10 December 2009

Labour Force Survey 2009

A total of 33,000 housing units were selected for the initial sample for the comprehensive Labour Force Survey 2009.

Of these, 1,494 households were subsequently found to be unoccupied, non-residential or demolished and excluded from the survey.

How were non-residential or demolished housing units included in the initial sample?

Following the practice in previous years, the housing units would have been selected from the National Database on Dwellings (NDD), a register of all residential dwelling units in Singapore.  The NDD, which is maintained by the Department of Statistics, is updated monthly from administrative data to provide a comprehensive sampling frame for conducting household surveys.

The NDD should be able to differentiate a non-residential housing unit from a residential housing unit (unless the change of use was illegal) and should have up-to-date information on whether a housing unit exists or has been demolished.

Secondly, 28,487 households responded to the survey; 3,019 households didn't.

Altogether, 4,513 (1,494 + 3,019) housing units in the initial sample did not participate in the survey.  That's 13.7 per cent of the initial sample.

The housing units in the initial sample were chosen by systematic sampling in a stratified design.  Collectively, they were supposed to fairly represent the resident population, within certain sampling errors.

As 13.7 per cent of the housing units in the initial sample did not participate, this could have significantly distorted or otherwise affected the conclusions of the Labour Force Survey, over and above the usual sampling error.  For example, HDB households might have been over-represented if the non-residential or demolished housing units were less likely to be HDB flats.  Or perhaps, certain categories of households might have been less inclined to respond than others.

Unfortunately, this non-sampling error cannot be quantified.

Thirdly, the problem with the non-sampling error resulting from households being unwilling or failing to respond cannot be addressed by tighter supervision of the data collection process or other administrative procedures.

What can be done?

The Labour Force Survey was conducted under the Statistics Act (Chapter 317), which empowers the relevant authority to collect data on economic activities.

The Act requires every person to whom a requisition for particulars and information has been issued to furnish particulars and supply information, and provides for penalties for refusing to furnish particulars and supply information within the time allowed.

In spite of this, 3,019 households — almost one in ten of those surveyed — did not respond.  Perhaps, they did not understand that they had to respond.  Could more have been done to inform or advise them?

30 October 2009

CPF LIFE Should Be Improved

It is disappointing that CPF LIFE's payout rates will not factor in inflation.

According to Department of Statistics, one in two persons aged 62 years in 2006 will live beyond 85 years old and one in seven will live beyond 95 years old 20 and 30 years, respectively, from the first CPF LIFE payout at age 65 years.

Using the past three years' average CPI of 3.2 per cent, one dollar today will be worth 53 cents in 20 years' time and 39 cents in 30 years' time — a significant erosion of purchasing power.

Even without inflation, healthcare and some other costs increase with age.  Some members will require nursing care.  They will also find that hospitalisation plans are much more costly (about four times as much for a 84-year-old as that for a 64-year-old person), the deductible portion may be higher or coverage may not be available.  They may require more medication.

Because CPF LIFE is an important, or possibly the main, part of retirement cash flow for less well-off members, especially in their later years when their other savings may run low, the impact of inflation and other age-related costs over an extended period of time should be addressed.  Members should not have to monetise their homes, or depend on financial assistance from their family members, charity or the government, to mitigate their effects.

It may be difficult for CPF LIFE to index the payout rates to CPI, because CPI is not known until after the fact.  The solution is for the government to issue inflation-linked bonds to CPF LIFE to invest in.  Alternatively, CPF LIFE can incorporate predetermined increases in the payout rates over time; while these may not track the inflation rate perfectly, it is better than nothing.

The argument that this will result in significantly lower payout rates when members are younger to provide for higher payout rates when they are older is correct only in nominal dollar terms.  In real dollar terms — that is, after adjusting for inflation — the present arrangement will result in progressively lower real payout rates as members age, and a lower standard of living.

30 June 2009

Water From Conventional Sources Is Better

Whilst we may be pleased with the progress we have made, and continue to make, with waste water reclamation and desalination, which enable us to reduce if not eliminate our dependence on adequate rainfall and imported water, we should not lose sight of the fact that obtaining potable water from waste water or sea water is more costly than that from conventional means because of the extensive use of membranes and the energy intensity of the purification processes.

However, we don't necessarily have to incur this higher cost, at least for part of our water consumption.

So long as the relevant reservoirs in Johor collect more than enough water to satisfy Johor's own needs and our entitlement under the existing water agreements, it probably makes more economic and environmental sense for both countries if we purchase such surplus water from Malaysia.  This will be particularly so when the 1961 water agreement expires in 2011, freeing up 86 million gallons per day which Malaysia is obligated to supply to us until then.

Of course, both parties must be willing and the price must be right.  The price needs to be lower than the lowest variable cost of producing our own water to a comparable level of purity by reclamation or desalination.  The price can be much lower if the quantity that is offered to us is not fixed over an extended period, but is allowed to vary from time to time, so that it is really water that is surplus to Johor's needs and will otherwise flow into the sea.

We benefit from a lower cost of water and Malaysia benefits from realising some monetary value for a commodity it cannot harvest at the moment.  It won't affect our overall trade balance, but it will improve Malaysia's.  It will reduce the impact on the environment.

This does not mean that we should revert to being dependent, even partially, on imported water.  We should, and must, continue to develop the infrastructure to reclaim and/or desalinate water, but we may want to use these facilities only to the extent that we can't get imported water at a meaningfully lower cost than the variable cost of doing so ourselves.

05 June 2009

Limiting Proprietary Foreign Exchange Trading

Apart from maintaining a book to facilitate foreign exchange transactions with their non-bank customers, should banks engage in proprietary foreign exchange trading i.e., speculating for their own account?

Many banks have systems which try to quantify the potential loss of their trading positions under certain stress scenarios.  Such systems usually work well, provided the mathematical models on which they are based correctly reflect historical experience and then, only to the extent that historical experience can accurately predict future exposure.  However, markets have fat tails (periodic, albeit infrequent, price movements that are much larger than predicted by most finance theory) which may not have been built, or not adequately built, into their models.

Even with capital adequacy ratios in the mid-teens, banks are more highly leveraged than many other companies.  A bank with a capital adequacy ratio of, say, 15 per cent, has 6.67 times as much risk-weighted assets as capital, and this is after taking the credit risk of not-so-risky assets at less than their full face value.

When banks falter, either depositors lose their money or governments rescue them with taxpayers' money.

Risks aside, a more fundamental question is this is speculating on currency movements a banking activity, or even a business activity?

Many people do not consider foreign exchange, or any other, speculation as a business activity of non-banks.

What differentiates banks from non-banks then?  Is it expertise or more sophisticated risk management systems?  Is it because banks have been doing it for years, perhaps profitably?  Or, is it some notion that it is a banking activity by reason that it involves currencies, economic analysis, etc.?

There's no difference, really.  If individuals wish to speculate, that is their prerogative.  But, companies banks as well as non-banks should not speculate.  Not as a business and not with money not theirs to risk.

19 February 2009

Setting Public Transport Fares

The two public transport operators, or PTOs, have decided not only not to seek a fare increase later this year, but also to reduce fares, in order to lessen the burden on the commuting public in these difficult economic conditions.

However, I wonder if the extent to which the PTOs are prepared to reduce fares may likely be limited by how the fare formula works.

The maximum annual fare adjustment is based on the percentage change over the preceding year in both the Consumer Price Index and the Average Monthly Earnings (Annual National Average).

Foregoing or reducing the fares now can be painful for the PTOs in the future.

Firstly, when the PTOs next seek to increase fares, the fare formula does not take into account the fare increase foregone of up to 5 per cent and/or the fare reduction in 2009.  Any increase in 2010 will be a percentage of the fares prevailing in 2009 (after reductions now being considered).  There is no provision for the PTOs in the future to claw back, recover or compensate for any fare increase foregone and/or fare reduction in 2009.  In other words, the fare increase foregone and the fare reduction in 2009 will continue forever, unless the formula is changed.

Secondly, part of the proposed fare reduction comes from cost savings the PTOs will derive from Budget 2009.  However, some of these cost savings are temporary.  For instance, the road tax rebate is for one year only.  But the fare formula is not a cost plus formula, so when the road tax rebate is withdrawn, the PTOs cannot pass on the resulting higher cost to commuters, even though the rebate is the very economic reason behind the reduction in 2009.

Thirdly, the fare adjustment formula uses lagging factors.  When the PTOs next seek to increase fares (say, in 2010), the applicable Consumer Price Index and Average Monthly Earnings will likely reflect the dismal conditions in 2009.  Indeed, the maximum fare adjustment in 2010 may possibly even be negative, before extracting (i.e., deducting) the fixed productivity factor of 1.5 per cent.  PTOs, like other businesses, operate in business cycles but in a regulated market, what are the longer term financial implications for the PTOs when they skip a substantial fare increase this year, especially since it will be foregone forever?

Perhaps, the fare formula should be made more flexible so that the PTOs can respond more flexibly.

11 February 2009

Representative Fuel Oil Reference Price - Part II

An earlier post on the above-mentioned subject dated 12 November 2008 was published in the forum page of the local press on 13 November 2008.

During the Committee of Supply debate (Ministry of Trade and Industry) on 9 February 2009, Senior Minister of State (Trade and Industry) Mr S Iswaran announced that Energy Market Authority would be revising the formula by using the average of fuel oil prices in the preceding three months to determine the tariff for the current quarter, beginning with the third quarter of 2009.

He said that the new approach had two advantages.  Firstly, it would help to reduce the volatility of the electricity tariff by averaging fuel oil prices over a longer period.  Secondly, with a three-month average, more recent fuel price data would be used to determine the tariff.  This would allow the tariff to be more reflective of the prevailing market prices of fuel.