If it's too good to be true, something's wrong

DURING a recent shopping session with my family, I saw an interesting promotion for a television set at a big retail store.

The retail price for the said television set was RM4,999. A 22% discount was offered for cash purchasers which brought the price down to RM3,899.

While the price seemed attractive enough, I saw another sweetener for the deal, stating that the special price under its flexible payment plan was RM2,729.30, apparently a massive 45% discount from the retail price!

At first glance, the flexible payment plan was the best deal. As the deal seemed too good to be true, I decided to do some calculation to see the rationale behind it.

Under the flexible payment plan, the weekly installment was RM26.72 for a total of 5 years.

The price of the television set would end up to be RM6,947 instead of RM2,729 upon the last payment.

I was surprised with the huge difference between a cash purchase and the flexible payment plan. This incident has also highlighted some blind spots we have in our spending.

Many a time, there are instalment plans that offer seemingly low interest rates as their marketing strategy.

As consumers, we may end up spending more than we thought if the effective interest rate and other financial concerns are not taken into account.

Taking the television set as an example, the total amount paid for the instalment plan is 78% higher than the cash purchase.

The effective interest rate per year for the financing of 5 years is about 45%, which is way higher than our fixed deposit rate of only 4%.

Bear in mind the high amount that we pay is for a depreciating item. With more advanced technology introduced year after year, the television set we buy today would not have much value left.

Thus, what looks like an attractive deal initially does not ring true anymore after factoring in high effective interest rates and accelerated depreciation in values.

Looking at the high premium charged for the instalment plan, it would be better to go for a cash purchase if the situation permits.

Often, it is better to evaluate our needs before making the decision to purchase depreciating items.

I always encourage prudent spending especially in testing times when we are faced with uncertainty in the economic environment.

Imagine if we can channel the money spent on depreciating items to assets such as investments or properties for the same period of 5 years.

Our money would have grown and helped to improve our financial position, or at least to hedge against inflation.

Other than potential value appreciation, the interest we pay for a housing loan is lower compared to other loans such as personal, credit card and car loans.

The effective rate for a housing loan is as advertised, and the rate is calculated based on the reducing balance (only pay interest on the remaining loan balance).

On the other hand, for car loans and flexible payment plans like the one mentioned above, their interest rates are calculated based on the full loan amount throughout the term, which makes the actual interest rate higher than the advertised rate.

For instance, the interest rate for credit cards is calculated based on 1.5% per month, hence the effective rate per year is 18% (1.5% times 12 months).

On the other hand, for a RM100,000 car loan with a 2.5% interest rate and a 7-year loan tenure, the interest amount would be RM17,500, making the total amount for the car RM117,500.

As a result, the effective interest rate for this car loan is 4.7% instead of 2.5%.

On many occasions, we tend to be drawn in by the “attractiveness” of easy payment plans without weighing the hidden financial commitments.

Though it helps us to obtain an item immediately, we may overlook the true value of the item and the potential financial burden it brings.

Therefore, if a deal is too good to be true, most of the time, it is just too good to be true and worth a second thought.

By Alan Tong food for thought

Datuk Alan Tong was the world president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

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Malaysia's ringgit has done a stunning about-face as China starts buying Malaysian bonds

 

The market is saying that this recovery in oil prices will be pretty positive for the Malaysian economy," said Kelvin Tay, chief investment officer for southern Asia Pacific at UBS Wealth Management in Singapore.

SINGAPORE: Malaysia's ringgit has done a stunning about-face this year, with surging capital inflows turning it into Asia's best-performing currency from the region's worst in 2015.

Still, few expect the ringgit to regain all the ground lost last year, as inflows may have peaked as Malaysian risk assets are starting to look pricey to investors and analysts.

The ringgit strengthened 10 percent against the U.S. dollar in January-March, its largest quarterly gain since 1973, Thomson Reuters data shows.

In 2015, the ringgit had its worst year since 1997, shedding 18.5 percent on the back on plunging oil prices, anticipated higher U.S. interest rates and a financial scandal at state-owned 1Malaysia Development Berhad (1MDB).

Driving the currency's U-turn is the return of foreign investors, who have poured into Malaysian stocks and bonds on better crude oil prices, a surprisingly resilient economy and easier monetary policies from major central banks.

"The market is saying that this recovery in oil prices will be pretty positive for the Malaysian economy," said Kelvin Tay, chief investment officer for southern Asia Pacific at UBS Wealth Management in Singapore.

In February, exports rose faster than expected. Sales of electrical and electronic products, the biggest item, increased 8.9 percent from a year earlier.

JACKED-UP HOLDINGS

Through the week ended April 1, foreign investors bought a net 5.5 billion ringgit ($1.4 billion) of Kuala Lumpur stocks this year, data from the research arm of Malaysian Industrial Development Finance showed. Last year had total outflows of 19.5 billion ringgit, it said.

Offshore investors have raised their local bond holdings by 11.8 billion ringgit in January-March, central bank data shows, with increased interest in longer-tenor debt. For all of last year, foreigners slashed holdings by 11.1 billion ringgit.

The cautious stance of Federal Reserve Chair Janet Yellen on U.S. rate hikes has caused investors to seek higher yields in Asia, aiding flows into Malaysia.

"This combination of an attractive currency valuation and higher yields in a world of low or negative interest rates is drawing foreign investors back to the local Malaysian market," said Eric Delomier, Asia fixed income investment specialist for Capital Group of the U.S.

Analysts and investors have concerns, including valuations of Malaysian assets and leadership of the central bank as its internationally-respected governor, Zeti Akhtar Aziz, retires at the end of April, and her successor has not been named.

Malaysian bonds seem "a bit rich," said Maybank Investment Bank's fixed income analyst Winson Phoon in Kuala Lumpur. Earlier this month, the 10-year yield fell to 3.77 percent, the lowest since February 2015.

SMALL INFLOWS AHEAD?

"I don't expect to see a repeat large inflows in months ahead, although the direction should remain slightly positive," Phoon said.

On share valuations, "Malaysia is actually not particularly cheap or attractive, compared to other markets," Tay of UBS said. "We don't think earnings growth has actually improved among Malaysian corporates."

Local stocks were trading at about 17.3 times the past 12 months' earnings, according to Thomson Reuters data. That compared with 11.8 times for Indonesian stocks, according to exchange data.

Zeti has led Bank Negara Malaysia (BNM) since 2000, and investors are hoping for a successor with her credibility to help Malaysia's standing at a time of political crisis for Prime Minister Najib Razak, chairman of 1MDB's advisory board.

"Given the near-term challenges to a new BNM governor, oil prices and festering political risk from 1MDB, among other things, the ringgit's upside is limited," said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia in Singapore.

His year-end target for the ringgit is 3.70 per dollar, 16 percent appreciation from its 2015 closing. Late Friday, the ringgit was at 3.90.- Reuters

China starts buying Malaysian bonds

 

Ong: ‘The Chinese government is keen to buy more Malaysian bonds

KUALA LUMPUR: China’s government has started buying more Malaysian government securities (MGS) and this inflow of new foreign money could rise to 50 billion yuan (RM30bil) in total, according to International Trade and Industry Minister II Datuk Seri Ong Ka Chuan.

In an exclusive interview with The Star, Ong said a senior representative of the Bank of China told him about this development recently when he met with the bank on issues pertaining to the use of yuan and ringgit in Malaysia-China direct trade.

“This could be one of the key factors contributing to the strength of the ringgit lately. China’s purchase of our MGS, which I am under the impression could rise to 50 billion yuan, will be very positive for our currency as it shows China’s confidence in our economy,” Ong said.

Other factors that had contributed to the strength of the ringgit in recent weeks included the recovery of crude oil prices, softer US dollar and the successful debt rationalisation of 1MDB, he added.

If China were to buy RM30bil worth of MGS, it would mean supporting 8.5% of Malaysia’s debts in the current MGS market. According to Bank Negara’s website, the value of outstanding MGS stood at RM352.06bil as at April 5, 2016.

Meanwhile, Malaysia’s debt markets saw inflows of RM11.5bil, versus RM1.4bil of outflows in February. The March foreign inflow was the largest monthly inflow since May 2014, according to a Nomura research note on April 7.

The inflows pushed foreign holdings of MGS to a historical high of RM171.5bil, the Japanese research house said. As a result, foreign ownership in outstanding MGS has risen to 48.7%.

Ong noted that Chinese Premier Li Keqiang had pledged to support the Malaysian economy – which was hit by a slowdown, local political problems, heavy outflow of funds and consequent plunge of the ringgit – when he visited Kuala Lumpur last November.

On Nov 23, the Chinese leader announced at a local forum that China would buy more MGS, issue yuan bonds in Kuala Lumpur and grant local institutional funds a quota of 50 billion yuan under the Renminbi Qualified Foreign Institutional Investor programme to invest directly in Chinese equities in the mainland.

The following day, the ringgit reacted positively gaining about 1% and the currency stabilised at around 4.25 to a US dollar in early December. MGS also gained.

“I was told China would use its reserves to buy our bonds. Its international reserves are high, at US$3.21 trillion (RM12.5 trillion) in March. With this development, I don’t think our ringgit will fall to 4.46 again,” said Ong.

Last month, Bank Negara said there were now more foreign governments and central banks holding MGS. A total of 29% was held by these two groups and 13% by pension funds.

The presence of these long-term investors is seen as reducing the risk of Malaysia facing sudden and massive outflows of capital in the event of unfavourable conditions, just like what had occurred last September, which saw the ringgit weakening to a multi-year low of 4.46.

Foreign inflow into the local stock market might be another factor that has boosted the ringgit. According to a Credit Suisse report, Malaysia saw a record net foreign equity inflow of RM6.1bil in March, which contributed to the ringgit’s 10.3% rise against the dollar in January-March 2016. At late trades on Friday, the ringgit stood at 3.9096.

Due to the recent new inflows, Bank Negara’s foreign exchange reserves had risen to RM412.3bil (US$96.1bil) as at March 15 from RM408.5bil (US$95.1bil) as at Jan 15. This reserves figure is an important buffer against capital flows and has an impact on the ringgit and the sovereign credit rating of the country. Moody’s recently noted this buffer has improved.

Ong also said China would like to see Malaysia conducting roadshows in the mainland so that there is better understanding of Malaysia’s fundamentals and its bonds.

“The representative of Bank of China also told me the Chinese government is keen to buy more MGS, but they also hope our central bank could go there to market our MGS. I have conveyed this to Bank Negara. It is up to them to act,” says Ong.

Ong, who is also MCA secretary-general, noted that China’s huge direct investments had also boosted the ringgit’s sentiment.

The ringgit rose sharply in March partly due to the conclusion of the sale of 1MDB’s energy assets to China’s state-owned China General Nuclear Power Corp for RM9.83bil, as the absorption of all the debts of Edra Global Energy Bhd has reduced the systemic risk to pubic finance, banking system and economy.

Ong is confident that Kuala Lumpur is able to attract more major Chinese investments into the country this year due to Malaysia’s strong bilateral ties with China as well as the many free trade agreements – including the Trans-Pacific Partnership Agreement – Malaysia has signed with various countries and groupings.

By Ho Wah Foon The Star

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Malaysia's pragmatic patriot: friends with benefits

The South China Sea dispute. The global terrorism threat. Malaysia’s foreign policy is back in the world’s spotlight and it is exciting times for ISIS Malaysia’s Foreign Policy and Security Studies chief.

IN an article titled “Think tanks aren’t going extinct. But they have to evolve”, American scholar James Jay Carafano wrote that the capacity to do rigorous, credible research is “no longer sufficient” for think tanks to manoeuvre their ideas prominently into the policy debate. Instead, think tanks must learn to communicate “in ways that will allow their ideas to break through to decision-makers who are bombarded with information from all sides”.

In that regard, Elina Noor has proven to be a real asset to Malaysia’s premier think tank, the Institute of Strategic and Interna­tional Studies, or ISIS Malaysia. Her ability to articulate on complex and dynamic global affairs – such as major power relations, cyber warfare, terrorism and conflicts – in succinct yet jargon-free language has also made her a highly sought-after interviewee by the international media.

As a child, Elina wanted to be “everything”, from prime minister to fashion designer. Her parents, who ran a management consultancy firm, however, might have subconsciously put her on her career path by leaving the world news on television all the time when she was growing up.

“My parents would engage in lively debates about international affairs between themselves. As I grew older, I wanted to do law with an eye towards international law, specifically how war and conflict affect people.”

After graduating from Oxford University in the United Kingdom, she specialised in public international law at the London School of Economics and Political Science. This was followed by an internship at the Centre for Non-proliferation Studies at the Monterey Institute of International Studies in Washington DC, specialising in issues of weapons of mass destruction terrorism.

Essentially, she helped compile a database of terrorist groups with chemical or bioweapons capabilities by combing through secondary sources and obtaining intelligence from experts who had gone into the field.

Her days in the United States were cut short, however, by visa limitations. So, after nine months, she returned to Malaysia in 2001.

Her appetite whetted by her Washington experience, Elina joined ISIS Malaysia as a researcher.

Though formally positioned as a research organisation for nation-building initiatives, ISIS Malaysia was set up by former prime minister Tun Dr Mahathir Mohamad in 1983 to serve as a crucial sounding board for the government on foreign policy and security issues.

In addition to research, ISIS Malaysia engages actively in non-governmental meetings between states, known as Track Two diplomacy, and fosters closer regional integration and international cooperation through forums such as the Asia-Pacific Roundtable.

Now, having risen through the ranks, Elina heads a team of eight in the Foreign Policy and Security Studies division.

As a claimant state in the ongoing South China Sea dispute, chair of the Association of South-East Asian Nations in 2015, and currently a non-permanent member of the United Nations Security Council, Malaysia’s foreign policy direction has drawn renewed interest at home and abroad.

Invariably, Elina is asked questions on Malaysia’s relations with China. Her answer is perhaps best laid out in an article she wrote, titled “Friends with Benefits: Why Malaysia can and will maintain good ties with both the United States and China.”

On the topic, Elina had explained: “Malaysia should or will be subservient to an awakening dragon, but the cost-benefit calculus militates against provoking it. Equally, Malaysia’s location and posture make it a strategic partner for China in South-East Asia.

“It is the mark of a mature and solid friendship when overall relations are not held hostage to single-issue disagreements.”

Elina had added that such overlapping claims in the South China Sea, “should not, if managed well, stultify cooperation between Malaysia and China in other areas of the relationship. For a developing country with high-income and knowledge-economy ambitions like Malaysia, the show must go on”.

Or to put it simply, Malaysia wants to be everybody’s friend. That’s always been the country’s foreign policy from the start, she points out.

On the other hand, this pragmatic approach has also enabled the country to punch above its weight in places where even superpowers fear to tread.

Elina’s other portfolio, cyber warfare and security, is expected to come further into the spotlight with recent headlines claiming that the so-called Islamic State extremist group in Iraq and Syria intended to abduct top Malaysian leaders, including the PM.

“Malaysia up to this point has handled terrorism very well,” Elina says.

Many attempts have been foiled in the past, she adds, and the police have kept it low-key.

“If you follow the issues closely, you’ll notice the police only started publicising their efforts in the run-up to Pota (The Prevention of Terrorism Act 2015), an anti-terrorism law passed by the Malaysian government on April 7, 2015 enabling the Malaysian authorities to detain terror suspects without trial for a period of two years.”

Part of this publicising had to do with the political selling of Pota, but there was a more legitimate, pressing reason: People were taking security for granted in Malaysia.

“Malaysians treat security like it’s not a problem. We often criticise the police but the military and Special Branch in charge of counterterrorism really know what they’re doing. The police have been very vigilant and I think they do good work but haven’t been given enough credit.”

After 14 years, she still enjoys her job because of the intellectual robustness but admits some world-weariness has set in.

Nevertheless, Elina remains motivated by the knowledge that a lot of good Malaysians on both sides of the political divide are doing good work for the country.

Pointing to a faded wristband she has been wearing for “donkey’s years”, the inscription reads: “Malaysia tanahairku (Malaysia, my homeland)”.

“Call me cheesy,” she says, “but I’ve never thought of removing it. Love for country might, but does not always, equate to love for government. I’m a sentimental patriot.”

By Alexandra Wong, China Daily/Asia News Network

Lessons from Penang affordable housing

AS we all know, affordable housing is the saving grace for the middle to low income group in our common dream to pursue the “roof over our heads”.

Most often, aspiring homebuyers are sandwiched between increasing property price and developers’ tendency to build high-end apartments especially in greater KL for the last decade.

The introduction of PR1MA and other affordable housing agencies by the federal government is aimed at addressing this gap and to promote better home ownership as part of the prime minister’s national transformation programme. Nonetheless, not many realised that affordable housing is also a state initiative whereby state governments are free to introduce affordable housing schemes given that land and development are within the exclusive power of the state under the Federal Constitution. For instance, Penang is fully behind the notion of affordable housing by placing their top priority on increasing homeownership ratio within the state.

Checking online, there are currently 29 affordable housing projects in Penang with 12 being developed by the state government and the other 17 by the private sector. Penang is delivering a commendable amount of affordable housing by trading plot ratio of built-up area in exchange for more units to be built.

The state government is constantly reviewing and updating the criteria for the purchase of affordable housing in Penang. A person who already owns a property can still purchase affordable housing in Penang provided the person can satisfy the conditions imposed.

For example, the house to be purchased must be of higher value than the one already owned.

In addition, for those who are not born in Penang, under the talented and skilled category, they may also purchase affordable housing in Penang provided they undertake to reside there for a minimum of five years. In short, affordable has become a driver for talent retention. This ultimately helps to upgrade living standard in Penang.

On the flip side, Penang has uncovered a problem. Those who are entitled to affordable housing may not qualify for financing, especially those from the lower income group as they are considered as high risk by banks.

Job and income security at this level are extremely vulnerable given the high cost of living that in effect reduces disposal income. Bank and financial institution are after all profit-making entities. Loan disbursements below a certain threshold amount does not always generate their desire margin. Many expiring home owners are left helpless.

While nothing is perfect, one can only achieve success through lessons learned along the way and from history. The federal government is aware of the high loan rejection rate. It has, therefore, provided a 10% loan guarantee and First House Deposit Financing to help purchasers with their downpayments. The “Rent to Own” scheme was also introduced to circumvent the stricter loan financing situation.

Penang has introduced a similar Rent to Own scheme. Under this scheme, the state government provides 30% of the home price so that the house buyer can seek a 70% loan margin.

PR1MA, on the other hand, is facing difficulties finding suitable land as land is state matter. There is also a tendency for the state government to allocate land for this purpose in areas they want to urbanise, but which are often far from amenities and transportation links.

We all know that to develop affordable housing is not the best commercial decision to make because profit margins are definitely lower. As such, we cannot expect private sector developers to always bear the cost.

Penang, on the other hand, is able to overcome this problem by reducing the development charges via an increase in plot ratio. This then attracts private sector developers to come in.

A recent survey conducted by PR1MA shows that buyers prefer to purchase residential projects close to schools, clinics and shops. They also prefer access to transportation. Penang is closer to achieving its objective in the affordable housing arena because it “focuses on the homeowners”.

Under the recently announced Penang Transport Master Plan, the state government is mulling over RM8bil worth of projects that will enhance connectivity.

The development of an underground tunnel from Gurney Drive to Bagan Ajam, Gurney Drive to Jelutong Expressway and an alternative road connecting Gurney Drive right up to Batu Feringhi will really improve connectivity.

Penang is ambitious in executing its affordable housing plans. It is also spot-on when it comes to addressing the different issues connected with this subject.

The banking sector must buy into it. Banking and financial institutions are governed by the fiscal policy of the federal government. Maybe some mandatory quota or corporate social responsibility initiatives can be imposed on banks to provide loans to deserving house buyers. So it is timely that Bank Negara has called for a comprehensive and carefully designed National Planning Policy to support the Government’s aim in delivering more social housing in its recently released annual report.

By Chris Tan

Chris Tan is the founder and managing partner of Chur Associates.


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1MDB business model relied on debt to form capital is not sustainable

PETALING JAYA: 1MDB was unsustainable from the start, relying heavily on financial assistance to stay afloat.

The PAC observed that 1MDB’s capital financing structure and financial performance were both unsatisfactory.

“1MDB relied on debt (bank loans, bonds and sukuk) to form its capital, a chunk of which had been sanctioned or supported by the Government.

“Initially, the debt stood at RM5bil in 2009, and went up to RM42bil, compared to its assets of RM51bil in the financial year ending March 31, 2014, and it spent RM2.4bil to pay off interests.

“In January 2016, its debt was RM50bil, compared to its assets of RM53bil, where 1MDB spent RM3.3bil to pay off interests between April 1, 2013, and March 31, 2015,” said the report.

The PAC report also stated that 1MDB had paid RM3.3bil in interests on the loans it took from April 1, 2014, to March 31, 2015, which 1MDB said had yet to be audited.

“It is obvious that the debt amount and repayment of interest are too high compared to the company’s cash flow,” said the committee.

1MDB had also heavily relied on the refinancing exercise to settle matured debts and take new loans, which were used to settle interests on previous loans, among others.

The PAC report also found that 1MDB began facing an imbalance in cash flow in November 2014, five years after it started operations.

“The management and board of directors relied on the Initial Public Offerings (IPO) of Edra Energy Berhad to generate funds, but the IPO could not be carried out,” said PAC.

In the same month that year, 1MDB announced its first loss of RM665mil, resulting in its inability to pay off its almost matu­ring debts which stood at RM2bil, through its refinancing exercise.

“The company’s business model is overly dependent on loans and this caused a burden on the company as it did not have enough income to sustain operational costs and pay off its loans,” read the report.

The PAC also said that as a state investment arm, 1MDB should have focused on best practices, and raised examples of weaknesses in its administration.

“For instance, the board of directors was too dependent and often accepted explanations by the management without delving into the details.

“Indeed 1MDB’s experience is a lesson to all government-linked corporations on the importance of effective administration and integrity,” said the committee. - The Star/ANN

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