The Euro came into existence on 1 January 1999. Before that, the PIIGS – Portugal, Italy, Ireland, Portugal and Spain, had their own currencies. These countries were, in the past, the weaker of the European economies. They had higher inflation and interest rates. They regularly devalued their currencies to maintain competitive.
Under the Euro, interest rate was standardized across the EU. This presented the PIIGS a sudden lowering of the cost of borrowing. The effect was a domestic consumption boom and a real estate bubble. This caused the costs to go up, especially labour. The problem was exacerbated by the immobility of the labour forces in the EU. The end result was a lowering of competitiveness. Unlike before, they are unable to devalue their currencies to regain competitiveness now.
Like the business sector, the easy credit induced the governments to borrowed more money to develop the countries. This caused a ballooning of their debts. An increase in government revenue due to the consumption boom gave the governments more confidence to embark on the lavish spending.
When the EU raised rates to fight inflation, the real estate bubble burst and the tax revenue collapsed. This resulted in them finding difficulty to service their huge debts.
The only way forward for the PIIGS is to lower wages and endure years of deflation and high unemployment. They have to go on a real austerity drive.
Tuesday, June 8, 2010
Thursday, April 15, 2010
The rising Ringgit
The Ringgit is doing pretty well since the beginning of the year. Against the US$, it has appreciated 7% in the last 3 months. It reached a level below RM3.2 to 1 US$ recently and is almost at a two-year high. The main reason for this bullishness is the optimism of a robust economy. The economy is expected to grow by 5.7% this year. Foreigners are also moving more money into the country to acquire assets.
The Ringgit has risen by a hefty 16% versus the US$ since the liberalization of the peg on 21 July 2005. Expectations are that it will rise further. This is because the Asia region economies are all expected to be doing very well in the next two years. The Chinese economy in particular is forecast to grow at a rate of 12% in the first quarter of this year. As a result, there is great pressure for the Yuan to be revalued. A surging Yuan will lend strength to the Ringgit and they will rise together.
The Ringgit has risen by a hefty 16% versus the US$ since the liberalization of the peg on 21 July 2005. Expectations are that it will rise further. This is because the Asia region economies are all expected to be doing very well in the next two years. The Chinese economy in particular is forecast to grow at a rate of 12% in the first quarter of this year. As a result, there is great pressure for the Yuan to be revalued. A surging Yuan will lend strength to the Ringgit and they will rise together.
Friday, March 12, 2010
Net investment flow
Since the relaxation of the country’s foreign exchange administration in April 2005, there has been an increase in the outflow of funds from the country. This is mainly due to the aggressive investment of foreign assets by Malaysian companies. To make matters worst, foreign direct investment in Malaysia has shrunk in the same period. This has resulted in a net outflow of RM50.0 billions in the last 3 years.
The main areas of investment abroad by Malaysian companies are banking, telecommunications, power and properties. Between 2006 and now, local banks have invested a total of RM25.3 billion in overseas banking assets.
Partly due to the huge outflow, the healthy external trade balance of RM118.3 billion and RM141.8 billion surpluses for years 2009 and 2008 respectively did not lift the country’s foreign reserve much. It rose only RM17.0 billion in the whole of 2009.
A direct result of the outpouring of funds to buy foreign assets is the reduction of investment at home. To plug the gap, the government has to bump up public spending to keep the economy going. In the process, the government chalked up a huge budget deficit of 7.4% of GDP in 2009.
The world financial crisis hit in 2008. In that year, there was a net portfolio investment outflow of RM84.3 billion from Malaysia. This caused a total deficit of RM118.5 billion in the balance on financial account in the year.
The outflow of funds has diminished the demand for the Ringgit. Consequently, the currency has been weak for the whole of 2008 and 2009. Things seem to have improved this year. Hopefully, it will end the year better.
The main areas of investment abroad by Malaysian companies are banking, telecommunications, power and properties. Between 2006 and now, local banks have invested a total of RM25.3 billion in overseas banking assets.
Partly due to the huge outflow, the healthy external trade balance of RM118.3 billion and RM141.8 billion surpluses for years 2009 and 2008 respectively did not lift the country’s foreign reserve much. It rose only RM17.0 billion in the whole of 2009.
A direct result of the outpouring of funds to buy foreign assets is the reduction of investment at home. To plug the gap, the government has to bump up public spending to keep the economy going. In the process, the government chalked up a huge budget deficit of 7.4% of GDP in 2009.
The world financial crisis hit in 2008. In that year, there was a net portfolio investment outflow of RM84.3 billion from Malaysia. This caused a total deficit of RM118.5 billion in the balance on financial account in the year.
The outflow of funds has diminished the demand for the Ringgit. Consequently, the currency has been weak for the whole of 2008 and 2009. Things seem to have improved this year. Hopefully, it will end the year better.
Sunday, December 27, 2009
China's voracious appetite for commodities
China’s economy grew at a 9 % rate in 2008. It is one of the best growth figures in that year. This is despite the mortgage crisis hitting the US and by contagion, the rest of the world. Also, this has come after a decade long of double digit growth.
All this growth has increased China’s demand for commodities. In 2008, China consumed about 7.8 million barrels of oil per day. In the same year, the country consumed 3 billion short tons of coal, representing about 40 % of the world total. As for steel, it produced 37 % of the world total and used 35.5 %. In copper, China accounts for 29 % of the global usage in 2008.
To ensure a steady supply, China is embarking on a worldwide acquisition of natural resource based companies. In February this year, Chinalco agreed to invest US$19.5 bil in Anglo-Australian mining giant Rio Tinto Group. However, the investment was rejected by Rio Tinto. In June, Minmetals did successfully acquired OZ Minerals for US$1.4 bil. The prizes are a copper and gold mine in Laos and two zinc mines in Australia.
Sinopec had, in June, acquired Addax Petroleum Corp for US$7.3 bil. The buy gave Sinopec oil reserves in Iraq’s Kurdistan and West Africa. Two months later, Yanzhou Coal announced that it would buy Australian coal miner Felix Resources for US$2.9 bil. The following month, PetroChina said that it would buy 60 % of Athabasca Oil Sands Corp’s oil sands projects in Canada for US$1.7 bil.
All this growth has increased China’s demand for commodities. In 2008, China consumed about 7.8 million barrels of oil per day. In the same year, the country consumed 3 billion short tons of coal, representing about 40 % of the world total. As for steel, it produced 37 % of the world total and used 35.5 %. In copper, China accounts for 29 % of the global usage in 2008.
To ensure a steady supply, China is embarking on a worldwide acquisition of natural resource based companies. In February this year, Chinalco agreed to invest US$19.5 bil in Anglo-Australian mining giant Rio Tinto Group. However, the investment was rejected by Rio Tinto. In June, Minmetals did successfully acquired OZ Minerals for US$1.4 bil. The prizes are a copper and gold mine in Laos and two zinc mines in Australia.
Sinopec had, in June, acquired Addax Petroleum Corp for US$7.3 bil. The buy gave Sinopec oil reserves in Iraq’s Kurdistan and West Africa. Two months later, Yanzhou Coal announced that it would buy Australian coal miner Felix Resources for US$2.9 bil. The following month, PetroChina said that it would buy 60 % of Athabasca Oil Sands Corp’s oil sands projects in Canada for US$1.7 bil.
US$ carry trade
It used to be the Japanese Yen that was fuelling the carry trades in the 1990s. Now, the US dollar is doing just that. Ever since the mortgage crisis in 2008, the Federal Reserve has lowered the Fed Funds Rate to near zero. This has caused an exodus of US money looking for better returns. The US dollar has flooded emerging markets causing a rise in asset prices.
The inflow of funds to emerging markets has also caused their currencies to appreciate. This is causing economic disruptions there. To counter this, some countries like Brazil and Taiwan have resorted to capital controls.
The big question is what happens when the carry trades are unwound. Will the emerging economies experience a sharp drop in asset prices? What about recession and deflation? Are the economies prepared for this? Who knows?
The inflow of funds to emerging markets has also caused their currencies to appreciate. This is causing economic disruptions there. To counter this, some countries like Brazil and Taiwan have resorted to capital controls.
The big question is what happens when the carry trades are unwound. Will the emerging economies experience a sharp drop in asset prices? What about recession and deflation? Are the economies prepared for this? Who knows?
Wednesday, November 18, 2009
Not So Mighty Anymore
Japan’s economy has been in the doldrums since 1990 when its stock bubble burst. The first decade after the market collapse has been characterized by recession, deflation, near- zero interest rate and massive fiscal pump-priming. The second decade was more of the same thing. Only now is the US$ 4.5 trillion economy showing some life. The GDP grew at an annual rate of 2.7 % & 4.8 % for the last two quarters respectively.
A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.
But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.
Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.
A direct result of the fiscal stimulus is the accumulation of the biggest public debt of the development world which amounts to almost twice the size of its economy. To help boost the economy, the government has deliberately depressed the value of its currency. The hope was the undervalued currency, near-zero interest rates and fiscal stimulus would create a self-reinforcing growth dynamic that would raise consumption, GDP and wages.
But the growth could very well be ephemeral. If the extravagant spending on public works projects is taken away, the growth could just fizzle away. Also, the revaluation of the Yen this year has stymied exports and this has helped cause one third of Japan’s factories to sit idle.
Another problem Japan has to content with is its shrinking population. The nation of 126 million people is aging fast. Twenty three percent of its people are over the age of 65 while less than 13 % are younger than 15. Coupled with a policy of strict immigration control, it would be hard for the nation to increase its production. The nation also has to compete with fast emerging economies like South Korea, China and India.
Monday, November 16, 2009
The Yuan Dilemma
China, the world’s third largest economy, is leading the world in emerging from the recession caused by the credit crisis. Its economy grew at a rate of 8.9 % in the third quarter of this year. Next year, it is expected to surpass Japan to become the second largest economy in the world. It has chalked up a foreign reserve of nearly US$ 2 trillion. Such is its strength of growth.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
Its economic expansion is based on the mode of too much investment, too high saving and too little consumption. Its utmost priority domestically is job creation and social stability. It already has surplus manufacturing capacity. So, the only way to increase employment is to sell more. They do this by deliberately holding down the value of the Yuan. This action is generating a lot of disgruntlement from the rest of the world, in particular the USA. They are all suffering from a trade deficit with China.
The other way for them to increase production is to step up domestic consumption. This method is more desirable to the westerners as it would not add to their trade deficit with China.
But the holding down of the Yuan has its adverse consequences too. The government has to sell Yuan to keep its exchange rate low. This has resulted in a 29 % increase in the money supply in the last six months. Also, expectation of the revaluation of the Yuan has attracted a US$150 billion inflow of speculative funds in the same period. All this extra liquidity is causing asset price inflation. Apartment prices are reaching record levels and the stock market has risen 74 % this year.
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