Weakening Ringgit, Strengthening Dollar

Global and domestic developments are affecting the volatility of Ringgit movement. Global developments would include the investor expectations relating to monetary policies of major central banks and the trends in crude oil and gas prices, where domestic factors include concerns about government linked entities and ratings related issues.

Ringgit has been underperforming against the strengthening US dollar, being Asia’s second worst performer YTD, behind Indonesia, where asian currencies tend to move together against the stronger USD. The pressure on MYR is largely driven by sentiments, rather than fundamentals. The analysts are expecting bad times for the country as well as the whole Asian region, at least until the second quarter is over. For countries under the emerging market space, it seems that only Eastern Europe where the growth has been picking up, but things arent looking that bright in the larger European space, with potential UK and Greece’s exit from Europe. Asia and latin america are both equally been under pressure due to weakening currencies and growth slow down, but on the positive side, most of the Asian countries are benefiting from lower oil price and less inflationary pressure. So yeay to other Asian countries but not Malaysia.

More bad news it seems with Fitch is said to be on track to downgrade the sovereign rating as short term view on Malaysia is not so positive, particularly on the debt ceiling and contingent liabilities. Their next review is due by end of July 2015 and until then, we just hope that the market has priced in the impact. As I talk to few fund managers, they’re currently staying away from our credit papers, due to the foreseeable risk of downgrade and MYR uncertainties.

While external developments are beyond the control of any open economy, every effort needs to be undertaken to bring about resolution to the domestic issues that confront our economy. Once these issues are resolved the performance of the currency is expected to be consistent with our sound economic fundamentals and growth prospects.

 

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Strengthening of fiscal policy?

Malaysia’s sovereign risk profile compares poorly to rating peers on the fiscal side. Accelerated by the drop in oil price and weakening ringgit. Being an oil exporting country, it has to absorb a large terms-of-trade shock and face greater fiscal and external vulnerabilities.

Further hike in OPR is expected in 2H2015, probably after the implementation of goods and services tax (GST) in April. Statistically speaking, housing credit has remained pretty stagnant over the last few years, whereas personal loan and vehicle loan are on the rise. I think such unhealthy situation like this wont warrant the central bank to further increase the interest rate this year. Furthermore with the recent implementation of GST, which would normally gives a profound impact to the economy especially within its few months of implementation.

The increase in government’s development expenditure (as announced in the budget 2015) is expected to boost GDP in 2015 due to development expenditure has a higher multiplier impact on the economy relative to government’s operating expenditure.

One thing for sure, 2015 aint going to be a good year for the economy. Say on the currency front, there are analysts who predict that the ringgit might go down to 3.80/dollar level by year end. That is quite a scary possibility. Last week we could see there had been a slight increase for ringgit, 3.62/dollar, but that was expected due to the issuance of the dual tranche $1.5bil sukuk wakalah. By next week the rate could go back down again, we shall see.

Malaysia Market Reform – How to Get out of Fiscal Debt Situation

Poland and Slovakia among many other countries currently are dubbed as high income nations, where these countries have made significant economic reforms after being stagnant in the early years. South Korea for instance, has amazing economic growth within a short period of time, where it was once a devastating nation due to the Korean war and had managed to transform to becoming one of the wealthiest nation in the world.  

Challenges for Malaysia, are of short term and long term, where the next general election is in 2018, and until then there are key areas that the current government administration is tasked to do.  In this case few economic matters are of concern, which are reducing the government debt, implementation of GST, strengthening of ringgit and reducing the debt-GDP ratio. Now there are two things that are also of concern in my opinion, in terms of our corruption and competitiveness indexes. We are still far from achieving corruption-free state and our competitiveness index is at the unsatisfactory level (24^th out of 148 countries).

A reform can simply be defined as a major policy change. In economical sense, this could mean a positive improvement to the society, such as in reducing the country’s fiscal deficit. A successful reform could also mean by spreading the burden of the adjustment of government expenditures and revenues across income classes and income sources.

 Some suggested economic reforms:

– Enhancing the role of private sector in the society and limiting government’s involvement in infrastructure projects, which in turns would lessen the contingent liabilities for the government.

-To increase government’s revenue (to achieve >25% of GDP) via more efficient tax collection system and to move away from oil and gas revenues stream.

– Eliminating price controls, deregulating capital markets and lowering trade barriers. As for capital market point of view, to limit foreign holdings in the stock market, to limit GLC participation by way of encouraging the GLCs to sell down their ownership in stocks as well as to ease companies participation in the ACE market and also their movement from ACE market to Main market of Bursa Malaysia.

– Limiting the subsidies and handouts. Though BR1M is a measure of targeted form of subsidy, it is still bearing the characteristics of featherbedding, which discourages and limits self development in the society.

– Allowing media freedom

-Encourage self reliance in food production, which means promoting and supporting the agriculture industry.

All these economic reforms in transforming the country’s political economy should start from the grass roots level, and that includes individual, household and the society at large. Educating the rakyat on the necessities of reforms and difficult government decision such as subsidy rationalisation should be a priority. Any policy reform is indeed painful at the beginning, which largely due to people receptive of changes, thus it is important for the government to disseminate the right information.

Caveat Emptor

The Malaysian financial market has seen one major, if not shocking development on the first quarter of 2014.

The Bank won in Pesaka Astana case vs the bondholders. According to The Star, the decision by the Federal Court rattles the bond market. Well, this is the first Malaysian case whereby the Federal Court favoured the Principal Adviser / Lead Arranger, on the basis of veracity of information contained in the Information Memorandum (IM). Similar to prospectus issued by IPO, IM is a sales brochure containing the information on the bonds, which usually are sent to the institutional investors. In Malaysia IM are also available on the SC website, therefore it is a public document. One of the ways bond is different from shares and funds is that the bondholders are sophisticated investors where they are mainly institutional investors, the likes of Employee Provident Funds, Pilgrimage Funds, banks and other fund management companies. These institutional investors have vast capital market knowledge and experience, hence the difference in regulatory treatment and requirement for them as opposed to retail investors in shares, people like you and me.

Below are the chronology of this case, prepared by The Star:

 

 

 

 

 

 

 

 

However Maybank Trustees is not spared from the liability.

 

I personally don’t think that efficiency of the market will be affected after this. Ever since the first issuance of bond in our market, it has always been targeted to sophisticated investors, whom are expected to conduct their own research and due diligence before making their investment decisions. Therefore with this new court ruling, which not in favour of the bondholders it would mean a greater checks and balances on the investment decisions made by the fund managers.

Malaysian Economy, Where Will It Go From Here (Part 2)

Getting priorities Right by Wan Saiful Wan Jan (The Star)

“The Government has suddenly realised that we are in a bad fiscal situation. This news is not very new, actually.

Back in 2010, the alarm had been raised that Malaysia could face bankruptcy by 2019 if we continue giving handouts and subsidies the way we have been doing for decades.

With the benefit of hindsight, perhaps it would be right to say that the Government should have acted as soon as the warning was issued. Unfortunately with the 13th general election, politics took precedence over leadership.

And now, several months after GE13, the Government looks set to make some difficult decisions. The Goods and Services Tax (GST) will come into effect soon. And various subsidies will be reduced.

Let us get one thing clear. The Government is not increasing prices.

Instead, the Government is reducing subsidies and removing price controls that have been keeping prices artificially low for many years.

Prices should have actually gone up gradually over the years. But government intervention has kept them lower than what they should be, such that when the subsidies and controls are removed, the increase is drastic.

Many people are complaining about the rising cost of living. Rightly so. The cost of living is indeed increasing.

But some of the complaints are rather misdirected because they call for the Government to continue subsidising and controlling prices. This is the wrong demand.

Further subsidies and price controls will only keep us living in a false world, one in which the actual cost of living is masked by interventions by politicians, whichever side of the political divide they may be on. And the reality is, the interventions are unsustainable anyway.

The fact is, subsidies, handouts and price controls should be removed. The market must be allowed to function efficiently with minimal distortionary interventions. Therefore the Government’s decision to stop them, is, in principle, praiseworthy.

I say “in principle” because there is another factor that must be taken into consideration. That is the issue of prioritisation.

Malaysia’s fiscal management is in a sorry state. Every day we hear reports about how our money is wasted on travels, projects that are not needed, corruption and leakages.

Plus so much wastage has been identified in the Auditor-General’s Report again and again every year.

If the Government wants to save money, they should prioritise reducing the wastage and leakages.

They should also prioritise removing subsidies given to big businesses and concessionaries, and recovering money given under questionable situations.

Actions that affect common people should come last on the list.

Unfortunately it is still not clear what is being done to prevent problems already identified by the Auditor-General.

There is no news about how the Government plans to stop subsidising corporate entities and concessionaries. Nobody knows if the billions lost to questionable projects and contractors will ever be recovered.

Let me stress again that I completely agree subsidies and handouts must be removed. They have distorted our economy for such a long time, and they are bad for our future economic growth.

But the way these steps are being implemented today makes it impossible to argue for subsidy removal. The Government has prioritised the wrong first steps.

Let me suggest some more steps that can help save money without hurting the public.

Our Government spends billions every year in public procurement. Ideas studied this topic in 2013, and we have released a policy paper on it recently. We calculated that simply by improving the processes of public procurement, we could save up to RM2.3bil in public procurement alone.

If we add the amount of money spent by the Public Private Partnership Unit (Unit Kerjasama Awam Swasta) under the Prime Minister’s Department, the potential saving could be much more. But the unit operates in a protected environment and not much is known about how they evaluate contract proposals.

We need more transparency around Ukas.

Nevertheless, I am glad that Datuk Paul Low, Minister in the Prime Minister’s Department, has managed to persuade various agencies to improve their processes and employ competitive tendering instead of direct negotiation. This is a brilliant first step.

Another step to save money is by reducing the size of the civil service. Why exactly do we need to have such a bloated civil service anyway?

Now is a good time to start issuing redundancy notices to as many civil servants as possible.

Perhaps they can start with under-performing officers. They should be sacked, not merely transferred to another unit.

An example of government leadership is being shown by another country that is also facing fiscal challenges after decades of government splurging – the United Kingdom.

The UK government has committed to cutting administrative staff at their ministry of education by 40%, and another 23,000 administrative posts in their health services. That is concrete action.

If we see concrete actions with the right priorities, the Government will face less resistance.”

Some highlights of the articles:

1. Our fiscal situation is bad. It is not new. It has been plaguing the country since many years ago, up to a point the World Bank estimated that at the rate we were going we would probably be bankrupt by 2019. Many Malaysians are ignorant to that fact that we were desperate for fiscal remedies.
2. Learn about fiscal policies in Investopedia, though some economists shun Keynesian ideas but the gist is there.
3. Goods and Services Tax is a form of consumption tax which its introduction would aid the country in reducing fiscal deficit. So welcome, GST.
4. Subsidies, price controls and cash handouts would never ever work in the long run.
5. Malaysians have been living in a false world where food price is (generally) cheap, non existent price increase (when price hikes normally happened during festivities). Thus when the government had to normalise the price by lifting the price controls, then all hell breaks loose. Just how is it to make you people understand that price increase is inevitable?? You can’t expect the price of 1kg of flour to remain constant at RM2 (for example) forever. That’s just not gonna happen.
6. It seems that we have too many whiners who don’t (refuse to) understand the necessity of the government’s actions.
7. Nevertheless spending cut should be a top priority. We have too many civil servants for such a small country (for God knows what reasons). There has been no profound action taken so far in handling corruption and leakages in government spending. UK govt as quoted in the article has successfully cut down their civil servants even up to 40%. That showed how committed the country is in curbing their challenges.

Till then, godspeed Malaysia.