop of plummeting tax revenues and soaring welfare costs.

The Japanese government expects its fiscal deficit in 2010 to hit 9.3% of GDP, and public debt to rise to 17 times its annual tax revenues by the end of the year. Japan’s public debt situation seems irrecoverable, and its newly installed prime minister has warned that Japan could face a financial crisis of Greek proportions if it does not tackle its colossal debt.

Prospects of a downgrade

Despite all that, Japan isn’t in the kind of pickle Greece is in right now. In fact, credit rating agency Standard & Poor’s rating on Japan’s sovereign debt remains at AA, one step below its best possible rating, though it did in January raise the prospect of a downgrade on concerns about large fiscal deficits and a sluggish growth outlook.

Why isn’t Japan in the same kind of mess as Greece? And why hasn’t its sovereign credit rating been downgraded to junk status, like that of Greece’s?

It is possible that Japan is perceived as being too big to fail. Japan is the world’s second largest economy after the United States, and even though it may have lost some of its shine, it remains a technological powerhouse with a diligent and highly trained workforce. Its default risk is low, as it has a huge current account surplus as well as the backing of massive domestic private sector savings to continue investing in government bonds.

And unlike Greece, Japan’s credibility remains good, there being no fiddling with statistics to make Japan’s public finances look good. Its institutions are strong, and there is no crowding out of the private sector by the public sector. And corruption is hardly an issue in Japan; according to TI’s Corruption Perceptions Index 2009, Japan scored 7.7 points and was ranked number 17.

Malaysia’s public finances are clearly better off than either Japan’s or Greece’s, and its current debt-to-GDP ratio is nowhere near that of either’s. The CIA’s list (The World Factbook) ranking countries based on public debt as a percentage of GDP (2009 estimates) puts Malaysia at number 50 (at 47.8%); that’s far behind Japan at number 2 (192.1%), Singapore at number 6 (117.6%), and Greece at number 8 (113.4%).

However, according to Datuk Seri Idris Jala, Malaysia could in 2019 end up bankrupt like Greece if it does not cut its subsidies because its debt-to-GDP ratio would by then soar to 100% from the current 54%. Could Malaysia actually end up bankrupt like Greece?

As can be seen from the Greek and Japanese examples, the million-dollar question is actually not whether Malaysia could in 2019 end up bankrupt if its debt-to-GDP ratio soars to 100% but whether investors still find Malaysian government bonds attractive.

But this is an impossible question to answer because besides debt-to-GDP ratio, many other factors like economic strategies and policies, transparency and quality of governance, government efficiency, strength of institutions, etc also figure significantly in investing decisions.

According to the National Economic Advisory Council’s New Economic Model (Part 1) report, aggregate investment levels (in products and services) as a percentage of GDP have been declining ever since the Asian Financial Crisis of 1997-1998. The same report also mentioned that the contraction was driven mostly by a decline in private investment.

Is this an indication that investor interest in Malaysian government bonds could likely go the same way south as investor interest in the real sector in Malaysia?

Suffice to say that if Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we’ll have fewer worries.

COMMENT
By QUAH BOON HUAT

● The author is a research fellow at the Malaysian Institute of Economic Research (Mier). The views expressed in this article are the author’s and do not represent those of Mier.

Immigration Can Fuel U.S. Innovation—and Job Growth

Lost amid the heated debate over U.S. policy is a key point: Immigrant entrepreneurs and skilled workers are a boon to the economy

By Chris Farrell

 Arizona may be ground zero for the conflict over U.S. immigration policy, but it takes only a few minutes of watching cable television news and scanning local op-ed pages to see how raw and divisive the matter has become in the nation's political sphere.

Yet with all the heated rhetoric about illegals, border security, amnesty, racial profiling, and other incendiary topics, one aspect of immigration isn't emphasized enough: the job-creating potential of immigrant entrepreneurs. They're the vanguard in America's global competition for entrepreneurial talent and innovative ideas. The nation needs to encourage more entrepreneurs from other nations to call America home. Their energy is the elixir of future economic growth.

Take a recent study by the McKinsey Global Institute on U.S. multinational corporations. In Growth and competitiveness in the United States: The role of its multinational companies, the consulting firm notes that big business comprises less than 1 percent all U.S. companies, yet the 2,270 multinational corporations in its database accounted for 31 percent of the growth in inflation-adjusted gross domestic product from 1990 to 2007. Even more important, U.S. multinational corporations have contributed 41 percent of gains in labor productivity since 1990—and 53 percent of the productivity increases during expansions.

The consultants highlight the role immigrants play in bolstering the competitiveness of American multinationals, especially helping the U.S. "lead the world in the number of engineers, scientists, and business professionals who are ready to work in a multinational company."

High-Tech Startups

Specifically, some of the world's brightest brains and cutting-edge innovators come to learn and create in the U.S.—and they stay. In 2007, for instance, 62 percent of foreign-born nationals who received a science or engineering doctorate remained in the U.S. for at least five years following graduation. That figure is up from 41 percent in 1992. More than 80 percent of graduates of Indian origin and 90 percent of Chinese graduates still lived in America five years after graduation, according to McKinsey. (The McKinsey study on multinationals makes for good companion reading to Intel founder Andy Grove's cover story in the July 5-11 issue of Bloomberg BusinessWeek. The Silicon Valley legend is himself an immigrant from Hungary.)

It's well-known that America's high-tech economy has prospered thanks largely to highly educated foreigners. But the degree that the nation's cutting-edge industries, from semiconductors to biotechnology, depend on immigrant scientists, engineers, and entrepreneurs to remain competitive is stunning. For example, a quarter of the engineering and technology companies started in the U.S. from 1995 to 2005 had at least one founder who was foreign-born, according to research by scholars Vivek Wadhwa, Annalee Saxenian, Ben Rissing, and Gary Gereffi. In Silicon Valley, America's epicenter of technological innovation, the percentage of immigrant-founded startups reached 52 percent of total new companies over the same period.

The scholars also calculate that foreign nationals living in the U.S. were named as inventors or co-inventors in 24 percent of all international patent applications filed in the U.S. in 2006. That's up from 7 percent in 1998. The influx of highly-skilled workers from India, Asia, Latin America, and other corners of the world is also a boon to U.S. exports.

Lake Street Revival

It isn't just highly educated foreigners who are entrepreneurs, either. Immigrants have created businesses, from the corner grocery to the local builder, that create jobs and revitalize neighborhoods throughout the country. Take Lake Street in Minneapolis. A good portion of the major urban artery had become was one of the city's most poverty-stricken, crime-ridden neighborhoods by the late 1980s and early 1990s

Storefronts were boarded up, while drug dealing, prostitution, and other crimes were all too common.

The area started to attract Latino immigrants, legal and illegal. The first Latino-owned business opened on Lake Street in 1994. Cheap rents and a growing market attracted many more Hispanic entrepreneurs. "We saw the need and the opportunity," says Ramon Leon, founder and chief executive of the Latino Economic Development Center on Lake Street. "Everybody wanted to open a business on Lake Street."

Business is doing well on Lake Street today, despite the economic downturn. The street is lined with restaurants, small grocery stores, and other classic neighborhood shops. East African entrepreneurs from Somalia and Eritrea have also opened businesses. Little wonder that cities with lots of immigrants have seen their per capita tax base go up, according to David Card, economist at the University of California, Berkeley. The competition on Lake Street is fierce enough that immigrant entrepreneurs are increasingly aware they need to expand their market beyond their ethnic communities. "If you want to be successful you need to sell stuff to others," says Ramon.

Put Out the Welcome Mat

The Obama Administration wants to start a national debate on comprehensive immigration reform. It's a sensible but daunting, politically perilous undertaking. The Bush Administration took a similar tack, and it ended badly. All the political signs point toward legislative intransigence rather than compromise. The danger is that during a period of anger and vilification of immigrants, fortified by post-9/11 fears of immigrants, 
America will lose out in the global war for innovative brain power and entrepreneurial hustle. It's all too easy for overseas innovators and entrepreneurs to stay home and pursue their dream there, particularly in fast-growing emerging markets with modern universities and high-tech clusters.

Yet America's historic record, blue-chip economic research, and well-established business experience all suggest the payoff from making it vastly easier for immigrants—especially educated immigrants—to stay permanently in the U.S. will be enormous. Tear down the walls that place obstacles to immigrants attending American universities and set up procedures for rapidly granting educated workers permanent resident visas.

Create a mechanism for a permanent "entrepreneurial" visa for those immigrants with a hunger to create a business and a plan for a job-generating startup. Instead of piling on more obstacles to prevent abuses of the current temporary H-1B visa system, why not streamline the whole process and eliminate many of the restrictions that make it difficult for workers to travel, change jobs, or earn a promotion?

Let's turn down the rhetoric and put out the welcome mat again.

Farrell is contributing economics editor for Bloomberg Businessweek. You can also hear him on American Public Media's nationally syndicated finance program, Marketplace Money, as well as on public radio's business program Marketplace. His Sound Money column appears on Businessweek.com. 

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