Challenge in recovery...

One of the hot topics currently is the increasing inflation rate that led to increase in cost of living. 

We can see from figure 1 & 2 that since the outbreak of the pandemic,  Producer Price & sea freight rate has been increasing... There are signs actually before the actual hike in recent goods price. Producer Price Index (PPI) is a measure of inflation at the wholesale level of the economy measuring producer prices by industry & product category.

One of the challenges that faced by many developed western countries during the recovery from the pandemic is how to control/balance the inflation when economy re-open under the situation of the global supply chain disruption. 

So far, there is not yet a complete vaccine. The West chose to open up all the economy sectors when booster shot proven to be able to reduce severe symptoms.  Imagine the intermittent breakdown in between the supply chain... For Import/Export, whether finished goods / semi-finished goods / raw materials , from manufacturer -> forwarder warehouse -> port -> cargo ship -> destination port -> buyer's forwarder warehouse -> buyer. Any disruption/shortage of workers in between will cause the delay in goods supply then the price hike when the demand exceeds supply especially when the country economy re-open.

 

Figure 3 showed the latest inflation rate of different countries. During the recovery from the pandemic, FED hopes to achieve soft landing... For current situation, it is a hard decision for FED on the interest rate policy. The inflation is very high, if rate hike is implemented high/too fast, it will dampen global economy recovery. While the possible slow pace of rate hike do not help much either because of the gap in between the interest rate and actual inflation rate.

Russia knows the challenge faced by the west. Russia is the world's third largest oil producer behind the United States and Saudi Arabia. While, Ukraine and Russia both play a major role in global food markets. The decrease in food & fuel supply in the global market will definitely push inflation up further... The question is how long will it continue? 

Figure 4 shows the current trend in 10 year government bond yield. Rising yield indicates falling demand from investors... We can see that Russia's ruble go in reverse direction few months ago, from increasing yield to back to normal. What happened to the EU sanction? Is it have "No Effect" ?  It is because of the capital control from Russia's Central bank preventing its currency from flowing out of the country.

Russia is not in a low position. On the other hand, what are the strategies behind China's zero-covid policy? We can see that China controls well its inflation rate & bond yield during the recovery..... TO BE CONTINUED

Reference:

https://tradingeconomics.com/

https://www.worldometers.info/

My Previous Article:

https://ce-lifediary.blogspot.com/2021/11/global-market-recovery.html

https://ce-lifediary.blogspot.com/2021/09/outlook-of-domestic-market.html

Chan Hang

June 2022

Global Market Recovery

Continue from my previous article in Sept 2021, we learn that there are three ways to define sovereign debt : statutory debt, official debt and total debt. While, total debt is more accurate to do so. We can notice from the special "windfall" tax recently.

We can see from KLSE participant that during the period of state border opening, foreign side became net buyers while local institutions keep retreating. 

Remarks :  Local institutions consists of  mostly the sovereign, pension and government linked fund.

On global side, the energy supply : coal & crude oil will be the parameters which affect global economy recovery from the pandemic. Current crude oil price is having an upward trend because Saudi side refused to increase oil production to cover back its previous loss from pandemic. They are able to do so because of the shortage of alternative energy supply : coal.

The supply of coal has interfered the activities of manufacturing sector. First, factories need to pay higher electricity cost for production. And, in country like China,  the government limit the electricity usage of factories thus disrupting the production line then causing reduction of goods supply in the market and finally the price hike of finished goods.

While crude oil is the core item used in transport, whether by air or land. Together with the ongoing peak of sea freight rate, it will be hard for global economy recovery.

Company like TENAGA (5347) will face not only the high price in its raw material : coal & gas , but also ICPT rebate mechanism plus special "windfall" tax. 

We can see from developed countries like, United States , United Kingdom, Germany, France..... One of the issues in economy recovery is the skyrocketing of CPI index. While , this is not difficult to understand since currently price for raw materials , sea freight, energy : coal & crude oil .... all in upward trend. While, for domestic market, it is 2.0% and 2.2% respectively for August & September 2021.

The United States CPI index will be the parameter for FED rate hike which will then  dampen the market , whether stock or bond. So, recently FED reacted by slowly reducing the amount of quantitative easing into the market. While, the rate hike is a must in upcoming months. At that time, central bank of all over the world will adjust their interest rate respectively .

Nov 2011

Chan Hang

 

Outlook of Domestic Market ( Macroeconomics Approach)

Consumer Price Index (CPI) released by DOSM for May, June, July 2021 are 4.4%, 3.4% and 2.2% respectively. It shows a decreasing trend.

While, on the other hand, Producer Price Index (PPI) in manufacturing shows an upward trend, 11.9%, 11.5% and 11.7% respectively for May, June, July 2021 .

It is obvious that the downtrend of recent CPI is due to MCO 3.0 lockdown which suppress spending among consumers. As a matter of fact, the actual CPI  is rising behind with the skyrocketing in sea freight rate and increase in raw materials.

Since the beginning of the year, sea freight cost has been increasing due to disruption by the pandemic worldwide. Factories of different countries and areas shut down and reopen on and off. Thus, causing delay in goods finished which then interfere sea freight shipping and then the cost.

Let's see the latest data released by BNM. 

As of 2021 2nd Quarter, total Federal Government Debt is RM 958.3 billion

GDP for 2020 is RM 1342 billion.

So,   total Federal Government Debt / GDP = 71.4%

While, actual total debt/GDP around  98~99%

(Included Government Guarantees and other liabilities: 1MDB ......)

That's why after huge bailout to the domestic market during MCO 1.0 ,  government no longer has more bullets to save the market and people for MCO 3.0

The strategy used during MCO 3.0  is based on 20/80 theory , allowing factories (which contribute to most of GDP) to operate while closing micro & SME (which consists of more than 50% of employment market.)

As of 2021, Malaysia consists of 30.0 million citizen and 2.7 million non-citizen.

As of June 2021, labour force consists of 16.07 million people.

So, theoretically, there will be less than 25% of the population moving around during MCO 3.0 

On the other hand, we can see a weak trend of RM currency.

And, the upcoming reduction of quantitative easing (QE) by FED and the rate hikes will make the situation worse. 

While, the support of RM currency from both Crude Oil & CPO Price are fragile.

 KLSE CPO future shows a down trend of CPO price (current at high price due to lack of foreign workers to harvest, then lead to reduction of existing CPO stock in the market)

Current Crude Oil Price at 69.10. It may be maintained around this level by OPEC so as to align with the economy recovery worldwide from the pandemic.

Refering to above mentioned,

total Federal Government Debt / GDP = 71.4%

actual total debt/GDP around  98~99%

We can foresee that there will be the coming back of GST after election ( July 2023 or earlier), whether current government or opposition.

While, the main and biggest threat is still the new variant that emerges from time to time. 

Chan Hang 

Sept 2021

Reference

1) https://tradingeconomics.com/

2) https://fbx.freightos.com/ 

3) https://www.bnm.gov.my/

4) https://www.dosm.gov.my/

5) https://finance.yahoo.com/

6) https://www.bursamalaysia.com/

Macroeconomics: Malaysian Sovereign Debt

As a Malaysian, nowadays we always hear that our country debt is skyrocketing. But, how and where can we obtain the latest exact figure?

First, we goto Bank Negara Malaysia website.
http://www.bnm.gov.my/

Then, "Publications & Research Paper"-> "Periodicals"-> "Monthly Statistical Bulletin" , we will see a lot of data. Let's filter out some of the important information.

3.8 External Reserve

From the above, we see that Malaysian External Reserve dropped to lowest at August 2015 and rebound back after September 2015. The rebound is due to the government rescuing effort by relocating back overseas investment assets to strengthen the country fundamental.

3.7 External Debt

As of 2010 3Q, Malaysian external debt is RM 427,023 million , while as of 2015 3Q, it has double to RM 852,864 million. Short term debt can be found at the last column "Overall external debt profile". It is about RM 373,005 million.

3.1.1 Federal Government Revenue

Federal Government Revenue records the income of government, for example corporate tax, personal tax, GST, Petroleum Tax and so on. We can see that from year 2015 to 2016, income from Petroleum Tax is decreasing, meaning that the dividend that government gets from Petronas which is much more bigger in amount is decreasing too.

3.1.4 Federal Government Debt

As of 2015 3Q, Federal Government Debt is RM 623,348 million, about 73% of total external debt. Federal Government Debt to GDP ratio always being used as an gearing ratio for a country to evaluate how much more debt the country can sustain.

3.1.5 Federal Government Debt Issued Domestically

As of 2015 3Q, it is RM 601,101 million, about 96% of total federal government debt.

3.1.6 Federal Government Debt : Classification by Currency and Remaining Maturity

As of 2015 3Q, Federal government debt in RM currency is RM 601,099 million.
We can see that Malaysian debt is skyrocketing and most of it is in RM currency.