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  • SVB Banking Crisis – FLYouths Research

    SVB Banking Crisis – FLYouths Research

    Silicon Valley Bank (SVB), the 16th largest bank in America, is now the most recent major bank to collapse since the 2008 Financial Crisis second only to Washington Mutual Inc.

    Last Friday on 10th March, Federal Deposit Insurance Corp (FDIC) took over SVB, transferring all of their deposits to an entity they set up: Deposit Insurance National Bank of Santa Clara. This effectively means all deposits made by tech firms in Silicon Valley Bank have been frozen.  This comes after Silicon Valley Bank revealed a USD1.8 Billion after-tax loss on investments on Wednesday evening, and is seeking to raise USD2.25 Billion in common and preferred stocks.

    As the stock market opened, panicking depositors pulled out their money in anticipation of a bank failure, in fear of losing access to their deposits. Fortunately for the tech community, on 11th March Federal Authorities announced that all of Signature Bank and Silicon Valley Bank’s deposits would be available to customers on Monday morning. Usually, Deposits beyond the FDIC limit of $USD 250,000 will not be insured, meaning there is no guarantee of getting deposits back if the bank defaults and collapses.

    The US Government has made an exception, as the banks’ collapse has been identified as a potentially serious consequence to the economy.  SVB had more than USD 151 Billion worth of deposits over the FDIC Limit.

     

    The unfortunate led-up

    Established in 1983 by Wells Fargo executive Bill Biggerstaff and Stanford University professor Robert Medearis, they were both former Bank of America employees. Silicon Valley Bank was established to cater to the growing financial needs of the developing tech industry in Silicon Valley.

    SVB for much of its reign services Silicon Valley’s tech startup industry, with an estimated 3,000 customers and firms affiliated with venture capital and private equity as of December 2022.

    With the growth of the tech industry after the Post-Covid economic revival in 2021, its deposits soared, with its assets and value doubled. Too much easy cash that SVB dumped en masse into US Treasury and other government-sponsored debt securities before the Federal Reserve started raising interest rates in 2022.

    Its total deposits grew by 86% in 2021 to $189 Billion, peaking at $198 billion in 2022’s first quarter.

    Higher Interest Rates by the Federal Reserve prompted startup firms to drain their reserves quickly. Deposits fell by 13% during the final three quarters of 2022 and declined further in January and February of 2023.

    Its bond portfolio slumped, as new bond issuances by the government with higher interest rates effectively meant little worth for relatively lower-valued bonds held by the bank.

    Standard & Poor’s credit analysts explained their reason for downgrading SVB as they are heavily reliant and whose financial services are interconnected with the tech startup industry,  which had laid off a significant portion of their workforce, seeing declining investments and venture capital opportunities.

    The lack of investment in startups meant that insufficient deposits were made into SVB. Rising Interest Rates diminished SVB’s bond portfolio. It desperately needed capital. Investors and Hedge Fund Managers panicked and urged a bank run from its associates and clients, leading abruptly to its collapse.

    Now the holding company behind Silicon Valley Bank, SVB Financial Group has filed for bankruptcy on 17th March ET.

    As the 16th largest bank in the USA, they are in stern competition with other megabanks: Bank of America, JPMorgan, WellsFargo, and Citigroup.

    With relatively Smaller resources and networks to conduct financial services, higher deposit rates are a major incentive to encourage the deposition of funds. Silicon Valley Bank’s rate was 2.33% in contrast with the industry average of 1.17%.

    This proved attractive to Silicon Valley-based tech and life science startups looking to obtain a high cash flow and revenue amount to prepare for a slim chance of a sudden product takeoff, requiring them to immediately acquire funds in a short period of business days.

    Its implicit connection to the tech industry has allowed its unprecedented growth by latching onto a symbiotic relationship with Silicon Valley firms.

    Now, this has proven to be a double-edged sword. Investment has declined from higher interest rates, coupled with a slowdown after an initial recovery boom has subsided.

    News coming of mass tech layoffs, the practice beginning from Elon Musk’s acquisition of Twitter and firing employees en mass allowed Microsoft, Google and other tech firms to layoff staff in January and February this year.

    Mass layoffs are a sign that a firm is incurring a heavy financial burden and is unable to pay its debts. It appears that the Banking system has finally caught up as well.

     

    A Domino Effect is on the horizon

    The far-reaching consequences of SVB’s collapse might even cumulate in the bankruptcy of global companies from low liquidity at risk of defaulting. National Banks will have to bail them out to avoid a total economic collapse, further worsening debt burdens for the nation’s expenses.

    That was the case back in the 2008 Financial Crisis, when then-President Bush signed a bill to purchase $700 billion worth of financial assets of failing firms at significant risk of defaulting by increasing market liquidity.

    Previously President Biden signed a total of $4.6 Trillion Covid Relief Fund, already straining America’s debt burden.

    If the worst-case scenario occurs and the US government has to bail the market out again, we can only imagine the devastating impact on inflation, investment, and consumption with a death loop.

    With its downfall, the Silicon Valley Bank effect will string along other banks as well. Currently First Republic Bank is experiencing their own survival crisis. On 12th March 2023, Signature Bank, the 30th largest bank in the USA was closed and seized by the Federal authorities.

    Credit Suisse, a Switzerland based banking firm was acquired by its local rival UBS to stabilise the Swiss economy and protect its financial services from any deposit loss and from declining investor confidence on 20th March 2023.

     

    SVB effect on Malaysia

    Our Budget 2023 aspired to strengthen Malaysia’s digital ecosystem, inherently Malaysia would be seeking investors to build a tech startup ecosystem.

    However, the SVB phenomenon may halt this development since there would be a lack of funding for technological startups to thrive.

    There may be further spillovers of SVB’s financial crisis, like the spillover of the 2008-2009 financial crisis affecting the international market.

    Imported goods may be relatively higher than before, driving our inflated economy to more inflation. On the contrary, Malaysia has its economy mainly driven by domestic demand. This signifies that there are local alternatives that can sustain our country’s demand for goods and services.

    A strategist at Morgan Stanley, Jonathan Garner, elaborates that Asia may experience lesser impact. It has been observed over the past year that Asia is experiencing re-growths with lesser concerns over asset quality. Malaysia may experience mild aftereffects from the SVB event, but our local inflation may persist due to uncertainty from our global supply chain.

    We expect some initial downturns in the Malaysian economy from Silicon Valley’s ripples. For Malaysia to walk out of the crisis with minimal harm, our hopes are that our local market is strong enough to meet demand, investors making informed choices, and Budget 2023 delivers.

     

    References

    Benoit, D., Ensign, R.L. and Ostroff, C. (2023) “Signature Bank Is Shut by Regulators After SVB Collapse,” WSJ, 13 March. Available at: https://www.wsj.com/articles/signature-bank-is-shut-by-regulators-after-svb-failure-a5f9e0f7?mod=article_inline.

    Business Today Editorial (2023) “SVB Shutdown Sends Shockwaves Through Silicon Valley As CEOs Race To Make Payroll – BusinessToday,” BusinessToday, 11 March. Available at: https://www.businesstoday.com.my/2023/03/11/u-s-hiring-surges-311000-jobs-filled-despite-fed-rate-hikes/.

    Demos, T. (2023) Were SVB and Signature Bank Just Bailed Out by the U.S. Government? Available at: https://www.wsj.com/articles/were-banks-just-bailed-out-by-the-government-6b0a582f?mod=hp_theme_svb-ribbon.

    Ensign, R.L., Driebusch, C. and Bobrowsky, M. (2023a) “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” WSJ, 10 March. Available at: https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522.

    Ensign, R.L., Driebusch, C. and Bobrowsky, M. (2023b) “Silicon Valley Bank Closed by Regulators, FDIC Takes Control,” WSJ, 10 March. Available at: https://www.wsj.com/articles/svb-financial-pulls-capital-raise-explores-alternatives-including-possible-sale-sources-say-11de7522.

    Saeedy, A. (2023) “SVB Financial Files for Chapter 11 Bankruptcy Protection,” WSJ, 17 March. Available at: https://www.wsj.com/articles/silicon-valley-banks-failure-tips-parent-company-into-chapter-11-3553fd32?mod=article_inline.

    Santilli, P. (2023) “Companies Whose Deposits in Silicon Valley Bank Were Just Freed,” WSJ, 13 March. Available at: https://www.wsj.com/articles/companies-with-deposits-trapped-in-silicon-valley-bank-9034f33b?mod=article_inline.

    Shukry, A. (2023) “Malaysia Extends Rate Pause as Inflation Cools, Growth Slows,” Bloomberg.com, 9 March. Available at: https://www.bloomberg.com/news/articles/2023-03-09/malaysia-extends-rate-pause-amid-cooling-inflation-and-growth?leadSource=uverify%20wall.

    Vishnoi, A. and Mookerjee, I. (2023) “Asia Sees Limited Contagion Risk From Silicon Valley Bank’s Woes,” Bloomberg.com, 10 March. Available at: https://www.bloomberg.com/news/articles/2023-03-10/asia-sees-limited-contagion-risk-from-silicon-valley-bank-s-woes.

    Weil, J. and Eisen, B. (2023a) “Silicon Valley Bank: Tech Lender Stumbles, Causing Banks to Lose Billions in Stock Value,” WSJ, 9 March. Available at: https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4.

    Weil, J. and Eisen, B. (2023b) “Silicon Valley Bank: Tech Lender Stumbles, Causing Banks to Lose Billions in Stock Value,” WSJ, 9 March. Available at: https://www.wsj.com/articles/bond-losses-push-silicon-valley-bank-parent-to-raise-capital-125e89d4.

     

     

    Credits: Malcolm Wong Jun Xiang and Sherilynn Ngerng

  • Digital Finance in a nutshell, and where Malaysia stands

    Digital Finance in a nutshell, and where Malaysia stands

    Malaysia’s Budget 2023 plans towards digitising our industries, particularly digital finance

    Based on Budget 2023 tabled on 28 October 2022, there are a few touchpoints that will help expand digital financial services in Malaysia, powering inclusive growth in the digital economy. Firstly, a service tax exemption was proposed for online banking or financial services and digital payment services effective until 2025 (Ministry of Finance Malaysia, 2022). This will incentivise recipients of digital payment services and local non-bank digital payment services providers, such as payment instrument issuers, merchant acquirers, and payment system operators to expand their business during the tax exemption period until 2025.

    Following this, there are initiatives to help increase the usage of digital finances such as e-Pemula, where e-wallet credit worth RM400 million will be distributed to 2 million youths and another RM800 million credited to individuals from M40 households through e-wallet as well (Ministry of Finance Malaysia, 2022). This form of financial assistance is effective in reaching broader communities due to increased accessibility and convenience through technological advancement and the prevalence of e-wallets.

    Another initiative to increase usage and confidence in digital financial services in Malaysia is taking measures to curb online scams. For example, forming the National Scam Response Centre (NSRC), tightening internet banking security by discontinuing OTP for high-risk transactions, and organising the Financial and Digital Literacy Programme to raise awareness on online scams(Ministry of Finance Malaysia, 2022). 

    Additionally, there are initiatives to increase digital network connectivity, including the Jalinan Digital Negara project (JENDELA) Phase 2, which aims to provide 100% internet coverage in populated areas (Ministry of Finance Malaysia, 2022). An RM700 million allocation was budgeted to be spent on JENDELA in 2023, and it’s expected to improve digital connectivity in 47 industrial areas and nearly 3,700 schools. Also, Digital Nasional Bhd is to expand the 5G network nationwide to cover 70% of highly populated areas in 2023, with infrastructure expenditure allocation worth RM1.3 billion. This will increase the reach of digital financing and allow it to be utilised by the masses, especially those in rural areas. These initiatives are estimated to benefit more than 1 million people in rural areas and reduce the unbanked population from 11% to 8% by 2025. According to World Bank, 88% of Malaysians were considered the banked population in 2021, which indicates their accessibility to financial services regardless of conventional or digital. The net 12% of the unbanked population mostly came from rural areas and was equivalent to 7 million people who could not access any financial services.

    The Budget 2023 is a great step forward in line with the digital finance movement. This is a dire need in Malaysia due to the country’s fast growth rate in mobile banking and e-money transactions, which quadrupled to RM800 billion in 2021. Moreover, the existence of financial inclusion gaps among underserved communities such as women, gig workers, and lower-income earners require significant attention (Hani, 2022). With the rise of digital banking, the credit gap between Malaysians is expected to be filled through the implementation of a personalised financing structure that benefits underserved communities (The Edge Markets, 2022). This will also lead to more convenient and accessible financial services, looking beyond traditional credit scores and home ownership to ensure individuals’ and SMEs’ competitiveness in this rapidly-growing global digital economy.

    However, Malaysia still has a long way to go when it comes to the implementation of digital finance. To promote digital inclusion, Malaysia must first be able to provide 100% internet coverage in the country to make progression into the digital economy a reality (NST Business, 2022). 

    “The government may propose that telco providers offer free data or whitelist certain registered apps necessary for online banking and e-wallets,” says Saify Akhtar, the director of the strategy at Pertama Digital Bhd (NST Business, 2022). He also hopes the government considers allowing third parties to authorise access to specific data via Application Programming Interfaces (APIs) because the regulatory framework for open APIs is currently limited to card and insurance data accessed by data aggregators (NST Business, 2022). It is also important to highlight that there is still low public confidence in digital banking due to the rise in online fraud and scams. Thus, it is crucial that the government prioritises educating its people, particularly senior citizens, about fintech and mobile banking (NST Business, 2022).

     

    How is digital finance different from traditional finance?

    Traditional finance refers to the traditional financial system, which is centred around brick-and-mortar financial institutions such as banks and credit unions and involves the use of physical financial instruments such as cash, checks, and credit cards.

    On the other hand, digital finance refers to the use of digital technologies to deliver financial services such as mobile banking, electronic payment systems, and online lending platforms. Digital finance is a renowned way of financing and usually provides a lower entry threshold and aims to deliver a better customer experience.

     

    Key differences between traditional finance and digital finance

     

    Difference Traditional Finance Digital Finance
    Presence Traditional finance exists in the form of physical bank branches and serve walk-in customers. Digital finance usually does not exist physically as all services are provided through digital means
    Convenience Traditional finance is less accessible, especially in rural areas where there may not be a physical financial institution nearby. Digital finance is generally more convenient than traditional finance, as it allows people to access financial services from anywhere and at any time.
    Accessibility Traditional finance is limited. People have to visit physical banks, and it is only available during working hours. Digital finance is more accessible, especially to underserved populations. It enables people to access financial services through their smartphones or digital gadgets.
    Security Traditional finance might face risks of data leaks from the bank’s centralised server. Digital finance is vulnerable to cyberattacks and malware apps which could leak the users’ data and give malicious parties access to info without the users’ knowledge. 
    Speed Traditional finance transactions can take longer to process, especially if they involve physical documents that need to be mailed or delivered. Digital finance transactions can be completed relatively faster as they can be processed electronically in real time.
    Efficiency Traditional finance is less efficient as its services are carried out by bank officers, and these officers only can serve one customer at a time. Digital finance is more efficient in serving customers. It can serve a bulk amount of customers at the same time without the need for human capital.
    Cost Traditional finance incurs a lot of operating and fixed costs. Digital finance has relatively low operating costs as it does not have a physical presence and requires only software maintenance to keep it running.
    Customer Service Traditional banks can provide tailored one-to-one services to customers and yield a higher customer satisfaction rate. Digital finance is still lacking in providing a satisfactory customer experience as no human interaction is involved and the system may sometimes be down for maintenance.
    Contact Customers can have face-to-face contact in traditional finance. Customers can only access electronic contacts in digital finance.

     

    Which industries in Malaysia are pioneering the digital finance movement?

    In general, the three branches in the finance industry that experienced the biggest digitalization are the payment, lending and e-wallet industries, which combined occupy more than half of the market of fintech companies in Malaysia. Specifically, the payment industry leads the market, with 60 Fintech companies launching products and apps that hold about 20% of the market size. This is due to the surfacing prevalence of digital payment usage, which boomed during the Covid-19 Pandemic as consumers’ paying behaviour largely switched from physical to digital or cashless to reduce unnecessary interactions such as the exchanging of money notes. 

    Next, the lending industry also experienced tremendous growth, represented by a total of 55 companies equivalent to 18% of the market size among Malaysia’s Fintech companies. Notable companies and apps such as Boost Credit, Bigpay, Capbay, and more are platforms that provide lending services outside of conventional banking coverage. They tend to be laxer on the minimum amount of borrowing allowed and their repayment terms. However, these fintech companies might charge higher interest rates than conventional banks as they bear higher risk by dealing with customers of a lower credit score threshold. 

    The third largest digital finance industry is the e-wallet industry, with a total of 43 companies that hold 14% of the market among Malaysia’s Fintech companies. Apps like Touch N’ Go e-Wallet, Boost, Alipay, and ShopeePay have high market penetration among current consumers, especially youths due to its usage convenience and instantaneous transaction speed 

    The three industries mentioned above represent the biggest branches of the digital finance industry in Malaysia and have been growing rapidly in previous years. This rapid growth is also driven by changes brought about by the Pandemic and changing consumer behaviours, such as increased adaptation to technological changes. Many digital finance industries are still expanding quickly. The following section lays out an overview of the trends in the digital finance industry over the past several years.

     

    Market breakdown of Malaysia’s digital finance industry

    The digital finance industry can be granularly broken down into 10 branches. These niches are relatively new industries that have just started their expansion into Malaysia’s market. The biggest player in Malaysia’s digital finance market is the digital payment industry. It consists of companies that marketize various methods and technologies used to facilitate electronic transactions. This can include online banking, mobile payments, digital wallets, and payment gateways among other things. The digital payment industry is a key component of the broader financial technology ecosystem in Malaysia and carries several unique attributes such as vast accessibility, especially to the unbanked population, usage convenience, and speedy transactions.

    The lending industry in the digital finance market is made up by finance companies that are dedicated to lending money to consumers, typically serving the group of people that are unable to borrow from conventional banks. Digital lending apps cover various purchases regardless of their amounts, ranging from car purchases to home appliances and phones. However, digital lending companies might charge a higher interest rate than conventional banks as they impose less stringent standards on their applicants and thus bear a higher risk of default.

    The e-wallet industry refers to the companies that marketize financial applications that allow users to store money, make transactions, and track payment histories on devices like phones and tablets. Digital wallets usually do not require a bank account; instead, consumers can place funds online, which provides underbanked communities the chance to access financial services, thus enabling broader financial inclusion. E-wallets like Touch N’ Go function as more than just a platform to send and receive funds; they usually also have in-built functions for transport services and insurance purchase. 

    The digital remittance industry refers to the companies that provide digital technologies and platforms to facilitate the transfer of money across borders. This can include online platforms, mobile apps, and other digital channels that allow individuals and businesses to send and receive money internationally. The digital remittance industry has grown rapidly in recent years and is transforming the way people send and receive money across borders, making it faster, cheaper, and more convenient. 

    The Insurtech industry refers to the companies that have adopted technological innovations to design and find the balance between cost savings and efficiency in the current insurance industry model. Insurtech explores avenues that large insurance firms have less incentive to exploit, such as offering ultra-customized policies and social insurance and enabling dynamic price premiums according to users’ behaviour. Overall, Insurtech is aimed at making the insurance industry more efficient, cost-effective, and customer-centric by using technology to streamline processes, increase transparency, and customise offerings for different customers.

    The Wealthtech industry refers to the finance companies that provide wealth management services to customers through the use of big data and analytics to improve investment decision-making. Wealthtech aims to develop digital platforms to pool and invest clients’ funds by automated investing algorithms. Take Robo-advisory services as an example—it is an automated online investing platform that uses algorithms to provide personalised investment advice, portfolio management functions, and other financial services. Also, the rise of social trading platforms like eToro allows individuals to follow and copy the investment strategies of successful traders, which enables them to achieve the same return as the trader they follow. Overall, Wealthtech makes wealth management more efficient, cost-effective, and customer-centric by using technology to streamline processes, increase transparency, and customise offerings for different customers.

    The blockchain and cryptocurrency industry in Malaysia refers to companies that provide platforms for cryptocurrencies trading and digital asset management. The cryptocurrency industry in Malaysia currently offers platforms for customers to trade and hold cryptocurrencies like Bitcoin, Ethereum, etc. Although blockchain technology has the potential to disrupt the finance industry, the risk of investing in cryptocurrency is high and uncertain, given the technology is still developing and just having less than a decade of history. Not only that, unlike the equity market, cryptocurrency has less regulatory governance, so investors should look out for the systematic risks of cryptocurrencies such as regulatory risk, programming risk, and market manipulation.

    The Islamic finance industry refers to companies that are backed by Islamic law and provide Shariah-compliance financial services to the Muslim population in Malaysia. The Islamic finance industry has its uniqueness in abiding by the Islamic principles. One of the principles, namely Riba (interest), prohibits the charging or paying of interest, while Maisir (speculation) prohibits investment in certain types of businesses, particularly those that are considered harmful to society or are in conflict with Islamic values; for example, sports betting businesses and alcoholic companies. The Islamic finance industry includes various financial institutions and products, such as Islamic banks, sukuk (Islamic bonds), Islamic insurance, and Islamic funds. The Islamic finance market in Malaysia is considered well-established and diverse, and it continues to grow, making it one of the leading Islamic finance markets in the world, hence attracting foreign investors who look to invest in the country via Islamic finance investment opportunities. 

    Regtech (regulatory technology) is the application of technology to the compliance and regulatory requirements of financial institutions. The Regtech industry helps companies to be more efficient and to effectively comply with the growing number of regulations they are subject to while also reducing the costs and risks associated with compliance. Regtech aims to help financial institutions comply with regulations in more automated and cost-effective ways while also reducing the risk of non-compliance and increasing transparency and security. However, Regtech is still growing at a slow pace. It is considered a niche market in Malaysia as local regulators are still currently relatively conservative about Regtech.

    Lastly, the crowdfunding industry provides a structural platform for connecting potential donors with entrepreneurs or organisations seeking funding. The business model of the crowdfunding industry operates as a middleman for connecting entrepreneurs to donors for funding their business or project. The platform charges a certain percentage of the management fees as operating income. Generally, crowdfunding platform fees vary from 5% to 12%. The crowdfunding business is an alternative way for businesses, projects, and entrepreneurs to access funding aside from conventional banks’ debt or equity financing. Crowdfunding tends to seek capital from individuals and hence has a relatively lower threshold of donation amount.

     

    How can we Malaysians benefit from digital finance? What are the potential cons to look for?

    A report from the World Bank stated that countries with deeper, more developed financial systems can actually achieve higher economic growth and faster reductions in poverty and income equality, especially among developing countries. 

    Digital technologies are making it possible to bring financial services to those who previously have lacked access (almost two-thirds of adults in the developing world). Adopting technology could lower costs by maximising economies of scale, increasing the speed, security, and transparency of transactions, and allowing for the development of sustainable financial products tailored to the needs of people with very low, erratic incomes. Digital finance is removing the barriers to financial services, including those arising from issues such as lack of identification, absence of formal income, and geographical distance.

    A high mobile phone usage rate was the key to achieving digital financial inclusion in many developing countries. Today, there are over 850 million registered mobile money accounts across 90 countries, with $1.3 billion transactions occurring through these accounts every day.  Sub-Saharan Africa has become a leader in mobile money, with over a fifth of the adult population having a mobile money account. This region has also shown that these accounts can provide a basis for more sophisticated financial services, such as digital lending and insurance. Large e-commerce platforms and telecom operators have leveraged the ability of digital finance to facilitate payments to offer services such as insurance and lending.

    One of the most significant benefits of developing digital finance is increased financial inclusion. Digital finance makes financial services more accessible to people who were previously unbanked or underbanked, such as those living in remote areas or those with low incomes. This results in greater economic opportunities and improved financial stability for these individuals. By providing access to basic financial services, digital finance can help people build a better future for themselves and their families.

    Other than that, the development of digital finance can improve the accessibility and convenience of the financial services industry. Digital finance eliminates the need for physical bank branches and ATMs, allowing people to access financial services from anywhere with an internet connection. With solid digital finance development as the backbone of the economy, transactions can be completed faster and with more ease, making it easier for people to manage their finances. Digital finance also enables financial institutions to lower transaction costs and serve massive customers at once, enabling better and quality services to deliver the best customer experience. 

    Another benefit of digital finance is enhanced security and fraud prevention. Digital finance is often more secure than traditional financial services, with multiple layers of security, including encryption and authentication processes. This can help prevent fraud and protect consumers’ financial information. In particular, digital finance platforms often use biometric authentication and multi-factor authentication, making it difficult for fraudsters to access people’s financial information. However, incautious user behaviours may bring about vulnerabilities through security breaches such as the installation of malware apps and viruses that leak users’ data.

    The COVID-19 pandemic has heightened the urgency of using digital financial services to keep financial systems functioning and people safe during time of social distancing, falling demand, reduced input supply, and tightening credit conditions. The development of digital finance can help governments quickly and securely reach people with cash transfers and other forms of financial assistance and reach businesses with emergency liquidity. It is allowing people to transfer funds, enable cross-border remittances, and pay bills from their homes with no physical contact.

    Overall, the development of digital finance has the potential to transform the financial industry and bring numerous benefits to consumers and businesses. This is also aligned with World Bank’s findings of digital financial services, which states that the development of digital finance can benefit people in accessing basic financial services such as transaction accounts, credit, savings products, and insurance. It is crucial as it can help the poor increase their incomes and become more resilient. Lastly, as technological advancement continues to evolve and expand, it is clear that digital finance will play a critical role in shaping the future of finance.

     

    Reference List:

    Top 10 differences between Internet Banking and Traditional Banking (no date) AccountLearning.com. Available at: https://accountlearning.com/top-10-differences-between-internet-banking-and-traditional-banking/ 

    Fintech News Malaysia (2022) Fintech Report 2022: Malaysia charts a new path for Fintech growth, Fintech News Malaysia. Available at: https://fintechnews.my/31945/malaysia/fintech-report-malaysia-2022/ 

    World Bank Group (2020) How countries can expand access to digital financial services, World Bank. World Bank Group. Available at: https://www.worldbank.org/en/topic/financialsector/publication/digital-financial-services (Accessed: March 4, 2023). 

    Written by:  Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong

    Edited By: Abigail Phang

     

  • Everything you need to know about “Sustainable Finance”

    Everything you need to know about “Sustainable Finance”

    What is ‘sustainable finance’?

    Sustainable finance is any form of financial activities and processes in the financial sectors that takes Environment, Social and Governance (ESG) into consideration.

    • Environmental factors – Involves climate change mitigation and adaptation, the environment in general, such as biodiversity preservation, pollution avoidance, and the circular economy.
    • Social factors – Comprises issues of inequality, inclusion, labour relations, human rights problems, investment in human capital and communities.
    • Governance – Includes public and commercial organisations, including management structures, employee relations, and executive compensation, which plays a crucial role in ensuring that social and environmental factors are included in the decision-making process. 

     

    Impact investing

    This is a form of investment made in businesses or organisations that seeks to generate both financial returns and positive social or environmental impacts. Impact investors often focus on sectors such as renewable energy, affordable housing, and education. Impact investments are a type of responsible and sustainable investing, in addition to environmental, social, and governance (ESG) risks to operational or financial performance.

     

    Sustainable finance regulation

    Governments and regulatory bodies around the world are increasingly implementing policies and regulations to promote sustainable finance. These policies can include requirements for financial institutions to disclose their ESG practices and performance, as well as incentives to encourage investment in sustainable projects.

     

    What do the regulations entail? 

    Taxonomies, product standards, disclosures, and labelling; management and disclosure of climate risks; management and disclosure of ESG risks; ESG in stewardship, and green bond rules are the main subjects in sustainable finance regulation around the world. 

    All regions of the world view sustainable finance regulation as essential for boosting market openness and minimising the possibility of greenwashing. The nations of the European Union continue to dominate in terms of the depth and breadth of regulatory efforts. While Asia has accelerated their pace of new initiatives, North America and Australia have also substantially boosted regulatory activity. Additionally, the United Kingdom has the most extensive regulatory structure of any country outside the EU.

     

    Green regulatory landscape in Malaysia

    Several sustainable finance guidelines addressing environmental and social (E&S) concerns have been published and these include:

    Financial institutions are expected to handle climate-related risks in accordance with Bank Negara Malaysia’s Climate Risk Management and Scenario Analysis guidance (BNM) and Value-based Intermediation Financing and Investment Impact Framework (VBIAF) sector guides.

    Financial institutions in Malaysia are also obligated to disclose information in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), the Climate Change and Principle-based Taxonomy (CCPT). Management of this risk would need increased deforestation- and conversion-free commitments from financial institutions and enterprises, and also a categorization system (taxonomy) based on risk for sectors and assets susceptible to biodiversity degradation. This system would potentially assist in the reallocation of capital flows from biodiversity negative to positive initiatives.

    Additionally, the Joint Committee on Climate Change (JC3) is in the process of developing a data catalogue to map accessible climate data sources. This catalogue will aim to enhance disclosure and data accessibility for more openness and harmonisation, which in turn promotes improved decision-making and risk management.

    BNM’s participation in the Central Bank & Supervisors Network for Greening the Financial System (NGFS) and other worldwide platforms is a driving factor for the expansion of excellent regulatory and supervisory practices. Central banks and financial regulators however would need to expedite the full deployment of their monetary policy, regulatory, and prudential powers to enable a quick and orderly transition.

     

    What is ‘greenwashing’?

    Greenwashing is a complicated and broad phenomenon that may arise at any level of the financial chain, resulting in firms being able to create misleading sustainability statements about their operations and policies to make their goods becoming more environmentally attractive. It was initially started in the 1960s, when the hotel industry faced a reduction in their laundry expenses, as they demanded that guests reuse their towels to conserve the environment. Today, brands and products have gone through multiple greenwashing processes, as they are rebranded and repackaged as eco-friendly to persuade and promote consumers on the firm’s sustainability actions.

     

    How is Greenwashing relevant in today’s world?

    According to Diab (2022), although many corporate firms will readily commit to reducing their carbon emissions, they will not react now, and this puts future generations at risk. The government’s absence of regulation and monitoring is an advantage to firms in fulfilling their green objective by maximising their green brand image at the lowest possible financial and operational cost, unfortunately resulting in insignificant environmental effects on the Earth. Apart from maximising profit, firms tend to practise greenwashing to pursue a high trajectory of business growth and shareholder value maximisation, which is unfavourable for our environment.

    To illustrate, Chanel, known for its luxury fashion, has been keeping pace with the changing trends and doing its part in fighting climate change with its climate strategy, Chanel Mission 1.5° (Chanel, 2020). According to Rocha et al. (2022), Chanel borrowed €600 million from its investors by offering its sustainability-linked bonds (SLBs) with certain conditions in 2020. Its Chief Financial Officer sees SLBs as a perfect opportunity to integrate its finance strategy with its corporate strategy based on its sustainability ambitions. Investors were promised that if Chanel did not fulfil specific climate targets, extra returns had to be paid as a penalty for not meeting the targets.

     

    Consequences of Greenwashing

    Greenwashing is detrimental to both consumers and the environment. Consumers may be misled into purchasing environmentally unfriendly products that are advertised. This can lead to a waste of money as well as a loss of consumer trust in environmentally friendly products. Furthermore, by engaging in greenwashing, businesses may be able to avoid making necessary changes to their operations, which can have a negative impact on the environment. A company that claims to be environmentally responsible but continues to use hazardous chemicals in its products, for example, contributes to environmental degradation.

     

    Ways to identify Greenwashing

    Consumers must be able to recognise fraudulent or deceptive environmental claims in order to avoid being taken advantage of by greenwashing. There are several methods for detecting greenwashing, such as looking for vague or unsupported statements. A claim that a product is “eco-friendly,” for example, is ambiguous and impossible to verify, so it should be approached with caution. Another method to help avoid one from falling prey to greenwashing is to look for third-party certifications from organisations such as the Forest Stewardship Council or the Rainforest Alliance. Finally, readers of news stories or visitors to websites that track a company’s environmental performance can learn about its track record of success. Consumers can better educate themselves about which products are truly environmentally friendly and which are simply greenwashed by following these actions.

     

    SDGs behind prevention of Greenwashing

    Companies can meet at least a few of the Sustainable Development Goals (SDGs) by adopting the 6-Steps Approach that refers to the guidance from Ernst and Young Global (2017) provided in contributing and aligning their business towards the SDGs. The 6-Steps Approach are:

    1. Identify and commit
    2. Develop targets and KPIs
    3. Align sustainability and corporate strategy toward targets
    4. Create business opportunities
    5. Collaborate
    6. Measure, assess, document and communicate

    In order to contribute and meet the SDGs, the companies must first realise and identify which SDGs they can commit to through their businesses. The business opportunities and interests of a company can be linked to the existing SDGs and a company’s particular choice of SDGs could form a positive loop, creating a win-win situation for both sides. Companies can start taking a strategic approach and align their corporate priorities with the relevant SDGs. This practice allows them to explore all the opportunities and come up with plans to achieve the mutual goals between the companies and SDG 17.

    Second, companies can develop their targets and KPIs. They should set their own clear targets and key performance indicators (KPIs) to monitor and communicate progress towards SDGs from time to time. The companies should also adjust any existing corporate targets as well as monitoring and measurement methods to meet these new SDG targets and KPIs.

    The next step is to align the sustainability and corporate strategy of the companies toward SDGs. Companies need to reassess how well existing practices are in line with the issues and targets by adjusting the business models, products and services, supply chains, and sustainability strategies towards the SDGs. Also, companies who support the SDGs can start by reducing the link between economic growth and intense use of energy, water efficiency, and lower carbon emissions.

    Through proper alignment of strategies, these companies who set themselves on the path of SDGs are able to create and spot new business opportunities. This, in turn, helps the companies to grow themselves as they create more resilient and prosperous communities, enabling an expansion of their markets and a growth in consumer bases. 

    The fifth step is to collaborate; it is unlikely for a single company to solve any of these problems on its own, and collaboration, both within sectors and across different industries, is crucial to put the puzzle together. The companies can identify collaboration opportunities with the government, peers, customers, suppliers, academia and nonprofit organisations across various industries to achieve mutually beneficial solutions for all. 

    Lastly, the companies should closely measure, assess, document and communicate their actions and results to the public in order to play their part in achieving SDGs. Companies should develop a transparent system that integrates the management of SDGs’ issues into everyday business decision-making and report their accomplishments by issuing a sustainable report to communicate to the public.

    The measurement of a company’s commitment towards the SDGs is dependent on each company as they tend to evaluate themselves based on their own achievements. However, referring to independent organisations such as GRI (Global Reporting Initiative) by the UN will provide a holistic and transparent view of the companies’ progress in pushing the SDGs initiatives.

     

     

    Reference

    Bakken, R. (2021, August 9). What Is Sustainable Finance and Why Is It Important? Harvard Extension School. https://extension.harvard.edu/blog/what-is-sustainable-finance-and-why-is-it-important/

    Broom, D. (2022, January 20). What is sustainable finance & how it is changing the world. World Economic Forum. https://www.weforum.org/agenda/2022/01/what-is-sustainable-finance/

    Chanel. (2020, March). Chanel Mission 1.5°. https://www.chanel.com/my/climate-report/

    Chater, J., Kernoghan, H., & Sigauke, G. (2022, September 21). Greenwashing – a hinderance to sustainable finance. Penningtons Manches Cooper. https://www.penningtonslaw.com/news-publications/latest-news/2022/greenwashing-a-hinderance-to-sustainable-finance

    Diab, K. (2022, March 5). Why do corporations greenwash? Al Jazeera. https://www.aljazeera.com/opinions/2022/3/5/why-do-corporations-greenwash

    Ernst & Young Global. (2017, March 9). Why Sustainable Development Goals should be in your business plan. Ernst & Young. https://www.ey.com/en_my/assurance/why-sustainable-development-goals-should-be-in-your-business-plan

    GRI. (2022, January 17). Most companies align with SDGs – but more to do on assessing progress. Global Reporting Initiative. https://www.globalreporting.org/news/news-center/most-companies-align-with-sdgs-but-more-to-do-on-assessing-progress/

    Hayes, A. (2022, November 8). What Is Greenwashing? How It Works, Examples, and Statistics. Investopedia. https://www.investopedia.com/terms/g/greenwashing.asp

    NatWest. (2021, January 14). Sustainable finance a success story of change. https://www.natwest.com/corporates/insights/sustainability/sustainable-finance-a-success-story-of-change.html

    Rocha, P. A., Rathi, A., & Gillespie, T. (2022, October 4). Empty ESG Pledges Ensure Bonds Benefit Companies, Not the Planet. Bloomberg. https://www.bloomberg.com/news/features/2022-10-04/greenwashing-enters-a-22-trillion-debt-market-derailing-climate-goals?leadSource=uverify%20wall

    UNEP FI. (2017, June 6). The Evolution of Sustainable Finance –. United Nations Environment Programme – Finance Initiative. https://www.unepfi.org/news/timeline/

    World Business Council for Sustainable Development [WBCSD] & World Resources Institute [WRI]. (n.d.). A Corporate Accounting and Reporting Standard (Revised Edition). Greenhouse Gas Protocol. Retrieved December 15, 2022, from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf

     

    Written By:  Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong

    Edited By:  Julia Yazid

  • The Circular Economy – is it a viable step for Malaysian waste management?

    The Circular Economy – is it a viable step for Malaysian waste management?

    Circular economy and cyclical waste

    The circular economy is a production and consumption framework that promotes the reuse, refurbishment, and recycling of existing resources and goods, thus extending the product life cycle as long as possible (European Parliament, 2015). When a product approaches the end of its life, its materials are recycled wherever possible to produce new goods and value (European Parliament, 2015). It eliminates waste and pollution and circulates products by reusing certain commodities as inputs to extend their lifespan (Wiesmeth, 2021). It is time that Malaysia reverts to structural changes in its industries as proposed by the circular economy model that presents us with practices of reusing resources and refurbishing existing products, to fulfil its commitment in the 2015 Paris Agreement to lower its greenhouse gas emission intensity and the 2050 carbon neutrality goal of the 12th Malaysia Plan (Leong, Platts and Woo, 2022; Phang 2022).

    Malaysia and our waste management

    Malaysia is confronting waste management issues due to its rapidly increasing cities and population of over 32 million (Holland Circular Hotspot, 2021). In 2021, Malaysians created 38,427 tonnes of rubbish daily, with 82.5% of the waste ending in landfills (Phang, 2022). Furthermore, the COVID-19 pandemic was expected to create additional clinical waste in 2020-2021 (Holland Circular Hotspot, 2021). Malaysia reported that the country was the biggest consumer of used plastics per year in 2019, compared to various Asian countries (Holland Circular Hotspot, 2021). The nation is also one of the leading producers of fossil-fuel plastic goods. The recycling rate was 28.1% in 2019 (Malaysia Investment Development Authority, 2021). However, not all plastic can be recycled, as evidenced by the existence of microplastics in the food chain (Wiesmeth, 2021). The loss of material value in plastics demonstrates poor waste management and has economic ramifications for the nation and the people (Wiesmeth, 2021). The circular bioeconomy is worth investigating when tackling the issue of waste management by utilising Malaysia’s abundant biomass, particularly in Sabah and Sarawak, where palm oil plantations are located (Holland Circular Hotspot, 2021). A biobased source works in harmony with nature and may dissolve naturally in a typical environment, whether on land, sea, or ocean (Malaysia Investment Development Authority, 2021).

    Standing as a resource-rich land

    Malaysia is bestowed with an abundance of both conventional and renewable energy sources (Sahid, Siang and Peng, 2013). Ironically, our nation’s energy mix of the total primary energy supply has been deteriorating and becoming more unsustainable throughout the years (see Figure 1) (Shadman, Chin and Sakundarini, 2018). Malaysia is increasingly dependent on coal despite its low efficiency and loaded damage to the environment (Kathirgugan, 2021; Salleh, 2022). As of 2018, coals represented 22.3% of our energy mix, up from only 4.2% in 1998 (see Figure 1). Tenaga Nasional Bhd (TNB) generated roughly 66% of the power generated on the peninsula by 2020 using imported coal because Malaysia is not capable of producing coal resources (Salleh, 2022). However, it is still used intensively for the sake of energy security and affordability objectives (Economic Planning Unit, 2022; Kathirgugan, 2021). Based on the latest data, the nation was also a net importer of refined petroleum products, such as fuel oil and motor petrol that power our vehicles (Suruhanjaya Tenaga Malaysia, 2021, 2022). The price of solar energy has been declining over the past two decades, leading to greater potential for its adoption to become one of the best sustainable energy sources that will gradually replace the use of fossil fuels in Malaysia (Lau et al. 2022). Along with continuous efforts of the government, such as The Renewable Energy Act of 2011, the Green Electricity Tariff, and the Virtual Power Purchase Agreement, 18% of the energy utilised by companies in Malaysia last year was green energy, ahead of Vietnam (14%), and Thailand (13%) (Aziz and Liew, 2022).

     Figure 1: Malaysia’s energy mix, 1998 vs 2018, illustrated by author (Source: Suruhanjaya Tenaga Malaysia, 2021)

    Pointing fingers, “No it’s you, no it’s them!”
    According to the current situation, customers blame firms for being unable to deliver environmentally friendly items, while producers blame consumers for failing to recycle owing to a lack of information (Malaysia Investment Development Authority, 2021). The environmentally friendly model may not be in the commercial interest of producers, which means that not all producers are likely to be enthusiastic supporters (Wiesmeth, 2021). The government should create an ecosystem that allows businesses to benefit from the circular economy model, as they will have a more secure and sustainable supply chain because they rely less on finite resources. Policies should align financial institutions’ interests in accelerating circular economy financings, such as providing resources for viable projects, offering insurance products, and developing rating systems that can help improve transparency around sustainability-related business risks (Phang, 2022). It must begin with a rethink of the business model in which all things made are easily recycled, repurposed, or reused while utilising sustainable raw material sources (Malaysia Investment Development Authority, 2021). A favourable business climate for our manufacturing sector, particularly semiconductor and automotive firms, should be followed by more steps targeted at moving to a circular economy.

    When there’s a will, there are endless ways
    The immense support from information and communication technologies (ICT) has cultivated new models, such as car sharing and bicycle sharing on the consumer end (Wiesmeth, 2021). Recycling behaviour among the general public may be encouraged through the use of social media and the engagement of non-governmental organisations (Wiesmeth, 2021). Artificial intelligence (AI)-based technologies such as smart garbage bins, smart vehicles for rubbish collection, and waste sorting robotics can aid in the management of various waste streams, which could also foster job opportunities for technicians (Wiesmeth, 2021).

    3 RRRs… Reduce, Reuse, Recycle
    The most efficient strategy to decrease waste is to avoid producing it in the first place (United States Environmental Protection Agency, 2013). Consumers may be familiar with the concept of recycling but lack knowledge of the importance of the other 2 ‘R’s, which are reuse and reduction. Reuse and reduction are both financially and economically beneficial since they allow things to be utilised to their full potential, reducing the quantity of waste that must be recycled or sent to landfills and incinerators. Awareness should be raised to encourage consumers to maintain and donate products such as clothing, tires, appliances and furniture to prevent frequent replacement and further waste, as those products are not easily recyclable (United States Environmental Protection Agency, 2013). Another issue lies within the recycling of e-waste which recycling activities are not keeping up with the amount of e-waste that people are generating each day (Sobri, 2021). The vast majority of e-waste may include poisonous and possibly hazardous elements, not only to the environment but also to human health in general (Sobri, 2021). However, there is a lack of proper infrastructure and guidance, particularly in recycling e-waste. City planners should also build more recycling bins or infrastructure in busy areas. Empirical evidence has shown that convenience improves composting and recycling rates (DiGiacomo et al., 2018; O’Connor et al., 2010; Rosenthal and Linder, 2021).

    Let’s expand our horizons, there’s not just a one fits all solution
    Many zero-waste initiatives actually contribute to the problem they are trying to solve, according to Professor Shelie Miller, a professor of sustainable systems at the University of Michigan (Eschner, 2020). Reusable recycling bags in replacing single-use plastic bags may not be as eco-friendly as it seems. Note that plastic bags were invented to replace paper bags which were deemed to harm our environment decades ago. Reusable items only save waste if they are reused frequently enough to justify their existence (Eschner, 2020). “We shouldn’t get rid of that,” Miller says. “We just need to broaden that even further.” (Eschner, 2020) Rather than forcing people to accept using recycling bags, alternative solutions (such as zero waste shops) should figure out ways to incentivise people and promote broader inclusion. It requires multiple efforts from different parties to achieve the long-term goal.

    Conclusion
    Although Malaysia is a pivotal producer of natural resources, the method of dependence on primary commodities export is not a sustainable way of financing Malaysia’s economy. Malaysia still has a long journey towards a strategic and sustainable energy mix. Moreover, post-consumer plastic waste output in Malaysia is expected to be more than one million tonnes (Malaysiakini, 2022). Failure to recover the material results in the loss of 81% of the material value of plastics, and this results in a USD 1.1 billion loss of potential material value to Malaysia’s economy (Malaysiakini, 2022). Looking at the circular economy and the awareness that resources are finite, there should be a way to recycle, reduce and reuse in extracting the maximum value from our natural resource production and consumption. We need newer technology to build a sustainably circular production, which will also create high-value jobs and opportunities. Waste management should not be done as a reaction to laws given by the government. For the consumers, there is a gap between understanding the essentials of 3R and the product life cycle of goods. Finally, there is an education gap, and breaching this can help extend the financial responsibility of our youths to not only be more sustainable, but get the best value for their purchase by using it to the max before replacing it.

    References: 

    Al-Maleki, Y. (2016) “Malaysia’s Energy Security Challenges and Opportunities,” in International Conference on Integrated Petroleum Engineering & Geosciences. Springer. Available at: https://www.researchgate.net/publication/333659081_Malaysia’s_Energy_Security_Challanges_and_Opportunities.
    Azhar, K. (2022) Targeted electricity subsidy to be implemented from Jan 1; domestic users and small businesses exempted from tariff hike, The Edge Markets. Available at: https://www.theedgemarkets.com/article/medium-and-high-voltage-electricity-users-among-industry-participants-including (Accessed: December 22, 2022).
    Aziz, A. and Liew, J. T. (2022) Powering up the solar industry, The Edge Markets. Available at: https://www.theedgemarkets.com/article/cover-story-powering-solar-industry (Accessed: December 23, 2022).
    Basyir, M. (2022) Malaysia targeting 40 per cent renewable energy by 2035, New Straits Times. Available at: https://www.nst.com.my/news/nation/2022/07/814972/malaysia-targeting-40-cent-renewable-energy-2035 (Accessed: December 21, 2022).
    Bhattacharya, P. and Hutchinson, F. E. (2022) 2022/21 “Malaysia’s oil and gas sector: Constant expectations despite diminishing returns” by Pritish Bhattacharya and Francis E. Hutchinson, ISEAS-Yusof Ishak Institute. Available at: https://www.iseas.edu.sg/articles-commentaries/iseas-perspective/2022-21-malaysias-oil-and-gas-sector-constant-expectations-despite-diminishing-returns-by-pritish-bhattacharya-and-francis-e-hutchinson/ (Accessed: December 21, 2022).
    Buol, J. J. and Vaughan, M. D. (2003) Rules vs. Discretion: The wrong choice could open the floodgates, Federal Reserve Bank of St. Louis. Available at: https://www.stlouisfed.org/publications/regional-economist/january-2003/rules-vs-discretion-the-wrong-choice-could-open-the-floodgates (Accessed: December 22, 2022).
    Economic Planning Unit Malaysia (2022) National Energy Policy 2022-2040. Available at: https://www.epu.gov.my/sites/default/files/2022-09/National%20Energy%20Policy_2022_2040.pdf.
    Energy Watch (2021a) ICPT to the rescue: Why this mechanism works, Energy Watch. Energy Watch: Igniting The Global Energy Conversation. Available at: https://www.energywatch.com.my/blog/2021/08/11/icpt-to-the-rescue-why-this-mechanism-works/ (Accessed: December 22, 2022).
    Energy Watch (2021b) Reliability, affordability, sustainability: Malaysia’s energy trilemma explained, Energy Watch: Global & Regional Energy Insights, Thought leadership, & Conversations. Energy Watch: Igniting The Global Energy Conversation. Available at: https://www.energywatch.com.my/blog/2021/11/08/reliability-affordability-sustainability-malaysias-energy-trilemma-explained/ (Accessed: December 22, 2022).
    Free Malaysia Today (2022a) PM unveils Low Carbon Aspirations 2040 initiative, Free Malaysia Today. Available at: https://www.freemalaysiatoday.com/category/nation/2022/09/19/pm-unveils-low-carbon-aspirations-2040-initiative/ (Accessed: December 21, 2022).
    Free Malaysia Today (2022b) T20 enjoying RM8bil in fuel subsidies, says Tengku Zafrul, Free Malaysia Today. Available at: https://www.freemalaysiatoday.com/category/nation/2022/07/21/t20-enjoying-rm8bil-in-fuel-subsidies-says-tengku-zafrul/ (Accessed: December 22, 2022).
    Grubel, H. and Lloyd, P. J. (1971) “The Empirical Measurement of Intra- Industry Trade,” Economic Records, 47(4), pp. 494–517. doi: 10.1111/j.1475-4932.1971.tb00772.x.
    Hamzah, S. R. (2022) Reliable, efficient energy key to economic recovery, The Edge Markets. Available at: https://www.theedgemarkets.com/article/reliable-efficient-energy-key-economic-recovery (Accessed: December 21, 2022).
    Hin, R. K. B., Kheong, K. C. and Wei, V. H. P. (2022) Malaysian Government launches the National Energy Policy 2022-2040, Lexology. SKRINE. Available at: https://www.lexology.com/library/detail.aspx?g=58374bf0-6181-4c40-b5c8-20828aa52a46 (Accessed: December 22, 2022).
    Kathirgugan, K. (2021) Malaysia should shake off its increasing addiction to dirty coal, Free Malaysia Today. Available at: https://www.freemalaysiatoday.com/category/opinion/2021/04/08/malaysia-should-shake-off-its-increasing-addiction-to-dirty-coal/ (Accessed: December 21, 2022).
    Khalid, S. (2022) Petronas’ 2022 Fortune Global 500 rises to 216 from 277 in 2021, The Edge Markets. Available at: https://www.theedgemarkets.com/article/petronas-2022-fortune-global-500-rises-216-277-2021 (Accessed: December 21, 2022).
    Lau, L. S. et al. (2022) “Expert insights on Malaysia’s residential solar-energy policies: shortcomings and recommendations,” Clean energy, 6(4), pp. 619–631. doi: 10.1093/ce/zkac043.
    Leong, Y. Y., Platts, M. J. and Woo, W. T. (2021) Viewing the 12th Malaysia Plan through the lens of decarbonisation, The Edge Markets. Available at: https://www.theedgemarkets.com/article/my-say-viewing-12th-malaysia-plan-through-lens-decarbonisation?type=opinion (Accessed: December 21, 2022).
    Murugiah, S. (2022) Malaysia ranks among top 10 nations with cheapest gasoline prices, The Edge Markets. Available at: https://www.theedgemarkets.com/article/malaysia-ranks-among-top-10-nations-cheapest-gasoline-prices (Accessed: December 22, 2022).
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    Salim, S. (2021) 12MP: Malaysia committed to becoming carbon-neutral nation by 2050, says PM, The Edge Markets. Available at: https://www.theedgemarkets.com/article/12mp-malaysia-committed-becoming-carbonneutral-nation-2050-says-pm (Accessed: December 22, 2022).
    Salleh, N. H. M. (2022) Is Malaysia ready to leave coal behind in renewable energy push?, MalaysiaNow. Available at: https://www.malaysianow.com/news/2022/04/13/is-malaysia-ready-to-leave-coal-behind-in-renewable-energy-push (Accessed: December 21, 2022).
    Shadman, S., Chin, M. M. and Sakundarini, N. (2018) Energy security in Malaysia: Current and future scenarios, University of Nottingham Asia Research Institute. Available at: https://theasiadialogue.com/2018/12/11/energy-security-in-malaysia-current-and-future-scenarios/ (Accessed: December 21, 2022).
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    Written by; Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong
    Edited By: Angellina Choo

  • Inside the Buy Now Pay Later industry with myIOU

    Inside the Buy Now Pay Later industry with myIOU

    Introduction

    The luxury of not paying immediately was once reserved for credit card holders But now there are new kids on the block as Buy Now Pay Later (BNPL) services have expanded access to financial flexibility to a wider and bigger audience.  

    BNPL services as a whole have certainly caused a whirlwind worldwide as it reached $200 billion in global transaction value for 2022. In Malaysia alike, the Buy Now Pay Later market is seen to be brimming with many ambitious entrants, with myIOU being one of the standouts.

    So what is BNPL and how does it work? FLY journalists Zer Yan and Zi En had an opportunity to chat with Gwen Khor, Head of Marketing of myIOU, where we demystify what Buy Now Pay Later offers, how to properly respond to its risks, and what makes myIOU so special within a very crowded market?

     

    What is Buy Now Pay Later? 

    “It allows you to get your purchase immediately, hence Buy Now, but splitting the price into instalments, defining Pay Later, which sums up the abbreviation of Buy Now Pay Later” – Gwen Khor 

    Gwen kicks off the interview by enlightening us about the true definition of BNPL. As mentioned, Buy Now Pay Later is a digital payment alternative that allows one person to make immediate purchases and split the payments into affordable instalments overtime. BNPL does not only provide a service for customers, but to merchants and stores as well. It aims to add value to their products by helping increase sales and customer groups. Since BNPL companies do not charge interest for instalments, they earn profit by charging a service fee towards all the stalls and merchants that are participating in the programme. 

    According to Gwen, we, as Malaysians, are accustomed to the usage of credit card instalments in the consumer market. However, this privilege is currently restricted to credit card users, making it inaccessible to those who aren’t eligible to use them, such as university students or fresh graduates entering the workforce. Buy Now Pay Later acts as a new alternative that is targeting these groups, consisting primarily of debit card holders and young adults, to enjoy paying in instalments before they are eligible to use a credit card. 

    There are a few other notable differences between BNPL and credit card services. Firstly, BNPL does not block any credit on your card. For example, when a customer purchases something that is worth RM8000 on their credit card, this amount is immediately blocked on their account. If they only have a RM10000 limit, only RM2000 would be allowed to be utilised until the previous money has been paid. 

    Furthermore, BNPL services typically charge 0% interest. Even though credit cards offer instalments, many of them charge a certain minimum interest. Moreover, customers can benefit from better cash flow management. For example, if someone would like to purchase something valued at RM 1000. Instead of utilising the RM1000 once, Buy Now Pay Later helps in splitting the amount, for example to RM300 per month. This will help you in having a stronger cash flow, which aids in managing any potential emergencies. 

     

    The story of myIOU so far

    Interestingly, myIOU is actually not the first venture of its parent company, IOUpay, but in fact, an indirect brainchild of their origin business – transaction messaging services.

    Remember the OTP/TAC that we all need to enter when buying something online? Through Gwen, we found out that IOUpay actually started off as the aggregate generator of transaction-related messages. Messages can be sent on behalf of clients such as big banks and corporations to customers in order to help authenticate customers or inform about loyalty programs.

    IOUpay’s expertise with financial institutions, their main clientele, became a catalyst to the launch of myIOU – the BNPL arm of IOUpay. They believe it could fulfil a product gap which traditional banks could not serve due to their stringent regulatory environment.

    According to Gwen, myIOU aims to be part of an ecosystem, which would create synergies with IOUpay’s other business lines, such as their newly-acquired subsidiary which provides civil servants salary deduction services to banks. For example, myIOU could actually serve as a stopgap to provide short-term funding for civil servants who are under probation and are yet to be qualified for a bank’s personal loan application. Such an ecosystem would also help IOUpay generate sufficient cash flow to run myIOU in a very margin-slim BNPL market. 

    With regards to how myIOU differentiates itself in a very crowded field of Malaysian BNPL providers, Gwen first mentions the fact that myIOU provides longer tenures for repayment, spanning up to 6 months in instalments, while still being completely free of interest. This practice is believed to be starkly different to other firms, who may include hidden charges for longer instalments. Furthermore, Gwen stressed on the fact that IOUpay has been a strong advocate of responsible financial management. myIOU is not believed to just have its eye on the BNPL market itself,  but rather a component of the ecosystem above to help achieve financial stability. Finally, the fact that IOUpay is a listed company in Australia provides stable funding for the firm, and hence guarantees stability for merchants under myIOU.

     

    Marketing myIOU

    Touching on her responsibilities as the Head of Marketing in IOUpay, Gwen mentions that her day is normally occupied by discussions with senior management which aid in the achievement of the firm’s various targets. Furthermore, as a different direction is set for the company quarterly, she would then have to lead a market research plan that aligns with such direction (eg. liaising with the sales team to strategize marketing for their merchants). Finally, she also reveals that it is a role that requires a lot of reading, as a broad base of knowledge is needed for market research to be effective.

    On myIOU’s marketing approach, Gwen starts by clarifying that myIOU is not a mass-market product, but instead focuses its effort to a very defined target audience – population between the age of 18 to 39. Such a focus is translated into efforts which will maximise their exposure to the base. Part of their efforts include offering a Shariah-compliant BNPL alternative and also choosing Yuna, a wildly popular singer among the young, to be the face of myIOU. These efforts would also set a good foundation for expansion into neighbouring nations such as Indonesia.

     

    Persuading Merchants to Hop On Board 

    “These merchants could be offering their products to probably our parents. But parents grow old, and they will need to replace these customers. And all of you here are actually the future consumer that is going to spend. So we are helping the merchants to actually prepare for a new group of customers with a younger demographic. – Gwen Khor”

    In Gwen’s perspective, one of the strongest points to convince merchants to adopt BNPL services is by telling them it  targets a new group of customers with a younger demographic. The current merchants could be offering the items, or their services to the generation of our parents. As our parents continue to grow older, the younger crowd is needed to replace them as a new customer group. Hence, the Buy Now Pay Later service helps the merchants to prepare for a younger demographic of consumers. 

    Adopting BNPL has many other benefits. With BNPL, items are more affordable as it allows customers to pay smaller amounts in longer periods. Merchants also benefit in terms of exposure as Buy Now Pay Later companies typically publish all participating merchants on their marketing channels. Companies also work with social media influencers to spread the word about the service, which would further expose customers to the merchants. Due to the large number of clients that banks have, conventional credit cards are unable to provide this benefit. 

     

    How about the risks？

    Overspending may be a risk associated with the use of Buy Now Pay Later services. To respond to such risk, Gwen states that this should not only be the consumer’s responsibility, but to be borne by BNPL firms themselves too. She mentions the role that a credit assessment system plays in averting such risk. Using myIOU as a case, access to the myIOU platform would only be granted if users pass a credit check through verification of their personal info. In contrast to other apps with interfaces that may encourage excessive spending, the homepage of myIOU clearly shows the user’s credit balance, hence instilling financial discipline in the user itself. All the above efforts are how myIOU fulfils its responsibility to avert the risks associated with BNPL.

     

    The future of myIOU

    myIOU has so far posted impressive results in terms of its total transaction value and customer activation numbers. Faced with the exciting yet uncertain future the BNPL market faces, Gwen believes that myIOU has a very bright future outlook since she personally experienced the growth when joining in 2021. She states that IOUpay’s main strategy is to prepare way ahead before things get stagnant. First of all, they have taken steps to increase financial flexibility, IOUpay have successfully attained several partners which will help fund the development of their products. Secondly, they are preparing the launch of various supplementary products, eg. a Visa-branded prepaid card which would enable consumers to continue to enjoy BNPL transactions at merchants not affiliated with myIOU. Finally, these steps would then enable the service to be matured in Malaysia and hence bring greater profit.

     

    Final Statements

    Despite calls to tighten regulation as indicated in the newly-released 2023 Budget, there is much to expect from the BNPL industry in the future. Gwen believes that increased regulation could actually restrict BNPL companies from practising unethically, and through the implementation of a universal credit scoring system, users could be more effectively vetted. Hence, such changes would actually lower the overall risks and increase reliability of Buy Now Pay Later services.

    When presented with the opportunity to provide any further advice to the youth, a demographic with relatively low financial literacy, when using BNPL services. Gwen stresses again on the principle of buying within your own limit. Be a smart consumer and do not shop out of your means!

    “Even though we are in the industry, we are not advocating everybody to solely use BNPL, but just as an alternative product, which enables you to have flexibility on your cash flow – Gwen Khor”

    Secondly, Gwen believes that BNPL should be treated as an alternative payment method instead of the main spending tool. The service should only be used when the stuff needed is essential and BNPL can help further the user’s financial flexibility. Young users should be encouraged to really understand their financial situation or have a clear picture of their budget first before deciding to use Buy Now Pay Later services. Knowing yourself better is the way to spend better!

     

    “This is my advice to the young people, which is to get to know yourself better. – Gwen Khor”

     

    Researcher(s): Zer Yan, Zi En 

    Reviewer(s): Emeline Yong and Elina Yong

    Editor(s): Ayziel

     

  • The Importance of Financial Inclusion

    The Importance of Financial Inclusion

    Medium, small, and micro enterprises (MSMEs) make up 99% of total business in Malaysia. MSMEs also employ north of 7 million people, or, a staggering 65% of the employed population. 

     

    To quote SME Corporation Malaysia’s definition, “it refers to firms with sales turnover not exceeding RM20 million OR number of full-time employees not exceeding 75”.

    Another large sector of the Malaysian economy is the informal sector – characterised by economic activities outside legal purview – with an estimated 3.5 million workers. Because of the lack of formal arrangement, these workers do not enjoy benefits from law or social protection (insurance such as EPF SOCSO). 

    Examples of informal workers include domestic workers, street vendors, and even the self-employed. At the peak of the pandemic, among the most pressing economic issues was how MSMEs could be sustained when so few of them were digitised and consequently had to close-shop. In May 2020, Malaysia’s unemployment reached an all time high of 5.3%; a devastating period when suddenly, people found themselves without income but still with a houseful of mouths to feed. In 2020, although everyone faced a lockdown, not everyone felt it in equal magnitude; those already disadvantaged in pre-covid times and especially low-skilled or informal workers were the hardest hit.

    This is where financial inclusion enters – to ensure equitable development across all sectors and demographics.

    To quote the World Bank, the definition for financial inclusion is:

    “Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.”

    TLDR; without credit access, an agricultural business for example, would not be able to obtain loans for their seeds or fertilisers.

    Without banking service access (including financial literacy and infrastructure), individuals would have no savings for their child’s education or insurance to protect themselves in emergencies. Ultimately, this results in social inequalities being exacerbated as underprivileged groups miss out on resources for upward social mobility.

     

    The broadest, most at risk group would be the unbanked (unserved) and underbanked (underserved) in Malaysia – comprising around 12.5 million adults.

    Hence, the end-goal of financial inclusion is to not only reduce the number of unbanked or underbanked, but to also ensure that target, vulnerable groups remain resilient in the face of economic fluctuations, thus alleviating poverty.

    Promoting national financial inclusion is one of Bank Negara Malaysia’s (BNM) core functions.

    What BNM is doing:

     

    Digital Divide as the Ultimate Hurdle for Financial Inclusion

    Digital infrastructure is the most vital precondition for development in the present age. Without a digital device or internet access to online learning resources, students fall behind. Meanwhile, teachers get flooded with tasks that could’ve been streamlined by technology, eating into energy that could’ve been otherwise invested in their students.

    As schools become dilapidated, employment remains low or at a low-income, and the economic prospects of the area stagnate. Banks, the providers of financial credit, are the most capable of empowering economic activity here but, how come we don’t see more commercial banks setting up more branches in rural areas?

    Problems shared by both demand and supply sides for financial services in rural areas include: lack of financial literacy and of proof documents, as well as poor internet connectivity. Other supply-specific problems include; high costs of setting up and high default risks. Demand-specific problems include; a lack of confidence and the misuse of capital. These cascading issues can be traced back to the lack of digital infrastructure.

    Whilst Kuala Lumpur is a metropolitan capital, sadly, the rest of Malaysia couldn’t look more starkly different. For example, while the national average for broadband penetration is 127.1%, Sabah’s is only at 81.2%.

    (To read more on this issue, head to WikiImpact’s ‘Impact Sabah’)

    Hence, the issue of financial inclusion cannot be addressed in isolation but must also take into account the environmental factors of the most underserved demographics.

    This calls for a cohesive effort between major stakeholders in telecommunications, financial institutions, and city planning, lest we wish to see the rest of Malaysia to be left in the dust.

    To quote former BNM governor, Zeti Aziz, in her 2014 keynote address for AFI’s global policy forum:

    “Economic growth, no matter how stellar, will begin to fade when inequality sets in, and as income disparities widen.”

    And in a webinar for MIT Sloan in 2021:

    “There is (also) no shortcut solution for addressing rising inequalities … the responsibility of addressing inequality shouldn’t fall solely on the central bank. The central bank should interface with other agencies but establish clarity on who is responsible for what.”

     

    Researcher(s): Jennifer Ley

    Reviewer(s): Muhammad Bahari

    Editor(s): Maryam Nazir Chaudhary

    Designer(s): Sonia

    1. Malaysian Digital Economy Corporation. [cited 2023Jan27]. Available from: https://mdec.my/digital-economy-initiatives/for-the-industry/sme 
    2. Oecd. Malaysia MSME [Internet]. OECD iLibrary. OECD; 2022 [cited 2023Jan27]. Available from: https://www.oecd-ilibrary.org/industry-and-services/financing-smes-and-entrepreneurs-2022_3bc2915c-en  
    3. Issues and Challenges of Financial Inclusion Among Low-Income Earners In Rural Areas of Malaysia, Sharizan S., Turkish Journal of Islamic Economics, Vol. 8, 2021
    4. Digital divide sabah. Wiki Impact. [cited 2023Jan27]. Available from: https://www.wikiimpact.com/digital-divide-sabah/
    5. Department of Statistics Malaysia. [cited 2023Jan27]. Available from: https://www.dosm.gov.my/v1_/
    6. Tapping into the potential of digital banking, The Star, June 06, 2022
  • Watch out for Derivative Bombs in 2023

    Watch out for Derivative Bombs in 2023

    Introduction

    “In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” Warren Buffett

    One still remembers the disastrous Global Financial Crisis (GFC) that happened over a decade ago and its ramifications that spurs reminiscence about undermined and proliferation of unregulated financial derivatives during that time. The excessive risk and over-extended leverage taken by speculators in derivatives trading have the capacity to expose the economy to systemic risks, as derivatives markets are free from the constraints of the real economy because their value is derived from financial assets and indices (Amadeo, 2021; Bajracharya, 2009). Greater regulation was followed by the third Basel Accord, a framework that sets international standards for banks. However, no matter what regulations are put in place, there are always channels to go around them (Bajracharya, 2009).

    Bank for International Settlements (BIS), the bank for central banks, recently reported concerns surrounding the issues of US dollar-denominated debt in currency derivatives such as swaps and forwards that are off-balance sheets (Borio, McCauley and McGuire, 2022, p. 67). In other words, they are hidden under the current accounting reporting framework and standard debt statistics. The majority of this hidden debt is due to the ever-expanding and intertwined links between the conventional financial system and the shadow banking sector (bank-like activities outside the traditional banking sector, such as funds) (Davies, 2022). 

    Therefore, it poses challenges to policymakers in scrutinising the situation as there are only shreds of information about the geographic distribution of the missing debt (Borio, McCauley and McGuire, 2022, p. 67-8). According to the BIS, this is an issue as swaps were a flashpoint during both the GFC and the early days of the Covid-19 pandemic when the US dollar funding prompted central banks to intervene to assist struggling borrowers (Ritchie, 2022). The explosion of the hidden debt is anticipated as the black swan event to look out for in 2023.

    The types of Derivatives; Foreign Exchange Swaps/Forwards and Cross Currency Swaps

    A foreign exchange swap or forward begins as an agreement between two parties with both wanting to borrow one currency and lend another simultaneously at an initial date (CFI Team, 2022b). The parties exchange quantities of equal value at the spot rate (current exchange rate), and then exchange amounts are determined by the forward rate when the contract matures. This arrangement allows each party to receive the currency lent and return the currency borrowed (CFI Team, 2022b). Note that the forward rate is simply the exchange rate on a future transaction, determined between the parties based on expectations.

    Illustrative example (assuming numerical values)

    Suppose Party A is from Malaysia and needs USD, whilst Party B is from the United States and needs MYR. Suppose both parties entered into a swap for six months. They agreed on the initial amount of RM100,000 or $25,000, based on an abstract spot rate of 4 USD/MYR. Both agreed on a forward rate of 4.5 USD/MYR as they deem that MYR will depreciate relatively to USD. After six months, Party A will then return $25,000 to Party B and receive RM112,500 from Party B, ending the swap. It allows both parties to hedge against forex risks and predict cash flows in the future. It is also evident for large entities such as central banks to engage in swaps/forwards without impacting the exchange rate.

    The difference between foreign exchange swaps and cross-currency swaps is the interest payment (CFI Team, 2022a). Suppose a European firm needs US dollars to invest in the United States, and the firm may find it expensive to borrow, which is evident as the dollar index has risen sharply in response to the aggressive rate hike by the Federal Reserve this year. Through a swap bank (acting as a middleman), the European firm may find a US firm with the opposite demand, as the US firm will find it relatively expensive to borrow euros since it is not a domicile firm (not based in Europe). Hence, cross-currency swaps function by finding a counterparty from a foreign country that can borrow at a lower local rate (CFI Team, 2022a). At the same time, the party borrows at their domestic rate, and the two parties promptly swap debt obligations. From our example, the European firm is responsible for repaying the dollar-denominated debt based on the lower local rate that the US firm borrowed. By using cross-currency swaps, entities could benefit from a lower borrowing cost and eliminate fluctuations in foreign exchange prices as the rate has been determined initially (CFI Team, 2022a). However, the risk is obvious as counterparties may fail to meet their obligations in repaying their loan (CFI Team, 2022a).

    Why is it troublesome now?

    Simple – Payment obligations arising from foreign exchange swaps/forwards and currency swaps are currently at staggering levels. The outstanding amount considering all currencies stood at $97 trillion as of end-June 2022, equivalent to the global GDP in 2021 and three times the global trade (Borio, McCauley and McGuire, 2022, p. 69). Dollar-denominated debts alone accounted for $80 trillion, exceeding the combined value of dollar Treasury bills, repurchase agreements, and commercial paper (Ritchie, 2022). Furthermore, the average swaps and forwards’ short maturity present the possibility of liquidity squeezes, with 80% of outstanding amounts maturing in less than a year as of end-June 2022 (Borio, McCauley and McGuire, 2022, p. 69). The problem arises when dollars become scarce, especially when borrowers frequently employ short-term swaps to purchase long-term assets (Davies, 2022). To see the sheer volume of settlement risk, Glowka and Nilsson (2022, p. 76) reported that in April 2022, $2.2 trillion of daily forex turnover was subject to settlement risk. The absolute on-balance sheet debt obligation and settlement risk is enormous, let alone those debts that are been hidden from the books.

    Figure 1 Forex swaps, Forex forwards and currency swaps outstanding, by currency (left) and maturity date (right) (Borio, McCauley and McGuire, 2022, p. 69)

    Conventional accounting standards let banks, pension funds, insurers, and others to only record their net derivatives exposure (Davies, 2022). The initial net exposure with a forex swap is zero and will only increase or decrease if exchange rates fluctuate (Davies, 2022). Although one may hide their debt obligations, the swaps and forwards need to be repaid eventually to the counterparty to complete the deal on the maturity date (Fox, 2022). As long as the foreign entity hangs onto the US-based asset, it has a currency obligation until the trade is completed (Fox, 2022). The concealed dollar debt unrecorded on the balance sheets of non-US banks and shadow banks as of June 2022 was $65 trillion, which was 2.5 times the size of the entire US Treasury market and accounted for 14% of global financial assets (Borio, McCauley and McGuire, 2022, p. 69-70; Davies, 2022; Ritchie, 2022). The figures have nearly doubled since 2008 (Davies, 2022). The missing dollar debt is mostly held outside the United States, with banks and non-banks holding approximately $39 trillion and $26 trillion, respectively (Borio, McCauley and McGuire, 2022, p. 69-70).

    Figure 2 US dollar-denominated debt held by non-banks outside the United States (left) and non-US banks (right) (Borio, McCauley and McGuire, 2022, p. 70)

    The Policy challenges, what the outlook is, and conclusion

    The foreign exchange and currency swap markets are prone to financing squeezes. This is significant during times of economic and financial turbulence, such as the GFC and in March 2020, when the COVID-19 epidemic wreaked havoc (Fox, 2022). Swap markets emerged as a flash point in both periods, with dollar borrowers compelled to pay exorbitant rates if they could borrow at all (Fox, 2022). Disruptions in dollar funding will pose systemic risks in the financial markets, and we may expect a financial meltdown whose scale is larger than the 2008/9 GFC. Exceptional policy in the form of central bank swap lines, whereby the Federal Reserve will transmit US dollars to major central banks, will be hard to implement and target due to asymmetric information  (Borio, McCauley and McGuire, 2022, p. 71). 

    However, the event this time is extraordinary. Off-balance sheet debts may be out of sight and out of mind for the time being. The concealed leverage and maturity mismatch in the portfolios of pension funds, insurance firms, and other entities, will only be revealed when the next dollar squeeze unfolds (Borio, McCauley and McGuire, 2022, p. 71). The situation will be accelerated by the possible continuous appreciation of the dollar, predicted by Alan Greenspan, former governor of the Federal Reserve Board (Sor, 2022). He said that the dollar would stay strong even if the Fed eventually eases up on rate hikes and pivots (Sor, 2022). Policy responses set to replenish the flow of funds would remain hazy and uncertain. The brink of collapse of the pension funds in the United Kingdom and Credit Suisse are not independent events and won’t be the last shocking event that we will navigate in the near future.

    Researcher(s): Yeoh Jia Xin

    Reviewer(s): Sherilynn Ngerng Siew Fong, Muhammad Bahari, Elina Yong

    Editor(s): Marcus

    References:

    Amadeo, K. (2021) Role of derivatives in creating mortgage crisis, The Balance. Available at: https://www.thebalancemoney.com/role-of-derivatives-in-creating-mortgage-crisis-3970477 (Accessed: December 12, 2022).

    Bajracharya, S. (2009) Are derivatives the cause of a financial crisis?, Research Gate. Available at: https://www.researchgate.net/publication/284174149_Are_derivatives_the_cause_of_a_financial_crisis (Accessed: December 12, 2022).

    Borio, C., McCauley, R. N. and McGuire, P. (2022) “Dollar debt in FX swaps and forwards: huge, missing and growing,” in Borio, C. et al. (eds.) BIS Quarterly Review. Bank for International Settlements, pp. 67–73. Available at: https://www.bis.org/publ/qtrpdf/r_qt2212h.pdf.

    CFI Team (2022a) Cross currency swap, Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/foreign-exchange/cross-currency-swap/ (Accessed: December 12, 2022).

    CFI Team (2022b) Foreign exchange swap, Corporate Finance Institute. Available at: https://corporatefinanceinstitute.com/resources/derivatives/foreign-currency-swap/ (Accessed: December 12, 2022).

    Davies, P. J. (2022) It’s the $65 Trillion in Debt You Can’t Find That’ll Get You, Washington Post. Available at: https://www.washingtonpost.com/business/its-the-65-trillion-in-debt-you-cant-find-thatll-get-you/2022/12/05/92560836-749d-11ed-a199-927b334b939f_story.html (Accessed: December 12, 2022).

    Fox, M. (2022) “There’s an $80 trillion ‘blind spot’ in the financial system that could spell trouble for markets as debts held off-balance sheet grow at a rapid pace,” Business Insider, 7 December. Available at: https://markets.businessinsider.com/news/currencies/80-trillion-off-balance-sheet-debt-blind-spot-financial-system-2022-12 (Accessed: December 12, 2022).

    Glowka, M. and Nilsson, T. (2022) “FX settlement risk: an unsettled issue,” in Borio, C. et al. (eds.) BIS Quarterly Review. Bank for International Settlements, pp. 75–81. Available at: https://www.bis.org/publ/qtrpdf/r_qt2212i.pdf.

    Ritchie, G. (2022) ‘Huge, missing and growing’: US$65 tril in dollar debt sparks concern, The Edge Markets. Available at: https://www.theedgemarkets.com/article/huge-missing-and-growing-us65-tril-dollar-debt-sparks-concern (Accessed: December 12, 2022).

    Sor, J. (2022) “The US dollar will stay strong even once the Fed eases rate hikes, and the central bank’s balance sheet reduction is the ‘elephant in the room,’ former Fed chief Alan Greenspan says,” Business Insider, 2 November. Available at: https://markets.businessinsider.com/news/currencies/alan-greenspan-us-dollar-dominance-fed-rate-hikes-quantitative-tightening-2022-11 (Accessed: December 18, 2022).

    Researcher(s): Yeoh Jia Xin

    Reviewer(s): Sherilynn Ngerng Siew Fong, Muhammad Bahari, Elina Yong

    Editor(s): Marcus

    Designer(s): Qurratul Ainin

  • The strengthening of the dollar and its effects on emerging markets

    The strengthening of the dollar and its effects on emerging markets

    The Dollar has just gone up by around 19%, according to the Dollar Index (DXY), which is measures the strength of the USD relative to a basket of other foreign currencies. This simply means that it is now more expensive to buy dollars, and dollars can buy more of other currencies. To put things into context, the dollar is now at parity with the euro ($1 could be exchanged for €1), for the first time in 20 years.

    Figure 1: DXY graph for 2022

    So why has the dollar been strengthening so dramatically?

    Inflation in the US has spiraled out of control this year reaching up to 9.1% in June 2022, almost 5 times the Federal Reserve’s target rate of 2%. The pandemic has caused mass food supply chain disruptions causing food prices to rise. The Russian invasion of Ukraine has led to a global spike in energy prices. Fertiliser shortages from Ukraine, topped with poor harvests and livestock illnesses, have jacked food prices up even higher. The daunting effects of international crises have spilled over to domestic households in the USA and consumers are paying the price.

    In order to combat the rising inflation, the Fed has taken a hawkish monetary policy stance to keep inflation under control. By raising interest rates, borrowing costs would increase and in theory, this would reduce demand, easing the upward pressure on prices. Hence in just 6 months, the Fed has raised interest rates from 0.25% to a staggering 3.25%, with aggressive rate hikes of 75 basis points (0.75%) in June, July, and September. And the Fed doesn’t aim to stop there just yet – it is expected that the Fed will raise their interest rates to 5% by March 2023 in order to curb the two-decade-high inflation.

    Figure 2: Federal reserve interest rates in 2022

    When the Fed raises its interest rates, the demand for the greenback increases as investors worldwide seek to profit from higher short-term interest rates. These inflows of foreign funds into the US are known as “hot money”. To better illustrate this mechanism, foreign investors could get higher returns when they deposit money in a US bank, rather than in a European bank, when interest rates in the US are higher. As such, investors are more inclined to exchange their money for dollars to be deposited. Following the mechanism of demand and supply, the value of the currency would then gain strength.

    Interest rates aren’t the only factor driving up the demand for the USD – stocks, bonds, real estate, and cryptocurrency are underperforming and have just become riskier to invest in. The USD benefited from a confluence of recent events – volatile financial markets, supply chain issues, global inflation, etc. With less confidence to invest in riskier assets, investors opt to place their money on the dollar which is regarded as their safe haven, an asset that could retain or even increase its value during an economic downturn.

     

    How is this important to other countries?

    Being the world’s reserve currency, the dollar plays a significant role in the international market. Most international financial transactions take place using the USD – a large portion of international loans and about 60% of international and foreign currency liabilities are denominated in U.S. dollars, USD. With the dollar’s global significance, the impact of its strengthening reaches beyond its borders and affects financial markets around the world.

    Among them, emerging markets (EM) have been hit particularly hard by the stronger dollar. Emerging markets are generally developing economies that are transitioning to being “developed” through industrialisation, such as Brazil, Malaysia, China, and Pakistan. Despite experiencing rapid economic growth, most open emerging economies are price takers when it comes to international trade – their economies are not significant enough to affect the global market.

    Imported inflation and trade troubles

    In emerging economies, dollar strength translates into higher import costs. Due to the dollar’s stability and store of value, most key commodities such as crude oil, wheat, and copper are priced in dollars when traded. With the USD on the rise, the purchasing power of non-US currencies declined and imports became more expensive for EMs. Hence, there arises a concept that a higher-valued dollar exports inflation to other economies. Annual inflation in Argentina skyrocketed to a rate of 50%, and Turkey at 70%. Countries such as Turkey, Egypt, and Kenya are deemed to be at financial risk due to their heavy reliance on food and energy imports while experiencing major current account deficits.

    A significant rise in the dollar would in turn depress global trade growth as countries become less engaged in trade, in light of spiking commodity prices. For most developing countries that are especially dependent on global trade, the value of their GDP would likely take a hit. This is unfavourable for China – small and medium enterprises may experience a squeeze in profitability as the renminbi weakens against the dollar. It would likely produce knock-on effects and exacerbate the situation in EMs given their ties with Chinese supply chains and export markets.

    However, this may not be the case for export-led EMs. On the flip side of imports being more expensive, EMs exports become cheaper for foreign buyers. Increased foreign demand for exports means GDP would increase, which helps to offset other negative impacts of the stronger dollar. Commodity-exporting economies could also benefit from dollar-strengthening. As the world’s largest copper exporter, Chile saw its currency gain 8% in the first quarter since the dollar’s value was raised. However, the Chilean Peso dropped afterward due to slowing world copper demand stemming from production cuts in China.

    Capital flight and dampened economic growth

    Most emerging economies rely heavily on foreign investments as it forms the basis for businesses and the economy to grow. However, as the US hikes its interest rates, foreign funds totaling more than $38bn have pulled out from EMs within five consecutive months in 2022, indicating the longest period of net outflows since 2005. The US has become a more attractive destination to secure funds as federal rates have risen. Fears of a recession have also led investors to retrench their funds from riskier EMs and flee to safer assets.

    To remain competitive, EMs have to follow in the footsteps of the US and raise their interest rates. In other words, higher returns have to be promised to avoid capital flight from an EM to less-risky US assets. This leads to a dilemma for emerging economies – rate hikes are ideal to protect foreign investments, but on the other hand, they would increase borrowing costs. This would dampen aggregate demand and lead to downward economic growth, pushing some EMs to be at risk of a recession.

    Debt becomes more expensive 

    EMs rely on debt to finance expenditures in both private and public sectors, and they repay the money slowly over time with interest rates. They may take out debts in the form of government-issued securities or direct loans from financial institutions.

    A feature of debt is that they are often dollar-denominated, due to the fact that lenders deem the dollar far less volatile than currencies of emerging markets. Since the dollar has strengthened against other currencies, it became more expensive for EMs to service their debts. This is because emerging countries have to convert their domestic currency into USD to pay off most of their debts, meaning additional financial stress is placed on emerging markets. When USD: MYR = 4.0, an initial debt of $1000 could be paid back with RM4000, but when the exchange rate rises to 4.7, a larger figure of RM4700 is needed.

    As the Covid-19 pandemic had pushed borrowing in emerging economies to an all-time high, the financial stress arising from a more expensive debt has been magnified. During the pandemic, huge expenditures on fiscal stimulus, coupled with lowered tax revenue due to unemployment, have resulted in extensive government borrowing. In 2020 alone, debt amounted to 207% of the GDP in emerging economies. With a quarter of the debt being dollar-denominated, the rise in USD has accounted for a major increase in debt repayment figures by emerging economies.

    Sri Lanka just defaulted on its foreign debts in April, and countries such as El Salvador, Ghana, Pakistan, Tunisia, and Egypt are at risk of defaulting too, according to statistics from Bloomberg. When the risk of default is high, bond yields also rise, meaning that dollar-denominated debt has just become an even bigger burden for emerging markets. Governments borrow money from investors to finance their expenditures, by selling bonds and offering each bond with returns (known as yields). Bond yields typically increase to compensate for the increased risk of defaulting (not paying) on the bond. Therefore, because of the financial stress that EMs are experiencing, the default risks of EM bonds have increased. Hence, higher bond yields have to be offered to entice investors.

    Conclusion

    The strengthening of the dollar has just made the situation for EMs recovering from the pandemic much more complicated – imported inflation leading to trade decline, international capital flow reversals, and heavier debt burdens.

    Some argue that despite the Fed’s mandate to solve domestic issues, it should take its decision’s impact on the rest of the world into account. This is because economies have become much more interdependent on each other than before, as a result of financial and trade globalisation, said Mr. Obstfeld, a U.C. Berkeley economist. However, most economists hold the stance that despite the fallouts of a stronger dollar, the effects on other countries would be even worse if inflation in the US is not lowered to a targeted level.

    So if pushing the dollar up is necessary, how could EMs minimise the negative impacts imposed on them? The increasing reliance on floating currencies may offer an answer. As opposed to pegging currencies in the past, EMs have now gained greater leverage over managing the value of their currency by utilising deeper foreign-exchange reserves. Some EMs such as Brazil are already responding to the Federal Reserve’s rate hikes with rate hikes of their own which has effectively countered inflation and currency declines against the USD. So far, some EMs are demonstrating astounding resistance to the vicious global financial conditions. The IMF has forecasted that EMs are expected to outgrow major economies this year and next.

    Not all EMs however enjoy the stability that some of their counterparts experience. A strong headwind is approaching not only these EMs, but the world as a whole.

    (1740 words)

    References:

    Bertaut, C., Beschwitz, B.von and Curcuru, S. (2021) The International Role of the U.S. Dollar, The Fed – The International Role of the U.S. Dollar. Available at: https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html (Accessed: November 2, 2022).

    Best, R. (2022) How the U.S. dollar became the world’s reserve currency, Investopedia. Investopedia. Available at: https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp#:~:text=The%20Bottom%20Line,-The%20reserve%20status&text=The%20trust%20and%20confidence%20that,currency%20for%20facilitating%20world%20commerce. (Accessed: November 2, 2022).

    Cohen, P. (2022) The dollar is strong. That is good for the U.S. but bad for the world., The New York Times. The New York Times. Available at: https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html (Accessed: November 8, 2022).

    Emerging markets look unusually resilient (2022) The Economist. The Economist Newspaper. Available at: https://www.economist.com/finance-and-economics/2022/10/13/emerging-markets-look-unusually-resilient (Accessed: November 3, 2022).

    Estevao, M. (2022) Three ways a strong dollar impacts emerging markets, World Bank Blogs. Available at: https://blogs.worldbank.org/voices/three-ways-strong-dollar-impacts-emerging-markets (Accessed: November 1, 2022).

    Fowers, A. (2022) What is Causing Inflation: The Factors Driving Prices High Each Month, The Washington Post. WP Company. Available at: https://www.washingtonpost.com/business/2022/07/26/inflation-causes/ (Accessed: November 2, 2022).

    Gopinath, G. and Gourinchas, P.-O. (2022) How countries should respond to the strong dollar, IMF. Available at: https://www.imf.org/en/Blogs/Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar (Accessed: November 2, 2022).

    Hartman, M. (2022) Why the U.S. dollar is so strong right now, Marketplace. Available at: https://www.marketplace.org/2022/08/29/why-us-dollar-is-strong/ (Accessed: November 1, 2022).

    Kalemli-Özcanis, Ş. (2021) The Federal Reserve, emerging markets and private debt – IMF F&D, IMF. Available at: https://www.imf.org/en/Publications/fandd/issues/2021/06/federal-reserve-emerging-markets-private-debt-kalemli-ozcan#:~:text=In%20emerging%20markets%2C%20a%20disproportionate,constitute%20the%20remaining%2035%20percent. (Accessed: November 2, 2022).

    Lee, Y.N. (2021) Rising debt in emerging markets could push back Covid recovery and widen gap with developed world, CNBC. CNBC. Available at: https://www.cnbc.com/2021/05/24/moodys-analytics-on-high-debt-covid-recovery-in-emerging-markets.html (Accessed: November 2, 2022).

    Lubin, D. (2022) A stronger dollar might hit emerging economies harder this cycle, Financial Times. Financial Times. Available at: https://www.ft.com/content/3e8737a0-b4c1-4e7c-b93f-f646e3c699dd (Accessed: November 1, 2022).

    Maki, S. (2022) Why Developing Countries Are Facing a Debt Default Crisis, Bloomberg.com. Bloomberg. Available at: https://www.bloomberg.com/news/articles/2022-07-07/why-developing-countries-are-facing-a-debt-default-crisis (Accessed: November 2, 2022).

    Otsuka, S. (2022) Superstrong Dollar Threatens Debt Crisis Across Emerging Economies, Nikkei Asia. Nikkei Asia. Available at: https://asia.nikkei.com/Business/Markets/Currencies/Superstrong-dollar-threatens-debt-crisis-across-emerging-economies#:~:text=A%20quarter%20of%20government%20debt,up%20from%2015%25%20in%202009. (Accessed: November 2, 2022).

    Person and Cambero, F. (2022) Chile currency plunge, inflation rattle Latin America’s copper king, Reuters. Thomson Reuters. Available at: https://www.reuters.com/markets/commodities/chile-currency-plunge-inflation-rattle-latin-americas-copper-king-2022-07-11/ (Accessed: November 1, 2022).

    Person and Karin Strohecker, S.R. (2022) The dollar problem: Emerging markets count the costs, Reuters. Thomson Reuters. Available at: https://www.reuters.com/business/finance/dollar-problem-emerging-markets-count-costs-2022-05-11/ (Accessed: November 1, 2022).

    Team, T.I. (2022) Emerging market economy definition: Examples and how they work, Investopedia. Investopedia. Available at: https://www.investopedia.com/terms/e/emergingmarketeconomy.asp (Accessed: November 1, 2022).

    Tepper, T. (2022) Federal Funds Rate history 1990 to 2022, Forbes. Forbes Magazine. Available at: https://www.forbes.com/advisor/investing/fed-funds-rate-history/ (Accessed: November 2, 2022).

    Tepper, T. (2022) Why is the U.S. dollar so strong right now?, Forbes. Forbes Magazine. Available at: https://www.forbes.com/advisor/investing/strong-dollar/ (Accessed: November 2, 2022).

    Wheatley, J. (2022) Emerging markets hit by record streak of withdrawals by foreign investors, Subscribe to read | Financial Times. Financial Times. Available at: https://www.ft.com/content/35969b19-86db-4197-a419-b4a761094e9a?shareType=nongift (Accessed: November 1, 2022).

    Researcher(s): Alexander Chen, Eunice Jong

    Reviewer(s): Nasir Ali

    Editor(s): Maryam Nazir Chaudhary

    Designer(s): Erdina Mysarah

  • Everything you need to know about Stagflation – and is it happening in Malaysia?

    Everything you need to know about Stagflation – and is it happening in Malaysia?

    Key terms:

    What is Core CPI?

    The Core Consumer Price Index (CPI) measures the changes in price for consumer goods, except for food and energy.

    This measure is used instead of the normal CPI, since it better reflects long-term inflation, as food and energy prices are relatively more volatile.

    What is GDP?

    Gross Domestic Product (GDP) reflects a country’s ability to produce goods and services.

    Based on the GDP growth rate, we can see that GDP shrunk in 1974-75, and again in 1980 and 1982, which matches the high inflation we saw earlier.

    The Year 2022 is quite miserable from an economic standpoint. According to the IMF, global economic activity is experiencing a sharper-than-expected slowdown, with a record-breaking inflation rate since decades ago. The ongoing tightening of monetary policies, the Russia-Ukraine War and the lingering Covid-19 pandemic, make the economic outlook dimmer. (IMF, 2022)

    Global growth is forecasted to slow from 3.2% in 2022 and 2.7% in 2023. This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the Covid-19 pandemic. Low growth, high inflation and high unemployment are early signs of stagflation and it was accurately indicated in the past 1970s Oil Crisis.

    Now the question that lingers on us is “What’s the direction of the economy for the next 5 years: are we heading towards stagflation?”

    Introduction

    Stagflation is a phenomenon where stagnation (when the economy is not growing) is combined with inflation (when prices rise). Interestingly, people don’t believe in stagflation, even economists in the early 60s, as it was considered a rare economic phenomenon back then. But people’s minds changed in the 1970s, during the time they had to experience the inevitable stagflation. (Statista, 2022)

    Definition

    Stagflation occurs in the existence of slow growth, high unemployment, and high inflation. Economic policymakers have a consensus that stagflation is the most difficult to handle, as efforts to correct one factor can exacerbate another. To illustrate this, governments and central banks can loosen the fiscal and monetary policies to cope with the slow economic growth, but it will certainly lead to an increase in the money supply that further pushes up inflation.

    History of Stagflation

    The term “Stagflation” was first used by Ian Macleod in 1965, to reference the phenomenon of high inflation and unemployment in the United Kingdom. The terminology was brought up again in the U.S. during the 1970s oil crisis, which caused a recession that was five consecutive quarters of negative GDP growth. At the same time, inflation doubled in 1973 and hit double digits in 1974, and unemployment reached 9% by May 1975.

    Stagflation was once thought to be impossible. Mainstream economic theories that dominated academic and policy circles for much of the 20th century tried to exclude it from their models. Essentially, world economics before 1970 was dominated by the infamous economic theory of the Phillips Curve, which developed in Keynesian economics and portrayed macroeconomic policy as a trade-off between unemployment and inflation.

    Phillips Curve

     

    Source: Federal Reserve Bank of St. Louis (2020)

    The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. It claims that with economic growth comes inflation, which should lead to more jobs and less unemployment.

    In 1958, New Zealand economist Alban William Housego Phillips, also known as William Phillips, found the inverse relationship between unemployment and the rate of change in money wage, which was the archetype for the Phillips Curve.

    While in 1960, Richard Lipsey, Paul Samuelson and Robert Solow provided further support for Phillips’ findings, who officially coined the terminology of “Phillips Curve” by linking price inflation (instead of wage inflation) with the unemployment rate. Samuelson and Solow believed they could fine‐tune the economy by choosing a socially optimal point on the Phillips curve, at least in the short run.

    Although Samuelson and Solow stated that their analysis pertained to the short run, there was a strong consensus that governments thought the Phillips curve was the permanent tradeoff between inflation and unemployment (ignoring the outliers on the graph above). That belief fostered the idea that mild inflation was beneficial in reducing unemployment. As a result, the inflation rate increased from 1.2% in 1962 to 5.8% in 1970.

    With high and variable inflation in the 1970s, reaching 13.5% in 1980, the Phillips curve lost its lustre as both inflation and unemployment soared. After that, the voices questioning the malfunction of the Phillips Curve arise and allow room for stagflation to stand from the economic point of view. However, the Phillips Curve has not been eliminated even today, as Fed Chairman Jerome Powell believes the Phillips Curve “continues to be meaningful for monetary policy” even though the strength of the correlation between unemployment and inflation “has weakened”. (Cato Institution, 2020)

     

    How stagflation happens

    The Causes of Stagflation

    In the simplest term, stagflation happens when growth is slow or negative, and there is high unemployment and high inflation. The presence of these 3 factors is considered the leading indicator that results in stagflation. The cause of stagflation is complicated and academics are yet to have one concrete theory to explain, hence, the theories below are among the mainstream in explaining the causes of stagflation.

    Supply Shock Theory

    The supply shock theory posits that stagflation occurs due to a sudden decline in the supply of products and services. This causes prices to increase dramatically, affecting lower profit margins for most companies and ultimately slowing economic growth. For example, if factories suddenly go bust, this would significantly reduce the available products in the market.

    Poor Monetary Policies Theory

    This theory states that stagflation is often the result of poor monetary policy. It is because the central bank’s and government’s attempt to interfere and regulate the economy will instead worsen a crisis. For instance, the US focused on maximum employment prior to the 1970s, by introducing loose monetary policies such as the Employment Act of 1946, which inadvertently caused inflation to grow and affected the employment market and economic growth.

    Government interventions can also cause stagflation, for example, the Nixon strategy of devaluing the dollar instituted wage and price freezes known as the Nixon Shock. But in the end, due to the conflicting objectives between the central banks and legislators who tried to keep inflation in check, this pressed down unemployment and high economic growth at the same time.

    Demand-Pull Stagflation Theory

    Proposed by economist Eduardo Loyo, the demand-pull stagflation theory suggests that stagflation can occur exclusively from monetary shocks without the need for a supply-related shock. It is most likely to occur when governments tighten monetary policies, such as raising the federal interest rate or a reduction in the money supply.

    Cost-Push Stagflation Theory

    The cost-push stagflation theory sees supply-side inflation as a key driver of stagflation. In this case, rising prices lead to unemployment since they usually reduce the profit of the companies, which leads to reduced economic output. Supply-side inflation can also be impacted by things like increases in wages or labour shortages.

    End of the Gold Standard

    Historically, Nixon’s ending of the convertibility of US dollars to gold marked the end of the Bretton Woods System, and it was considered to be one driver of the 1970s stagflation. The gold standard made the US vulnerable in gold runs, as there were more dollars in foreign hands than gold reserves in the US. (In 1966, non-US central banks held $14 billion, while the US had only $13.2 billion in the gold reserve.)

    Nixon closed the gold window that allowed for the exchange of dollars for gold in 1971, and US dollars officially decoupled from gold in 1976. Both moves devalued the dollar, which impacted inflation and economic growth and led to stagflation. (IMF, 1971)

     

    The Mechanism of Stagflation

     

    Click Here to View Diagram in Higher Quality

     

    Source: Seeking Alpha (2022)

    Stagflation is triggered by a supply shock. A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden price change. It can be negative, resulting in a decreased supply. Assuming aggregate demand is unchanged, a negative supply shock will cause a price increase in products and services. When the price of goods gets expensive, it decreases the aggregate demand of the economy, which causes the utilisation and production of the economy to slow down. Businesses might experience a decline in profit as demand plummets, and to cut costs to survive, employees get laid off, which causes the unemployment rate to spike. As the unemployment rate increases, wages will decrease due to more people actively searching for work. Also, the lower wages indicate lower disposable income for workers and forces them to spend less, further reducing the aggregate demands of the economy. (Business Insider, 2022)

    To sum up, the increasing inflation force came from the supply shock reducing the supply of the economy, while the rising unemployment rate was due to lesser aggregate demand and slowdowns in businesses. Ultimately, the impact is lower economic output, illustrated by stagnant or negative growth in GDP. (Seeking Alpha, 2022)

     

    Example of stagflation in US History 

    Stagflation broke the traditional economist’s beliefs, where unemployment and inflation have an inverse relationship.

    High Inflation

    > Caused by a spike in West Texas Intermediate crude oil, which brought about higher energy costs. (Investopedia, 2022)

    The oil crisis of the 1970s is the most frequently used illustration of stagflation. In response to Western backing for Israel during the Yom Kippur War, the Organisation of the Petroleum Exporting Countries (OPEC) imposed an oil shipping embargo on the United States and Israel’s European allies in October 1973.

    The rapid rise in oil prices by almost 300% resulted from the oil embargo. That led to significant problems in the country’s car-dependent economy, as oil prices remained high even after the embargo ended in March 1974. This led to a protracted period of stagflation during which high oil prices caused inflation to rise quickly, unemployment to rise, and the economy to stagnate. Manufacturing jobs were being relocated outside of the United States to save on labour costs and the rising cost of the Vietnam War.

    Real wages stopped growing as a result of the U.S. economy shifting from manufacturing to lower-paying service jobs, which also affected consumer confidence and spending, aggravating the crisis.

    To combat stagflation in the 1970s, President Richard Nixon devalued the dollar and enacted price and pay freezes. Jeremy Siegel, a well-known economist, believes that this plan is among the biggest failures in American macroeconomic policy because it was unsuccessful. The Federal Reserve’s expansion of the money supply, in the opinion of many economists today, was the primary cause of the stagflation crisis of the 1970s.

    At the time, it was thought that high inflation resulted in low unemployment, but in the 1970s, both rates climbed. To stop stagflation, the economic policy had to be revised to place more emphasis on low unemployment and price stability. (Seeking Alpha, 2022)

    Source: U.S. Bureau of Labor Statistics

    High Unemployment (>5%)

    The unemployment rate is measured by the number of people actively looking for work, but are not employed. The unemployment rate first spiked in 1975, and again in 1982-83. Throughout 1975-85, although unemployment rates fluctuated, the rate stayed above 5%.

     

     

    Is the US facing stagflation in 2022?

    As we have observed the data for stagflation in the 1970s, let us look at the recent data.

    High inflation: ✅ (has fulfilled the criteria)

    Based on the graph below, core inflation typically hovers between 1 to 3%.

    Source: U.S. Bureau of Labor Statistics

    Core inflation hit 6.3% in September 2022, which is among the highest figures we have seen in recent years. Although the core inflation is still lower compared to 1982, it is worrying that it has been abnormal in recent years.

    High unemployment: ❌ (has yet to fulfil the criteria)

    Source: U.S. Bureau of Labor Statistics

    During the Covid-19 pandemic, unemployment in the US spiked to 14.7% in April 2020. Hence, the US government introduced the CARES act, which helped businesses to retain employees.

    However, unemployment is supported by government intervention, and would not be sustainable in the long term, once the government stops providing employment assistance.

     

    Data Source: U.S. BUREAU OF LABOR STATISTICS

     

    Low growth: ❌ (has yet to fulfil the criteria)

    Source: U.S. Bureau of Labor Statistics

    Although the United States GDP fell by 3.4% during the pandemic in FY2020, it quickly recovered in 2021, with a 5.7% GDP growth rate.

    However, stimulus packages and inflation are temporarily fueling the US GDP growth, which can be unsustainable. Therefore, we would still need to look into this closely in the following years. (Forbes, 2022)

    Based on the analysis above, there is no sufficient evidence to conclude that stagflation is happening in the United States, at least in the near future. (U.S. General Services Administration, 2022)

     

    Is stagflation happening in Malaysia?

    Core Inflation: High ✅

    Source: Trading Economics

    Malaysia’s Core Inflation hit a record high of 4.0% in September 2022. Although it is still lower than the 6.3% faced in the United States, it is showing a worrying uptrend. (Trading Economics, 2022)

    The weakening Ringgit and global inflation setting are causing increased inflation in Malaysia.

    Unemployment: High but dropping ❌

    Source: Trading Economics

    Unemployment spiked to >5% when the pandemic hit in 2020, then gradually dropped to 3.7% in August 2022. However, it is still on the higher side compared to the 3-3.5% maintained throughout 2012-2020. (Trading Economics, 2022)

    GDP Growth: ❌

    Source: Trading Economics

    Malaysia’s GDP grows at around 5%. However, the circumstances in the past few years have caused the rate to be unstable. Currently, the GDP growth rate is rapidly increasing, recently hitting 8.9% for Q2 2022. (Trading Economics, 2022)

     

    Conclusion

    Responses to Stagflation

    It is challenging for both central banks and policymakers to address inflation, because focusing on one component of the issue may have a detrimental effect on another. For instance, raising interest rates raises borrowing costs and decreases demand, which lowers inflation but also slows GDP growth.

    1.   Monetarist Responses

    The monetary response is known as the most prevalent method taken by central banks around the world. Monetarists combat stagflation by lowering inflation even if doing so results in a temporary rise in unemployment and a slowdown in economic development. Between 1979 and 1984, the UK Conservative administration employed this tactic, which caused a recession.

    2.   Supply-Side Responses

    To combat cost-push inflation, policies like deregulation and suspending tariffs that help businesses by lowering costs and boosting efficiency could be utilised to enhance aggregate supply. However, because they are national initiatives to address global supply constraints, these methods are frequently disregarded.

    3.   Wage Control Responses

    If rising wages are the root cause of stagflation, pay controls might be put in place to slow down the rapid wage growth that is driving up prices and eroding corporate margins.

    4.   Waiting Responses

    Many economists think that doing nothing in the face of stagflation would be the wisest course of action. Stagflation can occasionally go away with time, but attempts to do so may trigger recessions with sharp drops in GDP. (Seeking Alpha, 2022)

    In short, the direction of the economy highly depends on how the three indicators play out. As of the current situation, the US is hit with two red flags of slow economic growth and high inflation, while the unemployment rate remains healthy. The scenario is more optimistic for Malaysia, as we have solid GDP growth and a low unemployment rate. Although the concerning factor for Malaysia is still the rising inflation, the problem arises on how soon the inflation will turn around, since the Bank Negara Malaysia (BNM) has risen to 100 basis points OPR from May 2022 to an OPR rate at 2.75%. Last, the market consensus foresees that BNM will continue to raise interest rates in 2023 to cool down inflation as well as managing inflation expectations.

     

    References

    Business Insider (2022) What is stagflation? Understanding the economic phenomenon that stifled growth through the 1970s. Available at: https://www.businessinsider.com/personal-finance/stagflation (Accessed: October 26, 2022).

    Cato Institution (2020) The Phillips Curve: A Poor Guide for Monetary Policy. Available at: https://www.cato.org/cato-journal/winter-2020/phillips-curve-poor-guide-monetary-policy#a-better-framework-for-monetary-policy (Accessed: October 26, 2022).

    Federal Reserve Bank of St. Louis (2020) What Is the Phillips Curve (and Why Has It Flattened)? Available at: https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened (Accessed: October 26, 2022).

    Forbes (2022) Stagflation: Causes And When It Will Come Available at: https://www.forbes.com/sites/billconerly/2022/06/28/stagflation-causes-and-when-it-will-come/?sh=3ed6624f27a5 (Accessed: October 26, 2022).

    International Monetary Fund (2022) World Economic Outlook Report October 2022. Available at:  https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022 (Accessed: October 26, 2022).

    International Monetary Fund (1971) Money Matters: An IMF Exhibit — The Importance of Global Cooperation: System in Crisis (1959-1971). Available at: https://www.imf.org/external/np/exr/center/mm/eng/sc_sub_3.htm (Accessed: October 26, 2022).

    Investopedia (2022) Stagflation in the 1970s. Available at: https://www.investopedia.com/articles/economics/08/1970-stagflation.asp (Accessed: October 26, 2022).

    Seeking Alpha (2022) Stagflation: Definition, Causes & Consequences. Available at: https://seekingalpha.com/article/4462851-stagflation (Accessed: October 26, 2022).

    Statista (2022) Stagflation – Statistics & Facts. Available at: https://www.statista.com/topics/9230/stagflation/#topicHeader__wrapper (Accessed: October 26, 2022).

    The Edge Market (2022). The State of the Nation: Bank Negara may front-load more OPR hikes in 2023 to tackle core inflation. Available at: https://www.theedgemarkets.com/article/state-nation-bank-negara-may-frontload-more-opr-hikes-2023-tackle-core-inflation (Accessed: December 5, 2022).

    The New York Times (2022) The Dollar Is Strong. That Is Good for the U.S. but Bad for the World. Available at: https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html?smid=url-share (Accessed: October 26, 2022).

    Trading Economics (2022) Malaysia Core Inflation Rate. Available at:  https://tradingeconomics.com/malaysia/core-inflation-rate (Accessed: October 26, 2022).

    Trading Economics (2022) Malaysia GDP Annual Growth Rate. Available at:   https://tradingeconomics.com/malaysia/gdp-growth-annual (Accessed: October 26, 2022).

    Trading Economics (2022) Malaysia Unemployment Rate. Available at:  https://tradingeconomics.com/malaysia/unemployment-rate (Accessed: October 26, 2022).

    U.S. Bureau Of Labor Statistics (2022) U.S. Unemployment rate. Available at: https://data.bls.gov/home.htm (Accessed: October 26, 2022).

    U.S. General Services Administration (2022) Consumer Price Index (CPI). Available at:  https://catalog.data.gov/dataset/consumer-price-index-cpi-ee18b (Accessed: October 26, 2022).

     

    Researchers: Alex Chong and Kok Chun Yik

    Reviewers: Nasir Ali and Sherilynn Ng

    Editors: Angellina Choo

  • Why Trickle-Down Economics Doesn’t Work

    Why Trickle-Down Economics Doesn’t Work

    Just like the rest of Europe at the moment, the United Kingdom faces numerous economic challenges that threaten the standard of living of its population. Surging energy prices, rising food costs and increasing interest rates have resulted in a recession predicted to last until the middle of 2023 with GDP estimated to fall about 0.3% overall next year (Ernst & Young). The 56th prime minister, Liz Truss previously attempted to propose a solution, an unorthodox approach dubbed “Trussonomics” by media outlets across the UK to scrutinise the radical and controversial economic ideology, the “trickle-down economics” theory. The plan backfired so spectacularly that her tenure ended after only 44 days in office. This article aims to explore what “trickle-down economics” is, and why it failed so significantly, resulting in Liz Truss becoming the shortest-serving Prime Minister in British history. 

    Context

    The UK economy has been facing low growth in labour productivity since the 2008 financial crisis. Labour productivity refers to the amount of economic value produced per worker and is calculated by dividing real GDP (goods and services produced in an economy) by the number of working hours supplied by the country’s workforce in a given year. According to the National Institute of Economic and Social Research, the UK had an annual productivity growth rate of 0.5% between 2008 and 2020 (NIESR, 2022). This is significantly smaller than the growth rate of 2.3% between 1974 and 2008. Many economists point to underinvestment in the public and business sectors as the cause of this lag in growth. These low levels of labour productivity growth negatively impact the growth in real wages of employees and consequently, their living standards.

    As an addition to that, Russia’s invasion of Ukraine at the beginning of this year has further worsened the living standards of the UK’s population. This is mainly due to the effect that this conflict has had on European oil supply (Click here to read more about it). Essentially, the Russian-Ukraine conflict has severely disrupted oil supply through economic sanctions and damaged underwater pipelines transporting natural gas to Europe (Vakulenko, 2022). The UK has thus been facing an energy crisis as the limited supply of natural gas pushes up energy prices and forces people into ‘fuel poverty’, where they must decide between spending on food or heating their homes.

    Source: https://tradingeconomics.com/united-kingdom/electricity-price

    The figure above shows the change in price of electricity (GBP/MWh) in the UK from 2017 to 2022. There was a significant spike in electricity prices this year as the conflict started. 

    With the low growth in labour productivity compounded with increasing living costs, Liz Truss along with her Chancellor of the Exchequer, Kwasi Kwarteng, declared an emergency fiscal plan to boost economic growth. This ‘mini-budget’ heavily incorporated trickle-down theory as it included the following :-

    • A cancellation of the planned Corporation Tax rate increase
    • Reversal in the 1.25% increase in National Insurance (a form of income tax)
    • The basic rate of income tax will be cut to 19% from 20%
    • The additional rate of income tax of 45% on income above £150,000 will be abolished
    • Cap on bankers’ bonuses will also be abolished

    It is obvious that these policies will disproportionately benefit the higher earning individuals of society and further stimulate demand despite UK inflation already exceeding 10%, according to the Bank of England. So what exactly is trickle-down economics and the rationale behind it that has persuaded Liz Truss to implement such unorthodox policies? 

    What Is Trickle-down Economics?

    It’s likely you have heard of the concept of trickle-down economics as it was greatly supported by the political right in the 1980’s. It was tested by President Ronald Reagan in the United States and also Prime Minister Margaret Thatcher in the United Kingdom during their term in office. The most recent attempts were during Donald Trump’s presidency and by the United Kingdom’s shortest-serving Prime Minister, Liz Truss. 

    The theory of trickle-down economics is straightforward. It claims that tax reductions for higher income earners and corporations result in economic advantages for the wealthy initially, but will gradually trickle down to everyone else in society (Amadeo, 2021). This is similar to supply-side economics which also states that all tax reductions spur economic growth. Supporters of the trickle-down and supply-side theory use the Laffer Curve to argue their stance because it shows that tax reduction creates a significant multiplying effect, indicating that economic growth over time would offset the revenue lost by the government (Amadeo, 2021). The Laffer Curve as illustrated below indicates that as tax rate increases, more revenue is generated until it reaches the optimum point of T* but as tax rate increases past T*, the increasing tax rates would discourage working and investing in businesses. Therefore, lowering the tax rate back to optimum level, T* will stimulate greater economic growth as people are more encouraged to work and invest while also increasing overall tax revenue (Hayes, 2022). 

    Source: Investopedia, 2019

    Supporters of trickle-down economics believe vital economic contributors such as business owners, corporations and banks would use the additional funds from tax reductions to expand their businesses, willingly invest more and increase lending respectively (Amadeo, 2021). As a consequence, more jobs would be created for the workforce which allows for more spending in the economy, and hence further economic growth. 

    The Reality of Trickle-down Economics 

    Based on a comprehensive study by Hope and Limberg (2022), strong evidence was found against the idea that trickle-down economics would boost the overall economy. The study investigated 18 Organisation for Economic Co-operation and Development (OECD) countries between 1965 and 2015, focusing on income inequality, economic growth as measured by gross domestic product (GDP) and unemployment rate. 

    Source: Hope and Limberg, 2020

    As seen in the chart above, tax reductions for the wealthy made them even richer, leading to a substantial increase in income inequality and this gradually became stronger over time. The income share of the top 1% rose by 0.6 percentage points three years after the significant tax decrease. 

    For instance, the Reagan and Bush tax cuts helped the bottom fifth increase household income by 6%, but on the other hand, the income of the top 1% actually tripled between 1979 and 2005 (Amadeo, 2021). The wealthy would face a disproportionate gain as compared to the lower-income earners when it came to tax reductions. This is because the wealthy would have a significantly greater disposable income as a result of lesser tax contribution, while the disposable income of the lower-income earners would not be increased as much. This comes to show that tax cuts for the rich disproportionately benefit the higher earning portion of society by putting more money in their pockets.

    Source: Hope and Limberg, 2020

    Secondly, trickle-down economics made an insignificant impact – close to zero – on the growth of GDP per capita. Though these quantities fluctuated slightly after the tax reductions, it did not lead to a higher economic growth when measured by GDP per capita. Meanwhile, the unemployment rate underwent fluctuation over time where the point estimates were negative immediately after tax reductions, but eventually returned to nearly zero. As shown in the study by Hope and Limberg (2022), both GDP per capita and unemployment rate did not show significant changes as a result of tax reductions for higher income earners and corporations. This is an indication that the benefits reaped by the higher earning portion of society did not trickle down into the rest of the economy, having no notable impact on economic growth (Ingraham, 2020). 

    A crucial element that needs to be taken into account when considering trickle-down economics is that this theory is heavily reliant on the investment patterns and economic action of the higher income earners and corporations. It depends on whether the type of investments made by businesses would even make an impact on economic growth and employment.  

    “For example, if businesses invest that in existing real estate or share buy-backs, there is probably not going to be much of an impact on employment or worker wages. However, investing in a new building or in new capital equipment will employ people and potentially increase worker productivity. In that case there will be a positive effect on employment and on worker wages.” says Robert P. Inman, Wharton Professor of Finance. (Knowledge@Wharton, 2017)

    The Aftermath

    The market’s reaction to Truss’s economic policies were swift, damaging to the UK’s economy, and indicative of how trickle-down theory is viewed as a far-too flawed ideology by a majority of people. One of the most notable effects of this fiscal plan was the volatility of the gilt market (government bonds in the UK are referred to as gilts). According to Fathom Consulting, the week following the mini-budget announcement saw the price of the 30-year Gilt fall by 24%, while its yield almost doubled. This sell-off of government debt by investors was fuelled by the deteriorating economic outlook of the country, in particular, the increase in government debt that would occur due to the unfunded tax cuts within the mini-budget. With global interest rates already at significantly high levels as countries battle soaring inflation, the cost of borrowing from abroad to fund further government spending would be high. Hence, future debt sustainability was at risk and this caused government bonds to be less attractive to investors. Higher gilt yields meant that the UK government would have to pay an even greater interest on their public debt, increasing their borrowing cost even further. 

    Furthermore, the value of the pound sterling had fallen to record lows after Liz Truss announced her fiscal statement. This is because with already high inflation, investors speculated that further injections of cash into the economy would continue to deteriorate the value of the pound. With that in mind, investors demanded a higher premium for UK assets via a cheaper currency (Goldman Sachs, 2022).

    Source: exchangerates.org.uk

    The figure above shows the exchange rate between the pound and the US dollar. It shows that there was a significant fall in the value of the pound relative to the dollar. This is a combination of two factors; the value of the pound decreasing due to speculation on higher future inflation rates and the increasing strength of the dollar as the US hikes interest rates (Forbes, 2022).

    After the disastrous effects of the mini-budget announcement on the currency and government bond markets, Truss eventually scrapped her tax cut plans amidst scrutiny from her own political party. Furthermore, her approval rate amongst the UK population stood at only 10%  based on a survey conducted by YouGov, an international research data and analytics group. This all culminated in her tenureship eventually coming to an end on the 20th of October with her resigning from her post, officially making her the shortest-serving prime minister in UK history.

    Other Ways To Boost Economy Growth 

    As trickle-down economics has proven to be a flawed right-wing economic ideology that only further promotes wealth inequality, what alternatives can governments use to boost growth? For one, governments can create a more attractive business environment for large corporations through initiatives that encourage and incentivise business investments in the country to help grow the economy. As cash flow problems remain as a common concern for many businesses, grants, disbursements or zero-interest loans could thus be offered to assist these corporations (World Economic Forum, 2020). For instance, the Japanese government supports zero-interest unsecured loans for companies that experienced a loss of more than 50% of their annual sales due to the pandemic, while Malaysia offers SME Digitalisation grants to assist SMEs in adopting digitalisation in their business operations (World Economic Forum, 2020).

    Other schemes such as employment support could also be provided to companies,increasing their capacity to hire more employees that enables expansion of their business as well as allowing for better protection of current employees (World Economic Forum, 2020). Malaysia introduced Wage Subsidy Programme (WSP 3.0) in 2021 that provides a wage subsidy of up to RM600 per employee for 6 months (Krishnan, 2021). Another way for governments to create a more attractive business environment is by implementing friendlier trade policies to minimise the challenges that come with globalisation and trading. In Bosnia and Herzegovina, reforms made to promote cross-border trade were supported by a Bank operation whereby permits were made easier to acquire, the costs of approval were reduced, and streamlined government procedures for issuing export-import licences were implemented (World Bank Group, 2018).

    References

    Amadeo, K. (2021). Does Trickle-Down Economics Work? [online] The Balance. Available at: https://www.thebalancemoney.com/trickle-down-economics-theory-effect-does-it-work-330557 [Accessed 13 Oct. 2022].

    Hayes, A. (2022). Laffer Curve. [online] Investopedia. Available at: https://www.investopedia.com/terms/l/laffercurve.asp [Accessed 13 Oct. 2022].

    Hope, D. and Limberg, J. (2022). The economic consequences of major tax cuts for the rich. Socio-Economic Review,  20(3), pp.539–559. doi:10.1093/ser/mwab061.

    Ingraham, C. (2020). Analysis | ‘Trickle-down’ tax cuts make the rich richer but are of no value to overall economy, study finds. Washington Post. [online] 23 Dec. Available at: https://www.washingtonpost.com/business/2020/12/23/tax-cuts-rich-trickle-down/ [Accessed 13 Oct. 2022].

    Knowledge@Wharton (2017). Does Trickle-down Economics Add Up – or Is It a Drop in the Bucket? – Knowledge@Wharton. [online] Knowledge@Wharton. Available at: https://knowledge.wharton.upenn.edu/article/trickle-economics-flood-drip/ [Accessed 13 Oct. 2022].

    World Economic Forum (2020). 4 ways governments can support start-ups and save their economies. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2020/06/4-ways-governments-can-support-start-ups-and-save-their-economies/ [Accessed 13 Oct. 2022].

    Krishnan, D. (2021). Pemerkasa+: RM1.5 billion allocated for WSP 3.0 extension. New Straits Times. [online] 1 Jun. Available at: https://www.nst.com.my/news/nation/2021/06/695072/pemerkasa-rm15-billion-allocated-wsp-30-extension [Accessed 13 Oct. 2022].

    The World Bank (2018). Stronger Open Trade Policies Enable Economic Growth for All. [online] The World Bank. Available at: https://www.worldbank.org/en/results/2018/04/03/stronger-open-trade-policies-enables-economic-growth-for-all [Accessed 13 Oct. 2022].

    www.ey.com. (n.d.). UK economy expected to be in recession until summer 2023. [online] Available at: https://www.ey.com/en_uk/news/2022/10/uk-economy-expected-to-be-in-recession-until-summer-2023#:~:text=LONDON%2C%20MONDAY%2017%20October%202022

    NIESR. (n.d.). Why is UK Productivity Low and How Can It Improve? [online] Available at: https://www.niesr.ac.uk/blog/why-uk-productivity-low-and-how-can-it-improve#:~:text=The%20United%20Kingdom [Accessed 13 Nov. 2022]

    Vakulenko, S. and Vakulenko, S. (n.d.). Shock and Awe: Who Attacked the Nord Stream Pipelines? [online] Carnegie Endowment for International Peace. Available at: https://carnegieendowment.org/politika/88062.

    Lipper Alpha Insight. (n.d.). News in Charts: Market reaction to the UK ‘mini-budget’ | Lipper Alpha Insight | Refinitiv. [online] Available at: https://lipperalpha.refinitiv.com/2022/09/news-in-charts-market-reaction-to-the-uk-mini-budget/# [Accessed 13 Nov. 2022].Goldman Sachs. (n.d.). Why the British Pound Fell to a Record Low Against the US Dollar. [online] Available at: https://www.goldmansachs.com/insights/pages/why-the-british-pound-fell-to-a-record-low-against-the-us-dollar.html.

    Prepared by: Sylvia Chen, Ishmael Kamal

    Reviewed by: Nasir Ali

    Edited by: Julia Yazid

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