The Damocles index by Nomura warns of fiscal tension in Malaysia, score accross coountries, the hits and misses 1996~20118

PETALING JAYA: Allowing a larger fiscal deficit and running the risk of a sovereign credit rating downgrade in 2019 could cause balance of payments stress, given Malaysia’s high short-term external debts and low foreign exchange (forex) reserves, said Nomura.

Following the reversal of fiscal reforms like goods and services tax (GST) and the removal of fuel subsidies, the new government now faces the tough choice of either cutting spending at the cost of growth, or allowing a larger fiscal deficit and the risk of a sovereign credit rating downgrade in 2019.

According to a Nomura global research report, Malaysia’s Damocles score in July 2018 was 86.9, below the 100 threshold.

The Damocles index by Nomura summarises macroeconomic and financial variables into a single measure to assess an economy’s vulnerability to a currency crisis.

The oil price slump of 2014 to 2016 was a major shock for Malaysia, one of the few net-oil and gas exporters in Asia.

“While Bank Negara initially expanded forex reserves to defend the ringgit, it eventually allowed a sharp depreciation in 2015 which boosted export competitiveness.

“Malaysia has proved resilient and its current account remained in surplus, benefiting from a diversified economy and fiscal reforms,” said Nomura.

Three countries in the region, namely, Thailand, Indonesia, and the Philippines, have a Damocles score of zero, while Vietnam has a moderate Damocles score of 35.

The Bank of Thailand is signalling policy normalisation to build policy space and reduce financial stability risks following a prolonged period of exceptionally low interest rates. This is as headline consumer price index (CPI) inflation returned to within the 1% to 4% inflation target and economy growing at potential.

Thailand’s current account surplus as a percentage of gross domestic product (GDP) has been sizeable since 2015, driven by weak domestic demand and, more recently, growing tourism revenues as well as an export recovery.

“Over this period, forex reserves rose sharply, and they are now at very favourable adequacy levels relative to both imports and short-term external debts.

“The fiscal deficit is expected to widen slightly in 2018, as the government increases spending to support populist policies targeting low-income earners, in the run-up to the election in early 2019,” said Nomura, adding that real interest rates are falling gradually and remain marginally positive, as inflationary pressures have been stubbornly weak.

Over in Indonesia, a negative terms-of-trade shock in 2014 raised the Damocles score in 2014 to 2016, but it has fallen back to zero due to Bank Indonesia’s build-up of forex reserve buffers and government reforms that improved foreign direct investment (FDI) inflows.

While depreciation pressures have risen again in 2018, BI has acted decisively with 125 basis points in policy rate hikes to date.

“We expect another 25 basis points, with the risk of more.

“Bank Indonesia maintains a flexible forex regime and a dual-intervention framework in forex and bond markets, as well as introduced macro-prudential measures, like requiring residents to hedge external exposure,” said Nomura.

The research house added that Bank Indonesia has also strengthened policy coordination with the Finance Ministry, which is implementing policies to reduce the current account deficit, while prioritising a credible 2019 budget despite upcoming presidential elections.

Sword of Damocles hangs over Sri Lanka

PETALING JAYA: Sri Lanka is at risk of an exchange rate crisis mainly due to its still-weak fiscal finances and a fragile external position.

Sri Lanka charted the highest Damocles score of 175, among 30 emerging market (EM) economies.

The Damocles index by Nomura summarises macroeconomic and financial variables into a single measure to assess an economy’s vulnerability to a currency crisis.

A score above 100 suggests a country is vulnerable to an exchange rate crisis in the next 12 months, while a reading above 150 signals that a crisis could erupt at any time.

Sri Lanka has large refinancing needs, with foreign exchange (forex) reserves of less than five months of import cover and high short-term external debt of US$ 7.5bil.

“Political stability also remains an issue, as recent resignations have weakened the government (its term ends mid-2020) and despite retaining a simple majority, complicates the task of continuing to implement International Monetary Fund (IMF)-induced reforms.

“However, without IMF support, the risk of a currency crisis would be higher,” said Nomura in its global research report.

Meanwhile, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine are currently vulnerable to an exchange rate crisis, having Damocles scores of more than 100.

“Based on our definition, Argentina and Turkey are experiencing currency crises, while Argentina, Egypt, Sri Lanka and Ukraine have turned to the IMF for assistance, leaving Pakistan and South Africa as the standouts.

“As investors focus more on risk, it is important not to lump all EMs together as one homogeneous group; Damocles highlights a long list of countries with very low risk of currency crises,” said Nomura.

Eight countries, namely, Brazil, Bulgaria, Indonesia, Kazakhstan, Peru, Philippines, Russia and Thailand, have Damocles scores of zero.

It is notable that China’s Damocles index has maintained since dropping to 36.9 in late 2017 from 62.4 in October 2017.

The index far below the 100 threshold suggests that the risk of an exchange rate crisis in China is limited.

Nomura concurred that China’s balance of payment position remains healthy, given it has the world’s largest foreign exchange reserves at US$3.1 trillion, as of July 2018.

“However, we highlight that its pockets are not as deep as they once were, given that current account deficits at minus 0.4% of gross domestic product (GDP) in the first half of 2018 may occur more frequently, net direct investment inflows may moderate further, and external debt has risen significantly.

“Moreover, we see domestic challenges from weakening aggregate demand and other fundamental problems, and external risks from the escalation in China-US trade tensions and trade protectionism,” said Nomura.

As for India, its Damocles score has fallen to 25 in the third quarter of 2018, from 56 during 2012 to 2013.

India’s most recent currency crisis occurred in 2013 and was due to weak domestic macro fundamentals and worsening external funding conditions. Since then, consumer price index (CPI) inflation has moderated to about 4.5% in 2018 from 9.7% in 2012, as has the current account deficit at an estimated -2.5% of GDP, compared to minus 5% in 2012. Furthermore, India’s central bank has a sufficient forex reserve buffer of 9.3 months of import cover versus 6.4 in 2012.

“However, given India runs a current account deficit, it remains vulnerable to bouts of global risk aversion. Higher oil prices and portfolio outflows are its key external vulnerabilities.

“Aside from these, the key risks stem from the government turning more populist ahead of the 2019 general elections (worsening domestic fundamentals) and a sharper-than-expected domestic growth slowdown (triggering equity outflows),” said Nomura.

The Damocles index comprises eight indicators that are found to be the best predictors of exchange rate crises in the 30-country sample, in which there have been 54 crises since 1996. It includes five single indicators which are import cover, short-term external debt or exports, forex reserves or short-term external debt, broad money or forex reserves and real short-term interest rate.

On the other hand, the three joint indicators are non-foreign direct investment (FDI) gross inflows of one-year and three-year, fiscal and current account, as well as current account and real effective exchange rate deviation. To date, Damocles has correctly signalled 67% of the past 54 crises in Nomura’s sample, including the Asian financial crisis (1997 to 1998), Russian financial crisis (1998) and the 2018 EM currency crises in Argentina and Turkey.

“The advantage of Damocles lies in its objective nature in letting the data speak, not clouded by conventional misperceptions or biases based on past experiences. While the results achieved are encouraging, but given the inherent limitations of any early warning system, it would be foolish to make any exaggerated claims.

“For instance, Brazil’s Damocles score of zero implies very low external vulnerability; yet the Brazilian real (BRL) has depreciated more than 10% in August alone due to an uncertain presidential election outlook,” said Nomura. - The Star

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Govt-linked companies (GLCs) shake-up as they sing a different tune

On the rise: A man walks past the Employees Provident Fund headquarters in Kuala Lumpur. Remuneration of GLC chiefs, senior management and directors have been on the uptrend following a transformation initiative to make them more competitive commercially. 

Overpaid CEOs and social duties of GLCs set for review

The new government has clearly said that there is a need to review the role of GLCs and the remuneration paid out to their top executives

A GLANCE at one of the annual reports of the country’s government-linked companies (GLCs) reveals that its chief human resource officer earned close to a million ringgit or about RM80,000 per month, last year.

Other senior personnel were also compensated with generous remuneration, with its chief executive taking home over one and the half million ringgit in financial year 2017.

More importantly, this was at a company that had courted much controversy in recent times over allegations of mismanagement and under-performance.

Such a scenario, however, is not uncommon at GLCs, where remuneration of key executives tend to run in the millions but performances sometimes leave much to be desired.

By definition, GLCs are companies where the government has a direct majority stake via their entities such as Khazanah Nasional, Employees Provident Fund, Permodalan Nasional Bhd (PNB), the Armed Forces Fund (Lembaga Tabung Angkatan Tentera) and the Pilgrims Fund (Lembaga Tabung Haji).

In recent years, remuneration of GLC chiefs, senior management and its directors have been on the uptrend following a transformation initiative to make them more competitive commercially.

The thinking behind this is that in order to attract talent – subjective as the definition of that may be – top dollar should be paid.

Some, however, argue that GLCs should in fact prioritise national service a little more.

Universiti Malaya’s Faculty of Economics and Administration professor of political economy Edmund Terence Gomez says GLCs have social obligations.

“What this essentially means is that GLCs cannot operate in a purely commercial manner as they also have to look at the social dimension,” he says. “The GLC professionals have many times articulated that they are doing national service. Going on that alone, one can argue that they shouldn’t be paid private sector salaries,” Terence adds.

And so it is now, there is a disquiet building up among GLCs following the change in government.

The new government has clearly said that there is a need to review the role of GLCs and the remuneration paid out to their top executives and senior management.

In this regard, the Pakatan Harapan government is understood to be mulling over making drastic changes in the appointment and remuneration of key directors at GLCs which include government agencies.

It was reported recently that the Council of Eminent Persons, headed by Tun Daim Zainuddin, who was Finance Minister in the 1980s, has requested details of the salaries of some of the top executives at GLCs as part of the review.

Already, there have been a couple of GLC chief executives who have left and more of this is expected to materialise over the coming weeks.

“It appears to be a purge of Tan Sri Nor Mohamed Yakcop’s boys,” quips an industry observer, referring to the veteran politician who was instrumental in the revamp and transformation of Khazanah which started in 2005 and subsequently, driving the GLC transformation initiative.

UM’s Terence says if the new government is to appoint new individuals, it must ensure that the process is transparent.

“If you are removing these people, who are you replacing them with? More importantly how are you selecting these people?

He adds there needs to be a transparent mechanism in the appointment of this new breed of professionals that will be brought in and what must also be looked into is the kind of check and balances being put in place to ensure governance.

“There should be a debate on these things,” he says.

Economist Yeah Kim Leng believes that a review is timely and appropriate as part of a deeper institutional and structural reform.

“The broad aims are firstly, to reduce excessive payoffs which don’t commensurate with performance and secondly, to address the widening wage and benefits gap between the top and bottom rungs of the organisation,” he says.

Such rationalisation will result in a more equitable salary structure as well as raise the generally depressed wages of middle management and support staff which form the largest number of most organisations, Yeah adds.

Unfair advantage

The role of a head honcho, be it at a GLC or non-GLC, is seldom a walk in the park.

CEOs make critical operational decisions that affect everything from future business directions to the health of a company’s balance sheet and employee morale.

The job generally entails long hours and tremendous pressure to meet expectations of shareholders and stakeholders.

But again, while local GLCs have been key drivers of the economy, one key feature is that they are ultimately owned by the government.

This, some argue, give GLCs unfair advantages such as access to cheap funding and political patronage over their private counterparts.

So, is running a GLC more of a stewardship role as opposed to an entrepreneurship role?

Therein lies the issue that in turn will have a bearing on the remuneration levels of GLC heads.

Minority Shareholders Watch Group (MSWG) chief executive office Devanesan Evanson puts it this way.

“Entrepreneurs have their skin in the game in that there are often the major or substantial shareholder in a company.

“It is in their direct interest to perform as this will be translated into share price appreciation which will impact the value of their shareholdings – this is motivation to grow the entrepreneurial spirit,” he says.

On the other hand, GLC heads do not have their skin in the game save for their limited shareholding through ESOS or share grant schemes.

“If a GLC loses money, the impact on them is limited. They may be prepared to take perverse risks as the eventual loser is the government-linked investment companies or GLICs (and the minority shareholders of the GLC), which eventually are the people who are the members or subscribers of the GLICs.

“In that way, we are not comparing apple to apple and yet, we need talent to run GLCs.

“So we can conclude that, we need to pay for talent at GLCs but it should not be as much compared to what one would pay the CEO of a firm which he started,” Devanesan says, noting that remuneration of some of the GLC heads have risen too fast in recent years.

Rising remuneration is a given, others say, as the government had recruited top talent from the private sector to helm these companies.

A case in point is  Axiata Group Bhd , which has done relatively well with the infusion of the “entrepreneurial spirit” under the helm of president and group CEO Tan Sri Jamaludin Ibrahim, who has helmed the Khazanah-owned telco since 2008, they point out.

Prior to that, Jamaludin was with rival Maxis Communications Bhd, a private company controlled by tycoon Ananda Krishnan.

Other GLCs which have performed consistently over recent years include banks like Malayan Banking Bhd and CIMB Group Holdings Bhd which have expanded their operations out of Malaysia, carving a brand name for themselves regionally.

Under a 10-year transformation programme for GLCs initiated in 2005, companies were given quantitative and qualitative targets to meet as measured by key performance indicators.

Now, the 20 biggest GLCs currently make up about 40% of the local stock market’s market capitalisation.

One of the principles under the programme was also the national development agenda, which emphasised the principle of equal growth and development of the bumiputra community with the non-bumiputras.

Asian Strategy and Leadership Institute (ASLI) Centre of Public Policy Studies chairperson Tan Sri Ramon Navaratnam says the purpose of establishing GLCs to encourage bumiputras to participate in business has largely been fulfilled.

“Now that the bumiputras are on a strong footing in the corporate sector with able leaders who have wide experience, it (GLCs) could be seen as an erosion to the welfare and progress of the smaller and medium-sized industries, particularly those where other bumiputras are involved,” Ramon says.

Having said that, he says although many GLCs are doing well, they have performed well “mainly because of protective policies and monopolistic practices”.

“The time has come in this new Malaysian era for more competition and less protection.”

Benchmarking

Still, if simplistic comparisons are to be made, the CEOs of the country’s two largest GLC banks, Maybank and CIMB for instance, took home less than the CEO of the country’s third largest bank, the non-GLC Public Bank Bhd last year.

In 2017, Public Bank’s managing director Tan Sri Tay Ah Lek took home some RM27.8mil in total remuneration while Maybank’s Datuk Abdul Farid Alias earned RM10.11mil and CIMB’s Tengku Zafrul Abdul Aziz made RM9.86mil.

Across the causeway, a survey of CEO remuneration of Singapore-listed companies by one financial portal shows that Singaporean GLC CEOs earned 31% more than their non-GLC counterparts in 2017.

Singapore’s Temasek Holdings-owned DBS Bank, which is Singapore’s largest bank, paid out S$10.3mil (RM30.36mil) to its head honcho, while in the telecommunication sector, SingTel’s remuneration to its top executive was some S$6.56mil (RM19.34mil) for the most recently concluded financial year.

By definition, Singapore GLCs are those which are 15% or more owned by the city-state’s investment arm Temasek Holdings.

UM’s Terence does not think Singapore should be a benchmark for Malaysian companies.

“Singapore is a much smaller country and the manner in which they operate in is also different ... their GLCs are deeply conditioned by their holding company, which is the Minister of Finance Incorporated,” he says.

MSWG’s Devanesan notes that determining remuneration is “not exactly science” as there are many parameters to be considered.

Some of the factors to note include whether the companies are in a monopolistic or near monopolistic position and the performance of the GLC heads over the years.

“Based on these parameters, we can instinctively know if a GLC head is over-remunerated,” he says. Over in China, state-owned Industrial and Commercial Bank of China (ICBC), the country’s largest lender by assets, paid out about 63.43 yuan or about RM39mil in total remuneration before tax for the year 2017 to its top executive.

Notably, the Beijing-based ICBC’s net profit’s was at a whopping US$45.6bil (RM182bil) in 2017.

Sources: Gurmeet Kaur and Yvonne Tan The Star

GLC singers sing a different tune

Some officials singing 'Hebat Negaraku'.

 Swan song for some after 'Hebat Negaraku' post-GE14 - CEO think video to showcase musical talents

 Several heads of government-linked companies (GLCs) have come together in a heartwarming music video titled "Hebat Negaraku" (my country is great). 

 GLC chiefs show off musical talent in 'Hebat Negaraku' music video ...

https://youtu.be/hfK_wfD17qk

The heads of government linked companies (GLC) who sang a song that later became the theme song for the Barisan Nasional’s election campaign have distanced themselves from the controversial music video.

Those who sang and played musical instruments in the music video titled “Hebat Negaraku” (my country is great) said they did not know the video or the song was going to be a political theme song.

There have been repercussions on the CEOs who appeared in the music video. They have come under scrutiny for making a song that was used as propaganda by Barisan in the last general election.

Three of the GLC bosses in the video have either retired or resigned since the new government took over.

Several more have been speculated to leave in the coming weeks or months but nothing is cast in stone. Sources said this is because most of the CEOs are not known to have campaigned openly for either Barisan or Pakatan Harapan.

“None of the CEOs had a clue it would become a political song. Do you really think the CEOs would have done it if they knew it would become political?” asked one of the CEOs who appeared in the video but declined to be named.

“We have said no to so many things, and we could have easily have said no to this if it was political.’’

Another CEO said he was approached and felt it was “more of a patriotic song and nothing more.”

“At that point in time, we did not think much (of the repercussions). Hebat Negaraku was announced as Barisan’s campaign theme long after the recording was made. We did not know that.’’

Another CEO added: “We thought it was a casual thing when we were approached as some of the CEOs have their own band.’’

It all started when several CEOs were called to be part of a music video and they thought it was to showcase the musical talents of 14 GLCs heads, plus staff members of the 20 key GLCs.

The song is about the greatness, advancement and inspiration of Malaysia. It was released on YouTube on March 22 but has since been taken down.

But fingers have been pointed at the GLCs bosses who made the music video because it became a political video.

Datuk Seri Shazalli Ramly has been said to be the main orchestrator for the group in terms of making the music video. He was also said to be the branding chief for Barisan’s elections campaign.

Barisan lost the elections held on May 9 to Pakatan, which has since formed a new government and is scrutinising all the performance, processes, remuneration and procurement of the government and GLCs.

Shazalli quit his job as group CEO of  Telekom Malaysia Bhd (TM) on June 6. Malaysian Resources Corp Bhd (MRCB) group managing director Tan Sri Mohamad Salim Fateh Din has retired as group MD last week and it was something he had planned to do.  Malaysia Airports Holdings Bhd Datuk Badlisham Ghazali did not get his contract renewed. All three were in the music video.

There is a GLC secretariat that now comes under the purview of TM, which was earlier parked under Khazanah Nasional Bhd. The secretariat organised the making of the music video, according to sources. The CEOs were called to attend a session and within a few hours it was all done with no prior rehearsals.

“When you are called, it could be difficult not to comply since it is the secretariat that called you. We have to oblige but we really did not know it was going to be a campaign slogan. This is really unfortunate that it has turned out like this.

“We were surprised when we found out it was a party slogan but it had already been done and what can we do, we are in the picture,’’ said another CEO.

Not all CEOs who were invited took part in the video. Prior engagements were the reason used for declining to appear. - By b.k. Sidhu The Star


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Impact of manifestos policy lead from Malaysia's General Electioon (GE14)

Market impact: The reaction of investors following the past two GEs is an example of how investors value certainty and how Bursa will be affected in the event of a Pakatan victory this time around.

Policy directions from political pledges have business and economic consequences.

EVER since Parliament was dissolved ahead of polling for the 14th general election (GE14), the combustible campaigning period has been mirrored by the volatile stock market.

The FBM KLCI hit an all-time high of 1,895 points on April 19, just a week after the dissolution of Parliament, but has since tracked lower as election day nears.

With the market edgy prior to polling day, UOB KayHian in a note on the election says that the election factor is a short-term sway phenomenon.

“While unexpected election results can be a significant market sway factor in the near term, such market reactions have been short-lived in the past.

“For example, when the Barisan Nasional’s control of parliamentary seats surprisingly slipped below two-thirds during GE12, the FBM KLCI plunged by as much as 9.5% in a day, triggering a trading circuit breaker at the worst level,” it says.

The research house notes that the FBM KLCI recouped most of the losses within a couple of weeks, once investors were assured of the continuity of political stability and business-friendly policies.

Both Barisan and Pakatan Harapan are mindful of maintaining business-friendly policies, it says. “Pakatan has on various occasions highlighted that it will generally uphold the sanctity of government contracts should it win the election. Eventually, equity markets will be dictated by external and domestic economic fundamentals and liquidity considerations.”

Market volatility and fierce campaigning do go hand-in-hand, given the uncertainties the outcome of the GE will bear on the stock market and businesses. Experts have said that the direction of the ringgit and also the economy will be determined after polling day as the country charts its political, along with economic and business, direction for the next five years.

“If Barisan wins, it will be seen as a vote for continuity. It will be business as usual, given the various plans and policies the Barisan government has laid out in the past and for the future,” says an economist.

“For businessmen, that mindset of what to expect is important for future planning and direction and they will like not to have any anxiety on what to expect in the future.”

The economic and business direction

The Barisan government, which has been in power since independence, has a track record of what it has done and will do for the country when it comes to business and economic planning.

The various Malaysia plans, budgets and policies announced over the decades have plotted the economic direction of the country. But in recent times, some will look at its manifesto as to the future policy direction the country will adopt should it retain power.

Policy promises are something more voters pay attention to these days, and judging by the manifestos of Barisan and even the Opposition, their documents are detailed with measures they will carry out in the impending five years.

For the Barisan government, the launch of its manifesto was done with much pomp, with it even detailing how it has fulfilled 99.4% of its 2013 manifesto pledges. Much of the focus of its latest manifesto is on the people, in order to lift their incomes and well-being.

These promises include raising the minimum wage in phases to at least RM1,500 within five years to setting up a Fair Works Commission to ensure that the salary levels of private-sector workers are more equitable.

BR1M recipients who enrol in higher education institutes will, meanwhile, receive a one-off assistance of RM1,500 plus there are a slew of measures for the country’s Felda settlers and their family members who are spread out over 317 settlements in 54 parliamentary seats nationwide in the manifesto.

Barisan is also promising to create three million jobs, and among the measures promised to help achieve this is by speeding up the development of the Malaysian Vision Valley, a 150,000ha area that is projected to create 1.3 million job opportunities.

On housing, the manifesto pledges a number of measures including setting up a special bank to facilitate loans for affordable and low-cost housing priced RM300,000 and below.

In addition, tax incentives or development funds will be provided to encourage banks and housing developers to offer rent-to-own schemes.

CIMB Research in a note on Barisan manifesto points out the key pledges which include low-income households, Felda settlers, females, the elderly and farmers.

It points out that the key promises include a top-up on the BR1M payments, raising the minimum wage to RM1,500 within five years, potential revisions in personal and corporate income taxes, expansion of affordable housing aid, special incentives and funds for Felda settlers, and subsidised public transport passes, broadband and other consumer goods/services.

It says that the additional BR1M payments will amount to at least RM3.71bil or 0.25% of gross domestic product (GDP) in 2018, which comes on top of the prior week’s civil servant pay hikes of RM1.46bil effective July 1.

“New spending commitments imply that the budget deficit is unlikely to improve significantly from the target of 2.8% of GDP despite windfalls from higher oil prices and GDP growth,” CIMB says.

It believes the market is expecting the ruling coalition, Barisan, to win the majority of the Parliament seats.

“We view Barisan’s widely expected win as neutral to positive for the market. The stock market’s performance post-election will depend on the degree of selling pressure during the campaigning period and the poll results.”

What the additional cash injection to households will mean is a lift in consumer spending. Consumption is a big driver of the economy and the BR1M payments have been one of the reasons for the steady performance of domestic demand.

“Furthermore, the economy will get a lift from the lift-off from projects that have already been identified for construction. The MRT, the high-speed rail between Kuala Lumpur and Singapore, and the construction of Bandar Malaysia will be some of the projects that will lift the construction sector and also the economy,” an economist says.

During the years when pledges from the past Barisan manifesto were being carried out, the economy had its ups and downs given the crunch felt by the collapse in crude oil prices.

The GDP, nonetheless, during the past five years has been positive, given the rollout of projects during that period. Growth came in at 5.9% in 2017 and was 4.2% in 2016, 5% in 2015, 6% in 2014 and 4.7% in 2013.

There have been concerns that spending pledges contained in the manifesto would leave a hole in government finances, but indicators so far do not point to that being a problem.

The government’s debt-to-GDP ratio has fallen below the self-prescribed ceiling of 55% to 51% and going by what the data shows in the first quarter, government finances seem to be holding up.

Nomura in a note says that Malaysia’s fiscal deficit was RM11.2bil in the first quarter of 2018, or 3.3% of GDP, which was below its forecast of 6%.

“This is smaller than any of the first-quarter deficits in the previous five years,” it says.

Nomura says revenue collection appears to have exceeded expectations significantly, surging by 16.5% year-on-year in the first quarter and was likely boosted by higher oil prices and possibly some lagged effect from strong GDP growth last year.

“However, more surprisingly, spending appears to have been quite restrained, falling by 2% despite the GE on May 9. Spending details have yet to be released but such restraint may prove temporary with the government likely concentrating the use of its fiscal firepower closer to election day,” it says.

“This likely explains the government’s confidence in maintaining its 2018 deficit target of 2.8% of GDP despite announcements of additional cash handouts around the election.

“While we continue to expect government spending to spike in the second quarter, the surprising outturn in the first quarter suggests that fiscal tightening in the second half may be less severe than we currently forecast,” it says. By Jagdev Singh Sidhu The Star

Election a short-term market sway phenomenon

THE consensus is for the Barisan Nasional to win the upcoming general election (GE) to be held next Wednesday. But what if Pakatan Harapan were to win?

The immediate implications of a Pakatan win will be on the financial markets. The other implication is the impact in the mid to long-term of a Pakatan win on the economy.

The financial markets

There is no precedence for a win by the parliamentary Opposition in Malaysian history, and because investors prefer certainty, the financial markets are sure to be volatile.

The reaction of investors following the past two GEs is example of how investors value certainty and how Bursa Malaysia will be affected in the event of a Pakatan victory this time around.

The local bourse’s benchmark, the FBM KLCI, slipped 9.5% on the first day of trading after the 2008 election, which was held on a Saturday. This was after Barisan lost its two-thirds majority in Parliament for the first time and also lost control of five state legislatures.

In 2013, the stock market fell the week before the election on speculation of an Opposition victory at the federal level. That was the year when many felt sure that Barisan would lose. The Barisan clung on to power but lost the popular vote. The stock market rallied.

While there certainly was a reaction by investors, it must be noted that the Malaysian financial markets, including the stock market, do not act in isolation.

In 2008, fund flows were also influenced by broader movements in the global markets made volatile by the global financial crisis.

“Don’t forget that news flow from the US markets was bad on a daily basis,” a fund manager with an emerging-market portfolio points out.

Shortly after the 2008 election, Bear Stearns Companies Inc, an investment bank, was taken over by another investment bank, JPMorgan Chase & Co, in an operation largely directed by the US Federal Reserve (Fed), which was afraid of what the failure of a Wall Street institution would do to market confidence.

The fund manager tells StarBizWeek that investors just took the opportunity to offload riskier emerging-market assets following the outcome of the election.

“It’s normal to point to market swings either way to domestic factors but in reality, for the index to move, institutional shareholders must react and they rarely do so on just domestic factors, especially in that period of time,” he says.

The same reasoning goes for currency movements. The ringgit’s weakness in the past month has been blamed on investor jitters prior to the upcoming election, but pressure on the currency is really coming from rising US bond yields.

Investors are repositioning on market speculation of four instead of three US interest rate hikes and this has had an impact on emerging-market currencies as well as equity markets.

Although the Fed left the benchmark interest rate unchanged in a recent meeting, officials say that inflation is close to the 2% target. The market expects the Fed to raise the federal funds rate a second time in June when it next meets.

How this works is that investors are anticipating that new US government bonds will now be issued with a higher coupon rate, which is the interest that is paid out annually on the bonds because of the higher interest rates. Also, because of the anticipation, the earlier issued bonds, with a lower coupon rate, will now be traded at a lower price, and because there is an inverse relationship between bond prices and yields, there is a rise in bond yields.

This is why the benchmark 10-year US Treasuries yield is now higher, because the price has dropped, causing US bond yields to narrow against the yields of similar-tenor bonds of foreign government issuers.

For example, the yields between the 10-year Malaysian Government Securities and the 10-year Treasuries have narrowed, making Treasuries – because of its safe-haven status and underlying currency strength – a more attractive asset.

An interest rate hike also means that inflationary pressure is picking up because of economic growth and that will attract investors too.

The steady US economic outlook, US dollar strength and safe-haven status at a time of much geopolitical uncertainty are also attractive factors. Currency strategists point to US dollar movements as more important when taking into account the US dollar/ringgit pairing. The decisions of US policymakers as well as other external factors such as trade will have more weight on the ringgit’s direction rather than purely domestic factors.

Even the rising oil price has not been able to stem the weakness in the ringgit, and that is because of the investors repositioning rather than any inherent political risks.

However, a political analyst did say that without the higher oil price, the ringgit could have seen a steeper fall. “It could be that rising US bond yields is the reason for the ringgit’s weakness but I believe that political factors are at play too and that without the higher oil price, the ringgit would have fallen even more,” he says.

The economy

A Pakatan government will have to find a middle path in unravelling some of the more unpopular policies, while ensuring policy continuity and assuaging the concerns of investors.

Both Barisan and Pakatan claim to have the people’s welfare at heart, and both claim they want to alleviate the cost-of-living issue that Malaysians have been grappling with in recent years. The Pakatan coalition is also calling for the shaping of the nation’s economy in a fair and just manner.

The Pakatan promises must take into account the urgent need for the economy to move up the value chain. In one respect, a focus on high-end manufacturing will have a positive spillover effect, as such initiatives will attract high-end service jobs including banking and financial services as well as research and development opportunities.

The Pakatan manifesto launched in early March includes 10 promises to be implemented within 100 days of winning the election. Among the promises are the abolishment of the goods and services tax, reintroducing the petrol subsidy and increasing the minimum wage to RM1,500 by their first term in office.

Moody’s Investor Service analysts say in a report released yesterday that the implications on the country’s credit standing will be determined by the impact of the election results on existing government policies, with particular regard to fiscal consolidation and debt trend.

“Ahead of the election, Barisan and the key opposition, Pakatan, have both unveiled their manifestos and specific spending programmes targeted at key voter bases. These measures include raising the minimum wage, greater cash handouts and relief for Federal Land Development Authority settlers, among others,” they say.

The rating agency, which has maintained the country’s A3 credit profile with a “stable” outlook, says the impact of these programmes on the sovereign credit will depend on how they are funded and whether they have a negative effect by delaying the government’s ongoing efforts at fiscal consolidation.

“Economically, these programmes are likely to boost consumption over the near term but against the backdrop of Malaysia’s export-driven growth, the impact is not likely to be material and could be offset by inflation,” they note.

Another crucial promise is to launch detailed studies of multi-billion-ringgit projects awarded to foreign countries. This particular promise is likely aimed at China, which has become a major investor, if not the largest in recent years, with not only infrastructure projects but also property development.

Pakatan will have to tread carefully where reviewing contracts is concerned, as the sanctity of contracts is crucial to investor confidence.

“Any review of the mega-projects will have to be done in a tactful manner. Malaysia is not the United States, we don’t have the heft, so we need to be careful,” an analyst says.- by Fintan Ng The Star

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BN loss will see bad future ?

Towering achievement: The Tun Razak Exchange is one of the projects Ng says will be halted if the Opposition wins the polls. — Bernama

PETALING JAYA: An analyst has warned of a bleak economic future for Malaysia if the Opposition is voted into power in GE14.

About - CREATE – Centre for Research, Advisory & Technology

Ng Yeen Seen | 世界经济论坛

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Centre for Research, Advisory and Technology chief executive officer Ng Yeen Seen (pic) said Malaysia will be sidelined by China from the Belt and Road Initiative.

She said the Opposition will cease all China-linked projects such as the East Coast Rail Link, Tun Razak Exchange and the Country Garden Forest City development.

Malaysia’s palm oil industry problems will then be compounded with a boycott by China, she said.

She said many will be expected to lose their jobs if China decides to use another route to bypass Port Klang.

The abolition of the Goods and Services Tax (GST) will also result in a huge loss in revenue for the Government, she said.

According to her, government employees will be expected to lose their jobs as Petronas is no longer a formidable force like it was in the 80s, 90s and in the first decade of 2000.

“The Government will have to find alternative sources,” she said in a statement yesterday.

She added that this will result in national debt rising as it did in the 80s and 90s as privatisation will see a significant increase to sell more assets to “friendly parties” via cheap loans guaranteed by the Govern­ment.

Furthermore, as the Opposition has vowed to abolish tolls, Ng said the Government will have to borrow money from the United States, for example, in its plans to buy back these assets.

Ng said this was because the Government no longer had the oil money it once had in the past, coupled with China and the Middle East not being as strong as they were due to falling oil prices.

Although the abolition of BR1M will result in the B40 group being encouraged to work in newly privatised companies, she said this will hamper the nation’s dreams of becoming a high-income nation.

“To be globally competitive, these privatised companies will have to keep costs low and our high-income nation dreams will be destroyed,” she said, adding that foreign workers will return to compete with locals.

She pointed out that this will result in Industry 4.0 modernisation not happening and the country falling behind nations such as Thailand, Vietnam and Indonesia by 2023.- The Star

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Malaysia needs structural reforms says global investor

Middle-income trap, brain drain and high public service spending among Malaysia’s risks

Cheah(pic) thinks the local stock market could go up by between 5% to 10% this year while the ringgit, which has mostly been on an uptrend in recent times, is “still down quite a lot”, against the US dollar.

Middle-income trap, brain drain and high public service spending among Malaysia’s risks

KUALA LUMPUR: A renowned global investor has called for structural reforms in Malaysia, saying that the country faces “very real” structural issues.

Penang-born Datuk Seri Cheah Cheng Hye (pic) who left Malaysia decades ago counts the middle-income trap, brain drain and high public service spending as current risks to the country.

Based in Hong Kong as the chairman and co-chief investment officer of fund and asset management group Value Partners Group for over two decades now, Cheah who helps manage over US$16bil in funds, however concedes that Malaysia remains a country with huge potential and opportunities.

“I don’t think we should underestimate the importance and attractiveness of Malaysia but what I am saying is that if we don’t want to be stuck forever (being) a so-called middle-income country, we need structural reforms,” he told StarBiz in a recent interview.

“Or maybe... we do want to be stuck because it is a comfortable position and because then, we can make a lot of compromises.”

“ (If that’s the case), we should be frank and say it, don’t pretend that we want to be an advanced country because that requires certain sacrifices.”

“The reality is that we are getting less and less competitive, we ranked number 23 in the latest Global Competitiveness report ,behind France and Australia which are developed countries. (Number 23) is not good enough for a developing country,” said Cheah, who recently made it to the top 40 richest Malaysians list.

Emphasising the issue of brain drain, Cheah, a former financial journalist and equities analyst said Malaysia could perhaps emulate India in this area where the concept of an Indian national overseas card has been introduced.

“I am told there are more than one million Malaysians overseas – (people like) entrepreneurs, these are exactly the type of people we want to stay here but they are not.

“We could introduce a new type of card called the Malaysian national overseas card for Malaysians who have chosen to leave the country and become citizens elsewhere.”

This card will give these Malaysian-born individuals no voting rights but will allow them to come back to work and invest here like everyone else, he said.

Cheah said this could help re-attract talent and there will be no political price to pay, because these people cannot vote here nor transfer this card to their children who would likely be foreigners.

“Some may actually come back, because it is not always greener on the other side... but you must make it easy enough (for them to come back).”

Cheah also pointed out that the amount Malaysia spends on public service is “very high” by any standards.

“Quoting from memory, about 30% of government spending is on civil service salaries and 16.5% of all employment in this country comprise civil servant jobs.

“No matter how you explain it, this is abnormally high ; something that I have learnt from my stay in Hong Kong is, keep the government as small as possible.”

He said although the civil service segment here appears to be bloated, it would be “unrealistic” to fire civil servants.

“Instead, maybe we can consider freezing and redeploying resources.

“Like any corporation, if you have too high a headcount, you freeze hiring and you redeploy people to where they are needed,” Cheah said.

Separately, Cheah, whose investments are mostly China-centric believes that Myanmar could be the next big thing.

“Nowadays, I like Myanmar because it is still cheap.

“It has about 55 million people but its gross domestic product (GDP) is only about US$65bil, Malaysia’s GDP is probably about US$320bil.

“Myanmar has enormous potential, at last they are emerging , gradually reconnecting with the world, they have (a lot of ) raw materials and are in a good position as one of the significant Belt and Road countries, China will go out of its way to invest there.”

Cheah said he would like to set up a Myanmar fund to invest in the country and is in the process of studying this possibility.

Among markets in Asia, Malaysia to Cheah, is “moderately attractive”.

He said consumer sentiment here was finally improving after it took a beating largely due to the implementation of the Goods and Services Tax (GST) back in 2015 plus there are some “interesting corporate restructuring taking place.”

Also, it is General Election year which going by history, tends to send the market higher, he said.

“I think there are good arguments why the Malaysian market is good this year but the arguments are not strong enough to result in a very strong market - and there’s also a global environment that’s not as good as last year.”

“I think the US administration is now focusing on globalisation and world trade and it seems to be moving in the direction of conflict with China over trade.

“If there is a China-US trade war, Malaysia will suffer collateral damage because we are a medium-sized player in a global supply chain, so it will be very disruptive,” Cheah said.

Upside for the Malaysian market could also be limited this year, he said, because its current valuation is relatively high at over 16 times price to earnings.

Cheah thinks the local stock market could go up by between 5% to 10% this year while the ringgit, which has mostly been on an uptrend in recent times, is “still down quite a lot”, against the US dollar.

The local unit appreciated by 8.6% against the dollar last year after losing some 4.5%, a year earlier.

At last look, it was traded at 3.9395 against the greenback.

By Yvonne Tan The Staronline


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Malaysia to end cronyism?

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KUALA LUMPUR: The Government has vowed to end “crony capitalists” whose wealth came at the cost of ordinary Malaysians, said Datuk Seri Najib Tun Razak.

The Prime Minister said lessons had been learnt from past mistakes in planning Malaysia’s economic transformation, after confronting many “legacy issues” along the way.

“Some of the country’s development under a former leader came with an unnecessary price tag, in the form of a class of crony capitalists,” he said in his keynote address at Invest Malaysia 2018 yesterday.

Citing public transport as an example, Najib said massive overhauls had to be done to rectify the issue.

“For decades, public transport was neglected. It was incoherent, with different owners, different systems and certainly no integration

“One man’s obsession with the idea of a national car – which is now being turned around under international joint ownership – led to Malaysia lacking an efficient public transport system.

“This was a serious obstacle to achieve high-income status and for Kuala Lumpur to be a world-class capital,” he said.

Although no name was mentioned throughout his speech, it was an apparent dig at former premier Tun Dr Mahathir Mohamad.

Najib also said that during this time, the Government had signed independent power producer concessions that were lopsided.

“Consumers had to pay far more for energy than they should have, even for energy they were not using.

“This was a real burden to the people, so we renegotiated these concessions – and determined that in the future, we would not allow private companies to earn excessively at the expense of ordinary Malaysians,” he said.

Najib also pointed out that the ringgit had been pegged against the US dollar for “far too long”.

“Investors and global markets lost confidence in us, and it took a long time to win that back. That was a very heavy cost to the country,” he said, stressing that the Government would never repeat that measure.

He also spoke on the challenges at state-owned institutions, such as 1Malaysia Development Bhd (1MDB), which were amplified and used as a tool to suggest that Malaysia’s economy was collapsing.

“I’m not going to brush over this issue. There were indeed failings at the company, there were lapses of governance. There was a valid cause for concern.

“This is why I ordered one of the most comprehensive and detailed investigations in Malaysia’s corporate history, one that involved multiple lawful authorities, including a bipartisan parliamentary body.

“Their findings were taken on board and the company’s board was dissolved, its management team changed and its operations reviewed,” he said.

On another note, Najib rubbished claims that Malaysia was welcoming foreign direct investments (FDIs) by selling out the nation’s sovereignty.

“My Government will never sacrifice an inch of our sovereignty,” he said, adding that while RM63bil in FDI stock came from China and Hong Kong, there was more from Japan at RM70bil.

“You don’t hear anyone warning that we are selling our country to the Japanese.

“Of course not. They are most welcome here. So are investors from Africa, the Americas, China, the European Union, India, Saudi Arabia and around the world,” he said.

Malaysia continues to improve in three key areas

Moving forward: Najib attending the Invest Malaysia 2018 launch together with (from left) Bursa Malaysia Bhd CEO Datuk Seri Tajuddin Atan, Treasury secretary-general Tan Sri Dr Mohd Irwan Serigar Abdullah, Chief Secretary Tan Sri Dr Ali Hamsa, Finance Minister II Datuk Seri Johari Abdul Ghani, Bursa Malaysia chairman Tan Sri Amirsham Abdul Aziz and Malayan Banking Bhd chairman Datuk Mohaiyani Shamsudin in Kuala Lumpur.

KUALA LUMPUR: Malaysia will continue to develop three key areas – transparency, accountability and efficiency – to attract more investments, said Datuk Seri Najib Tun Razak.

The Prime Minister observed that the country’s excellent economic and financial fundamentals had greatly benefitted local and foreign investors, providing them with stability, strength and certainty.

“We will continue to make our country even more business- and market-friendly, which means we are always working to improve transparency, accountability and efficiency.

“The Securities Commission, Bursa Malaysia, Bank Negara Malaysia and the Finance Ministry have continuously introduced and supported measures to increase the dynamism of our capital market.

“Towards this objective, I can assure you that we can expect further measures in the near future,” he said in his keynote address at Invest Malaysia 2018 here yesterday.

The two-day annual event is jointly organised by Bursa Malaysia Bhd and Maybank. A total of 61 local companies, with a combined market capitalisation of RM767.6bil were featured in the event.

The Prime Minister also cited figures that justified the confidence in Malaysia shown by investors and global institutions.

“Our total trade grew strongly by 20.8% between January and November last year, while in November alone, gross exports reached double-digit growth of 14.4%, with the highest receipts ever recorded, at RM83.5bil.

“Last year, foreign net fund inflow recorded a positive RM10.8bil, the highest since 2012, while corporate bond and new sukuk issuance reached RM111.2bil for 11 months of the year, close to 30% higher than the whole of 2016,” he said.

Najib also observed that Malaysia has enjoyed years of strong growth, with figures that most developed economies “could only dream of”, even during times of economic uncertainty.

“In fact, last year Malaysia exceeded all expectations, with the World Bank having to revise its estimate for our growth upwards not once, not twice, but three times – to 5.8%,” he said.

Najib added the World Economic Global Competitiveness index for 2017 and 2018 rate Malaysia very highly out of 137 countries.

The country is ranked third for Strength of Investor Protection, fifth for Pay and Productivity, fifth for the low Burden of Government Regulation and 14th for the Quality of Education System.

“The International Monetary Fund has also praised our sound macroeconomic policy responses in the face of significant headwinds and risks.

“The World Bank also recently confirmed that it believes Malaysia is on track, and that we are expected to achieve high-income status in the next few years,” he said.

 Source: The Staronline


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