To welcome 200SE7EN, Desiderata is introducing a new Guest Blogger to launch a regular Economic Education Service. I will get back to explain why I'm doing IT a few weeks hence as meanwhile, let my friend Mr PY CHIN render his national service.
This two-parter first appeared at the Sarawak-based
Sunday Post Dec 10 and 17, 2006.
I am happy to introduce
MR P. Y. CHIN,
a journalist with some 30 years' experience, who will be
sharing his observations and thoughts on the business
and economic scenes -- both local and international --
with a regular column to educate my EsteemedReaders on
an impoortant sector of knowledge expansion, and hopefully
I hope with Mr Chin's sharing of his vast experience and
insights, my readers here can better see the trends
ahead to help them understand the forces at play to
make better corporate and investment decisons.
ENJOY! enJOY! enjoy, joy, joy!
FALSE DAWN OF GOOD ECONOMIC TIMES?
By P.Y. Chin
It has always been said that "Good times never last".
So, are we riding now on a roll of good economic times
before the economic and financial gloom hits us?
Borneo Post is proud to welcome a new columnist who in
the first of a two-part article today reviews the good
turn in the country's economy and a year-end bonus at
the local stock market.
EVERYTHING SEEMS to be looking brighter these days.
Not just the skies (with the monsoon rains gone), but
also the economy, the stock market, corporate
activities and earnings. Even the once hard-hit
consumers seem to be smiling more, with retailers
ringing their cash registers even louder.
Understandably so, as Christmas is round the
corner and a New Year is within sight. It's that
season of rest and holidaying, merry-making and
For stock market punters, good days are back.
Bursa Malaysia has not seen such dazzling heights in
its Composite Index for the last 10 years. So when the
KL Composite Index (KLCI) broke through the
psychological 1,000-point barrier two weeks ago, there
were tumultuous cheers.
Memories of the disastrous days following the
1997 financial crisis seemed to have been forgotten.
As usual, in the euphoria, every other punter is
talking of higher and higher levels in the share
market in the months ahead.
So-called "expert" analysts are already making
optimistic projections, giving opinions of even
brighter days ahead for the KL stock market. They
believe, that the KLCI will break the 1,100- to
1,200-point in the next few weeks or months -- which
may well happen.
Their optimism, always in abundance on such
market upturns, is based on the substantial inflows of
foreign funds into local stocks, more aggressive
corporate activities, better than expected earnings,
and of course, the age-old song of local stocks being
Sure, there have been inflows of foreign funds,
especially into the Asian markets as a whole these
past months, and the KL stock market is no exception
as another recipient.
According to Japanese investment house Nomura
International, foreign investors bought a net
USD2.8bil (RM10.6bil) worth of shares in Asian markets
between Nov 1 and 24, 2006 after having seen an inflow
of USD3.3bil in October and USD3bil in September. That
means already USD9.1bil (RM34.7bil) had flowed into
the Asian region.
As the year draws to an end, Nomura expects even
more money to flow into this region, given that
liquidity is very high globally, and that "there is no
shortage of cash chasing after financial assets".
Small wonder that Bursa Malaysia is experiencing
high volumes of share trading these days, running
above two billion units a day -- a size not seen since
the beginning of this year. Of course, the higher
volumes translate into better bottom-lines all round,
especially for stockbrokers and Bursa Malaysia. Hence,
the rolling good times seem to be back on time for the
More aggressive local corporate activities and a
slew of better than expected good earnings announced
to-date have also added fuel to the stock market
The RM31-bil mega merger of the oil palm
plantation interests of Sime Darby, Golden Hope and
Kumpulan Guthrie led the way.
Next, the banks, led by the Australia and New Zealand Banking Group made a grand entrance, by paying
a hefty premium to secure a 24.9% stake in
Then there is Kuwait Finance House looking
seriously to buy a stake in RHB Bank, after reports
that it met Sarawak Chief Minister Tan Sri Abdul Taib
Mahmud to discuss Utama Banking Group stake in RHB
Bank. Taib's family and associates own 52%
of Utama Banking (largest single shareholder of RHB
Bank with 32.8%) through Cahya Mata Sarawak.
Even the insurance field wants a piece of the
action. Kurnia Asia jumped on the bandwagon to compete
with AMMB Holdings to buy Commerce Assurance.
Also, the newspapers are keen to join the merger
bandwagon -- between the New Straits Times and Utusan
Malaysia groups -- although the plan has been sent
back to the drawing board following some controversial
views expressed publicly by dissenting parties.
Local corporate earnings too are getting better,
with many publicly listed companies reporting stronger
and more robust results to Sept 30, 2006 -- most
well above market expectations.
Malaysian Airlines posted its first-quarter net
profit since unveiling a turnaround plan, reporting
RM240.3mil for the third quarter to Sept 30, 2006. Its
competitor, low-budget carrier Air Asia reported a 32%
jump in first-quarter profit to RM11.77mil.
Industrial conglomerate UEM World posted net
profit of RM12.14mil, property developer Metro
Kajang reported net profit of RM51mil,
stockbroker OSK Holdings recorded net profit of
RM22.02mil, and financial institution BIMB
Holdings returned to profitability after four
consecutive quarters of losses.
While Maxis Communications Bhd, Genting Bhd and
Resorts World Bhd gave sterling performances, MBM
Resources and Oriental Holdings in the motor sector,
and local steel and steel products companies such as
Kinsteel, Lion Group, Tong Herr Resources and
Ornasteel did not lag far behind either.
For next year, many companies are also
projecting brighter prospects, planning for further
expansions of operations -- both diversifying into new
areas as well as widening the geographical spread.
Carrefour Malaysia is investing RM200mil to
increase its outlets to 13 by next year from the
present 10. US-based SimpleTech will invest RM100mil
in the next five years on a 200,000 sq ft
manufacturing plant in Penang, while Uni.Asia Life
Assurance is confident of achieving RM300mil in
gross premiums for the year ending March 31, 2007.
It was also reported last week that Genting
Sanyen, Genting's paper, power and oil and gas
division, discovered oil and gas off West Natuna in
Overall, there is certainly a general feeling
among many in the business, financial and corporate
circles that the immediate outlook for the next 12 to
18 months is all "bright, clear, and optimistic".
No dark clouds on the horizon to fear, they say.
Even some foreign-based analysts are more
optimistic in their projections of the KL stock
market, and economy, in the near future.
A Hong Kong-based investment firm expects the
local stock market to "still have room to run",
arguing that there is a "valuation gap" between
local share prices relative to bond yields. By its
calculation, the KL Composite Index should hit 1,195
points before any downturn is expected. The KLCI
currently is at around 1,090 points.
The investment firm's rationale for its strong
optimism is that "seldom have we seen so many
positives piling up for the Malaysian market, like
presents under a Christmas tree."
So, many are now asking: What can go wrong?
Enjoy while you can seems to be the catch-phrase these
days, with many living it up as if there is no
The political front appears to have quietened
down, with fiery party gatherings out of the way. Even
criticisms of the present top leadership, once hogging
the headlines, seemed to have tapered off.
But the most important question to ask is: Are
we in for prolonged good times? Or are the present
good times merely a period of false dawn of happiness
before the doom and gloom set in?
For the stock market, it looks like
there is certainly more room at the top in the next
few months. A likely scenario, following a perennial
traditional chart pattern, is that share prices will
continue their uptrend at least until just after the
Chinese New Year. Happy times are ahead indeed, for
BETTER TO BE CAUTIOUS THAN TO BE SORRY
In last week's column, P.Y. Chin talked about the good
times the economy is currently ging through. In
today's final Part 2, he examines what other factors
are in play that will impact on the good times
currently on a roll, and he ponders if the present
happy situation is sustainable.
By P.Y. Chin
Everyone is smiling these days. The stock market is on
a roll, with the KL Composite Index well past the
1,100 psychological barrier which was deemed a big
barrier when the year 2006 started.
The economy is looking good, and set to achieve
this year's 6% growth, or near to it -- exactly where
everyone is projecting. The general feeling all round
is one of happiness, like there's nothing to fear
about any dark clouds on the horizon.
Even Prime Minister Datuk Seri Abdullah Ahmad
Badawi had said the stock market's present bullish run
was not based on speculative activities, indicating
the present run-up could be genuine.
The ringgit is also performing beyond many
people's expectations. The present reading is that the
local currency will continue to strengthen as foreign
funds flow into the stock market. These foreign
currencies would need to be converted into ringgit to
buy local shares.
Already, the ringgit's strength against the US
dollar was at its highest three weeks ago (RM3.544 to
the US dollar), since it was de-pegged in July 2005.
The ringgit's strengthening is also due to
strong export earnings accumulated over the last few
years. Malaysia recorded a trade surplus of
RM9.4billion in October 2006 -- the 108th consecutive
month of trade surplus since November 1997. Total
trade for that month was RM86.67bil.
Latest figures released by the Ministry of
International Trade and Industry showed that from
January to October 2006, total trade rose 10.3% to
RM882.58bil, with exports valued at RM485bil and
imports at RM397.59bil, giving a trade surplus of
The Ministry of Finance's Economic Report
2006/07 had forecast some three months ago that "the
trade surplus for the whole of this year to remain
On the economic front, projects under the Ninth
Malaysia Plan (9MP) are finally getting off the
ground, especially after critics have constantly
lambasted the present top leadership for dragging its
feet, ever since it was re-elected with a a record
90%-mandate some three years ago.
Minister in the Prime Minister's Department
Datuk Seri Effendi Norwawi said recently that "all
projects under the 9MP will be launched starting
January next year."
He said: "In the first half of 2007 you will see
aggressive launches of the projects. We are really
going all out to get the money into the system, to get
private sector going, the construction going, to get
manufacturers to increase exports and to increase our
competitiveness as a destination for foreign direct
Going by what he said, there should be no reason
to doubt the government's sincerity in launching the
mega-projects. But many Malaysians are born cynics so
there will always be some who prefer to wait and see,
pointing to the problem of a possible lack of funds to
finance such huge projects.
Among the mega-projects slated for launching are
the monorail project in Penang, the second Penang
bridge, the west coast expressway from Sepang to
Taiping, the Iskandar southern economic development
zone in Johor, and the power submarine cables across
the South China Sea linking Sarawak with Peninsular
According to the 9MP, the government plans to
spend RM200bil over the five-year period (2006-2010)
of the plan. This year alone the government has
announced mega-projects worth a total of RM220bil,
including some of those under the 9MP.
In carrying out these mega-projects, the
government has to ensure that its timing in
implementing these projects is perfect.
If one believes that the global economy is
slated to face a downturn, which many doomsayers are
saying would occur in the few years after 2008 or
2009, then the implementation of these mega projects
from 2007 would appear to be well-calculated, and
In such a scenario, it is obvious that Malaysian
economic planners are putting their bets in the
Keynesian economic theory. Based on the ideas of 20th
century British economist John Maynard Keynes, the
Keynesian theory proposed that in periods of economic
downturn, the State plays an important role by
carrying out projects that would help stimulate demand
in the economy at the macro-level, which essentially
is fighting unemployment and deflation.
In carrying out the mega-projects, the main
reservation of many is the availability of funds, as
well as the selection of the appropriate
private-sector partners to undertake the projects.
The government has proposed a new form of
privatisation to help fund the mega-projects.
According to the proposal, some RM20bil is to be
funded through a new scheme called the Private Finance
Initiative, where the government teams up with a
private-sector partner to carry out the project,
passing control and risks to the private-sector
Many have said that in many aspects, this new
scheme has all the ingredients of the build, operate
and transfer (BOT) scheme, which is presently being
used for some privatised projects.
Many believe that with an early general
election, perhaps in early 2008, the government will
undoubtedly do its best ensure the successful delivery
of the mega-projects in good time for the general
In that case, the important, and relevant,
question is: How successful can the mega-projects be
if there is a possible slowdown in the US economy, and
in tandem, the global economy?
These days the global economy is so volatile
that any forecast of where the global economic
locomotive is heading is difficult to envisage beyond
two to three months. Everything now hinges on how the
US economy will perform in the next few months.
Last month or two, every other analyst was
saying that there was nothing to worry about a
slowdown in the US economy. After all, strong domestic
demand should help counter the adverse effects most
major economies would be facing when the US economic
engine finally falters.
But this month, opinions have changed -- in the
opposite direction. Many are now saying that the
inevitable slowdown in the US economy "will cast a
long dark shadow" over the global economy for next
Even the International Monetary Fund two weeks
ago in its latest review was lowering its growth
estimate for 2007 for the world economy from its
present forecast of 4.9%.
However, it immediately qualified its revision
by saying that the world would continue "to benefit
from its most prolonged economic expansion since the
1970s, with growth of about 5.0% for each of the last
It argued that even at a record high of about
USD80 a barrel, crude oil prices "did not manage to
apply the brakes to global economic growth". Crude oil
prices have now subsided to around USD60 a barrel.
The Malaysian 2007 Budget estimated two months
ago the global economy to growth by 4.9% this year,
slowing to 4.7% next year.
Last month, the Paris-based Organisation for
Economic Co-operation and Development (OECD) in its
latest review preferred to call it "a re-balancing of
growth" instead of a major slowdown for the world
economy. And, the OECD added that if there were any
slowdown in the US (including Japan), it "should be
At present, the US is sending out confusing
signals, and indications are that the US economy
cannot make up its mind as to which direction it
should be heading.
What is clear is that the housing sector in the
US is facing a slump. So is the automobile sector. But
both these sectors are not sufficient to drag the US
economy into recession or a severe downturn, as other
sectors are holding the economy up.
An article in the Washington Post early this
month said that "the conflicting data could be a sign
that the economy is turning, with what was at first a
mild growth slowdown about to give way to a harsher
Thus, to counter worse news to come, the US
Federal Reserve last Tuesday left the short-term
interest rates unchanged at 5.25% at its last meeting
for this year. This is the fourth straight meeting
that left the rate unchanged, after it hit 5.25% in
June with 17 consecutive increases of a
For Malaysia, any slowdown in the US economy is
of paramount importance and consequence, given that
the US is still the largest single trading partner.
However, there is a slow but noticeable shift over the
last few years in the export markets to the
non-traditional areas such as ASEAN, India, Vietnam,
Spain, Mexico, New Zealand and Finland.
Indeed, more should have been done to move away
from the heavy over-dependence on the traditional
export markets. China, the Middle East, and the East
European countries are examples of the new markets to
Even Singapore's Mentor Minister Lee Kuan Yew,
after a brief trip to Saudi Arabia last month,
expressed optimism that the "window of opportunities"
in the Middle East for Singaporean businessmen was
"rather small", and that it was closing fast.
In many ways, the composition of Malaysia's
trading partners should already be changing over the
last few years so that there would be a softer impact
to its economy should the US economy go into a severe
The Malaysian Institute of Economic Research
(MIER) said the impact of such a shift could be
significant. It said in its latest review recently
that "the softening demand in primary markets such as
the US has partly been compensated by the expansion in
secondary markets involving intra-Asian trade".
Within this context, most forecasts have revised
slightly upwards their growth estimates for the
Malaysian economy -- to the upper end of the 5-6%
range instead of the lower end.
MIER recently raised its growth forecast for
2006 to 5.9% from the 5.6% earlier. It expects 2007
growth to be 5.2%, revised from 4.8%.
Even the Asian Development Bank in its latest
report recently projected that Malaysia's growth for
next year to be 5.3% due mainly to "lower net exports"
as a result of "weaker demand in major export market".
For this year, the ADB sees growth of 5.9%.
It looks like Bank Negara's projected economic
growth for this year of 6%, and the Ministry of
Finance's estimate of 5.8% for 2006, should be
achieved with ease.
China's spectacular growth at an average of 10%
a year for the last few years should provide a strong
impetus for Malaysian exports in the years to come, if
Malaysian businessmen are quick enough to tap into its
potential. The forthcoming 2008 Olympics in China
should also ensure that economic growth on mainland
China will continue unabated.
The emergence of India, both as an export market
and centre of consumer demand, and the possibility of
the Muslim world becoming a new international trading
hub, especially for halal products, should help to
offset the adverse effects of a weak US economy on
countries like Malaysia.
At the same time, trade and investment missions
need to be stepped up. There has been a lull in
Malaysia sending trade and investment missions
overseas in the last few years, resulting in inflows
of foreign direct investments registering at minimum
The recent trade and investment mission to the
United States, led by International Trade and Industry
Minister Datuk Seri Rafidah Aziz, and organised by the
Malaysian Industrial Development Authority and
Malaysia External Trade Development Corporation,
seemed to prove that foreign investors and businessmen
are still taking a serious look at Malaysia.
It was reported that the mission managed to
record potential investments of RM325.3mil, and
potential sales of RM56.176mil from three cities --
Philadelphia, Chicago, and Phoenix.
Despite the good times rolling in, a number of
disturbing signs have created some dark and ominous
clouds on the horizon.
For one, the rapid inflow of foreign money could
put pressures on the ringgit, causing it to rise --
which is both good and bad for Malaysia.
Good -- as a rising ringgit means cheaper
imports, and thus encouraging consumers to spend more.
Bad -- as exports will be more expensive, and this
could jeopardise export earnings.
Interest rate is another factor. To cope with a
strong and rising ringgit, interest rate may have to
be cut, but this will mean greater consumer spending
in almost everything through the use of credit and
borrowings, adding undue pressures on domestic
Luckily, as Bank Negara mentioned in its latest
monthly report on the monetary situation, "headline
inflation, as measured by the Consumer Price Index,
moderated to 3.1% in October 2006". This could mean
that the inflation could withstand a cut in the
According to Bank Negara, till the end of
October 2006, the total amount of credit line extended
to consumers under credit cards was RM68.788bil, of
which RM16.468bil were current balances, and the rest,
amounting to a massive RM52.32bil overdue in payment.
There are some, like CIMB group chief executive
Datuk Abdul Razak, who believe that "there is no
strong indicator for interest rates to move either
way". On the other hand, if the inflow of foreign
funds surged considerably, and the ringgit rises too
high, it is likely that Bank Negara may make its move.
Apart from the interest rate mechanism, Bank
Negara does have other measures to deal with a rapidly
rising ringgit -- mainly exchange controls and
At present, the average base lending rate of
commercial banks is 6.72%, while the average lending
rate is 6.56%.
One crucial factor is the price of crude oil.
Presently, due to three factors -- high inventories of
oil, warmer than expected winter in US, and falling
value of US dollar -- the price of crude oil has
fallen to around the USD60 a barrel level.
But talks of Organisation of Petroleum Exporting
Countries cutting back production to ensure a higher
price have made the market uncertain about the
direction of the price of crude oil for next year.
In Malaysia, the fear of another price increase
at the pump has made many unhappy as this will
certainly add to the living costs and inflation,
especially after the substantial increase some months
ago, and more so when the toll rates are set to
increase substantially from next month.
However, some believe there would not be any
more increase in fuel charges, for the time being, in
view of an expected early general election.
For next year, some like US-based Standard &
Poor's believe the outlook for the Asian region to be
quite uncertain, and that the region's financial
markets could face greater volatility.
It said in its latest review that "higher
financing costs, increased corporate borrowing and a
frenzy of mergers and acquisitions will fuel market
Though the stock market rally may extend into
the New Year due to pent-up demand and inflow of
foreign funds, what happens after that remains cloudy
Already property markets in some Asian countries
are facing the danger of a bubble bursting. For
example, in Singapore, the property market for
condominiums lately has never seen such good times for
the last 10 years, and the situation is reportedly to
be approaching a bubble ready to burst.
Said Standard & Poor's, "the potential for a
housing bubble to burst remains", but it added that
property prices should continue to be supported by
pent-up demand and rising middle-class incomes.
In conclusion, though much has been written
about a possible recession or severe downturn in the
global economy, resulting from a possible economic
mess to be left behind by US President George W. Bush,
Malaysians should rest assuredm that though good times
do not always last, neither will the bad times be too
severe this time around.
Malaysia has learnt its lessons of the 1997
financial crisis. It will protect itself from any
global raging economic storm.
So for the time being, as the saying goes, enjoy
while you can, but thereâ€™s certainly no harm in
Mr Chin has some 30 years of journalism and corporate
experience, and at The Star for more than 20 years, he
had served as Business Editor and later to become
(Planning & Development), and
Senior General Manager (Corporate Planning and
Development). Chin also had served as Chief Executive
Officer of a securities strategic research company.
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