Author: FLY: Malaysia

  • Introduction to Algorithmic Trading

    Introduction to Algorithmic Trading

    Algorithmic trading, also known as “algo trading,” refers to the use of computer programs to execute trading orders at speeds beyond the capability of human traders. These programs operate based on predefined criteria such as timing, price, and quantity. By leveraging mathematical models and historical data, algorithmic trading systems aim to identify and capitalize on market opportunities more efficiently than manual trading methods.

    The historical evolution of algorithmic trading took off in the late 20th century with advancements in technology, especially in computing power and data processing. Faster, high-performance computers enabled the rapid execution of complex trading algorithms, while big data and advanced analytics allowed these systems to analyze vast amounts of historical and real-time market data for precise, data-driven decisions. The advent of machine learning has further refined algorithmic trading, enabling systems to adapt and optimize based on evolving market patterns, making trades faster and more accurate than ever before.

    In the early 2000s, the Regulation National Market System (Reg NMS) was put in place in the United States to improve how stocks were traded. Before Reg NMS, trading was done on different exchanges, which sometimes meant that buyers and sellers didn’t get the best prices. This was unfair, especially for smaller investors. Reg NMS made it a rule that all trades had to happen at the best available price, no matter which exchange they were on. This helped make the market fairer and allowed computer programs to quickly find and make trades at those better prices, boosting algorithmic trading.This evolution has transformed the financial markets, with algorithmic trading now accounting for a substantial portion of trading volumes—over 70% of total trading in major markets like the US and nearly 40% in the EU (Corporate Finance Institute, 2023; Deloitte, 2018).

    The benefits of algorithmic trading are numerous. It allows for the rapid execution of trades, minimizing the impact of market fluctuations on order prices. Algorithmic trading also eliminates human errors and emotional biases from trading decisions, potentially leading to more consistent and profitable outcomes. Additionally, it can enable traders to handle large volumes of data and transactions, providing liquidity and efficiency to the markets by ensuring a continuous flow of buy and sell orders, narrowing bid-ask spreads, and allowing trades to be executed at optimal prices. This increased activity supports a smoother and more stable trading environment, making it easier for assets to be bought or sold with minimal price impact (Corporate Finance Institute, 2023; Investopedia, 2023).

    However, there are several challenges associated with algorithmic trading. The reliance on technology means that system failures or network issues can lead to significant financial losses. The strategies often depend on historical data, which may not always predict future market conditions accurately, especially during black swan events. Furthermore, algorithmic trading can contribute to market volatility and flash crashes, raising concerns among regulators and market participants (Investopedia, 2023; Deloitte, 2018).

    In summary, while algorithmic trading offers significant advantages in terms of speed, efficiency, and consistency, it also poses unique challenges and risks that need to be managed carefully to ensure market stability and fairness (Corporate Finance Institute, 2023; Investopedia, 2023; Deloitte, 2018).

     


    Edited by: Dicky Poh Ting Le, Zaki

    Reviewed by: Maryam Nazir Chaudhary

     

    References

    Corporate Finance Institute. (2023). Algorithmic trading – definition, example, pros, cons.

    https://corporatefinanceinstitute.com/resources/equities/algorithmic-trading/

    Investopedia. (2023). Basics of algorithmic trading: Concepts and examples.

    https://www.investopedia.com/articles/active-trading/101014/basics-algorithmic-trading-concepts-and-examples.asp

    Investopedia. (2022). Regulation NMS: 

    https://www.investopedia.com/terms/r/regulation-nms.asp

    The Trade News. (2021). What is Reg NMS and could it be beneficial for Europe?

    https://www.thetradenews.com/thought-leadership/what-is-reg-nms-and-could-it-be-beneficial-for-europe/ 

  • Degree Inflation in Malaysia: Is University Education Worth It?

    Degree Inflation in Malaysia: Is University Education Worth It?

    In 2022, TikTok user @ainxang went viral after sharing her experience of working at KFC, despite being an honours graduate in chemistry (Dorall, 2022). This very year, yet another article has reported a similar situation. The case of Zuraini Zulkornian, a 25-year-old who graduated with a first-class Bachelor’s Degree in Finance with a Vice Chancellor’s award, working as a restaurant assistant for the past year (Renushara, 2024).

    At first glance, this may be attributed to the mismatch of job opportunities or the lack thereof. Perhaps more importantly,this also raises an urgent question: whether pursuing a degree is still a viable path to a successful career.

     

    What is Degree Inflation? 

    Degree inflation (or credential inflation) refers to the phenomenon where the value of a degree decreases as holding a degree becomes more commonplace (Araki & Kariya, 2022). As a result, many graduates accept roles that underutilize their qualifications and skill sets (Delaney, McGuinness, & Redmond, 2019). 

    Multifaceted factors are undermining this phenomenon, and here are a few key factors:

    1. Credentialism: Today’s job market views qualifications as a social status rather than a true indication of knowledge and expertise. This societal expectation leads to individuals seeking qualifications instead of competencies (Tomlinson & Watermeyer, 2020). Employers also tend to use degrees as a way to filter through applications, favouring applicants with degrees even if the job doesn’t strictly need one, to cut hiring costs (CIPD, 2022). 
    2. The skill gap dilemma: As technology advances, education institutions face the challenge of current education syllabuses being misaligned with the needs of the workplace (Predovic et al., 2020). Experts have shared that Malaysian students who learn through objective tests lack critical thinking skills and do not understand how to apply superficial knowledge to the real-life complexities of work (“The Future of Talent in Malaysia 2035,” 2019). 
    3. Oversupply of graduates: Student enrolment in higher education has increased drastically from 46,596 in 1980 to 1.2 million in 2020 (Abdul Hamid, 2022). The rapid expansion of tertiary education in Malaysia has been driven by the government’s policy of increasing intake in public institutions, and the growth of the private education sector. However, Malaysia’s economy has failed to meet the demand for skilled employment opportunities. In the second quarter of 2024, approximately 62.9% fall into the semi-skilled category, while only 26.7% are classified as skilled positions (Kana, 2024).

     

    What does this mean for Malaysians?

    Human Resources Minister V Sivakumar shared that Malaysia’s brain drain stood at 5.5% of the population, far higher than the global average of 3.3% (The Star Online, 2023). According to the Business Times, more than half of these Malaysians employed overseas were high-skilled workers (Leng, 2024). With lower salaries back home and better career growth opportunities abroad fuelling this phenomenon, it is clear that Malaysia faces significant challenges in retaining its skilled workforce. 

    Furthermore, a new trend is emerging among Malaysian youth, who are increasingly exploring alternative career paths. The Department of Statistics Malaysia (DOSM) quoted that 72.1% of youth wished to opt out of further education after obtaining a Sijil Pelajaran Malaysia (SPM) qualification (Mutalib, 2022). The majority justified this by citing the low starting salaries for fresh graduates, reasoning that the financial return does not justify the time and resources invested in obtaining a degree (Othman et al., 2023).

    While Malaysia strives to become a knowledge-based economy with a strong focus on building the digital sector, the net outflow of academics presents significant challenges. Notably, only 3.5% of Malaysian firms have introduced new products in the last three years due to limited research and development efforts (MIDA, 2021). With fewer individuals interested in pursuing further education, this might further exacerbate the talent gap in Malaysia. This is especially true with STEM sectors, as there has been an alarming decline in student interest (Idris et al., 2023).

     

    So, what is the value of a degree? 

    There are many pathways to obtaining a degree, from public to private universities. Universities in Malaysia offer many study pathways to obtain a bachelor’s degree within 3 to 4 years. The table below breaks down some common pathways and their monetary cost to further discuss its relative worth. (Excluding Bachelor of Medicine and Bachelor of Surgery)

    Type of university Public Universities Local Private Universities Foreign Branch Campus 
    Description These are funded by the government and typically offer a wide range of programs. These are privately funded institutions established in Malaysia.  These are Malaysian branches of international universities.
    Note Often have a strong focus on research and community engagement. May offer specialised programs and have generally smaller class sizes. Provide an opportunity for students to experience an international education without leaving their home country.
    Tuition fee for entire course duration
    (Excluding registration and miscellaneous fees)
    RM 5,000 – 15,000 RM 40,000 – 85,000 RM 75,000 – 210, 000
    Study duration  3 – 5 years 
    Examples University Malaya (UM), Universiti Sains Malaysia (USM), Universiti Kebangsaan Malaysia (UKM) Asia Pacific University of Technology & Innovation (APU), HELP University, Sunway University Monash University Malaysia, University of Nottingham Malaysia, Xiamen University Malaysia

     

    Now that we know the cost of pursuing a degree, let’s look into the return on investment – graduate salary. According to Statistica (2023), Malaysian employees with Sijil Pelajaran Malaysia (SPM) as their highest qualification earn an average of RM2,280 per month, while those with university degrees earn an average of RM5,760 per month. This can be attributed to university degree holders being able to pursue higher-skilled jobs that offer better compensation.

    Assuming the salaries stated, let us analyse the cost of pursuing a bachelor’s degree. Here, we will use a cost estimate of a student pursuing a 4-year engineering degree at a local public university. 

    Given an estimated cost of RM191,440, we can calculate the time it would take for a degree holder to recoup this amount through their job. 

    Assuming the monthly salary of a degree holder is RM5,760 per month.

    191,440÷5,760=~ 33 months

    33 months ÷12=~ 3 years

    While the estimated recoup time is approximately 3 years, the calculations above only take into account the cost of the degree itself, without taking into account other fees, repaying PTPTN loans, or even inflation. 

     

    Making it worth: 

    In Malaysia, degree inflation is tied to many socio-economic challenges. Addressing this multifactorial issue requires a collective effort from various parties and stakeholders. 

    Since 2011, the Malaysian government has been running the Returning Expert Program (REP) to encourage Malaysian talent to return home. Although around 11,068 overseas Malaysian professionals have applied (Gimino, 2024), financial incentives, such as tax exemptions and housing support, may not be sufficient.

    The European Union (EU) offers a compelling model for addressing this challenge. Rather than relying solely on individual incentives, the EU has focused on systemic improvements, particularly in building the research and development sector. Initiatives like Horizon Europe create high-quality jobs and attract skilled workers by fostering an ecosystem of innovation and opportunity (Directorate-General for Research and Innovation (European Commission), 2024).

    The Malaysian government could learn from the EU by attracting foreign investment in high-tech sectors and fostering academia-industry collaboration. These measures can raise wages for skilled jobs (Bertelsmann Stiftung, 2024), making career development in Malaysia more appealing for both returning professionals and emerging youth. This approach could help safeguard the value of degrees and stem brain drain.

    Educational institutions also play a pivotal role in addressing degree inflation as the degree providers. They navigate a delicate balance, fulfilling academic requirements while meeting industry demands. Ultimately, educational institutions should be bold to defy standards when there is an opportunity for innovation in the field. 

     

    Outlook for our youth: 

    Higher education’s true worth is in building lifelong learning skills. While degrees provide valuable technical skills and knowledge, there are also other paths to success. Alternatives like vocational training and entrepreneurship offer unique benefits and shouldn’t be overlooked. It’s essential for individuals to carefully consider the pros and cons of each option, choosing what best suits their goals, circumstances, and learning preferences. Above all, maintain an open mind, as every experience offers an opportunity to grow!

     


    Written by: Neoh Yi Theng

    About the Author

    Yi Theng is currently studying abroad at The University of Hong Kong (HKU), majoring in science. Her interests span a wide range of topics, especially those impacting our daily lives, be they financial, social or environmental issues. She is passionate about learning and developing multidisciplinary insights and solutions. Yi Theng hopes to leverage the power of data to bring about social good in the future!

    Sources:

    1. Abdul Hamid, H. (2022). Malaysian Higher Education  and Economic Growth:  A Causality Analysis. Khazanah Research Institute. https://www.krinstitute.org/assets/contentMS/img/template/editor/HEI-WP_FINAL.pdf
    2. Araki, S., & Kariya, T. (2022). Credential inflation and decredentialization: Re-examining the mechanism of the devaluation of degrees. European Sociological Review, 38(6), 904–919. https://doi.org/10.1093/esr/jcac004
    3. Bertelsmann Stiftung. (2024). BTI 2024 Malaysia Country Report. BTI. https://bti-project.org/en/reports/country-report/MYS
    4. CIPD. (2022, August 3). Too many employers still using generic degree qualifications to screen candidates, reducing employment opportunities and contributing to ongoing skills gaps [Press release]. https://www.cipd.org/en/about/press-releases/030822-degree-qualifications-skill-gaps/
    5. Delaney, J., McGuinness, S., & Redmond, P. (2019, November 4). Skills mismatch in low and middle income countries: key synthesis findings and policy recommendations. The University of Bath’s Research Portal. https://researchportal.bath.ac.uk/en/publications/skills-mismatch-in-low-and-middle-income-countries-key-synthesis-
    6. Directorate-General for Research and Innovation (European Commission). (2024). Horizon Europe strategic plan 2025-2027. Publications Office of European Union. https://doi.org/10.2777/092911
    7. Dorall, A. (2022, July 20). Bachelor degree graduates end up working fast food jobs, Rakyat laments overqualification. TRP. https://www.therakyatpost.com/fun/2022/07/20/bachelor-degree-graduates-end-up-working-fast-food-jobs-rakyat-laments-overqualification/
    8. Gimino, G. (2024, July 12). Over 11,000 Malaysian professionals keen to return home, says HR Ministry. The Star. https://www.thestar.com.my/news/nation/2024/07/12/over-11000-malaysian-professionals-keen-to-return-home-says-hr-ministry
    9. Idris, R., Govindasamy, P., & Nachiappan, S. (2023). Challenge and obstacles of STEM education in Malaysia. International Journal of Academic Research in Business and Social Sciences, 13(4). https://doi.org/10.6007/ijarbss/v13-i4/16676
    10. Kana, G. (2024, August 14). Lack of high-skilled jobs a critical issue. The Star. https://www.thestar.com.my/business/business-news/2024/08/15/lack-of-high-skilled-jobs-a-critical-issue#:~:text=Of%20the%2031%2C860%20new%20jobs,%25%20and%2013.3%25%2C%20respectively.
    11. Leng, T. A. (2024, March 22). Malaysia’s brain drain conundrum. The Business Times. https://www.businesstimes.com.sg/international/asean/malaysia-s-brain-drain-conundrum
    12. MIDA: M’sian firms vulnerable to global technological shift due to lack of R&D. (2021, December 4). BERNAMA. https://www.bernama.com/en/news.php?id=1951572
    13. Mutalib, H. (2022, July 31). 72.1% lepasan SPM tidak sambung belajar. Utusan Malaysia. https://www.utusan.com.my/nasional/2022/07/72-1-lepasan-spm-tidak-sambung-belajar/#google_vignette
    14. Othman, I. W., Mokhtar, S., Ahmad, M. K. L., Diming, R., Bakar, K. A., & Yusoff, M. S. (2023). DECISION DILEMMAS: HIGHER EDUCATION PURSUITS OR WORKFORCE ENTRY AMONG SPM GRADUATES. International Journal of Entrepreneurship and Management Practices, 6(23), 190–223. https://doi.org/10.35631/ijemp.623014
    15. Predovic, D., L. Dennis, J., & European Association for International Education. (2020, September 17). Education, aspiration, action: solving the job skills mismatch. https://www.eaie.org/resource/solving-job-skills-mismatch.html
    16. Renushara. (2024, May 3). M’sian First-Class Graduate Works as a Restaurant Helper After Failing to Secure Job in Her Field – WORLD OF BUZZ. WORLD OF BUZZ. https://worldofbuzz.com/msian-first-class-graduate-works-as-a-restaurant-helper-after-failing-to-secure-job-in-her-field/
    17. Statista. (2023a, November 17). Average monthly salary of employees with a degree in Malaysia 2013-2022. https://www.statista.com/statistics/720281/malaysia-average-monthly-salary-with-a-degree/#:~:text=In%202022%2C%20the%20average%20monthly,around%205.76%20thousand%20Malaysian%20ringgit.
    18. Statista. (2023b, November 17). Average monthly salary of employees with SPM education in Malaysia 2013-2022. https://www.statista.com/statistics/720253/malaysia-average-monthly-salary-with-11th-grade-education/
    19. The Future of Talent in Malaysia 2035. (2019). In CIPD. https://www.cipd.org/en/knowledge/reports/future-talent-malaysia-2035/
    20. The Star Online. (2023, March 8). National 5.5% brain drain higher than global average, says Sivakumar. The Star. https://www.thestar.com.my/news/nation/2023/03/08/national-55-brain-drain-higher-than-global-average-says-sivakumar
    21. Tomlinson, M., & Watermeyer, R. (2020). When masses meet markets: credentialism and commodification in twenty-first century Higher Education. Discourse Studies in the Cultural Politics of Education, 43(2), 173–187. https://doi.org/10.1080/01596306.2020.1814996
  • From Data to Decisions: The Power of NLP in FinTech

    From Data to Decisions: The Power of NLP in FinTech

    As human beings, we find understanding our native and even foreign languages relatively straightforward – well, after we have learned them. But why is that? The key lies in the learning process we go through. We start by learning our mother tongues as babies, subsequently picking up our first foreign language as children and so on. Hence, this continuous learning process trains our brains, making it easier to acquire new languages with each one we learn. This in theory is not much different from how a machine learns languages too. Natural Language Processing (NLP) adopts this idea to understand and generate languages, bridging the gap between human language and computational understanding. From ChatGPT to Microsoft Copilot, NLP has become a pivotal topic among numerous industries, including FinTech. 

     

    What is Natural Language Processing?

    NLP is a subfield of Computer Science and Artificial Intelligence (AI) that uses machine learning to enable computers to understand and communicate with human language. It is composed of two primary components: Natural Language Understanding (NLU) and Natural Language Generation (NLG). 

    NLU focuses on comprehending and interpreting human language, allowing machines to process text, understand context and extract meaningful information. On the other hand, NLG focuses on the generation of a message or text by a machine based on human inputs. Together, these components form the core of NLP, enabling seamless applications such as language translation, sentiment analysis and text summarisation. 

     

    How does it Work?

    Let’s look at this piece of text:

    “In Malaysia, FinTech is revolutionising the banking sector with intelligent technologies. By integrating AI, it enhances transaction security and offers predictive financial advice, making financial services more accessible and secure. This innovation simplifies finance for individuals and businesses alike, empowering them to navigate the modern financial landscape with greater confidence and convenience.”

    This paragraph explains how FinTech is using advanced technology to transform the banking sector in Malaysia. When machines are able to read and understand text, it is able to automate tasks such as document processing, which reduces human effort and minimises errors. It also helps in extracting relevant information, which improves accuracy in identity verification. Sounds cool right? But to get there, we have to first teach our computer the fundamentals of written language and build up from there.

     

    Step 1: Sentence Segmentation

    Sentence segmentation is the first step in pre-processing text for NLP. It breaks the paragraph into separate sentences. 

    Like so, sentence segmentation then produces the following result from the text above:

    1. In Malaysia, FinTech is revolutionising the banking sector with intelligent technologies. 
    2. By integrating AI, it enhances transaction security and offers predictive financial advice, making financial services more accessible and secure. 
    3. This innovation simplifies finance for individuals and businesses alike, empowering them to navigate the modern financial landscape with greater confidence and convenience.

     

    We can assume that each sentence in English is a separate thought or idea. It will be a lot easier for machines to understand a single sentence rather than an entire paragraph because sentences have clear markers that indicate when a sentence starts or ends. Additionally, machines can focus on specific patterns within a sentence, avoiding data sparsity issues that arise when processing larger blocks of text, like paragraphs. In practical aspects, segmentation models can be as simple as splitting sentences whenever there is a punctuation mark. However, most modern models use more complex models that work even when documents are not formatted properly. 

     

    Step 2: Tokenization

    Using word tokenizers, we can now break our sentences into separate words or tokens. This is called tokenization. Through this technique, machines can use algorithms to easily identify patterns and structures within texts, enabling more efficient analysis and processing of language data. 

    With the first sentence from our paragraph:

    “In Malaysia, FinTech is revolutionising the banking sector with intelligent technologies.”

    This is the result after tokenization: 

    “In”, “Malaysia”, “,” , “FinTech”, “is”, “revolutionising”, “the”, “banking”, “sector”, “with”,  “intelligent”,  “technologies”, “.”

     

    Step 3: Stop Word Removal

    Next, we need to consider the ‘important’ words in this paragraph. English has a lot of filler words such as “and”, “a” and “the”, which need to be filtered out to give more focus to the crucial information. These are called stop words, and they need to be removed before performing any statistical analysis. However, the removal of stop words is highly dependent on the task we are performing and the goal we want to achieve. For instance, if we want to perform sentiment analysis, then we might not want to remove the stop words.

    From the first line of the text, this would be the result after the removal of  stop words

    “In Malaysia, FinTech revolutionising banking sector intelligent technologies.”

     

    Step 4: Lemmatization

    Lemmatization is a text pre-processing technique used in NLP models to break a word down to its root or base form, known as “lemma”, to identify similarities. For example, the words “intelligent”, “intelligence” and “intelligently” are all derived from the word “intelligent”. Thus, when working with a computer, it is crucial  to know the base form of each word, so that the computer does not distinguish  these words as three totally different words. 

     

    Step 5: Dependency Parsing

    After that, we need to find out how all the words in a sentence relate to each other. Thus, the use of dependency parsing. Dependency parsing helps us understand the grammatical structure by identifying the relationship between words. It involves determining which words are the main words (heads) and which words depend on those main words (dependents). From the third sentence in the paragraph, dependency parsing identifies “enhances” as the main verb, “it” as the subject and “By integrating AI” as the prepositional phrase. As a result, the process creates a tree-like structure which shows how each word in the sentence is connected to each other, making it easier to analyse the sentence’s meaning. 

     

    Step 6: Named Entity Recognition (NER)

    Now that we have tackled the tough parts, we can finally move past grammar and actually extract information. NER, also known as entity chunking or entity extraction, is a component of NLP that identifies predefined categories of objects in a body of text.

    Here are some of the categories NER are able to recognise:

    • People’s names
    • Company names
    • Geographical locations
    • Product names
    • Monetary values 

    The goal of NER is to detect and label these nouns with the real-world concepts that they represent. From the sentence: “In Malaysia, FinTech is revolutionising the banking sector with intelligent technologies.”, NER will be able to detect and tag “Malaysia” as a geographic entity.

    While this is a general overview of how NLP, different techniques can be applied within NLP to handle more complex tasks for various purposes. Advanced technologies, such as transformers and neural networks, are examples of methods that enhance the capabilities of NLP, allowing it to achieve even more sophisticated outcomes.

     

    Applications in FinTech?

    Since its surge in prominence, NLP has been adopted in various industries with diverse applications. Among the popular fields are FinTech, manufacturing and marketing. In this publication, we will explore how NLP is employed specifically in FinTech.

    Business is without a doubt risky. In fact, there’s a well-known saying: “no risk, no reward”. A prime example would be the investment and financial firms utilising NER and NLP systems to extract key information from customer documents. This data is essential for conducting risk analysis, where customer profiles are evaluated to assess loan risks. Using document categorization and an established risk assessment criteria, NLP models analyse basic application documents such as account history, credit history, employment and education. Therefore, this streamlined approach speeds up the analysis process and provides a broader  understanding of each customer’s circumstance. 

    Furthermore, in today’s competitive landscape where customer satisfaction is paramount, many companies use NLP to interpret their customer’s emotions towards their products using sentiment analysis. Through tokenization, NLP breaks down unstructured data including social media posts, financial reports or news articles into tokens. These tokens, generated from text and document content, are trained using algorithms linked with a combination of different emotions to understand a customer’s needs. For example, the investment bank, Morgan Stanley, uses NLP tools to detect and collect online criticisms and allegations in real time, providing their investors with key information on public perception and their potential impact on their company stock prices.   

    Not only that, NLP has been an indispensable tool towards fighting against fraud. A notable example would be when JP Morgan utilised machine learning algorithms trained on historical data to identify patterns that are indicative of fraud, such as unusual spending patterns or large transactions from unfamiliar locations. These algorithms allowed JP Morgan to quickly identify and respond to potential fraud. Such approaches allow organisations to adapt to cybersecurity threats and maintain robust security measures. 

    Overall, NLP plays a significant role in FinTech by improving customer interactions, managing risk and enhancing data analysis. As NLP evolves with AI advancements, it continues to drive innovation in financial services, promising a future where technology elevates efficiency and meets evolving industry demands.

     


    Written by: Swetha Jayaprasad Rao

    About Swetha

    Swetha is currently an A-Levels student at Kolej Tuanku Ja’afar. She is an aspiring Computer Science student, with a keen interest in data science, programming and machine learning.

    About MYFinT

    Malaysian Youth FinTech Association (MYFinT) is a non-profit youth organisation dedicated to to empower, motivate and inspire the young generation in all industries to gain exposure to the latest trends and development in the FinTech industry.

    Sources:

    1. “Analysis of Natural Language Processing in the FinTech Models of Mid-21st Century.” Https://Www.researchgate.net/Profile/Pascal-Muam-Mah/Publication/363255877_Analysis_of_Natural_Language_Processing_in_the_FinTech_Models_of_Mid-21st_Century/Links/63137249acd814437ffe4434/Analysis-of-Natural-Language-Processing-In-The-FinTech-Models-of-Mid-21st-Century.pdf.
    2. “How AI Can Bolster Sustainable Investing.” Morgan Stanley, www.morganstanley.com/ideas/ai-sustainable-investing-use-potential#:~:text=NLP%20tools%20can%20be%20used,impact%20on%20company%20stock%20prices.
    3. Khanna, Chetna. “Text Pre-Processing: Stop Words Removal Using Different Libraries.” Medium, 10 Feb. 2021, towardsdatascience.com/text-pre-processing-stop-words-removal-using-different-libraries-f20bac19929a.
    4. “NLP Tutorial – Javatpoint.” Www.javatpoint.com, www.javatpoint.com/nlp.
    5. Riti Dass. “The Essential Guide to How NLP Works.” Medium, Medium, 24 Sept. 2018, medium.com/@ritidass29/the-essential-guide-to-how-nlp-works-4d3bb23faf76.
    6. UK, ACODS. “How JP Morgan Uses Data Science? – ACODS UK – Medium.” Medium, Medium, 18 Jan. 2023, medium.com/@Acods/how-jp-morgan-uses-data-science-2066871b2de8#:~:text=JPMorgan. Accessed 16 July 2024.
    7. “What Is Natural Language Processing (NLP) & How Does It Work?” Levity.ai, levity.ai/blog/how-natural-language-processing-works.
    8. “What Is Tokenization.” Datacamp, www.datacamp.com/blog/what-is-tokenization#.
  • Navigating the Financial Maze: Insights from A Maverick Fund Manager

    Navigating the Financial Maze: Insights from A Maverick Fund Manager

    Introduction

    Venture capital, private equity, investment banking, fund management are some examples of jargon that is commonly used among students pursuing business courses but their actual operations and inner workings may be rather obscure. As such, FLY: Malaysia seeks to shed some light on these with an exclusive interview with Mr Ng Zhu Hann and his team from Tradeview Capital, a boutique fund management company licensed by the Securities Commission (SC) Malaysia. Mr Hann assumes many roles; apart from being the founder and Chief Operating Officer (CEO) of Tradeview, he also writes for various local news agencies and authored the investing bestseller “Once Upon a Time in Bursa: The ­MONEY Equation”. Interestingly, he used to run a law firm and obtained his degree in law studies from the London School of Economics (LSE). “What made me so interested in the capital and financial market was that I was in the heart of the European financial hub amid the 2008/09 Global Financial Crisis. It propelled me to delve deeper into understanding the causes and dynamics. I found that maybe I should study finance and economics rather than law, but it was too late to regret,” said Mr Hann.

    The eventual inception of Tradeview Capital was a blend of struggle and hardships. “I tried my very best to switch my career path to get into financial institutions and research houses, but I was being rejected because I don’t have a finance-related degree. They were basically worried that I could not count.” Hann added. Elaborating further on the capital market licensing in the country, he pointed out that there are three-tier licences, with venture capital being the lowest tier, followed by private equity, and fund management. Venture capital typically invests in start-ups, whilst private equity targets established companies that are near their listing stage (Hopper, 2023). Both licences only allow 20% of the clients’ funds to be invested in public equities. Tradeview Capital is essentially a fund management company, which means it could further deploy its funds to various regulated capital markets products such as commodities and bonds.

    With the title “Boutique Fund Management Company”, Tradeview distinguishes itself from conventional full-fledged funds by only onboarding sophisticated investors as specified by the SC.

    According to the latest guidelines, eligible sophisticated investors include (SC Malaysia, 2024):

    1. accredited investors such as licensed financial institutions, 
    2. high net-worth entities that have assets exceeding RM 10 million under their management,
    3. high net-worth individuals with net personal assets exceeding RM 3 million, relevant educational backgrounds, membership in organisations such as Chartered Financial Analyst (CFA) and five consecutive years of working experience in a capital market intermediary.

     

    Deciphering the fund management industry

    A common question that students frequently ask is whether the theoretical models learnt in lectures apply to real-life scenarios.  “The short answer is yes, those financial valuation methods, including ‘discounted cash flows’, ‘price to earnings’,  jointly form the basis of the quantitative aspect of analysing a security,” answered Mr Hann. “Of course, one must further apply the knowledge that they learnt in university to decipher evolving global and local conditions which may or may not have happened before,” he added. To excel in the industry, one must also possess a qualitative skill set and a breadth of knowledge in analysing different industries, business models, relevant markets and more!. “A good fund manager must also have the ability to critically read people. You need to assess the management of the company and cross-check it with the numbers and prospects obtained from their financial reports.”

    When being asked about the day-to-day operations of a fund management company, Mr. Hann answered that there are two parts: investing and finding clients. “If you don’t have clients, you don’t have money, then you have nothing to invest, and the firm ceases to exist,” he said. As such, ample branding, marketing, and relationship-building is needed to find clients whose values align with the investment philosophy of a fund management firm, and gain their trust. “On the investing part, we do a lot of research, covering companies and macro news to come up with new investment ideas to generate alpha.” The term alpha is a finance jargon which refers  to the excess returns earned by an actively managed fund. In other words, astute fund managers distinguish themselves from passive investment strategies that track the performance of the broad market by generating alpha to offer superior investment returns to their clients to compensate for extra fund handling charges. “The focuses of our portfolio managers are segregated by sectors and each has their own niches to explore based on global and local trends, as well as any big news movements like the previously announced New Industrial Master Plan (NIMP) 2020 and the National Energy Transition Roadmap (NETR). They will need to think about potential sectors, and eventually, companies that are poised to benefit them. This must also be accompanied by a visit to the company, plant, or management to see how things actually turn out.”

    Answering the question about the ideal candidate for possible job openings, Tradeview looks for individuals with a passion for capital markets, those who possess the ongoing passion and capacity to learn and not be complacent. The exact discipline or  degree is usually a secondary consideration, as expertise in different fields like engineering or science may allow individuals to  interpret the performance and technologies of technical sectors or companies like semiconductors, as compared to business majors. 

    It is also quite interesting to learn that the bulk of the time spent by the CEO of a fund management firm is on client acquisition. When posed with the question of how Tradeview balances yielding a good return for its clients ,while maintaining a long-term investing approach and keeping clients who expect to see short-term gains, Mr. Hann attributed the boutique firm’s success to the composition of clients. Mr. Hann admitted that it is not easy to run a long-term fund if clients don’t share the same long-term investment horizon as Tradeview. Therefore, it is important that Mr. Hann explain the vision of the firm’s flagship fund: Tradeview Sustainability Fund, at the outset of its client’s investment journey with Tradeview Capital.

     

    Investment Ideologies and advice to young investors

    “Contrary to popular belief, sometimes the best decision is not to invest. Young investors like you all may think that with all the knowledge you have, you will know what stock to buy, and you will get rich. However, in the fund management industry, I prioritise risk management. That is, one must learn how to not lose money before learning how to earn money. If you make an analysis and come to a point that you decide not to buy a stock of a company, this may be the best decision you have ever made for yourself and your clients,” adds Mr. Hann. The investment decision of Tradeview adheres to three principles, that is to invest in securities that have a reasonable margin of safety, grounded through detailed fundamental analysis, and commitment to a long-term horizon. “Time is our best friend. We use a long enough time horizon to normalise fluctuations, allowing the mean reversion of undervalued securities and the company to have meaningful growth,” explained Mr. Hann. “One thing I asked my team is: Do you want to become a high-risk and high-returns fund or be a fund that everyone’s gonna remember and park their money in due to its well-established reputation in being safe in preserving wealth? Luckily, everyone agrees to be the latter.”

    Expounding on his stance towards the booming cryptocurrency industry, Mr Hann commented: “I prefer to call them crypto-speculators instead of investors, and I know many young people have made a fortune out of it. But I believe there must eventually be a use case for crypto if the market is to continue to exist or grow larger. If there is still no use case and the market continues to boom, one thing I can say is that crypto is based on the belief of shunning the fiat currency system, and is used to evade taxes as well as syphon money.”

    In advising young investors, Mr. Hann first acknowledges the impatience of young investors,eager to see results quickly, which may be propelled by peer pressure. “It is totally fine, as I also made the same mistakes when I started investing. The most important thing is that the young investor, at some point in time, must realise what strategies suit them best and they must have the discipline to correct their mistakes and change their mindset accordingly,” Mr. Hann added. Young investors should do their own homework diligently, instead of relying on rumours when executing investment decisions.

     

    Prospects about the Malaysian economy

    In terms of the projections of the Malaysian economy, Mr. Hann believes that Malaysia’s unique proposition in the semiconductor, palm oil sector, utility sector, food security and agriculture sector will be the main drivers of Malaysia’s economy in the foreseeable future. “Advancements in technologies will always be the forerunner of economic growth and the semiconductor sector will be on an upward trajectory due to increased demand, and the auxiliary sectors that provide services to the semiconductor value chain are the ones that Malaysia could use to differentiate itself from its neighbouring countries,” says Mr Hann. Seeking stability of the supply chains in the context of intensified geopolitical rivalry, foreign players have reinstated their renewed focus on the leading and pivotal status of Malaysia as a powerhouse in the global semiconductor value chain, a role the nation has been assuming since 1972.

    Malaysia is fast becoming an attractive investment destination for data centres, riding on the waves of cloud computing and artificial intelligence, with favourable sites in Selangor, Johor, Penang, Kedah, and Sarawak (Malaysian Investment Development Authority, 2023). Putting the local data centre industry into perspective, besides the relative abundance of land and resources, what appeals to foreign investors is the robust and superior infrastructure, continuous support from local utility players to upgrade the existing infrastructure, as well as the nation’s commitments to green energy and environmental, social, and governance (ESG) goals (The Edge Malaysia, 2024). “You may also look out for the utility sector, renewable energy included as well, as you need water and stable electricity connection to run data centres and other related digital infrastructure,” adds Mr. Hann.

    Feeling optimistic about the palm oil sector, Mr. Hann commented: “I also believe that the local palm oil sector will continue to thrive as the local palm tree is one of the best crops with excellent yield per acre, making it superior compared to other oils like sunflower oil or olive oil. Eventually, the world will come to realise that succumbing to European or American lobbyists on promoting other edible oil may not be the viable option way forward for humanity”. Malaysia has introduced the Malaysian Sustainable Palm Oil (MSPO) certification, acknowledging the ESG trend in providing a credible measurement of sustainable and responsible practices. As of Jan 31st 2023, more than 97% of palm oil estates and 98% of palm oil mills have received the certification (Free Malaysia Today, 2024). Officials from Malaysia and Indonesia are also actively voicing against the European discrimination policies and trying to rectify the image of palm oil.

    “Of course you will see the conventional sectors, such as construction and banking, to continue to grow, but they may not be the main engines of economic growth,” adds Mr. Hann.

     

    Note about sustainability and ESG in Tradeview’s operations

    Tradeview itself has a sustainability fund that aims to offer returns over the long term by investing in equities that place an emphasis on ESG practices and parameters. “Our uniqueness is that Tradeview is the only boutique fund that received the qualification of sustainable and responsible investing from the SC, and our ESG models allow us to screen and identify small-to-mid cap companies that are not within the radar of our larger-scale peers,” answers Mr. Hann. According to the fund’s prospectus, the fund manager would adopt both negative and positive screening to rule out and select companies. Companies are then internally rated by reference to the global standards, covering aspects such as environment regulations, compliances and operational exposures, energy and water consumption, employee health and safety, ESG policy and disclosure. The manager will also engage with the company’s management via private discussions, site visits, or proxy voting to drive desired outcomes. “The filing to be qualified as sustainable is tedious as it is hard to convince the regulators that our model works as there is no explicit consensus. We believe the trend is here to stay as investors nowadays and the future generations will be more conscious about ESG components when it comes to businesses, and hence we are in the forefront,” says Mr. Hann.

     

    Wrap-up

    FLY has delved into the topics of fund management, investment ideologies, and prospects for the Malaysian economy with Mr. Ng Zhu Hann. As Tradeview Capital continues to prioritise sustainability and ESG in its operations, it stands poised to make meaningful contributions to responsible investing and long-term value creation in the Malaysian market and beyond.

     

    References

    The Edge Malaysia. (2024, March 25). Data Centres: All eyes on Asia’s future ‘Digital Tiger.’ https://theedgemalaysia.com/node/705615

    Free Malaysia Today. (2024, April 24). No evidence justifying criticism of Malaysian palm oil, says Johari. https://www.freemalaysiatoday.com/category/nation/2024/04/24/no-evidence-justifying-criticism-of-malaysian-palm-oil-says-johari/

    Hopper, G. (2023, March 27). Private equity vs. venture capital: Which is right for your startup? Forbes. https://www.forbes.com/sites/forbesfinancecouncil/2023/03/21/private-equity-vs-venture-capital-which-is-right-for-your-startup/?sh=6fe4be9552e5

    Malaysian Investment Development Authority. (2023, June 9). Rise of data centres in Malaysia. https://www.mida.gov.my/mida-news/rise-of-data-centres-in-malaysia/

    Securities Commission Malaysia. (2024). Guidelines on Categories of Sophisticated Investors (SC-GL/1-2024). https://www.sc.com.my/api/documentms/download.ashx?id=0fa41de0-425c-4b60-a070-5f596fd2e0b4


    Researcher(s) / Journalist(s): Yeoh Jia Xin, Tan Czyn Jien, Amandev Singh, Malcolm Wong

    Reviewer(s): Yeoh Jia Xin, Maryam Nazir Chaudhary

    Editor(s): Waywen Loh

    Designer(s): Kang Yi Yao

  • From Grub to Gold: Black Soldier Fly’s Circular Solutions Against Food Waste

    From Grub to Gold: Black Soldier Fly’s Circular Solutions Against Food Waste

    Introduction

    Let’s take a moment to think about our last meal, shall we? How was it? Did you savour every bite? Or did most of it end up in the trash? It’s time to shift our focus from just putting food on the table to what happens afterwards.

    Here’s a shocking statistic for you, on average, Malaysians generate about 1.17kg of food waste per person each day (The Star, 2024). And guess what? It’s the largest share of domestic waste in the country! 

    Most of the time, our food waste ends up in landfills, which pollute the environment and destroy habitats.  But it doesn’t stop there! Methane, which is far more deadly than carbon dioxide (CO2), is emitted during the decomposition of food waste. Methane traps more heat in the atmosphere per molecule, making it 80 times more harmful than CO2 for 20 years after release (United Nations Environment Programme, 2022). Food waste accounts for approximately 8% of global greenhouse gas emissions (Move For Hunger, n.d.). One of the United Nation’s (UN) Sustainable Development Goals (SDGs) is to halve global food waste and reduce food losses in production and supply by 2030. 

    Curious to know what could be the solution to this global food waste issue? We at FLY were thrilled to find a local Malaysian startup determined to instate a circular economy. Meet the multi-award-winning startup – Entomal Biotech!

     

    An indigenous innovation

    On January 13th 2024, we met Ms Yanni Xinyan, the Co-Founder and Chief Commercial Officer of Entomal Biotech at Taylor’s University. Although the other two members of the founding trio, Mr Vic Pui and Mr Thomas Pui were unable to join us due to other commitments, they respectively serve as the Chief Technical Officer and Chief Operating Officer. Their collective expertise in breeding and rearing technologies for black soldier flies guarantees the provision of high-quality and scalable production methods.

    Ms Yanni reminisced that the spark that started her sustainability journey was when she was the Executive Board Member of AIESEC UK. Her time at the youth-led not-for-profit organisation instilled a strong passion for sustainable development. Ms Yanni quickly realised that she wanted a career not only focused on climbing the ladder but through which she could contribute to society and make a positive impact. 

    By combining their expertise in engineering, economics, and marketing, the founders Vic, Thomas and Yanni, established Entomal Biotech! The company harnesses the immense probabilities of Black Soldier Flies (BSF) in tackling food waste whilst contributing to the circular economy.

    Entomal Biotech’s list of achievements and awards trails long and far. Their very first win came at the Selangor Accelerator Programme 2022, where they were able to cinch the title of Grand Winner. Since then, they have continuously shone in various competitions. Entomal Biotech was named as a Global Top 50 Deep Tech Startup in Slingshot 2023 and listed as one of the 24 To Watch in 2024 by The Edge Malaysia (2023). They were also the only Malaysian startup among other grand winners at the Petronas Future Tech 3.0, the grant prize winner of the Khazanah Impact Innovation Challenge, and even the grand winner of Tiger’s Lair Pitching Challenge held by the Malaysian Business Angel Network. Miss Yanni said taking part in programmes helped them grow professionally as leaders of the company and gather resources crucial for the growth of the startup. 

    Moreover, they also managed to secure a whopping RM1.75 million in equity crowdfunding through MyStartr. This significant fundraising achievement through crowdfunding demonstrates Entomal’s innovative solutions, and further indicates a promising future as they continue to develop and commercialise their offerings.

     

    Black Soldier Flies

    Flies (house flies) are commonly recognised to be a dirty species, but this is not the case with Black Soldier Flies (BSF). BSF, also known as  Hermetia illucens, are naturally capable of breaking down any type of organic waste and digesting bacteria in food, with an efficiency that is capable of reducing food waste volume by 90% in 1 day and preventing the release of carbon emission by 96% compared to landfills. It has been certified as a friendly insect i.e. it’s not a destructive pest and does not spread disease as compared to household flies. As such, it clearly promotes circularity in our food system.

     

    Life Cycle & Process

    The life cycle of the BSF at Entomal begins with eggs hatching into neonate larvae within 3-4 days. These larvae are then nourished with a combination of agricultural and food waste during the feeding phase, promoting their rapid growth into larger larvae over 7-14 days through bioconversion. 

    Following this, a commercialisation process ensues, involving the separation of larvae from the frass. While some larvae are utilised in downstream products like animal feed and pharmaceuticals, others are kept for mating purposes, contributing to the cultivation of subsequent generations. 

    Pre-pupae BSF are then transferred to a drier area for 7 to 10 days before maturing into adult flies. These adult flies, within 5-8 days, engage in mating and egg-laying activities, perpetuating the cycle. This holistic approach not only maximises resource utilisation but also ensures the sustainability of the BSF population for continued bioconversion and product development.

    “Biosecurity of our operations is secured with multi-layer protection. The flies are contained within their designated area and are provided with an abundance of food to grow. In the case where any of these flies escape, they cause no harm to humans and will struggle to populate without sufficient food nearby.” said Ms Yanni. 

     

    Market Acceptance

    The bioconversion process of food waste will end up with 2 products – high protein insects and their excretion known as frass. The mature larvae are widely known to be a great animal feed for poultry, swine, and aquaculture industries. The frass, on the other hand, after going through the digestive tract of the larvae, consists of a high level of organic matter, which makes them a great organic fertiliser in the agriculture industry. Scaling up the operations at Entomal will allow Malaysia to turn our food waste into resources and achieve a circular economy. It kills 3 birds with 1 stone, Ms Yanni claimed, treating food waste sustainably, reducing carbon emissions significantly, and enhancing food security for all. 

    Ms Yanni also said that in Japan, insect protein is starting to get attention as a future protein source for human consumption. Insect products can be found on shop racks as a high protein snack, unlike here in Malaysia where admittedly the stigma towards insects for human consumption is still a barrier. 

    Despite the challenges, it doesn’t stop the company from researching and curating the potential of these flies. The innovative partnership between Entomal and Taylor’s University proves just that. Dr Chong Li Choo, Director of Taylor’s Impact Lab Food Security & Nutrition, mentioned that students are taught to separate waste into distinct categories at the university’s Culinary Institute. 

    With Entomal Biotech’s bioconversion process embedded as part of the student’s culinary studies, sustainability is put to its best practice. Several insect-derived snacks are developed, including crispy bite-sized chips infused with authentic nasi lemak flavour and aromatic anchovies. Students at Taylor’s also created an innovative twist of the Chinese meat jerky by the name “Bug-Gwa” instead of “Bak-Gua”, utilising BSF as a protein alternative. 

     

    Extending their wings

    Through Entomal’s innovation, the implementation of the bioconversion process is accomplished through two systems, the Decentralised Entomal Mobile Bio-Conversion System (EMBC) and the Centralised Biowaste Conversion Plant.

    One of the Entomal Mobile Bio-Conversion System is located at Taylor’s University itself, where FLY visited. The unit is introduced with segregated food waste on a scheduled basis. The waste then goes through a pre-treatment process before being fed to the larvae. In just 7 days, these unwanted leftovers get converted into valuable resources. 

    Futuristic-looking, this mobile system is convenient for communities, hotels, schools and corporate companies and easily placed near the waste generation premises. 

    The EMBC is currently in operation at Shah Alam Recycling Centre, Sunway Lagoon, Taylor’s University, with upcoming units in Le Meridien PJ Hotel, Courtyard by Marriot, and YWCA Kuala Lumpur. They are actively seeking collaboration with companies that have a strong focus on circular economy and aligning with Sustainable Development Goals. In return, the data collected from the EMBC unit will also contribute significantly to the clients’ carbon reporting and open up access to the nation’s green incentives. 

    Ms Yanni added that from her last visit to Taiwan, she witnessed firsthand how a decade worth of effort has developed the nation into practising waste segregation practices like a complete norm. This is a true showcase that we can also achieve the same levels of sustainable practice in Malaysia, and all it takes is to start doing it now. 

    On top of that, Entomal’s Centralised Biowaste Conversion Plant is a model designed for larger waste generators such as shopping malls, F&B factories, city councils, as well as plantations. This unique solution will be a great alternative to landfills, giving businesses a more sustainable option for waste treatment. Similar to EMBC, clients also enjoy a monthly carbon report to help align with ESG compliance and reporting. In the meantime, Entomal is working towards obtaining the necessary certifications to list the solution as a carbon credit offering, to further finance for the scale-up of its operations.  


    By further leveraging the technical expertise, Entomal’s consultancy services accounted for around 85% to 90% of the business’s profits (Khaw, 2023). “The key feature that makes us the leading BSF force lies within our capability to upscale and become a solution and system provider,” Ms Yanni elaborated. “We step in as technology consultants to assist other players in establishing automated plants.”

    Extending their meaningful impact across Asia, Entomal has partnered with companies from Thailand, Singapore, South Korea, Indonesia and Taiwan. The startup works closely with the South Korean Nutri Industry to treat 20 tonnes of food waste every day with a fully automated system. The company is also working with FGV to turn palm oil waste into sustainable animal feed in order to serve the food security issues in Malaysia. 

    Staying at the forefront of sustainability, Entomal Biotech has joined forces with local higher education institutions to expand its product outreach and development. This includes  Universiti Malaysia Terengganu (UMT)’s ongoing farm testing on shrimp aquafeed, Universiti Putra Malaysia (UPM)’s studies on chicken feed, Universiti Teknologi Mara (UITM)’s research into insect-derived skin healing creams and, lastly, with International Islamic University Malaysia (IIUM) on the exploration of shariah compliance of insect products. 

     

    What are some experiences that Entomal can share on your role in the BSF technology landscape?

    Miss Yanni replied that BSF is not the newest option in line for food waste treatment. The challenge in this field has always been about technology that allows for scalability. Their continuous effort of innovation alongside a proven track record internationally lays a solid foundation for the growth of Entomal’s solution.  In the meantime, educating the public on sustainable waste practices in hopes of pushing for policy changes in Malaysia will play a big role in the solution’s adoption nationwide.  

     

    Wrap up

    Ending the session of this wonderful startup story, we were reminded to be the change we want to see in this world. The story of this small, local startup going on to raise millions, win international competitions and collaborate with institutions worldwide is nothing short of awe-inspiring. 

    Ms Yanni’s journey from a passionate student to the founder of a successful business only highlights that each and every single one of us has the potential to be the change we want to see in this world! 

    The first step towards sustainable waste management starts in fact, from not wasting our food. WWF reported that 6%-8% of greenhouse gases can be reduced if we clean our plates in the first place. Imagine if 34 million of us do so. 

    Now coming back to that meal – did you finish it?

     

    References

    Musthafa, A. (2023, December 25). Listicle: 24 in 2024
    https://theedgemalaysia.com/node/694860

    Khaw, C. (2023, August 28). This M’sian biz already uses insects to treat waste & make pet food, next up is human food. Vulcan Post. https://vulcanpost.com/837693/entomal-malaysia-bsf-food-waste-treatment/

    Move For Hunger. (n.d.). The environmental impact of food waste. Move for Hunger. https://moveforhunger.org/the-environmental-impact-of-food-waste#:~:text=Food%20waste%20that%20ends%20up,8%20percent%20of%20global%20emissions.

    The Star. (2024, January 2). 39,000 tonnes of solid waste daily. The Star. https://www.thestar.com.my/news/nation/2024/01/02/39000-tonnes-of-solid-waste-daily

    United Nations Environment Programme. (2022, October 18). What’s the deal with methane? UNEP. https://www.unep.org/news-and-stories/video/whats-deal-methane#:~:text=Due%20to%20its%20structure%2C%20methane,warming%20to%201.5%C2%B0C.

     


     

    Researcher(s) / Journalist(s): Aisyah Sharif, Anamdev Singh

    Reviewer(s): Jia Xin Yeoh

    Editor(s): Maryam Nazir Chaudhary

    Designer(s): Wong Yan Qi

  • An eye on Japan and the Bank of Japan: A Regime Switch

    An eye on Japan and the Bank of Japan: A Regime Switch

    Introduction

    The Japanese economy is often found to be intricate, complicated, and confounded, characterised by headlines like the lost decades, deflation, sluggishness, and a low-desire society. It is still one of the largest economies, trailing behind only the United States and the People’s Republic of China, despite the fact that the economy has barely grown relative to other industrialised economies since the well-known real estate burst back in the 1990s. Japan was the first in Asia to industrialise and join the global superpowers by accepting Western institutions, technologies, and culture during the Meiji Restoration in the 19th century. The extensive embracement of technologies has turned Japan into a futuristic nation of neon-lit metropolises with the world’s fastest Shinkansen and leading status in automation and robotics. Japanese macroeconomic policies, such as quantitative easing (QE), negative interest rates, and yield curve controls, were also ahead of other advanced economies, which then provided valuable lessons when they confronted deflationary financial crises after 2008. Simultaneously, however, Japan is also awkwardly “stuck in the past”, held back by a deep-entrenched Japanese culture that is resistant to change (see Wingfield-Hayes, 2023).

     

    Some brief glossary:

    Quantitative easing: the involvement of the central bank in purchasing long-term government bonds or other assets (asset-backed securities and could even include stocks in the case of Japan) to push down long-term interest rates and borrowing costs, offloading debt securities, and support corporate valuations and stimulate investment

    Negative interest rates: as its name suggests, happens when a central bank establishes a target nominal interest rate that is lower than 0% to discourage cash hoarding that will lose value due to negative deposit rates.

    Yield Curve Control: is a monetary policy tool used by central banks to target interest rates at a specific level by buying varying amounts of government bonds or other financial assets. See below for a more detailed explanation.

    Japan had its “lost decades” from 1991 to 2021, which can be attributed to a number of factors including the bust of the late 1980s to 1990s real estate and equity bubbles, natural disasters, inappropriate fiscal and monetary policies, and an ageing demographic conundrum. During this time, Gross Domestic Product (GDP) growth and inflation averaged 0.7% and 0.4%, respectively, notwithstanding a few brief spikes (see Kochugovindan, 2023). In 2023, Japan garnered much excitement about future growth prospects from international investors, which marked a momentous change after decades of sluggishness. The Japanese economy grew 6% in the second quarter of 2024, beating many expectations owing to robust exports (CNBC, 2023). Morgan Stanley Research (2023) expects Japan’s nominal GDP growth to approach 5% in 2023, its highest since 1991. Nikkei 225, the Japanese stock index, breached its 33-year high (Wagatsuma, 2023). Warren Buffett also notably announced his explicit build-up of a large stake in five Japanese conglomerates. Wages and prices rose at their fastest pace in more than 30 years (The Economist, 2023), which will have implications for the conduct of the Japanese monetary policy. The global macroeconomic landscape is aware of and heightened by the potential alteration, which will be discussed shortly. But first, we are going to look at a few trading patterns that have emerged globally over the past few decades as a result of the Bank of Japan’s (BoJ) ultra-loose monetary policies.

     

    Carry Trade and Widow Maker

    Owing to its ultra-loose monetary policy regime, which includes large-scale QE, afterwards qualitative and quantitative easing (QQE), yield curve control (YCC), and an unprecedented negative policy rate under former prime minister Shinzo Abe and former BoJ’s governor Haruhiko Kuroda, the central bank flooded its financial system with cheap yen, sending the currency overseas in search for better yields. Japan’s external net assets stood at 418,628.5 billion yen, or around 75% of its Gross Domestic Product (GDP), making it a net creditor for 32 consecutive years (The Nikkei, 2023; see also FRED database).

    It also fuelled another popular trading method among international foreign currency (forex) traders, dubbed carry trade. Carry trade typically involves borrowing one currency at low interest and investing in another higher-yielding currency to earn the interest rate spread. The yen became the poster boy, and it became a no-brainer for investors to borrow from the excess savings of Japan with low or negligible interest rates while leveraging it to maximise profits by parking the money anywhere yields are higher throughout decades. From April to June 2018, the United States (US) dollar to Japanese yen (USDJPY) earned traders a 4.5% profit (Kondo, 2018). It is apparent this year that major central banks have diligently hiked their rates except BoJ, which had kept its rate at -0.1% with no explicit forward guidance of normalisation. Even the previous vice president of Berkshire Hathaway Charlie Munger praised Warren Buffet’s bet on Japan, saying that it was “awfully easy money”, owning to Japan’s historically low interest rates that allowed borrowing money cheaply as far as 10 years in advance to acquire other high-yielding assets (CNN Business, 2023).

    Widow maker trade emerged as the other side of such extensive monetary easing pursued by BoJ. In finance and trade, a widow maker simply refers to an investment that apparently results in devastating losses for everyone who tries it. When BoJ slashed interest rates to negative in 2016, the bank also came up with the idea of YCC to facilitate the formation of a robust yield curve (see Kihara, 2023). In simple terms, the BoJ is committed to purchasing any amount of Japanese 10-year government bonds in order to suppress its yield at near 0%. Note that bond prices and yields are inversely related; an increase in demand (reckless purchase from BoJ) will drive up the bond price and hence, suppress its yield. As such, the BoJ allowed the depreciation of yen due to an unlimited amount of bond purchases or QE to cap the 10-year yield at 0%, further facilitating the carry trade mentioned above. The widow maker trade, which in this case involved short-selling ostensibly mispriced Japanese government bonds, had survived its failure for decades from the early 1990s (Financial Times, 2023). Its supporters, who consistently wagered that things would be different, were rendered to be increasingly naive to challenge BoJ. It is even astounding to find out that BoJ has purchased 53% of the total 10-year government bonds ever circulated in the market as of March 2023 (nippon.com, 2023).

     

    Mixed signals moving ahead and consequences of BoJ’s normalisation

    Let’s first go straight into the possible consequences. Japan has contributed to increased global liquidity in recent years and has played a role in driving down yields globally. In this context, the reversal of this strategy may contribute to a regime shift where the repatriation of assets and funds back into Japan and an increase in world yields occur, particularly when major policy rates are still high. Japanese investors have started selling stakes in overseas markets across various asset classes that previously yielded higher returns in 2022 (Rovnick et al., 2023). Japanese investors own 6% and 4.1% of Australian and French bonds, respectively; while being the largest overseas holder of US Treasuries (Rovnick et al., 2023). The European Central Bank (ECB) warned in its financial stability report earlier this year, stating that “A shift away from the low-interest rate environment in Japan could test the resilience of global bond markets” (see Reuters, 2023a). Note that the size of the global fixed-income market is significantly larger than the equity market.

    BoJ has been awaiting sustainable inflation above the target of 2%, driven by wage growth. In other words, the return of a dynamic labour market, corporate renewal, and robust internal demand. Headline year-on-year inflation has overshot the BoJ’s target for 20 consecutive months even though much is due to imported costs (see YCharts). Prices for around 90% of items monitored by the BoJ are rising, and corporates are retesting the consensus where pushing up prices could lose customers (The Economist, 2023). Japanese Trade Union Confederation, also known as Rengo, has demanded a pay hike of at least 5% in 2024 Shuntō negotiations (Kyodo News, 2023). The largest trade union has successfully helped its workers win an average raise of 3.58% this Spring, exceeding 3% for the first time in 29 years (Kyodo News, 2023). Shuntō refers to the annual pay discussions between employers and trade unions between February and March.

    BoJ has been tweaking its YCC policy more frequently starting from December 2022, when it loosened the YCC band that allowed the yield of Japanese 10-year government bonds to fluctuate within an upper and lower limit of 0.5%. In July 2023, BoJ stated that the 0.5% band will be set as references, not a rigid limit while offering purchases of bonds at the 1.0% level. In October 2023, it further loosened the band to ± 1.0%. The Japanese yen appreciated significantly to a three-month high on the 7th of December, where investors priced in the potential early pivot by the BoJ following a visit of the incumbent governor, Kazuo Ueda, to the Prime Minister’s office to discuss economic and financial conditions (Menghani, 2023). The assertion was also echoed by the deputy governor the day before, who noted that households and businesses may benefit from the central bank’s decision to abandon its ultra-loose policy (Central Banking Newsdesk, 2023). However, the latest BoJ monetary board meeting on 18th and 19th December showed mixed signals, where there was a unanimous vote to maintain the current monetary policy stance, followed by a dovish press conference by the governor. “I don’t think the chance is high for us to say abruptly that we will hike rates at a subsequent meeting,” Mr Ueda said in response to a question on the potential of a policy adjustment during the much-anticipated meeting in January (Reuters, 2023b). The BoJ mentioned that they must see a clear sign of sustainable inflation at the 2% target, virtuously driven by wage growth, before rolling in any contractionary policies. Furthermore, the disastrous earthquake that haunted Suzu, Japan, at the beginning of 2024 further complicated the normalisation path of the BoJ.

     

    Conclusion

    A change in how prices and wage-setting behaviour could be prompted by the post-pandemic inflationary pressures and a few years of relatively high wage rises, which could lead Japan towards a higher inflation regime. As such, it could constitute a meaningful shift in domestically generated inflation. This year, the BoJ has been gradually normalising its policies by removing restrictions on its 10-year yield target and allowing for greater policy flexibility by modifying the phrasing and wording of its guidelines. In 2024, more moves to withdraw from its ultra-accommodative policies are probably in order, albeit policymakers are still keeping an eye out for any long-term increases in wages and inflation. Although BoJ officials’ comments about a date for a policy reversal are still unclear, the market is pricing in Japan abandoning its negative rates in the second quarter of 2024, after the 2024 Shunto wage negotiations. Japan’s exit from yield curve control and negative interest rates will be symbolically important for the global financial landscape, but interest rates will remain relatively low as compared to its peers (Kochugovindan, 2023).

     

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  • Unravelling the Future: Navigating the Cryptocurrency Landscape

    Unravelling the Future: Navigating the Cryptocurrency Landscape

    Introduction

    In an era defined by rapidly evolving digital landscapes and decentralised financial innovations, cryptocurrencies have emerged as a disruptive force, challenging traditional notions of money and finance. A cryptocurrency is a form of digital or virtual currency protected by cryptography, making it nearly impossible to forge or double spend. The majority of cryptocurrencies operate on decentralised networks employing blockchain technology, which is simply a collection of linked blocks of data on an online ledger. Each block comprises a series of transactions that have been independently validated by each validator on a network (Frankenfield, 2023). From an ASEAN perspective, the NUS Entrepreneurship Society (2023) stated that in 2020, the blockchain market size was $3 billion and it is anticipated to reach $39.7 billion by 2025 . Therefore, the usage of cryptocurrencies such as Bitcoin, Ethereum and XRP, are steadily increasing.

     

    Purposes of Cryptocurrency and Its Influence on Blockchain Technology

    One of the most well-known purposes of cryptocurrencies is its potential as an investment option. Some people became wealthy after purchasing Bitcoin when it cost less than $1 per coin in 2011 where now that $1 would be multiplied to about $43020. Bitcoin may not currently offer the same possibility it did where investors made a lot of money on their investments in it almost a decade later, but cryptocurrencies have proven to be resilient over downturn cycles. After every crash, Bitcoin prices have risen to record levels (Banks Editorial Team, 2022). While we can’t assume that Bitcoin will inevitably reach its previous record high, the cryptocurrency’s historical journey remains a compelling case study in the face of market volatility. It serves as a powerful reminder of the potential and unpredictability that define the world of cryptocurrencies, making them a subject of ongoing fascination for both seasoned investors and newcomers alike. 

    Other than that, cryptocurrencies also help consumers save money when transferring money, especially across countries. This is because the costs associated with using financial institutions as an intermediary in money transfers are not present when using cryptocurrencies. Major banking institutions’ fees will slow down the money transmission. You might need to send more money than you anticipated or ask the recipient to accept less. These issues are resolved by cryptocurrency’s decentralised blockchain technology (Banks Editorial Team, 2023). The use of cryptocurrencies in cross-border transactions can alleviate the stress of unexpected delays. With conventional banking, transfers may take days to clear, especially when dealing with international transactions, which can be a significant inconvenience for businesses and individuals requiring timely payments. Cryptocurrency transactions, on the other hand, often occur within minutes or even seconds, contributing to the overall efficiency of global commerce. While it’s important to note that the adoption of cryptocurrencies for cross-border transfers is not without its challenges, including regulatory considerations, their disruptive potential in this space is undeniable, making them a compelling option for those seeking to save money and simplify the process of sending funds across the globe. 

    Furthermore, cryptocurrency can also be used in daily transactions. Big companies like Whole Foods, Home Depot, PayPal and Microsoft are starting to adopt cryptocurrency. Cryptocurrency usage will advance and become normalised if more large companies and small businesses accept it as a means of purchasing products and services (Banks Editorial Team, 2023). . This, in turn, will increase demand for cryptocurrencies, potentially driving up their value and utility. In essence, cryptocurrency can bring about multiple benefits for consumers and firms.

    Various cryptocurrencies have adopted blockchain technology and now benefit from its great versatility. For example, blockchain technology is used by luxury resale retailers to authenticate their products and to provide transparency in the process of transferring ownership (Feger, 2023). In the marketing industry, blockchain technology is widely implemented to ensure secure sharing of customer information and transparency between companies and customers (Feger, 2023). On top of that, blockchain technology is employed in healthcare to improve the processing of payments, digital medical records, provider listings as well as in data interchange and security (Feger, 2023).

     

    Adoption of Cryptocurrency Globally

    The global adoption of cryptocurrencies has expanded exponentially, reshaping financial landscapes and transcending borders. El Salvador has become a global leader in implementing blockchain technology after being the first country to accept Bitcoin as legal currency (Lacapra, 2023). Blockchain technology was designed to make it simple for Salvadorans to exchange their money between Bitcoin and the US dollar automatically. Another such example is Singapore, where the government has made substantial investments in the research and development of blockchain technology. The Monetary Authority of Singapore, the nation’s financial regulatory authority, is in charge of guiding the nation’s development of governance structures, technological standards, and infrastructure to promote the adoption of blockchain and cryptocurrencies. Its main responsibility is to keep an eye on and reduce hazards in the cryptocurrency business while fostering technological advancement (Lacapra, 2023). 

    Despite the adoption and legal approval of cryptocurrency use  in different parts of the world, there are still some countries that limit the usage of cryptocurrencies due to the nature of decentralised blockchain technology, where the government has no control over the supply of the currency. Cryptocurrencies can also facilitate illegal activities as users on its pseudonymous network can only be recognized by their network addresses. Thus, determining the origin of a transaction or the person/business behind the address can be challenging (McWhinney, 2022). One of the most well-known instances of cryptocurrency crime is The Silk Road case.  The Silk Road was a Dark Web marketplace stocked with illegal items, such as narcotics and weapons, that users could easily purchase using bitcoin.The buyer did not confirm receipt of the products until the bitcoin was released from escrow. With only the blockchain addresses of the persons involved in such illegal transactions, law enforcement was at a loss. Eventually, the FBI succeeded in shutting down the market and obtaining 174,000 BTC (McWhinney, 2022). 

    As a result, countries like Egypt, Nepal and China have taken proactive measures to ban the usage of cryptocurrency. Due to the significant dangers, erratic value, and use of cryptocurrencies in financial crimes, the central bank of Egypt updated its warning against them in 2022 (Willing, 2023). Meanwhile in Nepal, the country’s central bank, Nepal Rastra Bank, outlawed the usage, exchange, and mining of cryptocurrencies in 2017. In 2021, crypto trading and encouraging people to use cryptocurrencies were also made unlawful. In January 2023, Nepal’s Telecommunications Authority gave all Internet service providers the order to block any cryptocurrency-related websites, apps, or online networks (Willing, 2023). Hence, it is apparent that the adoption of cryptocurrencies is viewed differently across countries, with some accruing its economic benefits whilst others remain apprehensive over its threats to national security. 

     

    Current Position of Cryptocurrency in Malaysia and Its Future Trend

    Despite the considerable acceptance and recognition of cryptocurrency in other big economies such as China and the United States, Malaysian governmental authorities and business entities are yet to recognize the feasibility of cryptocurrency in the local monetary system. Unsurprisingly, according to Free Malaysia Today (2022), in the first quarter of 2022, Malaysia’s former deputy finance minister I Shahar Abdullah mentioned that Malaysia had no initiative to recognise cryptocurrencies as legal tender at the national level.

    While cryptocurrencies have no central authority and regulation, a new form of currency known as CBDCs could be an alternative that is supported by central banks. This emerging trend has been widely discussed by various financial institutions in the world, including Bank Negara Malaysia as well. In simple terms, CBDCs are electronic banknotes or coins issued by the central bank. The primary benefit of CBDCs is its ability to allow users to hold direct accounts with the central banks or to transact directly with one another using the CBDCs as a legal tender. This is largely thanks to the innovation in distributed ledger technology (DLT), which is a digital system that records transactions and other details simultaneously at numerous locations without involving central data storage (Corporate Finance Institute, n.d.). Hence, CBDCs provide a more efficient and less intermediated payment channel compared to other widely adopted payment methods such as GrabPay, Credit Cards and Touchn Go eWallet (Free Malaysia Today, 2022). Nonetheless, according to Bank Negara Malaysia (2020), in the near future, the central bank did not have any intention to issue CBDCs since the bank believed that the existing monetary and financial system have been effective in supporting monetary stability. However, Bank Negara Malaysia has publicly expressed their intention to conduct further research on the public interests and overall impact of digital currencies in the ever-evolving landscape of payment infrastructure. 

    Furthermore, according to Wong at al. (2022), there are various potential determinants in influencing the cryptocurrency adoption behaviour amongst Malaysian users, namely output quality, perceived accessibility, perceived security, and result demonstrability.  Output quality can be defined as the impact of the user’s cognitive instrumental processes on perceived usability; perceived accessibility can be defined as the ease of consumer usage of a particular technology; perceived security can be defined as the users’ awareness on uncertainty and severity of the consequences; and result demonstrability can be defined as the magnitude of the noticeable and communicable results of using a particular technology. Interestingly, the empirical results of study showed that output quality, perceived security and result demonstrability has established a positive relationship with  the adoption behaviour of cryptocurrency among current and potential users in Malaysia (Wong et al., 2022).

    On par with the difficulties of implementing cryptocurrency in Malaysia, Malaysian users remain reluctant to use cryptocurrency for transactions. Zubir et al. (2020) found that although Malaysians were aware of cryptocurrency as a whole, the vast majority still preferred conventional online payments methods such as PayPal, credit card and Touchn Go eWallet.

    The development of cryptocurrency in next 10 years in Malaysia has the potential to be revolutionised more quickly, due to the emergence of artificial intelligence (AI). This could change finance, business and investor behaviour and improve acceptance of cryptocurrency into consumers daily transaction processes.

     

    Barriers to Implementation of Cryptocurrency in Malaysia

    The reason of why government is not confident in recognizing  the feasibility of cryptocurrency is that some experts worldwide have deemed cryptocurrency such as Bitcoin exhibiting their positions as lying somewhere  between currency, financial asset as they are more prompt to be leveraged as  speculative assets and trading assets, rather than to be used as legitimate and conventional currency (Yussof & Al-Harthy, 2020). Also, the second reason could be that cryptocurrency will certainly be less susceptible to enforcement by law and regulation (Yussof & Al-Harthy, 2020) as there is no central authority that oversees or regulates the currency.

    From consumers’ perspective, there are several reasons hindering the adoption of cryptocurrency in Malaysia’s markets. For example, as cryptocurrency depends on market demand, its volatile nature may discourage risk-averse consumers from leveraging it to purchase goods and services (Moorthy, 2018) . In other words, cryptocurrency prices can soar high suddenly, but they can also drop drastically in a short period of time, making some individuals have less confidence to exchange real money for cryptocurrency. Evidently, this is extremely different with the cases of adopting fiat currency such as U.S. Dollar and the Euro, where there is central authority that regulates the value and supply of the money via monetary policy. Another reason is the absence of a mediating third party (Moorthy, 2018). For example, should an individual mistakenly transfer the fund to a wrong recipient, the individual is unable to seek help from third party in charge of the transaction to resolve the issue. In contrast, transactions with traditional currency allow the involved  parties to go to banking institution to seek assistance.

    Additionally, another issue that arises is whether cryptocurrency complies with the principle of ‘gharar’ in Islamic Law. In general, gharar is a broad concept that associated with any form of deception, uncertainty, and risk. According to the definition given by Investopedia (2022), gharar is a term that is widely applied in Islamic finance to assess the legitimacy of risky investments such as forwards, futures, options, and gambling.  As cryptocurrency is a form of speculative asset, it violates the concept of gharar in Islamic finance to a certain extent, due to the fact that its future value is always unknown. Therefore, this would definitely be an obstacle for cryptocurrency’s position to be recognized officially in Malaysia, where the majority of its citizens are Muslims.

     

    Disadvantages of Adopting Cryptocurrency in Malaysia

    Undoubtedly, there are various  disadvantages of cryptocurrency that can impact users, community wellbeing and environmental health.

    One such negative environmental effect is the massive energy consumed by mining cryptocurrency. This is due to the fact that the process has been heavily dependent on computer networks to mine coins into circulation. Unsurprisingly, according to Katuk (2022), Tenaga Nasional, which is the electricity provider in Malaysia, has found innumerable reported cases of illegally taping electrical supplies for the purpose of cryptocurrency mining activities. Not only that, but the energy consumption for cryptocurrency such as Bitcoin is indicated to exceed the usage of every refrigerator in the US. The underlying reason for this phenomenon is that Bitcoin mining requires high-powered computers and massive power to assist in its transaction process (Katuk, 2022). The application of concession algorithms which ensure that every transaction initiated is valid and requires all nodes to communicate back and forth, will further boost the energy consumption (Rusli & Zolkipli, 2021).

    Apart from that, the disadvantage of adopting cryptocurrency is the possibility of losing funds. This is because private keys that are required in individual credential management are irreplaceable. Also, private keys play a vital role in cryptography to encrypt the data using a complex mathematical algorithm (Rusli & Zolkipli, 2021). Consequently, once the owner unexpectedly forgets details of the key, he will be unable to retrieve his entire cryptocurrency investments or cryptocurrency stored in a digital wallet.

    Lastly, cryptocurrency may further aggravate the issues of criminal and illegal activities. For instance, as explained by Rusli & Zolkipli (2021),  there have been innumerable cases of cryptocurrency exchanges and wallets being hacked in the past few years, resulting in the theft of millions of dollars, despite the general conception that blockchain technology is highly secure. Additionally, criminals involved in illicit purchases and money laundering can initiate cryptocurrency transactions more easily, as compared to conventional banking options, since the account can be accessed by anyone in a borderless manner.  Of course, scam syndicates have also been taking these opportunities to attract individuals to their so-called investment schemes that guarantee high returns, commonly via social media platforms such as Facebook, Instagram, and Twitter. Studies  indicate that a vast majority of the victims have no comprehensive knowledge of cryptocurrency and investment but have unrealistic financial goals (Pesan by Qoala, 2023).

     

    Advantages of Adopting Cryptocurrency in Malaysia

    The integration of cryptocurrency has multiple benefits for both Malaysian users and the entire monetary system.  First off, the most significant benefit is its transparency, underpinned by open source blockchain technology. In other words, by remaining decentralised, a public record of all transactions is recorded and reflected on a digital ledger called a blockchain (Stax, n.d.). Put simply, blockchain allows each user to see their code via open software. For instance, auditors can review cryptocurrency security whereas the general public can provide suggestions to enhance the blockchain system (Rusli & Zolkipli, 2021).

    Secondly, use of cryptocurrency is advantageous due to its potential wealth accumulation characteristics. Undeniably, due to the most contentious spike of Bitcoin price in the past, cryptocurrency has been gaining attention amongst new investors worldwide. Cryptocurrency has been leveraged as a trading asset that possesses extreme resilience during bust cycles. According to Banks.com (2022), some platforms even provide interest for the cryptocurrency deposited, to address the worries of investors regarding lack of cash flow. This is similar to the privilege of receiving interest payment at a specific point of time as the conventional bank deposit account.

    Thirdly, adopting cryptocurrency in daily life will enable quick, easy and direct fund transfers directly between two parties.  This is due to the fact that cryptocurrencies only require internet connection to trade or transfer, unlike conventional bank accounts that also require legal documents to enable registration (Bank.com, 2022). Not only that, but the removal of artificial barriers imposed by major banking institutions have substantially reduced the transaction costs of fund transfer for consumers (Yussof & Al-Harthy, 2020). This especially applies when transferring money overseas and is largely thanks to the decentralised structure that operates in a borderless manner.

     

    Conclusion

    In conclusion, as cryptocurrency is traded in the billions every day,  it is evident that cryptocurrency is becoming an unprecedented virtual form of money and credit, probably due to the various advantages brought by it, namely transparency of transaction, opportunities of wealth accumulation, as well as faster and more cost-effective transaction processes.

    However, cryptocurrency can have several negative implications on  investors, users, and the community. Therefore, it is vital for regulators in Malaysia to look into the potential risks for the purpose of protecting users from cyber-crimes, and subsequently establish new legislations and guidelines to ensure the balance between public security versus productive innovation. For instance, relevant authorities in Malaysia should regulate the crypto creation process and the transaction process, especially in the current phase of widespread cryptocurrency adoption.

    Apart from that, as responsible investors and users of cryptocurrency, it is extremely important to understand the risk associated with these assets and to make decisions according to one’s risk tolerance. Also, responsible business entities should uphold strong moral principles, instead of focusing on the pursuit of pecuniary gains through unethical business practices.

    Hence, it can be said that cryptocurrencies could still be beneficial for the monetary system in Malaysia, as long as each individual and organisation plays their own roles wisely, strategically  and ethically. 

     

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  • Sales and Service Tax (SST) Tax Explained

    Sales and Service Tax (SST) Tax Explained

    The implementation and management of Sales and Service Tax (SST) is crucial for governments to generate revenue. However, its efficiency, equity, and consequences for businesses and consumers differ widely, leading to continuous discussions and examination within fiscal policy.

     

    The Introduction of SST 

    A tax is a mandatory payment imposed by the government to generate funds and support its operational activities. Taxes typically account for approximately 80% of the government’s total revenue. After the 2018 national elections, the newly established Pakatan Harapan government substituted the Goods and Services Tax (GST) with the Sales and Services Tax (SST), effective from September 1, 2018. The goal behind the decision to eliminate GST and reintroduce SST was to reduce living expenses, especially for individuals in the middle and lower income brackets. The reintroduction of SST  also served as a strategy to enhance the efficiency of the taxation system in Malaysia. The SST comprises two different taxes that work separately. The first one is the sales tax, which applies to specific taxable products when they are imported or made locally, and the rates vary based on the types of products. The second is the service tax, which only applies to certain services like professional services, telecommunications, and insurance. So, if your business doesn’t fall into these categories, then you don’t have to deal with the SST at all.

    Looking at the Budget 2024, the decision to raise the Service Tax rate from 6% to 8% aroused much debate among Malaysians. While it makes sense to maintain the Service Tax rate for commonly used items, such as food, drinks, and telecommunications. On the flip side, it does mean that certain business services might see an uptick in costs. Also, if they include taxes on logistics services, it could make everything more costly, and businesses might raise their prices, passing those extra costs to consumers.

     

    Significance of the SST in Comparison to GST:

    SST is unique in that it is a single-staged tax. This means that it is only levied once on consumers across the entire supply chain, either by registered manufacturers upon acquiring taxable goods or by customs when importing taxable goods into Malaysia. Consequently, the tax is not imposed at every value-added stage of the production process, leading to potential reductions in the prices of goods and services. With regards to service tax, on the other hand, it is imposed on prescribed providers offering services to customers. While this approach might reduce the overall cost of goods and services by not taxing every value-added stage in production, there are concerns regarding the cascading or compounding effects it could have on taxpayers. This is because the tax element may be embedded into the cost by the wholesalers and retailers at each successive stage in the supply chain before reaching consumers (Bernama, 2023). As a result, the tax may build up across the distribution chain, contributing to the tax factor and raising the overall prices of the goods and services sold. This domino effect is particularly noticeable in the case of service tax (Lee, 2023).

    Under the SST system, there are more exemptions as compared to GST. In Malaysia, services that are exported are exempt from service tax, and goods manufactured for export are exempt from sales tax (Fatt, 2022). As of 2021, SST covers 38% of goods in the Consumer Price Index (CPI) basket*, with the number of goods exempted under SST being ten times greater than those exempted under GST. Services like tailoring, jewellery making, optician services, and engravings are also exempt from SST, which is excellent news for small and medium-sized enterprises engaged in such activities. Due to its smaller tax base unlike GST, SST is adjusted to minimize its impact on lower-income groups (Business Setup Consulting Worldwide, 2019). However, it is worth noting that SST thus contributes far less to government revenues as compared to GST.

    *CPI is an economic indicator that measures price fluctuations over time for a basket of goods and services. This is important as taxes often interact with inflation and economic conditions.

    SST implementation is significantly influenced by income levels, allowing for rate and exemption adjustments to suit various income groups, unlike GST which remains unaffected by income levels. For instance, some countries like Singapore and Thailand impose the same 7% GST rate despite Singapore’s GDP per capita being nearly 9 times that of Thailand, highlighting the disparity. Similarly, Bangladesh imposes a relatively high tax rate compared to Singapore, even though Singapore’s GDP per capita is 33 times higher than that of Bangladesh (Lim, 2019). Hence, GST is considered regressive because it imposes a flat tax rate on every item, regardless of income level. Consequently, this increases the cost of living for the low-income group and results in a tax burden that is disproportionate to their disposable income (Morni Hayati Jaafar Sidik, 2019), causing them to be most severely affected by price inflation (Shamsinar Rahman, 2018).

    The implementation of SST is cost-efficient and user-friendly compared to the GST that preceded it. Its single-stage nature makes it more straightforward to implement, eliminating the need for businesses to invest in additional accounting infrastructure and advanced systems to administer the SST, thus reducing their administrative costs. This stands in stark contrast to GST, which is more complex and often requires businesses to hire tax agents and experts to navigate its procedures and practices, including the use of new accounting software for GST calculations (Morni Hayati Jaafar Sidik, 2019). This complexity was due to the lack of exposure and guidelines for businesses when GST was first introduced on April 1, 2015. Furthermore, SST is also associated with fewer refund issues.

     

    Awareness on SST from SMEs perspective

    Upon the introduction of GST, there was widespread concern, particularly from SMEs, about rising prices for goods and services attributed to the new tax system. To address this, the government invested in public education through social media and TV ads; these efforts have continued even after GST’s abolishment. To access tax information, the public can visit the MySST portal, while businesses can digitally register on the website.

    According to a study titled “The Perception of SMEs on SST Implementation” by Kasmira Gupta, the majority of respondents were from private limited companies. Of the 116 respondents, the average awareness was positive. They suggested that the government should offer more training to companies before implementing the SST tax system to enhance awareness.


    SST Thresholds and Exemptions

    In Malaysia, not all goods and services are subject to the SST. There are specific thresholds for both, with businesses becoming liable for sales tax if their total sales of taxable goods exceed RM 500,000 in the past 12 months. Similarly, for services, different thresholds apply, such as cafes and restaurants needing to earn over RM 1.5 million in the past 12 months to be subject to service tax.

    Certain categories of goods and services are exempt from SST. This includes imported or exported services, as well as goods manufactured for export. Other exempted items cover a wide range, from bicycles and related accessories to books, newspapers, magazines, journals, live animals, meat, seafood, eggs, insecticides, disinfectants, and more. There are 5,443 items excluded from SST, and important services like those offered by private doctors, banking institutions, and construction services also fall under this exemption.

    Manufacturers of non-taxable goods, as well as specific government bodies and educational institutions, are also exempt from SST. These exemptions are categorized into three groups: Schedule A, which lists persons exempt from tax under specified conditions, often involving government officials or bodies; Schedule B, which pertains to manufacturers of non-taxable goods; and Schedule C, which deals with registered manufacturers of taxable goods.

    Businesses have the option to apply for exemption certificates through the MySST portal. It’s important to note that tax evasion can lead to severe consequences, so seeking advice from tax professionals is advisable to determine if your business qualifies for these tax exemptions.

     

    The Rationale for the 8% Increase in the SST in the 2024 budget:

    During the budgetary session on 13th October 2024, the Prime Minister revealed that Malaysia’s tax revenue at 11.8% of the GDP, lags behind that of other ASEAN countries such as Singapore (12.6%) and Thailand (16.4%) as of 2021. As such, the government intends to boost tax collection by introducing more tax measures that involve the revision of the SST rate, introducing Capital Gains Tax from next year onwards, and implementing e-invoicing from August 1, 2024, specifically to enhance the efficiency of Malaysia’s tax administration management. The government has taken the initiative to broaden its revenue base to enhance the quality of services provided to the people while striving not to overburden its citizens.  According to Ernst & Young’s (2024) key takeaways on the newly introduced budget proposals for 2024, the tax proposals include measures aimed at increasing government tax revenues and incentivizing new investments and reinvestments. The budget’s theme, “Economic Reforms, Empowering the Rakyat“, is centred on enhancing the well-being of Malaysians, especially the lower-income group. 

    The proposed tax measures aim to increase revenue for the government whilst taking into account the livelihood of the people. One such measure involves increasing the service tax rate from 6% to 8%. Notably, this tax hike excludes sectors with a strong focus on the well-being of the people, such as F&B and telecommunications. This arguably demonstrates the effort that the government has put in to ensure that the tax base increases are not too burdensome for taxpayers, especially during the current global economic downturn. The Secretary General of Treasury, Ministry of Finance, Datuk Johan Mahmood Merican also pointed out that the SST hike is projected to bring in an extra revenue of approximately RM3 billion for the government. 

    Niaz Asadullah, Professor of Economics from Monash University supports the motion to increase the SST rate to 8%, emphasizing that it will create a more equitable and sustainable economy. This selective increase in SST and the expansion of its coverage are considered necessary adjustments within the government’s ongoing tax reform agenda and as part of a long-term strategy to gradually broaden the tax base. These changes are expected to bolster the national economy following the significant decline caused by the Covid-19 pandemic. Additionally, the government aims to promote social justice and fiscal discipline while adjusting the tax system to generate higher revenue growth and alleviate the burden on lower-income groups (Sivanisvarry Morhan, 2023). However, some concerns have been raised by tax experts about this tax increment, including potentially higher costs in logistics for businesses and consumers. This, in turn, could push businesses to raise their prices, especially in retail. As a result, everyday goods might become more expensive, potentially causing inflation. Tax experts believe that as these changes take effect, both businesses and individuals will need to adjust to the new tax system and its economic effects. 

    The question of why the SST continues to be part of the budget, as opposed to its replacement with the GST, arises from a strategic approach. In an interview with BFM Radio, Datuk Johan Mahmood Merican said “to implement both subsidy reforms and GST simultaneously is not advisable”. Prime Minister Dato’ Seri Anwar Ibrahim has emphasized that the primary focus of the Ministry of Finance for the year 2024 will be on improving subsidy allocation and targeting. The objective is to address leakage and inefficiencies by reducing subsidies to the affluent before considering the imposition of the GST (Datuk Johan Mahmood Merican, 2023). During a recent interview at the Milken Institute 10th Annual Asia Summit in Singapore on September 13, the Prime Minister did not deny that GST is a more efficient and transparent taxation system. However, he expressed concern that introducing a regressive, wide-ranging tax like GST could place a burden on the populace, especially considering the prevalence of poverty in the country. He believes that a more progressive tax policy, such as SST, is currently more suitable (Bernama, 2023). Prime Minister Anwar persisted that Malaysia is not ready for GST, given the presence of 130,000 households* registered under the hardcore poor category (Teh Athira Yusof, 2023), earning less than RM1,198 a month (Samsuddin, 2023). He argued that strengthening revenue collection by enforcing tax compliance and other fiscal management such as the Capital Gains Tax and Luxury Goods Tax would be a viable alternative to implementing GST at this moment (Martin Carvalho, 2023). 

    *Currently there are 102,888 households based on the data from eKasih as of Oct, 31 (Free Malaysia Today, 2023)

    Deputy Prime Minister Steven Sim Chee Keong also supported the retention of SST, especially in the face of economic instability and high inflation, both in Malaysia and globally. Research indicates that the previous implementation of GST led to higher prices for goods and services, adversely affecting the cost of living, particularly for lower-income groups. Since GST has a broader tax base with fewer exemptions, it does not cater to the needs of the majority, especially since 80% of the Malaysian population cumulatively falls under the B40 and M40 income groups. Consequently, GST faced significant opposition from people with lower incomes during its initial implementation back in 2015 (Rizq Afzareen Afdlin Rozaidi, 2018).  

    As of 2022, revenue collected from SST administration amounted to RM31.4 billion (Ministry of Finance Malaysia, 2023) whereas the projections for 2024 suggest that SST revenue is expected to reach RM34.2 billion. Within this context, Sales Tax accounts for RM17.6 billion, while Services Tax contributes RM16.6 billion to the total SST revenue collected by the government (Ministry of Finance Malaysia, 2024). 

    Since SST currently covers 38% of goods in the CPI basket, one of the strategies that the government can take to improve the tax base under SST is to extend the coverage of SST to 50% of goods in the basket. This figure is close to the GST coverage which is between 52% to 60% of goods in the CPI basket that was being taxed. By enforcing this, the government can potentially enhance tax collection by 0.9% of the GDP which is close to the level of GST coverage, ranging from 52% to 60%. (Deloitte, 2021).

    To conclude, the fundamental principles of effective tax administration encompass several key insights. First and foremost, a well-structured tax system should uphold the concept of vertical equity. This means that taxes should be proportionate to the taxpayers’ ability to pay, ensuring fairness. Secondly, the tax system should be designed for easy collection, promoting economic activity, and fostering broad social acceptance. (Deloitte, 2021) The current administration of the Sales and Services Tax appears to align with these principles, as it successfully incorporates these key elements.


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  • What would Happen if We Banned Billionaires?

    What would Happen if We Banned Billionaires?

    “I can’t help the poor if I’m one of them.

    So I got rich and gave back.

    To me, that’s the win, win.”

    – Jay-Z.

     

    Rockefeller was the first billionaire ever documented, owing to his ownership of Standard Oil. Over the last several decades, numerous people have followed in his footsteps, achieving fortune that no one could have predicted, such as Elon Musk with Tesla and SpaceX, Jeff Bezos with Amazon, and many more. According to the principles of a perfect market, billionaires should not exist, for their existence demarcates an unequal society. However, we have arrived at a point where a single billionaire may make more money in a matter of seconds than the workers do in a year, all the while struggling to meet basic needs like housing and healthcare. We have reached an outrageous inequality crisis where money is concentrated in the hands of a vital few. Unfortunately, this is at the expense of debilitating hardship, precarity, and compromised well-being for many. There will always be a divide in our social classes if it is based on riches, but is it fair to live in a society where only one group of individuals  of the same race and social status possess significant wealth,  while others barely have  enough to eat? Mathematically, it appears impossible for the average person to become a billionaire in today’s society. It would take 18,000 years for an average American to even reach a billion dollars when they only earn around $54,000 annually. Thus, many individuals currently argue that eliminating the presence of billionaires in society would be the right thing to do – but will it work? Should the government prohibit billionaires from continuing to eradicate poverty and further increasing wage disparities? So, let’s dig a little deeper!

     

    The fundamental problem with having billionaires in today’s society is wealth disparity. This is an issue that is more relevant now than ever before. According to statistics collected, the wealth of American billionaires had increased by 845 billion dollars by September 2020, whereas millions of average Americans struggled with the economic consequences of the COVID-19 epidemic (Business Insider, Sardana, 2020). This is equivalent to the Dutch GDP – all in the hands of less than a thousand people. The House of Commons reports that the wealthiest 1% will own two-thirds of all global wealth by 2030, proving this to be a very pressing matter. Financial inequality has increased at an alarming rate over the last few decades. The spark to the match was lit during the Covid-19 epidemic in 2020, when the affluent grew richer, and the poor poorer, proving that the essential issue with wealth disparity is the inequality it creates. 

     

    Consistent with  Oxfam’s statistics, the 26 wealthiest people have the same amount of money as the poorest half of humanity, amounting to 3.9 billion people. Nearly all of those  individuals live on less than $5.50 daily. The issue is increasingly critical  since it not only has disastrous effects on economic growth  but undermines social stability as well. Moreover, it brings to light  other societal topics such as racism, sexism, and xenophobia as racial minorities and other marginalised groups are more likely to suffer in poverty. So, why has wealth disparity widened? What has caused the recent rise in inequality?

     

     

    Part 1 : Neoliberalism as a factor in the uneven distribution of wealth

    The UN estimated that in 2021, 751 million people worldwide live in poverty. Furthermore, according to Oxfam (2022), the COVID-19 epidemic increased millionaires’ riches by more than the previous 14 years combined, the most phenomenal yearly gain since records started. The wealth of the world’s top 10 men more than doubled, while the earnings of the bottom 99% fell. However, the escalating repercussions of inequality are currently worse than the aftermath of COVID-19 and have been steadily developing even before the epidemic. Pre-epidemic, free market and liberal economists had been leveraging the law to favour themselves, like problems related to the minimum wage. The capitalist system inherently generates inequality and benefits the already affluent while exploiting labour. For instance, Amazon, responsible for Jeff Bezos’ acquired wealth, has been repeatedly discovered to have horrible working conditions, with several media platforms exposing the dehumanising atmosphere. In recent decades, neoliberal approaches to economic policies, primarily defined by tax cuts, the declining influence of unions, and welfare cuts, have driven inequality acceleration. Policies like these are reflected in countries worldwide. The US, in particular, favours neoliberal economic market policies. Furthermore, ‘Trickle down‘ economics, promoted by Reagan, was only an excuse to benefit the already affluent. Wealth hasn’t ‘trickled down’ to the lower classes as liberalism suggested it would. Instead, the rich are becoming more prosperous, while the poor continue to fall deeper into poverty. 

     

    Conversely, the wealthiest 0.0001% sit comfortably on their riches, which grew by 14% between 2019-2021. The most immoral part of it? The majority of that money is going nowhere. It’s not being invested back into the economy or offered to charity organisations; it’s solely a show of the mass production of capital. Climate change, poverty, homelessness; all these problems can be alleviated with each billionaire’s wealth. Money is power, and the wealthiest individuals can aid in solving the world’s challenges. This was evident when the UN informed Elon Musk that 6 billion, or a mere 3% of his fortune, could be utilised to overcome world hunger. Eleven people worldwide die from starvation every minute, but Musk’s fortune is yet to be put towards fixing this crisis. Musk is one of many failing to help, as we now turn to  Jeff Bezos who has only given less than 1% of his net worth to charity. The cornerstone truth of the wealth gap is that such extreme levels of inequality today are unethical and immoral. There is no justifiable cause for anyone to have a billion dollars – no one can work a billion times harder than anyone else. Evidently, the accumulation of extraordinary wealth is unfortunately achieved through exploitation, and as the rich flourish in their affluence further widening the wealth gap, millions continue to suffer daily. Ironically, those with the power to fix this are the ones who choose to keep them there.

     

    Part 2 : Big Money in Politics

    Quoting Emma Goldman, “Wealth means power : The power to subdue, to crush, to exploit, the power to enslave, to outrage, to degrade.” Thus, with great power comes great responsibility. However, this is not the mindset of many billionaires today. In 2022, American billionaires spent nearly $1 billion on the elections. Political contributions are often motivated by the goal to maximise their revenue even more, as elected officials are coerced to approve regulatory, tax and spending policies that please the big and wealthy (American for Tax Fairness, 2020). Later on, the billionaire class were found to be in support of  radical anti-democratic agendas which backed Trump’s lies in the 2020 election that it was rigged while questioning the value of democracy by stating that freedom and democracy are believed to be no longer compatible (The Guardian, 2022). Millions were donated to uphold this idea that the 2020 election was won by Trump. Now, in 2023, Trump is currently charged with four counts of felony regarding the matter above (PBS, 2023). Where this initiative leads to is not clearly displayed as Aaron McKean said, “Wealthy special interests and individuals try to hide their influence in elections, including by funding politically active nonprofits, because they know that the messenger matters,” (CNBC, 2023). Limitations on campaign finance, transparency, and constructive enforcement of the rules of wealthy donors during elections are exactly what we need (Brennan Center for Justice, n.d). 

     

    Part 3 : A billionaire’s footprint

    Wealth gave the idle rich new ways of living, perspectives, beliefs, and tastes (Jacobin, 2018). And in this case, billionaires still find ways to build their wealth by investing in pollution, causing a surge in  carbon footprints across the globe. Oxfam (2022) reported that the richest 1% of humanity produces twice as much carbon emissions compared to the poorest 50% of the human population. Superemitters, which are the top 0.1% of the wealthiest Americans, account for 3,000 tons of carbon pollution each year coming from the finance, insurance and mining industries (CNN Business, 2023). On the other hand, only 1 out of 125 billionaires have investments in renewable energy (Liberation News, 2022). With a huge amount of money in hand, billionaires should, by right, take the lead in mitigating climate change, by making way for more responsible investments (Oxfam, 2022). Sustainable funds in fact have no financial trade-off in the performance of sustainable and traditional U.S equity funds; Instead, sustainable funds have already surpassed traditional funds (Morgan Stanley’s 2021 Institute of Sustainable Investing Report, 2021). Sustainable funding is something billionaires should look at to ensure their investments are both positively impacting not only their revenue but the environment too.

     

    Part 4 : Should we eradicate the rich?

    It would be impossible to draw clear conclusions about how the world would appear if billionaires were expunged. Although substantial data may be gathered via research, there is always the risk of error. The market’s volatility makes it difficult to forecast whether the government should take this step in policy-making to make the globe more equitable. But how can one define a just world? Is there a way to make everyone satisfy? Many aspects must be considered in the determination of wealth distribution and how economic systems operate. 

     

    In reality, having no millionaires is better for the environment. “Everything about billionaires is harmful to the environment,” according to Beatriz Barros, an environmental expert from Indiana University. Billionaires’ lives are very carbon-intensive, with transportation being the most destructive activity, including the extensive use of yachts, private aircraft, helicopters, and several automobiles. Billionaires often use remote planes which release the most CO₂, given their size. It is superfluous since a commercial aeroplane can fly at a fraction of the CO₂/km. 

     

    Eliminating billionaires would have a massive global impact considering that they wield enormous power over economies and markets. According to Oxfam’s climate justice director, 125 millionaires are responsible for the same amount of CO₂ emissions as the entire country of France. To put this in perspective, the population of France in 2021 was 67.5 million people, showcasing gargantuan emission levels, given the ratios of both parties.

     

    Rising global temperatures and climate change are closely related to greenhouse gas emissions. CO₂, methane, nitrous oxide, and other artificial gases trap heat in the Earth’s atmosphere. In dry places, this disturbs weather patterns and increases the frequency of extreme weather events, droughts, and famines. These gases are primarily released when fossil fuels are burned to create electricity or power motor vehicles. Still, they are also released by the cattle, fertiliser, building, fashion, and technology sectors. According to the findings, eliminating the CO₂ emissions of 2668 billionaires would be far more important than stopping the CO₂ emissions of 2668 ordinary people.

     

    Part 5 : What can we do about this?

    Taxation is one method of addressing this. More effectively, taxing these billionaires’ money reduces the accumulation of wealth that permits billionaires to purchase many private aircraft and 500-foot boats. Furthermore, it would create revenue that governments can use to support environmentally beneficial measures, such as improving public transit systems. Wealth taxes on billionaires and their investments in polluting sectors would generate enormous funds to assist the poorest people, especially in countries that deal with climate change. However, we have to keep in mind that the effectiveness of billionaire taxation relies on well-designed policies that prevent tax evasion and avoidance. Additionally, it’s essential to strike a balance between wealth redistribution and incentivising innovation and entrepreneurship, as excessive taxation could stifle economic growth.

     

    Conclusion

    In conclusion, whether billionaires should be eradicated is a complex and contentious issue. While some argue that extreme wealth concentration perpetuates inequality and hinders societal progress, others contend that the success of billionaires can drive economic growth and innovation. Addressing wealth disparity requires a multifaceted approach, focusing on fair taxation, social safety nets, and ethical business practices. By striving for a more equitable society, we can better ensure that prosperity is shared and sustainable for all, irrespective of their wealth.

     

    References

    https://edition.cnn.com/2023/08/17/business/rich-americans-climate-footprint-emissions/index.html 

     

    Researcher(s): Haris, Aiman, Aisyah

    Reviewer(s): Maryam Nazir Chaudhary

    Editor(s): Anura Sofea, Maryam Nazir Chaudhary

    Designer(s): Isabel Yap

  • The Final Economic Frontier? An Overview of Malaysia in the New Space Economy

    The Final Economic Frontier? An Overview of Malaysia in the New Space Economy

    “A passion for exploration is the fuel to an innovative economy” – Neil deGrasse Tyson

    Growing up to become an astronaut is a childhood dream for many. For centuries, space has ignited a sense of adventure and exploration in the public, fuelling our imagination as we seek to understand our place in the universe. Nonetheless, it has not stopped either the public or private sectors from realising the untapped potential of space for their respective economies, from its developments in technology to space-based goods and services. Thus, a new economic phenomenon – the New Space Economy is born.    

     

    The New Space Economy refers to the emerging and rapidly evolving sector of the global space economy, focusing on the commercialisation and innovation of space exploration and utilisation. While countries such as the United States, Russia, and China have been well-established in this sphere for decades, Malaysia has recently recognised the untapped potential of space towards its national economy.  

     

    In September 2023, Malaysia’s Ministry of Science, Innovation, and Technology (MOSTI), through the Malaysian Space Agency (MYSA), announced plans to develop a space launch site, aiming to establish a presence in the space industry.

     

    With rapid advancements in space technology, a significant decline in launch costs, and steady interest from public and private sectors, it is unsurprising that the global space economy was valued at an estimated $546 billion in 2022, and is projected to evolve into a trillion-dollar industry by 2040. These developments may signal a shift in the focus of space activities from one of exploration to commercialization. Amidst this surge of activity and advancements from nations worldwide, where will Malaysia stand in this new space economy?

     

    Part 1: The Economics of Space

    Space economics can be categorised into the space industry and the commercial use of space, the space industry and commercial use of space. The space industry encompasses economic activities related to the manufacturing and delivery of components destined for outer space, namely satellite and launch site manufacturing. Commercial use of space, or the new space economy, is the provision of space-based services of commercial value, such as satellite navigation and the now widely discussed space tourism. Overall, the space industry has experienced steady growth, extending its reach beyond the aerospace and defence sector to include the IT hardware and telecom industries.

    Venturing beyond Earth’s orbit is not cheap. Government support, exemplified by institutions like NASA in the United States, has been synonymous with space exploration for decades. Governments and superpowers have usually been the only institutions with the tax revenue to fund the space sector’s extensive operating costs. Agencies like NASA frequently award contracts to firms such as Lockheed Martin, Boeing, and SpaceX to contribute to the production processes in the space industry. NASA then employs the spacecraft provided by these firms for research purposes.

     

    It is also worthwhile to mention that the genesis and intensification of the space race between the United States and the Soviet Union during the Cold War were primarily driven by geopolitical considerations and economic ideologies (capitalism and communism, respectively), rather than quick monetary gain..

    Part 2 : Economic Benefits

    One of the economic benefits of the private sector’s involvement in the space industry is competition. The alliteration attracts and incentivises firms within the industry to actively minimise production costs and increase innovation.  

     

    Governments’ hold on the sector changed with Elon Musk’s SpaceX launching the Falcon 1, the first privately developed and funded rocket to cross Earth’s orbit. Not only did the spacecraft’s development and launch cost $390 million, significantly cheaper than the customary billions NASA typically spend on their rockets, but it also led to SpaceX later designing the Falcon 9the world’s first orbital-class reusable rocket. The reusability was a game-changer since the reusability allowed SpaceX to refly the most expensive parts of the rocket, driving down the costs of space access. In comparison, NASA and other space agencies would typically dispose of their rocket debris in the ocean. 

     

    “Why should we spend money on NASA when we have so many problems on Earth?”Mark Rober

     

    This economic question was raised by Mark Rober, a YouTuber who ironically, is a former NASA engineer himself, in his video titled “Is NASA a waste of money?” However, it prompts us to consider, what is the economic value or return on investment of spending millions, if not billions, to send people and technology into space. 

     

    The biggest commercial value provided through space is satellite communication services. From consumers and companies utilising internet and broadcasting services to research agencies being able to monitor and measure critical information on Earth’s land and weather patterns, satellite communications have provided a reliable and effective means for global connectivity.This connectivity fosters international trade, business collaborations, and financial transactions, driving economic growth in ways unprecedented before its conception. Furthermore, these systems play a pivotal role in disaster management, weather forecasting, and navigation, safeguarding human lives and property while also improving the efficiency and safety of transportation and logistics. Satellite communications are an essential component of the global economy, facilitating information exchange, and economic development across diverse sectors and industries. Satellite data can provide valuable information to tackle issues like climate change; over 160 satellites are currently monitoring Earth to assess the impact of global warming. Food security and even national security are vastly improved with these macro insights and perspectives. 

     

    A more speculative realm of the new space economy is asteroid mining, involving the extraction of materials from asteroids or planets. Asteroid mining could, theoretically challenge one of the fundamental concepts of economics. The principle of scarcity in economics posits that our wants are unlimited while resources are limited, but what happens when the near-infinite scope of space yields deposits of valuable minerals like gold, silver, platinum, iron, and nickel worth quintillions of dollars? Despite the prospects of potential riches and the means to develop more technology, researchers at Tel Aviv University have claimed asteroid mining may not as much disrupt but instead dismantle the global economy for raw materials, especially affecting countries reliant on resource exports. Ultimately, asteroid mining is far too expensive to be a practical option at present.      

     

    Research and development (R&D) is also a crucial force in driving economic growth as it fuels innovation and technological progress. Developments in the space industry and its technology have long since contributed to many pieces of technology that are commonplace today. Notable examples include camera phones, wireless headsets, and portable computers.

     Part 3: Malaysia’s Standing

    Now that we have explored the economic returns of investing in the space sector, how does Malaysia plan to fare in this space race? For one, MOSTI and MYSA’s plans for the development of a space launch site seek to capitalise on Malaysia’s strategic location near the equator, making launches more energy-efficient and cost-effective, resulting in competitive operating costs. 

     

    It’s crucial to recognize the first-mover advantage Malaysia stands to gain by venturing into the space economy. Successfully establishing a space launching facility would position Malaysia as the ninth country in the world to possess such a facility. Additionally, Malaysia’s strategic geographical location near the equator provides a significant advantage in developing the facility.

     

    Malaysia has taken up several initiatives, including the Malaysian Space Exploration 2030 Initiative and Space Industry Strategic Plan (SISP 2030), These initiatives concentrate on the R&D of space-related technology, funding for the space industry’s programs, the development of local talent, and the creation of institutional frameworks as principles for the guidelines of the space industry. 

     

    Regarding the specific goods and services being capitalized on in the space sector, Malaysia appears to be focusing on specializing in satellite communications. Satellite communications are incredibly important in delivering real-time data such as the changes in sea levels, ocean temperature, and other indicators of climate change. Satellites can provide early warnings to flood-prone Malaysian states, such as Terengganu and Kelantan, that are prone to natural disasters like floods. The Straits Times reported that due to the 2022 floods, Malaysia recorded a total of $187.8m in losses. Without a doubt, this specialized focus on satellite communications will certainly minimize national economic losses due to natural disasters.

     

    Currently, Malaysia’s space industry generates about RM20-30 million annually but there is potential for more growth. Science, Technology and Innovation Minister Chang Lih Kang said that the government’s involvement in their venture could lead to the creation of 500 space-related tech start-ups and 5000 job opportunities, as well as contribute RM10 billion to Malaysia’s GDP by 2030.

     

    Although the industry for space technology has been traditionally dominated by wealthier nations, the decreasing costs have lowered the barriers to entry for developing nations like Malaysia. Presently, Chang and MOSTI are planning a national remote sensing satellite program through public-private partnerships, which is expected to commence in 2026.

    Part 4: Malaysian Space Industry 

    How is Malaysia integrating space into its own economy? Based on the Space Industry Strategic Plan (SISP) 2030, we can see the economic trajectory is shifting towards the space economy through investments in satellite technology, data analytics and artificial intelligence.

     

    Smallsats such as nano-satellites or CubeSats are currently being developed in Malaysia. These types of satellites are deemed favourable mostly due to of their short development time and cost-effectiveness while maintaining brilliant functionality.

     

    Artificial intelligence consistently generates substantial interest but data analytics shouldn’t be overlooked. Malaysia aspires to develop more talents specialising in data analytics, a vital skill in the aerospace sector. The synergy of both AI and data analytics would be an unstoppable force when it comes to reinforcing Malaysia’s economy.

     

    Regrettably, the privatization of space-related technologies has resulted in domestic players being out of reach with advanced global players. This will potentially erode the market share of the domestic industries associated with space technologies. However, rest assured as SISP 2030 has planned to ensure that Malaysia emerges as a prominent player player in the space economy.

     

    Part 5: Space Debris – Risks and Challenges 

    Like any other venture, it is also important to factor in the potential risks that come when diving into the space economy. On February 10, 2009, two communications satellites – one active commercial and the other a derelict Russian military satellite —inadvertently collided at a speed of nearly 12 km per second. The fallout led to both satellites breaking into over 2000 pieces. This has caused an increase in space debris but a question in mind is, what are the effects?

     

    Space debris may appear to be a small problem, just like the size of the debris itself. However, bear in mind that such debris is moving at 15000 miles per hour. At this speed, what once seemed small can even puncture a spacesuit! Even worse, it can damage sensitive electronic devices on spacecraft as well.

     

    A dramatic increase in space junk since the 1960s will probably hinder the advancement of aerospace technologies and cause delays in the development process on Earth. 

     

    In addition to the rise of carbon emissions and pollution produced directly as a result of space travel, there are a myriad of challenges that still need to be addressed to ensure that the space economy remains sustainable for future generations.  

     

    What can we do as youths to contribute to Malaysia’s space economy? 

    In the meantime, we as the youth of Malaysia can: 

    • Pursue a strong educational foundation in STEM (Science, Technology, Engineering, and Mathematics) and consider degrees in disciplines such as aerospace engineering, astrophysics, computer science, economics or business management 
    • Stay informed with the latest developments in the space industry 
    • Identify specific niches within the space industry, eg. space exploration, satellite technology, space tourism or space policy and develop our expertise in those areas

    Conclusion

    As the government aligns the nation with the Malaysia Space Industry Strategic Plan 2030 (SISP 2030), discussions about utilising space as a source of revenue are heated; but what is the nation’s action in this domain? Little by little, we can see the sparks of interest in aerospace rekindling in the younger generations as news about SpaceX is now the talk of the town. Simultaneously, we can observe a positive trend in this specialised field evident in the government’s active review of international treaties related to the space sector. Undeniably, these efforts are positioning Malaysia to be a part of the international space community, offering benefits to the nation in ways that are able to enhance the lives of its people

     

    In conclusion, it is clear that there are significant economic benefits that can be reaped from the space economy. However, though Malaysia has shown initiative and promises to become a strategic and competitive player in Southeast Asia’s space race, the question still remains: How feasible will this be?

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