Is the weakening Malysian ringgit a similar to 1997/98 crisis?

Economic troubles ahead but most don’t think it will be as bad as back then

We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed. Despite some portfolio outflows, we believe there is still sufficient liquidity in the market for some trading ideas

The weakening ringgit has caused anxiety. But is the economy in a similar situation to Malaysia’s worst ever crisis 16 years ago?

MANY Malaysians will still remember the Asian financial crisis of 1997/98. Nearly 20 years ago, the then crisis was responsible for the greatest capital market crash in the country and forced many structural changes we see today in the financial markets.

It was a time of great turmoil, with people losing their investments on a scale never seen since. Companies for years bankrolled on easy credit were leveraged to the hilt and crumbled under the weight of their debts as business evaporated and the cost of credit soared.

Shares traded on the stock exchange mirrored the scale of the troubles. The benchmark stock market index plunged from a high of 1,271 points in February 1997 to 262 on Sept 1, 1998. Words such as tailspin and panic were common in the financial section of newspapers and the chatter among market players as people scrambled to take action.

“More people are talking about it with the fall in the ringgit,” says a fund manager who experienced the difficult times in the late 1990s.

Triggering the crisis back then was the fall in the regional currencies, starting with the Thai baht. Speculators then zeroed in on other countries in Asia and Russia as the waves of attack on the currencies back then saw many central banks spending vast amount of foreign exchange reserves to defend their currencies.

Exhausting their reserves, those central banks requested for credit help from the International Monetary Fund to replenish their coffers.

Attacks on the ringgit and many other currencies in Asia sent the ringgit into freefall as the currency capitulated from a previously overvalued zone against the US dollar.

The ringgit dived into uncharted territory to around RM4.20 to the dollar before capital controls were imposed and the ringgit was pegged at RM3.80 to the dollar. The ensuing troubles were seen from the capital market to the property sector. Corporate Malaysia was swimming in red ink and huge drops in profit.

The shock from that period was different than what the country had seen in previous recessions. The last economic recession prior to that was caused by a collapse in global commodity prices and during that pre-industrialisation period before factories mushroomed throughout the major centres of the country, unemployment soared. Unemployment was not a major issue in 1997/98 like it was in the prior recession but the crunch on company earnings meant wage cuts and employment freezes.

With the drop in crude oil and now with the resurgence of the US economy, the flight of money from the capital market has began.

Deja vu?

Most would argue that no two shocks or crisis are the same. There is always a trigger that is different from before. From the Asian financial crisis, the world has seen the collapse of the dotcom boom which crushed demand for IT products and services. Then there was the severe acute respiratory syndrome (SARS) crisis and the global financial crisis in 2008/09. There were periods of intermittent volatility in between those periods but there was nothing in Malaysia to suggest trouble ahead.

Shades of 1998 though have emerged in this latest wave of turmoil but the situation now is not the same as it was back then.

“We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed,” says World Bank country director for South-East Asia, Ulrich Zachau.

The fall in crude oil prices, which has been the trigger for Malaysia, has sent the currencies of oil-producing countries lower, affecting their revenues and budgets. In South-East Asia, pressure has been telling on the ringgit and the Indonesian rupiah.

Reminiscent of the gloom and doom of 1997/98, the Indonesian rupiah tanked against the dollar to levels last seen during that period.

Intervention by the Indonesian central bank addressed the decline, but the situation is also different today then it was back nearly two decades ago.

“Bank Negara is still mopping up liquidity today,” says another fund manager who started work in Malaysia in the early 1990s.

Although liquidity is plentiful in Malaysia, money has been coming out of the stock market. Foreign selling has been pronounced this year and the wave of selling has seen more money flow out of the stock market this year than what was put in to buy stocks last year.

Equities is just an aspect of it as the bigger worry is in Government bonds where foreigners hold more than 40% of issued government debt.

“The fear is capital flight and people are looking to lock in their gains,” says the fund manager.

“The worry will start when people get irrational.”

Times are different

While the selling that is taking place in the capital markets is a concern, Malaysia of today is vastly different than it was during the 1997/98 period.

For one, corporates in Malaysia are not as leveraged as they were back then. Corporate debt-to-gross domestic product (GDP) ratio is below 100% but it was above 130% in 1998. Furthermore, corporate profits are still steady although general expectations have been missed in the last earnings season.

Secondly, fund managers point out that the banking system is in far better health today, better capitalised and seeing the average loan-to-deposit ratio below 100%. That loan-to-deposit ratio was much higher than 100% during the 1997/98 period and and as loans turned bad, the banks got into trouble.

“Fundamentally, we are much stronger now. That was not the case back then,” says a corporate lawyer.

“The worry though is on perception and denials that there is no trouble.”

The one big worry, though, is household debt. That ratio to GDP is crawling towards the 90% level while it was not even an issue back in 1997/98.

Sensitivity analysis by Bank Negara which looks at several adverse scenarios, such as a 40% decline in the stock market and bad loans from corporates and households shooting up, indicate that the banking system can withstand a major shock.

“The scenario-based solvency stress test for the period 2014 to 2016 incorporated simultaneous shocks on revenue, funding, credit, market and insurance risk exposures, taking into account a series of tail-risk events and downside risks to the global economic outlook.

“The simulated spillovers on the domestic economy were used to assess the compounding year-on-year impact on income and operating expenses, balance sheet growth and capitalisation of financial institutions, disregarding any loss mitigation responses by financial institutions or policy intervention by the authorities,” says Bank Negara in its Financial Stability and Payment Systems Report.

“Even under the adverse scenario, the post-shock aggregate TCR (total capital ratio) and CET1 (common equity tier 1) capital ratio of the banking system were sustained at 10% and 7% respectively, remaining above the minimum regulatory requirement under Basel III based on the phase-in arrangements which are consistent with the global timeline,” it says in the report.

Government finances and the current account

The line in the sand for Government finances seems to be at the US$60 per barrel level for crude oil prices. A number of economists feel the Government will miss its fiscal target of a 3% deficit next year should the price of crude oil drop below that level.

With oil and gas being such a big component of the economy than what it was in 1997/98, the drop in the price of crude oil could also spell trouble for the current account and cause a deficit in the trade account.

Those concerns have been highlighted by local economists and yesterday, Fitch Ratings echoed that worry.

“Cheaper oil is positive for the terms of trade of most major Asian economies. But for Malaysia, which is the only net oil exporter among Fitch-rated emerging Asian sovereigns, the fall increases the risk of missing fiscal targets.

“The risk of a twin fiscal and external deficit, which could spark greater volatility in capital flows, has increased. Malaysia’s deep local capital markets have a downside in that they leave the country exposed to shifts in investor risk appetite. Malaysia’s foreign reserves dropped 6.8% between end-2013 and end-November 2014, the biggest decline in Fitch-rated emerging Asia,” it says in a statement yesterday.

Despite the softness in the property market and corporates getting worried about their profits, the general feeling is that Malaysia will not see a repeat of 1997/98. The drop in the ringgit and revenue for crude oil will mean a period of adjustment but the cheaper ringgit will make exports more competitive.

The difference between then and now

The ringgit vs the dollar ...

The ringgit’s steep decline against the dollar has made it one of the worst performing currencies of late. That decline, although steep and having caught the attention of the central bank, is more down to the link with the decline in crude oil than structural issues to be worried about.

Capital ratios of banks ...

Banks today are far better capitalised then they were during the 1997/98 crisis, which forced the local banking industry to consolidate for their own good. Stress tests by the central bank suggests then even under adverse conditions, banks in Malaysia wil be able to withstand the shock associated with it.

Loans-to-deposit ratio ...

The ratio of loans against the deposit of banks have been rising but it is no where at the level before the Asian financial crisis in 1997/98. Banks too are aware of making sure it does not cross 100% and the development of the bond market means leverage risk has been diversified from the banking sector.

Businesses not as leveraged ...

One of the reasons corporate Malaysia was in trouble in 1997/98 was down to its leverage, or debt levels. Today. corporates are not as geared as they were back then and although that level is rising, their financial position and better cash balances and generation means they are able to better withstand a shock to the economy.

Household debt to GDP ...

This is the biggest worry. As households are leveraged despite the financial assets backing it, that means any economic weakness or shock will affect the ability to service loans taken to buy those assets. As consumer demand has been a big driver to the economy, any changes the affects the ability of consumers to continue spending will impact on economy growth and have an impact on non-performing loans in the banking sector.

Dropping current account surplus ...

The decline in the current account surplus means that the domestic economy has been growing strongly. There were concerns earlier and the prioritisation of projects was able to smoothen imports to ensure a positive balance of trade. The drop in crude oil prices could mean a deficit in the current account in the first quarter of next year but the weaker ringgit should translate to better exports and a better current account balance thereafter.

By JAGDEV SINGH SIDHU Starbizweek

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• A challenging time, but not a crisis
• Managing the downside risk of low oil prices is crucial for Malaysia, says World Bank

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Oil & Gas lead to wealth crunch, Malaysian Ringgit beaten and dropped!

PETALING JAYA: With the oil and gas (O&G) sector being the hardest hit in the current market rout, tycoons who own significant stakes in these companies have seen a huge loss in their net worth.

These tycoons had collectively had their shareholding in these companies valued at some RM15.89bil when O&G stocks were trading at their highest prices. The fall in global crude oil prices and the plunge in the value of O&G stocks on Bursa Malaysia saw the value of their shareholding cut by almost half to some RM7.86bil yesterday.

Accelerating the decline in share prices yesterday and the loss in their net worth was the decision by Petroliam Nasional Bhd (Petronas) to slash its capital expenditure (capex) by between 15% and 20% next year.

Petronas’ capex cut has spooked investors in the local O&G sector as many companies rely on the national oil company for work. Petronas’ huge capex, estimated at RM60bil a year prior to the planned cuts, was also a buffer for the domestic industry from the onslaught of crumbling crude oil prices and its effect elsewhere.

The largest of these companies, SapuraKencana Petroleum Bhd, has seen its share price dip by 48.78% year-to-date. At its peak, SapuraKencana was trading at RM4.81, translating to a wealth of RM4.85bil for Tan Sri Shahril Shamsuddin’s 16.84% stake in the integrated O&G concern.

SapuraKencana was the most actively traded counter yesterday, falling 10.36% to close at RM2.51. At yesterday’s market capitalisation of RM16.76bil, Shahril’s shareholding in the company was valued at RM2.53bil.

Another major shareholder of SapuraKencana is Tan Sri Mokhzani Mahathir, whose 10.25% interest has also seen a decline by almost half its value. At yesterday’s price, Mokhzani’s stake in SapuraKencana was valued at RM1.54bil compared to the RM2.95bil it was worth during its highest level.

Mokhzani had sold a block of 190.3 million shares in SapuraKencana earlier this year when the stock was trading at around RM4.30 per share, giving the entire sale a value of RM818.29mil. The shares were taken up by seven institutions.

Another stock in which Mokhzani has an interest in, Yinson Holdings Bhd, was also not spared from the bearish sentiment surrounding O&G stocks. Yinson’s share price has declined from its peak to close at RM2.45 on Dec 1. Based on yesterday’s price, Mokhzani’s stake in the company was worth RM235mil.

Billionaire Robert Kuok, T Ananda Krishnan, Tan Sri Ngau Boon Keat and Tan Sri Quek Leng Chan are also part of the list of value losers in this O&G stock meltdown.

Kuok owns 80% of PACC Offshore Services Holdings (POSH Semco), an offshore marine services provider that was listed on the Singapore Exchange in mid-2013 at a price of S$1.15 per share. POSH Semco closed yesterday at S$0.51, meaning that Kuok has lost more than half the value of his stake in that company.

Similarly, Ananda’s worth from his 42.3% shareholding in Bumi Armada Bhd has gone down by half the value it was during the peak of its share price. To be noted is that Bumi Armada had undertaken a rights issue in August this year that has seen the dilution of Ananda’s shareholding in the company.

Bumi Armada, Malaysia’s largest offshore support vessel firm, was relisted in 2011 at a price of RM3.03 per share. The stock dived into penny-stock territory yesterday, falling to a low of 98 sen before ending the day at RM1.01 per share. Based on yesterday’s price, Ananda’s stake in Bumi Armada was valued at RM2.06bil.

Dialog Group Bhd’s Ngau, meanwhile, has seen the value of Dialog’s stock fall. His stake was worth RM1.45bil based on yesterday’s closing price of RM1.26. This is about a one-third decline from the RM2.25bil his 23.2% stake was valued at when the stock had hit a high of RM1.96.

Stock investors such as Quek and his lieutenant Paul Poh are also edging into negative territory.

Quek had bought his 9% in TH Heavy Engineering Bhd (THHE) in 2013 at a price of 45 sen per share, enjoying gains for most of this year – the stock had hit a high of RM1.03 on Feb 19 this year. THHE closed yesterday’s trade at 40.5 sen a share, giving Quek a paper worth of RM38mil for his shareholding in the company as opposed to RM80mil as at the end of last year.

In April, Quek and Poh also took a block of 15.5% in Alam Maritim Resources Bhd at RM1.35 a share. They are sitting on a paper loss of some RM80mil today, or a decline of over 40%.

By: GURMEET KAUR The Star/Asia News Network

Ringgit Slides With Stocks as Oil Slump Poses Risk to Revenues



Malaysia’s ringgit posted the biggest two-day decline since the 1997-98 Asian financial crisis and stocks slumped on concern a protracted slide in crude will erode the oil-exporting nation’s revenue.

The currency weakened 1.5 percent to 3.4340 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. The ringgit has dropped 2.5 percent in two days, the steepest decline since June 1998. The benchmark FTSE Bursa Malaysia KLCI Index of shares fell 2.3 percent in the worst one-day performance in 22 months.

Brent slid to a five-year low after OPEC’s decision last week not to cut production to shore up prices, which have slumped 41 percent from a June high. The potential revenue loss may make it harder for Prime Minister Najib Razak to lower the fiscal deficit to 3 percent of gross domestic product next year from 3.5 percent.

“Malaysia is probably most affected by oil prices in the Asian space,” said Andy Ji, a Singapore-based strategist at Commonwealth Bank of Australia. “The ringgit could fall to 3.45 this week.”

A 1997 devaluation of the Thai baht triggered the Asia financial crisis and prompted Malaysia’s government to adopt a pegged exchange rate to the dollar in 1998. The ringgit was fixed at 3.8 until the policy was scrapped in 2005.

The currency dropped to 3.4392 earlier, the lowest level since February 2010, when it last traded at 3.45 and went on to reach 3.4545 on the 5th of that month, data compiled by Bloomberg show.

Stocks Fall

Oil-related industries account for a third of Malaysian state revenue and each 10 percent decline in crude will worsen the nation’s fiscal shortfall by 0.2 percent of GDP, Chua Hak Bin, a Bank of America Merrill Lynch economist in Singapore, wrote in an Oct. 22 report.

The FTSE Bursa Malaysia Index was dragged down by oil, gas and plantation stocks. The gauge has dropped 6 percent from its 2014 high in July.

SapuraKencana Petroleum Bhd., Malaysia’s biggest listed oil and gas services company by market value, fell 10 percent, the most on record. Dialog Group Bhd. (DLG), a contractor in the same industry, dropped 15 percent.

“We are watching the stocks closely,” said Gerald Ambrose, who oversees the equivalent of $3.6 billion as managing director at Aberdeen Asset Management Sdn. in Kuala Lumpur. “There are a lot of oil and gas companies that meet our quality and criteria but there was no upside previously. Now prices are falling.”

Bonds, Exports

Malaysia is already seeing a deterioration in its terms of trade. The current-account surplus narrowed to 7.6 billion ringgit ($2.2 billion) in the third quarter, the smallest gap since June 2013. A Dec. 5 report may show the nation’s exports declined 0.3 percent in October from a year earlier, according to the median estimate in a Bloomberg survey. That would be the worst performance since June 2013.

The nation’s sovereign bonds fell. The yield on the 4.181 percent notes due 2024 rose three basis points, or 0.03 percentage point, to 3.89 percent, data compiled by Bloomberg show. That’s the highest since Nov. 24. The five-year bond yield advanced five basis points to 3.81 percent.

“Hopes for Malaysia have rested on the fiscal consolidation story,” said Tim Condon, head of Asian research at ING Groep NV in Singapore. “Markets need to be re-priced for diminished hopes on that front.”

Source: Bloomberg By Liau Y-Sing and Choong En Han

Beating for KLSE and ringgit



PETALING JAYA: The stock market and the ringgit have taken a beating from falling oil prices, which have sunk below the US$70 per barrel mark.

The benchmark FBM KLCI, which measures the key 30 stocks of Bursa Malaysia, was down 42 points or 2.34% at its close at 5pm, marking its worst performance since mid-October, while the ringgit declined to 3.4340 against the US dollar, a four-and-a-half-year low.

At 5pm, Brent crude oil was down 94 cents to a five-year low of US$69.21 while US light crude oil – better known as West Texas Intermediate (WTI) – fell US$1.09 to US$65.06 as markets continued to be spooked by the plunge in oil prices.

The plunge follows an Opec decision not to cut production despite a huge oversupply in global markets.

The technical indicators are all pointing to even lower oil prices.

Technical analysts said the WTI – the benchmark oil price used by Bank Negara to calculate the economic indicators – should find some support at US$64 per barrel.

If it goes below that level, it could plunge all the way to US$32.40 per barrel – the lowest recorded price in recent years when it hit US$32.40 per barrel on Dec 19, 2008, before rising to US$114.83 on May 2, 2011.

Taking the cue from the plunging oil prices and a chilling warning issued by Petronas on declining revenues, oil and gas stocks on Bursa Malaysia also faced a rout which affected market sentiment as a whole.

Yesterday, some 981 counters declined compared to 82 gainers while 150 were unchanged.

Petronas president and chief executive Tan Sri Shamsul Azhar Abbas had said on Friday that the national oil corporation was cutting its spending for next year by between 15% and 20% and asserted that its contribution to the Government’s coffer in the form of taxes, royalties and dividends could be down by 37% to RM43bil from RM68bil this year.

Analysts said the selling could be over-done and expected a relief rebound when oil prices settle.

Oil prices fell to their lowest in five years yesterday due to the production war between Opec and the American oil boom from shale oil producers.

In recent months, the United States has become a major producer of shale oil and gas – fuel that’s extracted from rock fragments – threatening the position of Saudi Arabia as the dominant oil-producing country.

In response to the threat, Opec, which is influenced by Saudi Arabia, has vowed to continue production of oil in a market where supply has outstripped demand.

This has led to a free fall in global oil prices that have declined by more than 40% since July this year.

Late last night after the opening of the US counters, oil price fell to below US$65 a barrel.

Saudi Arabia hopes to break the back of shale oil and gas producers by making their operations not financially viable.

It had been reported earlier that at prices below RM80 a barrel, shale oil producers would go bust.

However, Bloomberg reported that only about 4% of US shale oil output needs US$80 a barrel or more to be economically viable.

Among the top losers of the Bursa yesterday were SapuraKencana Petroleum Bhd, Bumi Armada, Dialog Group Bhd, UMW Oil and Gas Bhd and Petronas-related counters.

The paper wealth wiped out due to the rout on the oil and gas stocks was close to RM8bil.

The selling pressure also spread to plantation stocks, with crude palm oil for third month delivery down RM63 to RM2,109 per tonne. The fall in crude oil prices would make biodiesel less viable as an alternative at current prices.

However, low-cost carrier AirAsia Bhd bucked the trend as it stands to benefit from weaker oil prices. AirAsia rose 21 sen to RM2.79.

Investors were also worried about the impact Petronas’ reduced payout would have on the Government that counts on the national oil corporation as a key source of funding for its expenditure.

UOB Kay Hian Malaysia’s head of research Vincent Khoo said a much lower crude oil price scena­rio would bring negative implications on the ringgit and the Federal Government’s ability to spend its way to pump prime the economy.

The head of research, products and alternative investments at Etiqa, Chris Eng, said that based on the weakening of the ringgit, foreign funds could be behind the selling.

“However, today’s selling was over­­done and I believe there could be a relief rebound,” he said, based on improving US economic growth and ample liquidity from China and Japan.

Eng said according to reports, Bank of America believed Malaysia’s budget deficit could balloon to 3.8% from a planned 3% while Citi thought the 3% deficit could still be maintained.

“The outlook for investing in 2015 remains challenging but it also depends on what level the local bourse ends the year,” he said.

By JOSEPH CHIN The Star/Asia News Network

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Malaysia's iconic Twin Towers are seen in the background of the Malaysian oil and gas company Petronas logo at a petrol station in Kuala Lumpur

DESPITE the geopolitical uncertainties in recent months – Islamic State of Iraq terrorism, Russian-Ukraine tension,Israel-Gaza conflict – Brent crude oil price has fallen to a new four-year low on Nov 13 at US$77.9 per barrel.

This is a significant drop from the average price of US$112 per barrel in June 2014. The floor price support is still not yet in sight and the downward spiral of prices seems likely to persist into 2015.

The key factors contributing to the recent drop in prices are large crude oil supply from American shale oil production, weakening demand from a subdued global economic growth outlook and also a stronger US dollar in the recent months.

Malaysia’s economy is very much dependent on the oil and gas sector. From the federal government budget revenue to the country’s exports of crude oil and petroleum products, the issue of falling crude oil prices warrants a closer inspection.

Government estimates gone awry

The Government’s projection of its fiscal position and overall economy in Budget 2015 is based on the assumption that the average Brent crude oil price would be US$105 per barrel in 2014 and US$100 per barrel in 2015. Given the substantial differences from the current market prices, the Government’s projections may no longer be in sync with the economic reality.

Budget net loss from oil prices downtrend

One notable impact of falling crude oil prices is on the government’s budget finances. On one hand, the oil and gas sector has been contributing a third to the government’s budget revenue since 2005. At the same time, the Government spends a substantial amount of its operating expenditure on fuel subsidies – an estimated of 8.5% of budget operating expenditure in 2014. Therefore, sliding crude oil prices is a double-edge sword to the country’s fiscal health.

To put the issue in perspective, the estimated budget revenue contribution from the oil and gas sector is around 6% of gross domestic product (GDP)in recent years while fuel subsidy costs the government around 1.7% of GDP in 2014. As such, the impact of lower budget revenue will outweigh expenditure savings from lower fuel subsidy cost.

Therefore, if the current blanket fuel subsidy mechanism is left status quo in light of falling crude oil prices, the circumstances would risk our nation’s fiscal deficit targets. Keep in mind that the government has committed to reduce the current fiscal deficit to GDP estimate of 3.5% in 2014 to 3% in 2015 and ultimately achieve a balanced budget by 2020.

Timely goods and services tax

No doubt the heavy dependency on the volatile oil and gas sector for budget revenue is beginning to show signs of cracks. The issue is even more pressing now that budget revenue is squeezed from falling crude oil prices.

Therefore, the broad-based goods and services tax (GST), which will enhance tax revenue collection, is considered timely at this juncture. However, the implementation of GST is only part of the long term solution to fiscal sustainability. The government must also look into the expenditure side of the budget finance to manage its fiscal prudence.

New subsidy mechanism or market prices?

Based on the current crude oil prices, the government is only subsidising RM0.13 per litre for RON95 and RM0.12 per litre for diesel in November, compared to RM0.47 per litre subsidy for RON95 and RM0.59 per litre subsidy for diesel in September – before the October RM0.20 per litre fuel price hike.

According to the Finance Ministry, if global crude oil prices fall to a low of between US$70 and US$75 per barrel, the Government would not be providing any subsidy for fuel at the current fixed price of RM2.30 per litre for RON95 and RM2.20 per litre for diesel.

Since the market pump prices are approaching a level that would require no subsidy at all, there is an urgent concern to review the sustainability of the current blanket fuel subsidy approach.Although the government has proposed to initiate a new targeted fuel subsidy rationalisation programme based on individual income thresholds, the circumstances demand a review of subsidy provisions.

Ultimately, fuel subsidy is not sustainable in the long run. Whether the government initiates a tiered fuel subsidy provision or not, the reality is that fuel subsidy should not be entrenched indefinitely.

To plan ahead for fiscal prudence, the government’s initiative to move towards a managed float pump prices is appropriate at this juncture.

When global crude oil prices are depressed, consumers would certainly rejoice. However, when there is a reversal of crude oil prices, the government could then step in to provide targeted assistance to the low-income households. As the government would be sensitive to the impact of rising cost to the low-income group, savings from fuel subsidy expenditure could be channelled to the targeted needy households.

The Bantuan Rakyat 1Malaysia (BR1M) provisions for eligible households and single individuals amount to around RM4.9bil in 2015, benefitting around 7 million recipients. Therefore, the low-income group has already been identified through the BR1M database. The government can consider to top up on BR1M with a supplementary monetary provisions equivalent to a cost of living allowance to compensate for the upside volatility of market fuel prices.

If the government would consider providing an additional RM250 to its BR1M provision for each eligible households and single individuals as the supplementary allowance, total BR1M payment for eligible recipients in 2015 would amount to around RM6.7bil.

Therefore, from the perspective of fiscal management, doing away with fuel subsidies would greatly assist the government to meet its fiscal objectives. From Budget 2015, the Government has allocated around RM37.7bil for subsidy expenditures. Based on historical trend, around 55% of total subsidy allocated is for fuel subsidies.

If the government considers abolishing subsidies for fuel in 2015, it could save up to RM20.7bil from the operating expenditure. Given that the projected fiscal deficit is around RM35.7bil for 2015, the savings from fuel subsidy will assist the government to meet its fiscal deficit targets. Furthermore, the government can also save billions of ringgit for money not spent on upgrading petrol pumps to accommodate the proposed tiered fuel subsidy mechanism.

As long as the provision for the additional supplementary allowance to BR1M does not exceed the savings from fuel subsidy expenditure, subsidies would be channelled to the targeted group while narrowing the fiscal deficit along the way.The cost of living allowance can be claimed through the BR1M distribution channel. This will assist the government to meet its fiscal deficit to GDP targets.

One way or another, it is still monetary subsidy provisions by the government. However, a more targeted approach to distributing provisions and also doing away with the heavy dependency on subsidies are the right approach moving forward not only for the fiscal health but also to the fundamental competitiveness of the economy.

By Manokaran Mottain, chief economist at Alliance Bank Malaysia Bhd.

Ringgit Falls for Sixth Week in Longest Stretch This Year on Oil

Malaysia’s ringgit fell for a sixth week, the longest losing streak this year, as a slump in crude oil prices threatens to crimp government revenue in a nation that’s a net exporter of the fuel.

The ringgit is Southeast Asia’s worst-performing currency in the second half as Brent crude lost 29 percent since the end of June. Oil-related industries account for 30 percent of government revenue. While a weaker exchange rate helps lower export prices it makes imports more expensive. A report today showed inflation quickened to 2.8 percent in October from a year earlier, compared with 2.6 percent the previous month.

“The drop in commodity prices, especially crude oil, is to be blamed for the ringgit weakness,” said Wong Chee Seng, a foreign-exchange strategist at AmBank Group in Kuala Lumpur. “The fact that the ringgit is a high-beta currency also didn’t help,” he said, referring to a measure of volatility.

The ringgit depreciated 0.3 percent from Nov. 14 to 3.3555 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It touched 3.3681 yesterday, the weakest level since March 2010, and has lost 4.3 percent since June 30.

One-month implied volatility, a measure of expected moves in the exchange rate used to price options and a gauge of risk, increased 16 basis points, or 0.16 percentage point, to 7.15 percent this week.

Subsidy Announcement

The ringgit led gains among Asian currencies today, rising 0.3 percent, after the government said in a statement that it will remove subsidies for fuel and diesel from Dec. 1 and as Brent rebounded.

“The ringgit strengthened today because of the increase in crude oil prices,” said Saktiandi Supaat, the Singapore-based head of foreign-exchange research at Malayan Banking Bhd. “The announcement on the subsidy removal gave further support.”

Malaysia’s 10-year government notes fell for a second week. The yield on the 4.181 percent securities maturing in July 2024 rose three basis points to 3.9 percent, data compiled by Bloomberg show. The yield dropped three basis points today. - Bloomberg

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Malaysian Ringgit drops to three-year low !

 

The ringgit tends to move more significantly lately because of domestic factors such as the fiscal situation, Says Saktiandi Supaat of Maybank in Singapore

KUALA LUMPUR: The ringgit dropped to a three-year low ahead of data that may signal the US recovery is gaining traction, bolstering the case for policymakers to pare stimulus that has fuelled inflows to emerging market assets.

Reports this week may show retail sales, manufacturing and housing starts increased last month in the world’s largest economy, according to Bloomberg surveys. Four Federal Reserve officials indicated greater willingness last week to begin tapering the central bank’s bond-buying programme.

Fitch Ratings cut Malaysia’s credit outlook in July, citing concerns over the country’s public finances.

“The general expectation is that these US numbers are going to be quite strong,” said Saktiandi Supaat, head of foreign exchange research at Malayan Banking Bhd in Singapore. “The ringgit tends to move more significantly lately because of domestic factors such as the fiscal situation.”

The ringgit depreciated 0.3% to 3.2595 per dollar as of 4.27pm in Kuala Lumpur, according to data compiled by Bloomberg. It touched 3.2613, the weakest level since July 1, 2010.

The one-month implied volatility, a measure of expected moves in the exchange rate used to price options, climbed six basis points to 7.89%, halting an eight-day losing streak.

Malaysia’s five-year government bonds were little-changed.

The yield on the 3.26% notes due March 2018 held at 3.50%, according to data compiled by Bloomberg.
The rate on 10-year securities fell by two basis points to 3.86%, the lowest level this month. — Bloomberg

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Malaysian currency weaken as foreign capital outflow

Foreign capital outflow a trend in emerging markets these days

The ringgit, which has been described as being in a tight spot, has fallen 6.6% since May 22, when the Fed first raised the spectre of an early stimulus withdrawal, reports the Singapore Business Times.

THE outflow of foreign capital from emerging markets is the trend these days.

The ringgit, which has been described as being in a tight spot, has fallen 6.6% since May 22, when the Fed first raised the spectre of an early stimulus withdrawal, reports the Singapore Business Times.

The ringgit has been trading at three-year lows against the US dollar, and month-long selling has pushed 10-year Malaysian government bond yields to their highest in 2½ years, says the report.

The reason is “an exodus of foreign capital, as investors reassess emerging markets most at risk from a withdrawal of US easy money policy,” it adds.

The Indian rupee has dropped more severely by 8.5% since May 22.

India has been described as being “caught in the middle”, as the United States ponders tapering off its quantitative easing policy, causing volatility in emerging markets, as investors pull money out.

India was enjoying a growth rate of 9% just two years ago. Now, the Reserve Bank of India is forecasting growth at 5.5% for the fiscal year ending next March, says the SBT.

Reliance on foreign capital has always been a dangerous game, and the authorities are well aware of that.

In some quarters, it is a known fact that foreign capital is not really welcome, as it wreaks havoc with its large movements.

Economies in South-East Asia, especially, have to be very cautious of foreign capital, as the impact can be severe once they withdraw their funds.

Fund flows are usually tracked by central banks, which will have an indication of the inflows and outflows.
The economy itself should be fundamentlly strong and able to withstand the shock of any outflow.

High economic growth is not really the objective in this case, but rather steady, resilient and broad-based growth.

Investors in emerging markets should be prepared for such a phenomenon and get ready with their asset allocation strategies.

Mark Mobius, the executive chairman of Templeton EM Group, was quoted by The Economic Times of India as saying that funds were expected to flow back into emerging markets.

“We think there will be a bounce-back because there has been too much negativity and that has pushed prices down to levels where there is a chance of an upsurge again,” he is quoted as saying.

The Australian central bank has cut rates for the eighth time in less than two years in a bid to improve sluggish growth, as a boom in mining investment over the past decade comes to an end, says the International Herald Tribune (IHT).

The Reserve Bank of Australia lowered its benchmark cash rate by a quarter of a percentage point to a record low of 2.5%, bringing the total cuts since November 2011 to 2.25 percentage points.

The Australian currency, which is closely watched by investors and parents with children studying in that country, has fallen about 15% against the US dollar since mid-April.

However, the currency remains well above where it has been for much of the past two decades, says the IHT.

The Australian dollar has rallied lately on positive economic data from China.

As new resource investments peter out, the Australian government is seeking to rebalance its economy, with strength in sectors such as tourism and manufacturing.

There are diverging trends in the Australian economy, where unemployment has edged up, with “signs of increased demand for finance by households”.

However, the pace of borrowing has remained “relatively subdued”.

It will be interesting to watch how the Australian dollar performs over the next few months and assess whether it is timely to invest in it.

Plain Speaking By Yap Leng Kuen contributed to this post.
Columnist Yap Leng Kuen sees a lot of investment opportunities in emerging markets.

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Stronger Malaysian ringgit seen

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Stronger ringgit seen

BY DALJIT DHESI daljit@thestar.com.my

Economists expect the ringgit to strengthen further against the US dollar

PETALING JAYA: Economists expect the ringgit to further strengthen against the greenback and attract extensive capital inflow into the region. It will also lead to possible further hikes in statutory reserve requirement (SRR) to stem excess liquidity if the global financial volatility worsens following the US credit rating downgrade.

Standard and Poor's (S&P's) had last Friday downgraded the world's largest economy a notch lower to AA+ from a triple A rating since the credit rating was issued to the US in 1917.

MIDF Research chief economist Anthony Dass said he expected the ringgit to strengthen against the US dollar at an average 2.97 for the year supported by a combination of healthy economic fundamentals and strong inflow of liquidity.

Stronger ringgit: Dass expects the ringgit to trade at an average 2.97 to the greenback for the year.

He added that the stronger ringgit against the US dollar would help cushion some level of imported inflation, which would give some breathing space for Bank Negara on further raising the overnight policy rate (OPR), which now stood at 3%.

“We have now placed a 30% odd for the OPR to stay at 3% for the rest of the year and expect the central bank to raise it by another 25 basis points (bps) in the second half of this year,” Dass said.

Much depends on the direction of the ringgit, the global commodity and food prices, liquidity and whether there will be further relaxation of subsidies.

Underpinned by healthy economic fundamentals and benefiting from the regional net inflow of funds, liquidity inflow into Malaysia has been strong, forcing the central bank to raise the SRR by 300 bps to 4% between April-June 2011. SRR are non-interest deposits kept at the central bank to mop up excess liquidity in the financial system.

With lingering uncertainties on the global front, Dass said he expected Malaysia, like other Asian ex-Japan economies, to continue to see inflow of funds. While this would strengthen the ringgit, he said ample liquidity would add pressure on inflation, adding that he was not ruling out the possibility of further hikes in SRR by another 50 bps to 100 bps should the inflow of liquidity pose a problem.

RAM Holdings economist Jason Fong, in response to a query from Starbiz, said if the financial volatility in the US turned out to be very significant and persistent, the impact on its external markets, including Malaysia, could be substantial.



One of the worst case scenarios would entail extensive capital flight from US-centric assets, he said. In this scenario, he added that there would be considerable decline in the value of the US dollar, causing an appreciation of US-denominated assets, particularly commodities.

The US financial volatility might also cause investors to put their money into safe haven assets such as precious metals, like gold, Fong noted.



Furthermore, he said if there were further US debt rating downgrade within the next two years as pointed out by S&P, then banks (depending on its portfolio weightings in US Treasuries) might slow down lending activities to meet international banking guidelines and this could slow domestic lending and cause consumption and investment to decline.

Fong said a larger-than-usual capital inflow would likely put upward pressure on the ringgit, causing Malaysia's exports to be more uncompetitive.

He said the rating agency maintained its economic growth forecast of 5.6% for Malaysia this year but acknowledged that the downside risk to growth had risen in the last few months.

This included a prolonged US slowdown coupled with a deteriorating external economic environment, he noted.

AmResearch Sdn Bhd director of economic research Manokaran Mottain reckons that the impact on Malaysia from the US credit rating downgrade will be minimal as the local economy is more domestic-oriented.

Countries more exposed to US Treasuries, including Japan and China, would face the brunt in the near term. China would be pressured to ease the grip on a weaker yuan policy, he added.

For Malaysia, the biggest impact will be in the currency market, with the ringgit rallying again towards RM2.93 per dollar again. The ringgit was traded at RM3.019 to a US$1 yesterday.

In the medium term, a possible quantitative easing (QE3) in the US would lead to the appreciation of the regional currencies, including the ringgit - which is expected to rally towards RM2.90 per dollar before settling between the RM2.80-RM2.90 range for this year.

Manokaran, who is maintaining the country's gross domestic product forecast at 5% this year, said the Government had trimmed its exposure to the G3 and plans to boost domestic demand. Apart from the US, the G3 also include Japan and the European Union.