Malaysia Raised Interest Rates, BSP Next? As South Korean Stocks Stormed to Record Highs, 4Q GDP Shrunk!

Malaysia’s central bank, the Bank Negara Malaysia (BNM) raised policy rates for the first time since 2014. The reason provided (Bloomberg): “The government is forecasting growth of as much as 5.5 percent this year, buoyed by a global trade recovery and rising domestic spending. Inflation pressures are also building because of rising fuel and food costs.”

The BNM may have been pressured to hike rates intoned an international media outfit (Bloomberg): “Not since 2010 has Malaysia’s central bank faced as many calls from economists to raise interest rates as it does now.”

And Malaysia’s move has been perceived as the possible “breaking the ice” of an anticipated chain of interest rate increases for Southeast Asia region (Channel News Asia).  

“Malaysia is the first in Southeast Asia to raise its key rate in years, and the first Asian nation to hike them in 2018, during which many analysts expect the Federal Reserve is increase U.S. rates multiple times, as in 2017.

“South Korea raised its rates on Nov 30. The Philippines, which last hiked in September 2014, is expected by many economists to have at least one this year to cool its fast-growing economy.

Philippine 10-year bonds have risen far more than its Malaysian counterpart, even as inflation rates for both nations have almost been at the same level.

Though both countries have seen M2 climbing (as of October), the Philippines (+11.8%) has outpaced Malaysia (+5.25%). The bond markets have ostensibly been pricing higher long-term inflation for the Philippines than Malaysia.

Interestingly, Malaysia has a staggering household debt-to-GDP of 84.6% (3Q 2017) down from 88.4% in 2016.

Malaysia’s domestic credit-to-GDP was at a whopping 124% in 2016 as against the Philippines at 63.6% as of Q2 2017, according to BSP Governor Nestor Espenilla in a recent speech. Remember, only a few people have access to the formal banking system in the Philippines.

Moreover, at the end of 2012, Philippine credit-to-GDP was at 50.4%.  The current credit-to-GDP has now surpassed the 1997 high of 62.22% (See Phisix Breaks 6,900 as Inflation Risk Becomes a HOT Political Issue! July 6, 2014). Historically low interest rates have accommodated the current massive debt buildup.

As I previously pointed out*, the Malaysian government has imposed a targeted ban on property development in response to the prevailing glut.

*See Phisix 8,560: 7 Factors Behind 14th Record High That You Won’t Hear From the Mainstream January 2, 2018

That said, the property ban and the interest rate hike could be inferred as a combo of tightening measures, through administrative and monetary policies, intended to forestall a further buildup of excesses that may lead to financial crisis.

As one would probably observe, while the Malaysian government and the BNW have taken steps to contain their imbalances from spinning out of control, this has not been so with the BSP. Thus, Philippine treasury yields continue to stream higher (mostly the long-end). The BSP adamantly refuses to increase rates. The likely reason is that should a shortfall in RA 10963 occur, the BSP’s easy money regime should function as a contingency measure.

However, good fortune has endowed the BSP. The peso has firmed during the past two days because the US dollar index has crashed. The US dollar index plummeted to a 3-year low.

The USD meltdown temporarily conceals the emerging strains in Philippine treasuries and in the peso 

 

Finally, South Korea’s 4Q GDP surprisingly contracted in the 4Q

From FoxBusiness.com (bold mine)

South Korea's surprisingly weak economic performance in the last three months of 2017 isn't cause for concern but does support the case for a cautious stance on central bank policy, according to economists and bank officials.

The economy ended its streak of outperforming expectations in the last quarter by recording its first quarter-on-quarter contraction since the global financial crisis.

That resulted in growth for the year--at 3.1%--coming in just below the government's 3.2% target, but above 2016's expansion of 2.8%. Markets on Thursday brushed aside the result, with the Kospi jumping 1% to reach record highs.

South Korea’s KOSPI posted an astronomical 21.76% return in 2017! The KOSPI has been up a fantastic 3.84% year-to-date!

South Korea’s household debt has been growing at the fastest rate among OECD nations. Like Malaysia, it raised policy rates in November last year, and more recently, imposed “macroprudential” lending restraints.

So with inadequate economic growth, loose monetary policies continue to fuel a feeding frenzy of speculations, not only in the stock market but also in Bitcoin.

Much like everywhere else, stock prices have become detached with reality.

The three national benchmarks of South Korea’s KOSPI, Malaysia’s KLSE and the Philippine PSYEi 30 have also exhibited the same pathology.

 

P.S. The Philippine PhiSYx hit another 8,999 today by force.

The biggest contributors to the huge end-session pumping were SM +.92%, JG Summit +.65% and Aboitiz Equity +2.9%

Yesterday’s -.88% loss was mitigated by colossal mark the close pumps by SMPH +.77% and by SM +1.1%

Tuesday’s .54% gain by the PSYEi 30 had been mainly through a stunning +2.34% pump on SM.

The Sy Companies have been the mainstays of the orchestrated pumps.

Explaining Soros' Move: South Korea's Central Bank Panics, Chops Interest Rates to Record Lows

And speaking of Developed Economy's NIRP and a Global ZIRP, South Korea’s Bank of Korea (BoK) just panicked, it chopped interest rates to record low! Korea's Zirp now looking for a NIRP! 

http://www.bbc.com/news/business-36486454

you can see the interest rate chart here

http://www.tradingeconomics.com/south-korea/interest-rate

South Korea’s external trade have been taking a hit…

Exports have been trending down…

http://www.tradingeconomics.com/south-korea/exports

As with imports…

http://www.tradingeconomics.com/south-korea/imports

Since merchandise trade account for nearly 80% of GDP, a slowdown in external trade affects their GDP

http://data.worldbank.org/indicator/TG.VAL.TOTL.GD.ZS/countries/1W-KR?display=graph

Also industrial production has also been down…

http://www.tradingeconomics.com/south-korea/industrial-production

so again the net result has been a slowdown in gdp…

http://www.tradingeconomics.com/south-korea/gdp-growth-annual

yet private sector loans continue to materially grow…

http://www.tradingeconomics.com/south-korea/loans-to-private-sector

And this only aggravates the balance sheet conditons of South Koreans households whom have already been heavily leveraged.

http://www.tradingeconomics.com/south-korea/households-debt-to-gdp

So why wouldn’t the BoK panic? With the economy trending down, given the huge debt level, just how will heavily leveraged households be able to meet their financial obligations?

Thus the BoK slashed rates in order to ease such debt burden (which represents a subsidy to borrowers) while at the same time allow borrowers easier access to credit (in the hope that balance sheets of banks have been impervious to the likelihood of increasing accounts of bad credit). Again HOPE is not a strategy.

As a side note, I do not share the view that such actions have been designed as to engage in acurrency war.

Aside, housing prices have begun to sink.

http://www.tradingeconomics.com/south-korea/housing-index

And this would reduce collateral values, as well as, diminish household option to use the housing channel to raise financing (by sales). If Koreans resort to further selling, then housing deflation will only accelerate. Additionally falling collateral values could mean that financiers may ask debtors to either increase collateral inputs or force a call on loans. This will also put pressure on housing prices.

You see, the BoK’s room to further kick the proverbial can down the road appears to be narrowing fast. So the increasing recourse to a desperation policy.

Well at least there still is a buoyant stock market, which is likely the remaining option for Koreans to eke some returns. Perhaps much of the latest borrowing have been funneled here.

http://stockcharts.com/h-sc/ui?s=$KOSPI

That’s of course, until such windows also shuts too

You see now why George Soros sees a global market crash and Asia equally a sell????

South Korea’s Collapsing Merchandise Trade

I’m supposed to be on a vacation, but there have simply been too many very interesting developments some of which I feel I must share.

Well one of these has been that Korean merchandise trade has virtually been collapsing.

Today, the Korean government reported a 4.2% drop in year on year March exports (chart from investing.com)

This marks a back to back decline with a seeming acceleration in the rate of the downtrend.

Considering that China, US Japan, Hong Kong and Singapore make up her 5 major export trade partners, aside from possible issues on competitiveness, the alternative and or complimentary explanation for the sluggish exports has been deepening languid performance of economic activities of her trading partners.

Korea’s plummeting exports has been occurring in the face of a sustained battering of her currency the won as shown in the USD-Krw above from google finance

So currency weakness has hardly done anything to improve on Korean exports.

March import data brings about even more bad news.

Korean imports have basically been collapsing. Since late 2014, the rate of decline has been intensifying. 2015 has been dominated by double digit declines!

The import cascade seems like a symptom of the weakening of Korea’s internal demand.

Although consumption spending has been creeping up while retail sales jumped in February following a drop in January 2015, the gist of these spending activities has been financed through household credit.

Considering that merchandise trade (exports and imports) constitute a big segment of her economy (82.4% 2010-2014 World Bank), the above slump signifies a coming squall to her statistical GDP. 

In essence, Korea’s economy has increasingly become dependent on leveraging. And such debt buildup has likewise become a drag to her economic activities, as this seems as being transmitted via the consumers, while simultaneously increasing her risk profile in the context of interest rate, currency and credit.

Korean mainstream press seems worried of the rapid buildup of household debt. From the Korean Times (March 31) [bold mine]

At the end of February, household loans reached an accumulated 522 trillion won after climbing 3.9 trillion won in the first two months, and a combined 66 trillion won in the 2012-2014 period, according to data from the Financial Supervisory Service (FSS).

Escalating worries of possible non-performing loans (NPLs), more than 70 percent of the accumulated household loans were mortgages in the two-month period, Cho said citing FSS data.

So aside from the recent unexpected rate cut two weeks ago, the Finance Ministry launched a bailout program called “relief loans” but was apparently met with skepticism

From the same article (bold mine)

Korea's household debt is on track to rise further after jumping nearly 4 trillion won ($3.6 billion) in the January-February period; while the "Relief Loans" designed to restructure this debt will not be of much help, experts said Tuesday.

"The 40 trillion won Relief Loans are aimed at helping a small portion of households convert their existing mortgages into fixed, low-rate ones, and also allowing them to pay principal and interest together on a monthly basis," Cho Young-moo, an economist at LG Economic Research Institute, said Tuesday.

He said installment payments of principal and interest will help families lower their overall debt over time, but the conversion program is not likely to reduce the country's entire household debt.

The law of demand says that the lower the cost of an activity, the more people will do of it. So by lowering cost of credit (via policy rates) and by providing subsidies or bailouts, one can expect credit activities to expand and aggravate on the existing impairments on Korea’s private sector balance sheets…until these collapses under its own weight.

A further bad news has been that the HSBC manufacturing PMI has posted 49.2 this March implying a contraction in manufacturing activities. The March survey supports the developing slack in Korea’s internal and external economic activities.

And given the apparent deterioration in her economy and the policy choice to subsidies internal debt at the expense of the currency, many South Koreans have been looking overseas to chase for yields.

The other option has been to chase yields in domestic stocks regardless of the intensification of her risk profile. 

So we have another parallel universe, rising stocks amidst a deepening of economic stagnation.

In McKinsey Global Institute's recent report “Debt and (not much) deleveraging”, they note of the burdensome effects of debt to economic activities:

High debt levels, whether in the public or private sector, have historically placed a drag on growth and raised the risk of financial crises that spark deep economic recessions

It’s not just about empirics, rather this has been based on economic axiom. Here is my version:

Debt represents the intertemporal distribution of spending activities. Borrowing money to spend simply means the frontloading of spending. The cost of debt financed spending today is spending in the future. Debt will have to be repaid at the expense of future spending. Of course there are productive and non-productive debts. But policies of financial repression via zero bound rates tend to promote non-productive ‘speculative’ and consumption debts.

As I have been saying here, there are multiple tinderboxes to trigger a global economic storm. 

South Korea has been just as vulnerable as the many others.  Yet signs of deterioration has been spreading everywhere.

Tick Tock. Tic Tock.

Central Bank Panic: South Korea and Thailand 'Unexpectedly' Cuts Interest Rates!

As I have been saying here global central banks appear to be in a state of panic for them to aggressively slash interest rates. And curiously too these rate cuts appear synchronized. 

I have been projecting central banks around the world to cut rates for the following reasons:

Political agenda will dictate on monetary policies. Incumbent political leaders would not want to see volatilities happen during their tenure, so they are likely to pressure monetary authorities to resort to actions that will kick the can down the road…

In short, authorities are likely to be concerned with short term developments. And political agenda will most likely revolve around popularity ratings and or the next election—or simply preserving or expanding political power.

Next, there is the social desirability bias factor. Monetary authorities won’t also want to be seen as “responsible” for a volatile environment. They don’t like to be subject to public lynching from market volatilities.

Third, there is the appeal to majority and path dependency. Since every central banker has been doing it and have long been doing it, they think that they might as well do it and blame external factors for any untoward outcomes…

Asian central bankers are likely to embrace the “sound banker” escape hatchet as propagated by their political economic icon—JM Keynes:

A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him.

In Asia, aside from India, Thailand and South Korea just confirmed these views.

Moments ago, the South Korean central bank, the Bank of Korea, just cut rates. 

From Bloomberg: (bold mine)

South Korea’s central bank unexpectedly lowered its key interest rate to an all-time low to prevent the nation from falling into deflation and support economic growth.

The Bank of Korea lowered the seven-day repurchase rate to 1.75 percent, as forecast by two of 17 economists surveyed by Bloomberg. The rest predicted no change. The central bank lowered the rate by 50 basis points in two steps in 2014.

With South Korea’s inflation at slowest pace since 1999 and exports falling, the BOK joins more than 20 other central banks in loosening policy this year, including its Thai counterpart, which unexpectedly cut rates Wednesday. Governor Lee Ju Yeol told parliament on Feb. 23 that the central bank would probably have to respond through interest rates if the economic situation deteriorated.

Raging stocks in the face of economic situation deterioration that prompts for a monetary policy response via interest rate cuts?! This has been du jour reward-risk environment: parallel universes, bad news is good news.

Well that’s South Korea’s policy rate trend from tradingeconomics.com

And that’s South Korea’s statistical GDP annualized.

Note that BoK has been cutting rates even as statistical gdp continues with its downshift.

It’s basically doing the same thing all over again expecting different results.

And here is the kernel of the policy decision from the same article:

Governor Lee said after holding the key interest rate on Feb. 17 that the “sharp increase” in household debt was one of the reasons for the decision. Government’s efforts to curb household debt could give more “leeway” for BOK to lower rates, according to Samsung Securities Co.

The Financial Services Commission said Feb. 26 that it planned to convert 20 trillion won of household debt this year to fixed-rate, amortized loans. Data released the same day showed South Korea’s household debt rose to a record 1,089 trillion won at the end of last year.

“A rate cut can lead to more household debt, and policy measures to reduce risks from higher debt offers room for monetary policy,” Stephen Lee, a Seoul-based economist at Samsung Securities, said before the decision.

Like anywhere else, the general idea of the present day dynamic of serial rate cuts have been to lessen the debt burden. At the same time while cost of servicing debt goes down, demand for debt may go up. So the unfortunate result for such engagement would be a “debt trap”.

That’s the US Dollar South Korean won based on Google Finance

Since the BoK has opted to subsidize the domestic debt, her choice would most likely extrapolate to an even weaker won, thereby shifting the vulnerability of her debt burden to overseas exposure.

All these actions are just signs of kick the proverbial can down the road. But the road has a dead end. 

Now the Bank of Thailand’s announcement: (bold mine)

The Bank of Thailand’s Monetary Policy Committee has decided to reduce the policy rate by 0.25 percent from 2.00 to 1.75 percent per annum with immediate effect.

Mr. Mathee Supapongse, Secretary of the Monetary Policy Committee, said that the decision was made on 11 March 2015 at a meeting of the committee, which voted 4 to 3 to reduce the policy rate. Three members voted to maintain the policy rate at 2.00 percent per annum.

He explained key considerations for policy deliberation, saying that in the fourth quarter of 2014 and January 2015, the Thai economy continued to recover slowly, as the economic momentum from private consumption and investment was softer than expected owing in part to weaker private sector’s confidence.

In the periods ahead, the economy is projected to recover at a slower pace than formerly assessed. Exports of goods are expected to recover at a rate close to the previous projection, but with higher downside risks from a slowdown in trading partners’ economies, notably China. Meanwhile, tourism is projected to recover steadily, partially offsetting the weaker domestic demand.

In the first two months of 2015, headline inflation declined and turned negative due to low global oil prices. Nonetheless, the prices of most goods and services continued to rise, reflected by positive core inflation. Looking ahead, inflationary pressure is forecasted to remain at a low level, close to the committee’s assessment at the last meeting. Overall financial stability remains sound, but there is a need to closely monitor the potential risk build-up associated with search-for-yield behavior, amid an extended period of low domestic interest rate environment.

“In the policy deliberation, the committee judged that the outlook of the Thai economic recovery is weaker than previously assessed. Fiscal stimulus will take time to materialize, while headline inflation is projected to remain low for a certain period of time. Against this backdrop, four members judged that monetary policy should be eased further to provide more support to economic recovery, and help shore up private sector’s confidence. Nevertheless, three members deemed the current policy rate as still being sufficiently supportive of economic recovery, while the policy space should be preserved as a shock absorber, to be used when more necessary and when policy transmission is more effective. Fiscal stimulus, especially the implementation of planned public investment, should be a key growth driver at this juncture.

“Going forward, the Monetary Policy Committee will closely monitor developments of the Thai economy, and will pursue appropriate policy to sustain the ongoing economic recovery, as well as to maintain financial stability in the long term.”

This is Thailand’s official policy rate trend since 2011

Those rate cuts have done little to support even the statistical economy over the same period

What those actions have done has been to swell Thailand’s credit markets…

...as well as inflate the balance sheet of Thailand’s banks.

A lot of those loans appears to have been channeled into speculative activities

Housing prices have been on wild ride up! (The data above is from Global Property Guide as of May 2014)

Others have been channeled to stocks where like everywhere else, Thailand’s stock market via the SET has been sizzling…

Coming off the jitters from October lows, the Thai SET appears to be inflecting again. 

And I believe that the decline in stocks which the BoT fears could amplify “part to weaker private sector’s confidence” could be a reason for last night’s divisive decision to cut rates in support of the speculative markets.

Yet subsidizing domestic debt will mean a weaker baht (USD-THB), which again like in South Korea’s dilemma will mean placing bigger weight on foreign debt exposures.

It’s odd how the BoT can claim “financial stability remains sound,” when they are in fact major force behind the “potential risk build-up associated with search-for-yield behavior, amid an extended period of low domestic interest rate environment”

BoT’s statements echo the Philippine BSP

Meanwhile despite the BSP’s stance, which has been to keep at current levels, those reiterative deflation risk spiel by the BSP chief have most likely been meant to condition of the public to the eventual lowering of rates. 

The problem is that lowering rates need to be justified. And since everything has been a showbiz, the BSP has been in a predicament to look for one. The BSP chief has even lectured financial journalists on how to write their articles by focusing on deflation.

The BSP cannot be seen as upsetting the boom image.

Anyway, Thailand and South Korea’s rate cut marks the 21st and 22nd rate cuts for 2015 according to CBrates.com. That’s aside from all other non-interest rate easing channel.

At the end of the day, there is a price to pay for all these debts, and this has been why central banks have been in panic. Extend and pretend.