Economics and Financial Issue

Significant drop in real wages in Malaysia

2009-01-15T08:34:00.001+08:00

PUTRAJAYA: Real wages in Malaysia have dropped dramatically over the last 10 years since the Asian financial crisis.

According to the Reshaping Economic Geography Report in East Asia, an East Asian and Pacific region companion volume to the World Development Report 2009, the growth in real wages, which refers to wages that have been adjusted for inflation, had reduced significantly to 1.9% post-crisis from 5.6% per annum for export-oriented industries.

Meanwhile, for domestic-orientated industries such as food, beverages as well as tobacco, growth in real wages had fallen to 1.4% post-crisis from 6.8% per annum.

According to report author Dr Yukon Huang, the fall in real wages was in tandem with the drop in gross domestic product (GDP) over the last 10 years.

Huang added that in terms of labour migration to Malaysia, although the number of migrant workers had increased over the same period, there was a fall in the number of highly-skilled expatriates.

Incidentally, over the last 20 years, Malaysia’s services sector contribution to the GDP had remained steady at 46.4% in 2007 from 46.2% in 1987.

“These indicators may reveal that Malaysia has not moved up the economic value chain successfully over the last 10 years and steps should be taken to address these issues,” Huang said at the launch of the World Development Report 2009 yesterday.

According to the Economic Planning Unit director general Tan Sri Sulaiman Mahbob, the latest report from the World Bank looks at the global economic development from fresh perspectives.

“Instead of emphasising on the role of government in initiating and dictating the shape and momentum of economic development, the report highlights the critical importance of natural, human and geographical forces at work such as density as well as distance that encourage the emergence of economic growth centres or hubs across the globe.”

He added that governments should not resist the emergence of these economic hubs but instead should encourage their development. “We share the World Bank’s view that we should approach economic development on a holistic level rather than on a central level.

“We believe that policies or approaches that work for one country or even a region, may not work for all regions within a particular country,” he said.

He said the Government had recognised the geographical differences when launching Malaysia’s five economic corridors, namely, Iskandar Malaysia, the Northern Corridor Economic Region, East Coast Economic Region, Sabah Development Corridor and Sarawak Corridor of Renewable Energy.

“The Government also recognise that each region possesses different economic resources and have adopted different sets of economic strategies designed to exploit the resources and maximise on the economic potential of each region,” he said.

For instance, Iskandar Malaysia would focus on the services, property and tourism industries, he pointed out.

He added that to date, Iskandar Malaysia had attracted investments totalling RM40.25bil.

The Star- Laalitha Hunt

M’sian equities to see recovery in Q4

2009-01-15T08:31:00.001+08:00

KUALA LUMPUR: Political risk is no longer an overriding factor for the Malaysian market and the country could see a recovery by the fourth quarter of the year, says Citi Investment Research.

Its director and Malaysia head of country research, Choong Wai Kee, said that political risk was an issue after the March 2008 elections but it was no longer now as the political risk premium was lower. Risk premium refers to the extra return that an asset has to provide investors for the unique risk that it carries.

“One of the reasons for this (the risk premium coming down) is that while it was shocking that certain states had changed government (in March), in practice, the process has been quite smooth.

“This has led to Malaysia being one of the top performing markets as othersin the region have tumbled,” he told a press briefing yesterday.

As for the leadership change in March when Deputy Prime Minister Datuk Seri Najib Razak will take over as Prime Minister from Datuk Seri Abdullah Ahmad Badawi, he said: “I think the market had factored in leadership change already.”

Choong Wai Kee

On the economic outlook, he said Citigroup had reduced its gross domestic product (GDP) forecast to 0.5% for this year from 3.1% previously on rising macro-economic risks. The forecast was the lowest compared with a Bloomberg survey of an average 1.5% growth while the Government projected a 3.5% growth.

Choong said the weaker outlook was due to Malaysia’s declining exports and weakening economic data in export markets of Europe and the US. Exports fell for a second consecutive month in November, contracting 4.9% from a year ago.

He said the Government’s more optimistic GDP outlook could be due to proposed RM7bil fiscal pump-priming “which is the most relevant measure to take at this time” while another package was in the works.

Citigroup also maintained its expectation of a 50- to 75-basis-point cut in the overnight policy rate by Bank Negara in the first quarter from 3.25% now.

On its investment strategy, Choong said investors should stock pick and focus on companies which had been badly sold down, including AMMB Holdings Bhd, IGB Corp Bhd, KLCC Property Holdings Bhd and Tanjong plc. Citigroup liked the large capitalisation stocks with good liquidity.

On a quarterly basis, the bank is forecasting a 0.9% fall in GDP growth for Malaysia in the first quarter, then remaining flat in the second and third quarters at 0% growth and to recover in the fourth quarter.

“Hopefully the market will bottom out in the first quarter, giving you plenty of time to pick your stocks in the second and third quarters,” Choong said.

On the banking sector, Citigroup vice-president of financial institutions research Malaysia, Julian Chua, said asset quality would be the main concern for 2009.

“Banks would be unlikely to be looking at growth,” he said. While non-performing loans (NPLs) had been low so far, they were likely to rise “as economic activity declines”.

NPL risks lay in the consumer and manufacturing sector, he said.

“Consumers would be affected by retrenchment activity and manufacturing sector is already seeing strain in export slowdown,” Chua said.

Mitigating factors for Malaysian banks were that they had already beefed up risk management processes, generally lending had not been overly aggressive, the banking system was relatively liquid with low loan-deposit ratio and the banks were generally well capitalised.

As for mergers and acquisitions (M&A) of regional expansion ambitions, Chua saw this as unlikely.

“It is still too early to look at M&A. Because earnings visibility is low going forward, banks would rather conserve capital than make acquisitions,” he said.

Investment banking income this year was also expected to be low until the possible fourth quarter market recovery.

For latest Bursa Malaysia indices, charts and other information click here

The Star

There are hopes or windows of opportunity amid the crisis

2009-01-13T08:40:00.000+08:00

AFTER the annus horribilis that was 2008, financial markets seem determined to start the year on a brighter footing.

In Asia, bourses have strung together a week of mostly rises, while in Europe, the expectation is for a significant easing of short-term money market liquidity and interest rates.

No one would seriously be thinking that the end to our economic troubles is anywhere in sight. The news streaming out of financial capitals is still unmitigatingly bleak.

The latest titbit to catch my attention was that the crash of New York’s unemployment claims computer system due to the overwhelming demands placed on it. My heart really went out to the poor snow-bound claimants.

Another was the suicide of the world’s 94th richest man, German billionaire, Adolf Merckle, who, among other things, took the wrong side of a very big stock trade. The rich obviously have different ideas about economic hardship from the rest of us.

Still, the idea that one should start the year with optimism and look for bright spots on an otherwise black canvas is a good one. One might equally ask what the bright spots on the Malaysian canvas are. Are there positives in the midst of the looming economic crisis?

There are most certainly positives although they could equally be considered hopes or windows of opportunity. I can think of three.

First, economic crises are a great opportunity for us to put aside our differences and work towards the common good.

Coming at a time when Malaysia is as ethnically and religiously polarised as ever, this can be a significant positive. After all, when a group of people has fallen into a deep hole, it is idiotic to quibble over race and religion or anything else when trying to find a way to climb out.

There is, of course, always the danger of gutter politics. This is politics that plays on our most elemental fears and exploits the most self-serving of interests.

It is a great pity that the political system, instead of penalising racists and religionists of every stripe and colour, actually seems to reward them. But that is another story.

It is my hope that the economic crisis does not slam us to the pavement. If it does, however, the logical choices are either to fight it together or, if possible, to flee separately. I, for one, am opting for the former.

Another bright spot of economic crises is that they force us to become more realistic and pragmatic.

Over time, human societies tend to become muddle-headed and complacent. We start to take economic growth and prosperity as a given. Worse, we start to develop fanciful ideas about we can achieve and what we are capable of.

This is when all kinds of grandiose and unproductive schemes leap from the drawing board. In the name of national pride, some countries today (which shall remain unnamed) have constructed some of the world’s tallest and most technologically sophisticated ghost towns.

The countries today that have broken through the so-called “middle-income trap” have kept their noses to the collective grindstone. They have largely declined ostentatious displays of wealth, at least relative to their growing piles of cash.

More than anything, they work feverishly to gather economic intelligence and position themselves to exploit and benefit from it. They do not, as seems to be a habit here, work until dinner devising another expensive plan or policy that will largely remain unimplemented and, in many cases, even unknown.

Economic crises should compel us to vigorously dispense with bureaucratic red-tape, appreciate those who are knowledgeable and capable and hold those who do not perform accountable.

The third and final positive is that the financial crisis on the doorstep promises to correct the yawning gap in relative incomes.

One of the reasons why this economic crisis is being acutely felt is that the economic growth of the past decade has been accompanied by increasing income disparities. The difference between blue collar and white collar pay is at a historic high.

In Malaysia, the bottom 40% of households earns much less than 20% of total income in a year. By contrast, the top 20% of households earns a little more than half.

It is perverse to welcome an economic crisis because it makes the rich poorer because it also hurts the poor.

Democratically-responsive countries, however, would use the opportunity to address equity issues and ensure that economic growth and prosperity are not only for the elite.

The richest and most dynamic countries in the world are not necessarily those with the lowest tax rates or the smallest governments. They are the most socially cohesive and best governed. If the economic crisis can shepherd Malaysia in this direction, it may not be as bad as it turns out.

Steven Wong is assistant director general of the Institute of Strategic and International Studies (ISIS) Malaysia responsible for the bureau of economic policy studies.

Education industry expected to remain positive this year

2009-01-12T08:41:00.000+08:00

PETALING JAYA: Meg Tan, who has always dreamt of studying overseas, has had her dreams dashed by the current economic downturn.

After completing her Cambridge A-levels in a local private university college, she was looking forward to pursuing an accounting and finance degree in Britain.

Her parents, however, have decided for her to continue her studies locally instead – via a twinning or an external degree programme – to save costs.

“It is the prudent thing to do. We do not know how long the economic downturn will last and whether our jobs will be affected. We can always send her overseas for her last year if finances permit.

“The degree programmes in the private colleges here are pretty flexible in this aspect and our financial burden will be eased substantially as we save more than half of what we need to spend if we send her to Britain,” says Meg’s father Paul Tan.

With more families tightening their purse strings and letting their children study locally rather than abroad to save costs, the outlook for the private higher education industry is expected to remain positive this year, say industry players.

The Malaysian Association of Private Colleges and Universities (Macpu) executive secretary Ko Kim Hooi says the current economic downturn can be an incentive for students to look at twinning and external programmes as cheaper alternatives.

“The education industry is seen as a recession-proof industry as education is a necessity, so the outlook is still good for us.

“During the 1997/98 financial crisis, the local private higher education industry came up with various twinning programmes to help students save costs and this move boosted business as well,” he tells StarBiz.

Ko says more students studying locally will also help the country save on foreign exchange.

According to Monash University Sunway Campus pro vice-chancellor and president (Malaysia) Prof Robin Pollard, the university is showing above-normal application rates.

An artist's impression of Taylor's University College Lakeside campus

“So it appears as though some people prefer to study at home rather than face an uncertain future with higher cost commitments by going overseas,” he says.

Some may also decide to further their education rather than enter an uncertain job market, thus leading to a rise in enrolment even in a declining economy, adds Pollard.

“Of course, the hope is that when the economy improves, the additional learning will lead to benefits,” he says.

Moreover, most parents would have set aside education funds for their children since birth as education is an investment for the future.

“Most in the affluent market who can afford to send their children overseas, would have pre-planned and allocated money for their children’s education,” says Taylor’s University College vice-chancellor Professor Hassan Said.

He adds that Taylor’s has a strong line-up of new programmes in the pipeline for students, in addition to its own degrees such as engineering and architecture.

Taylor’s, which is one of the largest pre-university centres in Malaysia, providing British, Australian and Canadian education. has about 10,500 students this year, of which 18% to 20% are foreigners.

Vinayaka Missions University pro-chancellor Dr S. Sharavanan believes it is unlikely the economic slowdown will affect the higher education scenario, especially for bigger institutions offering professional programmes.

“As an investor, we see long-term prospects in the education sector in Malaysia beyond the current and anticipated economic slowdown,” he says.

An additional advantage of the economic slowdown can be an influx of foreign students into the country as Malaysia is seen as a relatively cheaper education hub compared with Britain, Australia and Singapore.

Currently, Malaysia has some 63,000 foreign students.

Very few education providers are listed on the local stock exchange. They are HELP International Corp Bhd, SEG International Bhd (SEGi) and Stamford College Bhd.

HELP International scored top marks for the financial year ended Oct 31, 2008 (FY08) with net profit jumping 22% to RM11.8mil compared with FY07.

SEGi’s financials also showed a marked improvement as net profit doubled to RM6.98mil for the nine months ended Sept 30 versus the previous corresponding period. Earnings were boosted by a gain from the disposal of a property in Kota Damansara, Selangor.

The Star-Elaine Ang

Speedy implementation of stimulus package crucial

2009-01-11T07:58:00.000+08:00

THE proposed RM7bil stimulus package, to be rolled out by the first quarter, should emphasise on speedy implementation of the projects, which include housing and facilities for schools and armed forces, economists say.

Of the total amount, RM4.7bil would be for small construction and development projects which include a RM1.2bil allocation for building low-cost houses and the rest for infrastructure, schools, police stations and army quarters.

The remaining RM2.3bil meant for human capital development will involve investment in strategic businesses, which have high value-add and impact.

In November last year, Deputy Prime Minister Datuk Seri Najib Tun Razak announced the RM7bil spending package to cushion the Malaysian economy from a deepening global credit crisis.

Under the plan, there was no new allocation of funds involved but the money would be rechannelled from savings from a reduction in subsidy following a decline in oil prices.

The Government had estimated the subsidies for 2009 would drop by RM10bil to RM11bil, of which RM7bil would come from fuel subsidies, based on crude oil forecast of US$70 per barrel.

Of the proposed RM7bil stimulus package announced recently, RM4.7bil will be for small construction and development projects which include low-cost houses

As a follow-up to the stimulus package, Second Finance Minister Tan Sri Nor Mohamed Yakcop announced on Wednesday the Government has another stimulus package in store.

What is crucial, economists say, is that the projects should be implemented quickly and the funds for the construction projects be disbursed fast, so that the expected multiplier effect on the broader economy can kick in without any delay.

Economists say it is essential that each ringgit invested in a project translates into demand for building materials, payments to the workers, hence promoting consumer spending.

It is imperative, they say, to ensure that there are no leakages from the funds to ensure effective implementation of the projects.

There is, however, a concern that the RM1.2bil allocated for low-cost housing may not have a significant effect, given the weakening private housing sector.

Another concern is that efforts to woo investors in the current uncertain climate may draw a muted response as the weakening global economy and slower growth in Malaysia could make potential investors more cautious.

TA Research expects the Government’s RM7bil stimulus package to work strategically with the Budget 2009 to cushion the economy from a deepening global financial crisis.

The introduction of measures such as voluntary reduction in employee’s EPF contribution to 8% from 11%; a reduction in personal income tax rate from 28% to 27% for top tax bracket and from 13% to 12% for those with tax bracket at RM35,000-50,000 are expected to free up more disposable income into consumers’ pockets to support consumer spending.

In addition, to encourage private investment, the research house points out that the Government has waived the requirement to seek Foreign Investment Committee (FIC) approval for real estate investment of above RM500,000 and removed import duties on cement, long iron and steel products.

As for the second stimulus package, analysts are not expecting a huge-scale plan as they say the Government is constrained by the Federal Government Budget deficit.

“The deficit in the Budget would be more of a concern which is expected to be 4.8% this year,” an economist says, adding that the second package is aimed at boosting the construction sector, promoting consumer spending and encouraging private sector investments in the manufacturing and services sectors.

As it stands, the Government expects revenue to fall to RM168.7bil (from RM176.2bil previously) on the back of a drop in oil revenue and tax collection this year.

According to TA Research, this indicates that the upcoming stimulus package, if any, “may be capped at RM10bil to keep the budget deficit at its comfort zone.

“This could have a modest impact on the economy. However, instead of stretching its budget, unless necessary, we expect the Government to align its resources toward rolling out those proposed high-impact 9MP projects,” it said.

The Star-Joseph Chin

Other black economy components

2009-01-11T07:57:00.001+08:00

Illegal foreign workers

ACCORDING to a study by Dr Jeyapalan Kasipillai, who is chair of the Malaysian Business Unit at Monash University Sunway Campus’ School of Business, construction is likely to be the sector in Malaysia that generates the highest hidden income.

Others on the list are the professionals, cuts and kickbacks from contracts, multinational companies, and smuggling and under-invoicing.

The building industry’s No.1 position may be partly due to its heavy reliance on foreign labour. The legal process of recruiting foreigners can be time-consuming and costly. As such, hiring illegal foreign workers is yet another unlawful cost advantage.

Other sectors with large numbers of foreign workers include plantations, manufacturing and services.

News reports say there are 2.1 million registered foreign workers in Malaysia and they make up 20% of the Malaysian workforce. It is anybody’s guess how many more foreigners are employed here without going through the official channel.

An indication of the extent of the problem is the fact that whenever there is an exodus of illegal foreign workers, either due to intense crackdowns or amnesties – certain businesses suffer.

This extends beyond the employers. For example, food companies and gaming operators have been known to blame the decline in the foreign worker population for slower sales.

Malaysia has thrice offered amnesty to illegal foreign workers in recent years. Some 140,000 foreigners went home in 1998, 290,000 in 2002 and 1.2 million in 2004.

Unlicensed moneylending

EVERYBODY knows about the Ah Longs, the loan sharks who charge excessive interest rates and who are not shy to use strong-arm tactics to get back their money.

Following a spate of cases of family tragedies and acts of intimidation linked to Ah Longs, illegal moneylending has been highlighted in the media last year and there were plenty of discussions about their role, the factors that encourage the business, and the ways to reduce their activities.

In 2007, the MCA Public Service and Complaints Department handled 520 cases of entanglements with unlicensed moneylenders. The figure would have climbed closer to 600 last year.

It has been argued that borrowers are forced to turn to loan sharks because the banking system cannot or will not help them. However, most people agree that unlicensed moneylending is a problem because of the lopsided repayment terms and the sometimes shocking loan recovery methods.

The lean economic times may dampen the moneylending business. Just like the bankers, the loan sharks will rather not lend if the risk of default goes up.

Prostitution

DESPERATION may see a rise in sex services industry. As it is, it is common to hear complaints about an increasing number of foreign women who come here to offer sexual favours, massage centres and karaoke lounges that offer extra services, and lively Internet discussions on the prostitution scene.

The perception is that if the economy worsens, livelihoods will be threatened and people may turn to offering sex for money.

Prostitution in Malaysia is not confined to seedy joints and back alleys. For one thing, mobile phones have made it easy for freelancers to operate without pimps and being tied to a place of business. The mushrooming of massage outlets has created another avenue.

The Internet has become a rich source of information, and knowingly or otherwise, the sex workers have expanded their reach because customers exchange details of the workers in online forums.

Economists see longest recession since World War Two

2009-01-11T07:48:00.000+08:00

WASHINGTON (Reuters) - The U.S. recession will probably be the longest since World War Two and could worsen without heavy government spending, according to a closely-watched survey of economists released on Saturday.

The Blue Chip Economic Indicators poll of 52 economists from top financial firms, major companies and academia found that most expected a tepid recovery to begin later this year, with growth returning to more normal levels in 2010.

A majority of those polled thought the recession would officially end in the third quarter of 2009, which would make this the longest downturn since World War Two.

However, more than half of respondents thought unemployment would peak no earlier than 2010, suggesting that economic pain may linger long after the recession is technically over.

For 2009, the consensus view was that real gross domestic product would fall 1.6 percent, gloomier than the previous month's forecast for a 1.1 percent decline. A drop of that magnitude would be the worst yearly performance since 1982.

Merrill Lynch held the most pessimistic view, predicting a 2.8 percent decline, while Fedex Corp was the most optimistic of the bunch, forecasting just a 0.2 percent dip.

"Much likely will depend on the relative success or failure of ongoing and prospective stimulus measures applied by government," Blue Chip's monthly newsletter said, adding that absent a stimulus package, "prospects would be much darker."

The consensus opinion was that the stimulus plan would total $778 billion, with estimates ranging from $635 billion to $900 billion. President-elect Barack Obama has encountered some resistance in Congress, but a large spending package is widely expected to be approved next month.

The economists seemed to conclude that government efforts to push down mortgage rates may stall. On average, they expected rates on 30-year conventional mortgages at 5.1 percent at the end of 2009, roughly where they are now.

They forecast that the consumer price index would fall 0.4 percent this year, which would mark the first year-over-year decrease since 1955 and no doubt deepen investors' worries about deflation.

The panelists were split on the outlook for the U.S. dollar, which some economists have warned may be headed for a steep slide this year as the U.S. deficit soars and the Treasury Department issues a record amount of debt.

Nearly 48 percent thought the trade-weighted value of the dollar would end 2009 higher than its current level.

Defining moments

2009-01-10T07:55:00.000+08:00

GIVEN its nature, it is no surprise that the black economy has many aliases. Because so much about it is unknown and because there are no universally accepted views on how it should be defined and measured, different people know it by different names.

Substitute black with any word in a long list – hidden, underground, subterranean, irregular, unofficial, submerged, parallel, informal, second, cash, traditional, shadow – and we are talking about largely the same thing.

Says Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business: “Essentially, the designation refers to those economic activities that should be reported or measured by the techniques and conventions currently used for measuring economic activity, but are not.”

He adds that these activities are concealed from the authorities because by doing so, those taking part make private gains. These gains may take the form of evaded taxes, non-compliance with costly regulations, income from prohibited and criminal activities, or fraudulent receipt of various government benefits.

However, some definitions exclude the criminal economy, which deals in illegal goods and services.

Arguably, the most widely used term is informal economy, which is interchangeable with the informal sector. However, the popularity of the latter has slipped of late, mainly because it suggests that the informality is confined to a specific sector of economic activity, rather than cutting across many sectors.

Also, “informal economy” is considered a better label because it supports the ideas that the formal and informal parts of the economy are linked, and that the informality encompasses enterprise and employment. English anthropologist Keith Hart claims to have coined the term. In a 1971 conference on urban unemployment in Africa, he argued that many unemployed Africans were in fact working for irregular and often low returns.

“The term I chose is negative, but polite; it names the unnameable, labelling the people by an absence, their lack of ‘form’, as understood by the bureaucracy,” he says in a 2006 paper.

In a 1972, an International Labour Organisation mission to Kenya discovered that the African nation’s traditional sector (comprising petty traders, small producers and casual jobs) had expanded to include profitable and efficient enterprises as well as marginal activities.

Hence, the mission decided that informal sector (instead of traditional sector) is an apt name for the range of small-scale and unregistered economic activities.

With these two developments, the economic and intellectual fraternities realised that the official data did not capture what went on in the black economy. More than three decades later, the experts continue to work on ways to improve the statistics on unregistered economic activities.

This is undoubtedly a major challenge, for how do you properly calculate that which is meant to be hidden?

The Star-Errol Oh

Good or bad – the argument persists

2009-01-10T07:53:00.001+08:00

FEW people think that the black economy is all bad. There are certainly some aspects that yield benefits. One pro-consumer view is that the existence of the black economy compels legitimate businesses to be more innovative and efficient so that their products and services are more appealing than those offered by the illegal competitors.

Then there is the macroeconomic defence that it provides employment, boosts economic activity and supports the formal economy.

Among the strongest proponents of the informal economy are those who believe in its capacity to improve the lives of the poor. One of these advocates is a global research-policy network called Women in Informal Employment: Globalising and Organising (WIEGO).

In a 2002 booklet titled Addressing Informality, Reducing Poverty: A Policy Response to the Informal Economy, the US-based WIEGO asserts that governments need to develop innovative and supportive policies that recognise the informal economy’s contributions.

WIEGO also contends that there are a lot of outdated and inaccurate views on the informal economy. Below is how it addresses this matter:

Some people are convinced that the black economy will help reduce poverty

The Old View: The informal sector is the traditional economy that will wither away and die with modern, industrial growth.

The New View: The informal economy is increasing with modern, industrial growth – accounting for more than half of the new jobs in Latin America and 80% of new jobs in Africa. In India, more than 90% of the labour force is in it. It is a feature of economic transition as well as capitalist industrialisation.

The Old View: It is only marginally productive.

The New View: Virtually everywhere the informal economy is efficient and resilient, creating jobs. It is a major provider of employment, goods and services for lower-income groups. It contributes significantly to GDP.

The Old View: It exists separately from the formal economy.

The New View: It is linked to the formal economy – it produces for, trades with, distributes for, and provides services to the formal economy.

The Old View: It represents a reserve pool of surplus labour.

The New View: Much of the recent rise in informality reflects the decline in formal employment associated with structural adjustment and global competition. It reflects not only the incapacity of formal firms to absorb labour, but also their unwillingness to do so.

The Old View: Most of those in the sector are entrepreneurs of illegal and unregistered enterprises seeking to avoid regulation and taxation.

The New View: It should not be equated with the criminal or illegal economy. It is made up of non-standard wage workers as well as entrepreneurs and self-employed persons producing legal goods and services, albeit through irregular or unregulated means.

Most entrepreneurs and the self-employed are amenable to, and would welcome, efforts to reduce barriers to registration and related transaction costs and to increase benefits from regulation. Most non-standard workers would also welcome more stable jobs and workers’ rights.

The Old View: Work in the informal economy comprises mostly survival activities and thus is not a subject for economic policy.

The New View: Informal enterprises include not only survival activities but also stable enterprises and dynamic growing businesses. All informal enterprises are affected by economic policies.

The Old View: It comprises mainly unregistered businesses.

The New View: It comprises not only informal enterprises but also informal jobs, including employees of informal firms, casual day labourers, and domestic workers as well as industrial outworkers and other non-standard workers in both informal and formal firms.

The Old View: It comprises mostly street traders and very small-scale producers.

The New View: It is made up of a wide range of informal work arrangements – both “resilient old forms” and “emerging new ones” (temporary and part-time jobs plus home-based work for high-tech industries). Its two basic segments are informal enterprises and informal jobs.

The Old View: It is unregulated.

The New View: Some informal enterprises – such as street vendors – are highly regulated, so much so that regulations are impossible to enforce or comply with and are often not clear either to local authorities or to vendors. Regulations become a tool of harassment and control, not a way to encourage economic contributions of street vendors. On the other hand, the employers of most informal wage workers often seek to avoid complying with labour legislation.

The Old View: Because it is unregulated and untaxed, many working in the informal sector are wealthy.

The New View: Average incomes are lower in the informal economy than in the formal economy. A higher percentage of people working in the informal economy are poor. Most of the wealthy in the informal economy are micro-entrepreneurs who hire others. The poorest are, typically, informal wage workers, especially industrial outworkers.

The Old View: To regulate the informal economy is unnecessary interference with its workings.

The New View: In today’s globalised economy, the active role of government is needed in the regulation of economic activities, including the informal economy. Clear rules and appropriate legislation are needed to regulate the relationship between governments, foreign investors, local enterprises, and the workforce.

The Old View: Street traders are to blame for crime in the inner cities.

The New View: Criminals are a threat to the business interests of both formal and informal enterprises.

The Old View: It does not contribute to economic growth.

The New View: It contributes substantially to the economy and needs to be encouraged and facilitated.

The Star- Errol Oh

THE recession in advanced economies will set the tone for global economic outlook in 2009. Of importance is the extent of fiscal pump priming and mone

2009-01-10T07:51:00.000+08:00

In the current global economic downturn, with people losing jobs and businesses suffering shrinking revenues, we may well see a more vigorous black economy

THE black economy is also known sometimes as the hidden economy or the underground economy, but in fact, a lot of it is right there in plain sight. Broadly, the term covers all unregistered and unregulated economic activities. Not all of these are sinister crimes that take place in the shadows.

Your favourite chicken rice stallholder, who has never filed a tax return, is part of the black economy. So are the illegal car workshop just down the road and the factory in Balakong that makes knock-offs.

And what about the handyman you turn to for household repairs, the accounts executive who earns some side income by giving tuition to your kids, and the professional who freelances outside office hours? If the Inland Revenue Board (IRB) knows nothing about the earnings, the trio come under the black economy banner as well.

The foreign worker you see going around housing estates on weekends offering to cut grass? Black economy too. And of course, how can we forget the pirated DVD seller who provides your weekly movie fix?

Dr Jeyapalan Kasipillai

Conventional wisdom has it that in the current global economic environment, with people losing jobs and businesses suffering shrinking revenues, we may well be seeing a more vigorous black economy. The perception is that in such desperate times, legal and ethical requirements are often likely to take a back seat.

Individuals may be forced to moonlight, join the ranks of the self-employed or work outside the law, thus avoiding the income tax net. Companies may cut corners by sidestepping rules and regulations in areas such as taxes and duties, licensing and registration, and employee benefits.

“Obviously, when the economy is tougher, it does give impetus to the pirates to promote their illegal wares to consumers,” says Shamsul Jafni Shafie, executive director of the Malaysian Federation Against Copyright Theft (MFACT), which represents the Motion Picture Association (MPA) and the Entertainment Software Association (ESA).

(MPA is the international counterpart of the Motion Picture Association of America, the lobby group of the American movie, home video and television industries. The ESA is a US organisation that looks after the interests of computer and video game publishers.)

Informal and unfair

Even in the industrialised countries, which typically have lower levels of unreported economic activity than those of the developing economies, there is anecdotal evidence suggesting that during a downturn, more businesses are compelled to operate in the informal sector.

Just ask the Irish Small and Medium Enterprises Association (ISME). Last August, chief executive Mark Fielding warned: “There has been a marked increase in black economy activities during the economic slowdown, with numerous companies complaining to ISME that they are being undercut by rogue operators.”

tan Sri Mohamed Yakcop

The association’s lament is just one view, but it is not a unique one. Many businesses paint themselves as victims of the black economy. For one thing, their illegal competitors do not comply with taxation and regulatory obligations, and therefore incur lower costs.

That gives them an unfair advantage over the legitimate businesses. Nowhere else is this more evident than in the industries that are levied sin taxes.

The alcohol, tobacco and gambling players pay such high taxes – it is the government’s way of discouraging these vices by making the products more expensive – that there is a huge incentive for others to enter the market through the back door.

It is almost routine for the listed cigarette manufacturers, numbers forecast operators and brewers in Malaysia to grumble about losing ground to smugglers, counterfeiters and unlicensed bookies.

The chairman’s review in British American Tobacco (M) Bhd’s (BAT) annual report 2007 talks about the impact of the surprise 25% excise increase in July 2007, which pushed up cigarette prices.

“As expected, consumers downtraded to cheaper alternatives in the form of illegal cigarettes, which reached an all-time high of 25%, a serious increase from 14% just three years ago,” wrote chairman Tan Sri Abu Talib Othman.

In Carlsberg Brewery Malaysia Bhd’s annual report 2007, managing director Soren Holm Jensen points out that only Norway has higher excise duties than Malaysia. He expresses hopes that the current rates in Malaysia will not rise for the next few years and argues that the steep taxes encourage smuggling.

Another group of industries that would love to see the black economy contracting are those that revolve around intellectual property (IP). In this case, perhaps the most unsavoury aspect of the illegal competition is that it gleefully piggybacks on the output of the legitimate businesses for free.

The pirates make gains from movies, music, software and books without having to create the works. The producers of fake goods merely copy and sell stuff. They need not fork out a cent for artistic input, research and development, and marketing. It is yet another unfair advantage.

The damage can be debilitating, like it has been for the music companies in Malaysia.

A wider impact

About a decade ago, they were selling about RM315mil worth of CDs. This has plummeted to an estimated RM60mil in 2008. After adding sales of about RM20mil through online and mobile channels, we are talking about a 75% plunge in revenue.

Recording Industry Association of Malaysia CEO Tan Ngiap Foo asks: “Which industry can withstand such a big drop. We are dying. How to create good music?”

In addition, counterfeiters inflict harm by diluting the reputation of the genuine products. The legitimate businesses risk losing a customer each time a consumer is misled into buying an imitation and gets lower quality than he has bargained for – over-the-counter medicines that lack efficacy, bags and shoes that fall apart soon after purchase, watches that do not tell time accurately, cigarettes with dodgy additives.

When businesses gripe about unjust competition from the black economy, they do not always get sympathy. After all, apart from crime, few facets of the black economy appear menacing and serious enough to warrant special attention from the authorities.

The current laws and enforcement measures ought to be enough, should they not? Why fret over petty traders and backyard industries that do not pay taxes and fees, when there are bigger fish to go after?

Also, it is hard for the public to grasp the idea that large and high-spending businesses such as the cigarette, beer and gaming companies and the Hollywood studios are at all troubled by illegal operators.

In addition, it is common for most folks to view IP piracy as victimless, and that the legitimate businesses are partly to be blamed for not lowering prices.

For that matter, there are the arguments that the gray market creates jobs and eases social tensions, and that if allowed to mature, the illegal operators will eventually join the formal economy.

However, this surely cannot be a zero-sum game. There are consequences when the black economy pummels those who conduct business above board, and the effects will ripple through their supply chains. The governments (and by extension, the public) will feel it as well.

Naturally, the industries affected by the black economy are rather persuasive in articulating this point.

The BAT website says the trade in illegal cigarettes may undermine the legitimate tobacco industry, reduce the demand for Malaysian-grown tobacco, reduce the potential amount of taxation that could be collected by the Government and make the tobacco market difficult to regulate.

Says Confederation of Malaysian Tobacco Manufacturers (CMTM) chief executive Shaik Abbas Ibrahim: “The underground economy expands at the expense of the legitimate economy. The Government loses revenue. It cannot fulfil its health agenda because of the availability of cheaper illegal cigarettes.”

Shamsul Jafni of MFACT argues that if video piracy goes unchecked, the output of the film and TV industries may decline, and this will hurt not only those in the creative communities, but also those working in the movie distribution line, including cinema operators and video stores.

The are social costs as well, he says, such as the fact that piracy and sale of pornographic videos often go hand in hand, and that there are links between movie thieves and organised crime.

He adds: “Piracy hurts all Malaysians. The pirates don’t pay tax on the illegal copies they distribute or sell, and thus they don’t contributing to the welfare of all Malaysians.”

The case for extra vigilance

Indeed, there are several big-picture reasons to justify governments taking a deeper interest in the growth of the black economy.

No.1 is that the informal sector is unrepresented in the official statistics and data. This may lead to information gaps and flawed policies.

Says Professor Dr Jeyapalan Kasipillai of the Monash University Sunway Campus’ School of Business, “The existence of the hidden economy has an important implication in determining macroeconomic variables, the functioning of the national economy and the implementation of economic policy.

“From this point of view, some observations of the hidden economy and knowing something about where it occurs is an extremely useful research exercise.”

When the Government decided to give a cash rebate to salve the pain from the substantial jump in petrol and diesel prices last June, it opted to rely on the Road Transport Department’s database to maximise the number of people who ought to receive the rebate.

Some observers say a better way to provide relief to the rakyat is to grant tax credits because this would be based on income levels. The snag is that the reach of the tax system is limited.

In an interview with StarBizWeek in November, Second Finance Minister Tan Sri Nor Mohamed Yakcop acknowledges that the idea is good but difficult to execute.

“We have about 12 million people who work. Only about two million are registered with the IRB, and over one million pay tax. So we have another 10 million of the working population who are not registered taxpayers,” he explains.

Here is a clear argument for doing more to ensure that individuals and businesses are included in the formal economy.

Another drawback of the black economy is that its players are usually small-scale, inefficient and relatively unproductive. They continue to be thus because it is hard for them to be weaned off the dynamics that comes with their illegal status.

More importantly, governments have to realise that factors such as red tape, burdensome taxes and regulatory requirements, and lax enforcement hasten the growth of the black economy.

There is an eternal conflict between the authorities’ instinct to let enterprise find its course and the cold logic that the black economy should be driven to the surface. It’s a taut interplay of many forces. Eventually, something has got to give.

An example: Lately, there has been talk that the copyright owners, frustrated by the rampant piracy, may push for Malaysia to be bumped from the US Trade Representative’s watch list (for IP rights protection and enforcement) to the priority watch list.

That will bring us a step closer to trade sanctions. Although this is a remote possibility at the moment, such a step will be a rude wake-up call for the Government.

The black economy should never have such power to make life difficult for law-abiding citizens.

The Star- Errol Oh

Economic outlook 2009: Hazy days ahead

2009-01-10T07:49:00.000+08:00

THE recession in advanced economies will set the tone for global economic outlook in 2009. Of importance is the extent of fiscal pump priming and monetary easing measures and how the combined action can help to bring the world economy back on its feet.

Against this backdrop, the prospects for the Malaysian economy will to a large extent depend on the strength of the domestic demand.

According to Malaysian Rating Corp Bhd’s chief economist Nor Zahidi Alias, the Malaysian government will remain vigilant and keep a close watch on how the global economy, particularly the US, evolves owing to the correlation between the US and Malaysian economy.

“The last time when the US succumbed to a recession in 2001, Malaysia’s growth almost screeched to a halt. We do not anticipate a quick recovery for the US economy as lethargic consumer sentiment will magnify weak business conditions. At the same time, we expect poor macro visibility to persist for Asian economies in 2009,” Nor Zahidi said.

MARC does not foresee the global economy plunging into a depression, as central banks around the world have been able to avoid the major mistake of restricting money supply that was made during the Great Depression in the 1930s, and with the strenuous efforts being made by the US government and the Fed to prevent the world’s largest economy from a total collapse.

Growth could decelerate more than expected

With huge stimulus packages and a Zero Interest Rate Policy (ZIRP) being implemented in the US, a mild recovery can be expected at the end of 2009 or the early part of 2010, MARC noted, adding that despite this, it remains cautious as possible risks may emanate from the weaknesses of other major economies, particularly the Euro Zone and Japan.

“Given the circumstance, we are penciling in a 2.5% GDP growth as our base case for 2009 while anticipating a 0.5% expansion in our worst case scenario,” Nor Zahidi said.

The downward pressure in export growth will also be magnified by sharp declines in prices of crude oil and crude palm oil, the country’s two major export commodities from record highs in 2008

Private consumption is our hope

According to MARC, the sustainability of domestic demand is the key assumption of its GDP forecast for 2009, in particular, the strength of private consumption will be a major factor in determining the overall performance of the economy over the next one year.

Should, for any reason, private consumption collapse in 2009, Malaysia’s GDP growth will drift away from MARC’s base case target of 2.5%. MARC anticipates a decline in the growth of private consumption to 4% in 2009 from an estimated 8.2% in the preceding year.

Private investment to slide on falling sentiments and rising risk aversion

Private investment will remain vulnerable when growth deceleration starts to gain momentum, Nor Zahidi said as two major factors – deteriorating business sentiment as evidenced by the decline in MIER’s business conditions index and rising risk aversion among investors – could cause a sharp decline in private investment.

Based on past experience, volatility in private investment increased immensely during periods of economic uncertainty, he added, citing an example in 2001 when private investment plunged by -15.7% from an expansion of 32.6% in the preceding year when the economy suffered a mild recession.

Similarly, in 1998 during the Asian Financial Crisis, private investment contracted sharply by 55.2% compared with a 9.4% expansion in 1997.

As for 2009, MARC anticipates private investment to stagnate after posting a 6.5% growth in 2008.”

Exports will bear the brunt of external weakness

Being an open economy, Malaysia will likely bear the brunt of slumping global demand, particularly for electrical and electronic products, MARC noted.

Highlighting major indicators such as the semiconductor book-to-bill ratio which has remained below unitary level since February 2007 and are expected to remain lacklustre following the rapid declines in major economies in the US, Eurozone and Japan.

With the global demand for PCs and cell phones expected to contract in 2009, Malaysia will likely experience a sharp decline in its exports of E&E products.

In addition, the downward pressure in export growth will also be magnified by sharp declines in prices of crude oil and crude palm oil, the country’s two major export commodities from record highs in 2008, despite some recent price gains on account of the tensed situation in Gaza.

With recession curbing the appetite for both commodities, MARC believes that real export will contract by 0.5% in 2009.

Inflation to moderate throughout 2009

On inflation, as measured by the CPI, MARC expects it to taper off in the coming months, mainly because of slower increases in transportation index and weaker consumer demand, although food prices will remain at elevated levels as “sticky downward” phenomenon persists.

Going forward, inflation rate is expected to moderate to an average of 5.0% in the 1H09 following slower consumer demand.

MARC envisages, stating that in the 2H09, however, year-on-year growth in CPI will likely decline drastically as the base effect sets in, leading to an annual average of 3.5% in 2009 from an estimated 5.5% in 2008.

Sovereign rating likely to stay unchanged

The current sovereign rating of A-/A3 from S&P/Moody’s for Malaysia is likely to be maintained in 2009 despite the many challenges faced by the country, Nor Zahidi opined, citing the commendable government debt-to-GDP ratio of 38.4% in the 3Q08 (2007: 41.6%) as a key reason.

One factor for any likely change in the rating outlook is a reversal in the declining trend of government debt to GDP, Nor Zahidi said, pointing out that “It is noteworthy that the downward trend in the debt ratio has continued since early 1990s.”

Nevertheless, given the high correlations between rating outlook and macro indicators such as growth, fiscal deficit, government debt level and current account balance, a change in the rating outlook by the big three cannot be ruled out, Nor Zahidi added, as conditions for a sharper-than-expected slowdown of the economy and higher fiscal deficit persists.

Fiscal policy remains expansionary

Up until the 3Q08, the government had been prudent in its spending. This is reflected in the budget deficit ratio which, in the first nine months, stood at only 3.1% of GDP compared with the full year target of 4.8%.

Unutilised allocations from 2008 carried forward to 2009 will give the government a bigger leeway to ramp up its spending in 1H09.

MARC foresees such a scenario will unfold as the recent RM7bil worth of stimulus package only represents about 1% of the country’s nominal GDP.

Although the fiscal deficit is expected to remain large in 2009, MARC does not foresee any major obstacle in financing the fiscal deficit as the country’s bond market should remain supportive of the growing fiscal deficit.

Monetary policy will likely ease further

In terms of monetary policy, MARC believes that the BNM will be flexible in using its tools to complement the fiscal measures in supporting the economy.

With declining inflationary threat, BNM will have more room to ease its monetary stance should global economic weakness continue to drag Malaysia’s economic growth, he said.

Against such a backdrop, MARC anticipates the overnight policy rate (OPR) to be reduced by a total 50 bps, bringing the key rate to 2.75% by the 1H09 which is expected to put additional downward pressure on the ringgit particularly against the US dollar in the near term.

As a result, MARC anticipates the ringgit to depreciate between RM3.55 and RM3.70 against the US dollar in the 1H09 but in the second half, the ringgit’s movement will likely hinge on the extent of the recovery of the Malaysian economy.

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Zeti: Resilience and capacity to manage shocks key to surviving crises

2009-01-10T07:00:00.000+08:00

GOING forward into the future, the world is likely to continue to be plagued by financial crisis. History has shown that there has been more than a hundred distinct banking crisis in the recent two decades.

While the trigger factors for such financial crisis may be different, for most, there was a general loss in confidence, disruptions in the financial intermediation process and a general downward spiral of asset prices. While it is argued that what is needed is the reform of the international financial architecture, for any individual country, the prospect of surviving such a crisis is not only about building resilience, but also having the capacity to effectively manage the crisis.

Such a crisis was experienced in the Asian region ten years ago. Several parallels can in fact be drawn from the Asian financial crisis and the current financial crisis. In both cases, the crisis followed a period of strong growth, rapid credit expansion and rising asset prices.

Prior to the Asian crisis, there was indiscriminate lending by the banking sector. Similarly, the current financial crisis originated from imprudent lending practices and excessive risk taking that resulted in the formation of asset bubbles. In Asia, domestic credit rose to unsustainable levels, reaching 180% of GDP. In the United States, the ratio was 240% in 2007.

In both cases, there was a lack of capacity to manage the increased risks associated with the transformation of the financial sector. For Asia, the increased liberalisation was not accompanied by the necessary financial infrastructure or the capacity to manage the associated increased risks. In the current crisis, financial innovation occurred at a pace that outstripped the ability to manage the associated risks with such innovations. This resulted in an underestimation of the risks involved and the capital buffers that were necessary.

The ensuing turmoil in the financial markets resulted in illiquidity in the markets and the subsequent breakdown in their functioning. As the crisis advanced, financial stress and insolvencies emerged in the financial sector. In both crises, this precipitated a pull back in lending activities and thus the damaging consequences on the economy.

In the Asian financial crisis, the economic contraction was severe, in the range of 7% to 13%.

In the current financial crisis, the spillover effect on the economy has yet to be fully felt. The Asian crisis, however, ran its course in a short period of time. Asset prices and the foreign exchange (forex) rate plunged to their lows following significant market adjustments that occurred. The policy focus during the crisis was on restoring the functioning of the intermediation process to promote economic recovery. For most countries, growth resumed within 18 months from the start of the crisis.

The important actions that need to be taken in managing a financial crisis seem to be already apparent, as evidenced by the series of policy announcements that have been made by the respective governments, the multilateral agencies and the various international groupings. The policy actions have included providing the massive liquidity injections into the system, removing the troubled assets from the portfolio of financial institutions, strengthening their capital position and providing depositors protection. In addition, the implementation of monetary and fiscal stimulus also promoted economic recovery.

These were in fact among the series of measures that were implemented during the Asian crisis. The experience with these measures may not produce similar outcomes in containing the severity of the current global financial crisis and the degree to which confidence is restored and conditions normalised.

Vital measures from Malaysia’s experience

Several key elements are vital to achieve the desired outcomes. From Malaysia’s experience, measures implemented at the early stage of the crisis raises the prospects for restoring stability and the resumption of lending. Such early and pre-emptive action requires anticipation of the trajectory of the crisis. Reacting to developments or delayed action diminishes the effect of the measures to contain the deterioration. It will also raise the cost of the crisis.

A second key element is that the response needs to be comprehensive. Having clarity of the objectives and being focused on the necessary actions are important in an environment in which the demands are for addressing everything that has gone wrong.

In Malaysia’s experience, institutional arrangements were put in place early to restore lending activities by the banking sector. This involved the establishment of an asset management corporation to carve out the bad assets from the banking system. The assets were for the most part acquired at a discount that ranged 40% to 60% of the value of the asset. The asset management corporation managed the assets to enhance its value.

On the disposal of the assets, any return in excess of the value at which it was acquired was shared with the banking institution. A special-purpose vehicle was also established, for the recapitalisation of affected banking institutions. To avoid foreclosures of borrowers at the margin, a corporate debt restructuring committee was also formed to restructure loans.

Vital to this process was the Government machinery to facilitate the establishment of these institutional arrangements. Within six months of the course of these measures, lending resumed and economic recovery commenced. Having the supervisory function residing at the Central Bank also facilitated the swift action that was taken.

Massive liquidity was provided during this period. The implementation of selective forex controls that were put in place more than one year into the crisis drew significant attention at the time. The purpose of the controls was to stabilize the forex market. This was important given that severe disruptions in this market did not abate after more than a year into the crisis. It must be recognised, however, that while the stability it provided was important, on its own, it would not have resolved the crisis. It was the comprehensive set of measures involving resolution and growth supporting policies that resolved the crisis.

Perhaps a significant difference in the management of the crisis in Malaysia was the adoption of a more pragmatic approach. Relying on ideologies that the market mechanism would eventually restore stability and equilibrium did not take into account the irrational market behaviour and herd instinct that occurs during a crisis. Deviating from the conventional approach may thus be necessary. Such policies however, need to be undertaken with a high degree of transparency.

Disclosure and communication in these circumstances was critical. Regular information was therefore provided, sometimes on a daily basis. Information was given on all measures that were taken. Extensive communication channels with the public, the industry, the exporters, the corporate sector and foreign investors were maintained to promote understanding of the developments and the policies.

Leadership in crisis management is also important. In Malaysia, a National Economic Action Council was established and chaired by the Prime Minister. For several months it met daily. These meetings involved the private sector, professionals and technocrats. It provided the potential for coordination, consistency and comprehensiveness of the policy actions. Another element was the key role that was given to professionals and technocrats which raised the prospect for achieving the desired results and avoided actions that were based on political considerations.

Ten years hence since the Asian crisis, structural transformation has taken place in most of the economies and financial systems in Asia. This has enhanced our economic flexibility to adjust to external shocks. In addition, financial reforms have also been aggressively pursued. Surveillance and supervisory oversight have also become more rigorous and robust. A more recent development, is the deepening of regional surveillance and cooperation. This has also been reinforced by an integrated regional crisis management framework that may be activated in the event of any potential destabilising financial developments in the region.

In this global environment of increased inter-dependence, the prospect of future shocks that could translate into a financial crisis cannot be ruled out. To deal with this vulnerability, the strategy is to further strengthen the foundations and thus the resilience and capacity to manage such shocks. This is the approach to be pursued to ensure sustainability through episodes of such financial turmoil.

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The Star-Tan Sri Zeti Akhtar, Gavenor of Bank Negara

Don: Better knowledge of Islamic financing needed

2009-01-08T08:02:00.000+08:00

KUALA LUMPUR: The lack of understanding of Islamic financing needs to be addressed so that people are not confused and misguided, says International Centre for Education in Islamic Finance (Inceif) chief academic officer/dean Prof Datuk Dr Syed Othman Alhabshi.

He said even some employees who worked at Islamic banks couldn’t fully understand the concept of syariah-compliance.

“We need to address this matter so that everyone will fully understand and have a clear picture of Islamic finance,” he told a press conference yesterday.

Syed Othman Alhabshi

Syed Othman said as the world was currently facing a financial crisis, Islamic banking could be an alternative for the conventional banks to regenerate their business.

“I’m not saying that Islamic banking is the only solution for the current problems faced by the conventional banks. However, if this system can be a vehicle or a better solution to help them, why not,” he said.

Inceif, in a joint partnership with Britain’s University of Reading, is offering a 12-month masters course on investment banking and Islamic finance. The first intake, which commenced in September, is one of the steps taken to produce more experts in the field.

At the event yesterday, University of Reading director of the ICMA Centre Professor John Board said whatever banking system being used by the banks, at the end of the day, it was all about the attitude of the people.

“If people are greedy, whatever system you use would surely collapse as what we can see now from the global financial crisis,” he said, adding that if the Islamic banking system could become a good vehicle to uplift the financial industry by raising more capital to run businesses, there should be no objection to implementing the system.

Board said as more conventional banks wanted to offer Islamic banking and finance, it was important to educate the professionals in the banking line to master the system.

The Star

Pre-emptive action to mitigate effects of downturn

2009-01-03T15:43:00.000+08:00

In an interview with Business Times, Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz says at prevailing rates, there is flexibility for further monetary stimulus to support the economy.

QUESTION: How vulnerable is Malaysia, at this point, to the global financial crisis?

Answer: Despite the increased volatility in the global financial markets, Malaysia's financial system remains solid and resilient.

The impact on the financial system is manageable - with low exposures to foreign currency denominated assets, a well-capitalised and profitable banking system, ample liquidity, and a stress test which reaffirms the capacity to withstand the higher risk levels.

The global crisis, which has turned into an economic crisis, is likely to be more prolonged than earlier envisaged and the recovery will likely be delayed as impact on the rest of the world is likely far-reaching.

Asia, including Malaysia, will be adversely affected but likely to record positive growth. Malaysia's economy will record a positive growth due to current account surplus, continued financial intermediation, strong foreign reserves and a resilient banking system.

Q: The Malaysian economy is not ailing but there are growing fears that Bank Negara Malaysia and Ministry of Finance could be underestimating the severity of the downturn which would adversely impact our growth. Your comments Tan Sri Governor.

A: We recognise the severity of the global problem and impact on Malaysia.

Indeed, as early as in the July (2008) monetary policy statement, we already stated that the Malaysian economy was expected to experience a more challenging environment in 2009.

As the global problems deepen, the impact on Malaysia is expected to be more substantial.

The government came up with the RM7 billion stimulus package while Bank Negara eased the monetary policy in November 2008 - all these measures are aimed to support domestic demand and avoid a more severe economic downturn.

Given the uncertainty on the depth and length of the global slowdown, Bank Negara has identified three scenarios on the outlook of the Malaysian economy and is developing policy responses for each scenario.

Q: Malaysia's international reserves have been on a declining trend. Is this a concern?

A: In the first half of 2008, our international reserves increased by about US$25 billion, raising it to US$125.8 billion. During this period, the exchange rate appreciated to RM3.15 against the US dollar.

A major factor explaining this trend was the inflow of short-term capital.

The decline in reserves is mainly due to a reversal of short-term capital flows following the deleveraging process by investors following the financial distress experienced in the US and in Europe.

In the first quarter alone, the inflow of short-term capital amounted to about seven per cent of gross domestic product (GDP). Such short-term capital does not represent a permanent part of our reserves. Reversals may happen at any time.

Our high level of reserves, which are more than seven times retained imports and more than three times our short-term debt, continue to be well-positioned to cope with such out flows.

The heaviest outflow occurred in October (2008) and has since continued to subside.

Our reserves are still high for a country like Malaysia.

Q: There is the risk of Malaysia's current account surplus weakening in the second half of the year, to below 16.7 per cent of the GDP. What happens in a situation when it (C/A surplus) falls below 10 per cent in the coming months?

A: Even if we were to apply a significant contraction in exports under a more extreme scenario for 2009, Malaysia's current account balance would remain in surplus at about 10 per cent of GDP (or RM68.8 billion), which is still very large by global standards.

The trade surplus is expected to remain sizeable as moderation in exports would be mitigated by slowdown in imports. About 70 per cent of Malaysia's imports are intermediate goods, which are mainly used as inputs for manufactured exports. Therefore, any decline in exports would also lead to import compression.

Malaysia's trade linkages with the rest of the world have become more diversified. Exports to Asia account for about two-thirds of Malaysia's total exports. This is noteworthy as parts of the Asian region are expected to continue experiencing positive economic growth in 2009.

Q: While Malaysia can handle a slowdown in 2009, brewing external risks could mean that Malaysia may have to lower its growth target again. What could be the engine of growth with a backdrop of a weakening external demand as well as a weaker domestic demand? Are current low interest rates enough to support the economy?

A: We are not projecting a recession for 2009. Although domestic demand is expected to moderate, it is still expected to be able to contribute to GDP growth in 2009. Key to achieving this is sustained private consumption and increased government expenditure.

Private consumption is supported by factors such as that there has been no widespread unemployment and that there has been continued access to financing. The lower inflation will also add to purchasing power. However, should external conditions deteriorate further, the government and the central bank have the flexibility to provide further stimulus to our economy.

Factors that will support private consumption in 2009 are:

* No widespread unemployment;

* Growth in income;

* High level of savings;

* Availability of credit;

* Lower prices that will add to purchasing power; and

* Fiscal stimulus package.

On the supply side, the manufacturing sector is expected to be most affected by the weaker external demand. While other sectors are expected to moderate, overall growth is expected to remain positive.

Agriculture will be supported by expansion in food production and sustained growth of palm oil and rubber production.

Growth in the construction sector will benefit from the stimulus package and the infrastructure projects under the Ninth Malaysia Plan while there will be continued expansion in crude oil production and consumption activities in the services sector.

Given the heightened downside risks to growth and diminishing inflationary pressures, Bank Negara reduced the Overnight Policy Rate (OPR) and Statutory Reserve Requirement (SRR), as a pre-emptive measure aimed at providing a more accommodative environment to ensure domestic demand is sustained and supportive of growth.

Bank Negara will undertake the appropriate monetary policy action and respond pre-emptively to mitigate a severe economic downturn. At prevailing rates, there is flexibility for further monetary stimulus to support the economy.

Q: Given that the services sector has been a significant contributor to Malaysia's economic growth, will the decline in tourism numbers by nine per cent (in 2009) have a significant impact in the services input in the real GDP?

A: The services sector, which has been the key driver of growth, has been largely domestically driven. As such, the anticipated decline in tourism activity is not likely to have severe impact on the services sector.

The services sub-sectors that are influenced by tourism are wholesale and retail; accommodation and restaurants; and transport and storage (18 per cent of GDP). However, the contribution of tourism to these sub-sectors is very small.

Although we do foresee some moderation in domestic demand, we believe that the services sector on the whole will remain resilient, and will be the key sector to support GDP growth in 2009.

Economy looms as China, US celebrate relations

2009-01-03T15:15:00.002+08:00

Crisis may be the biggest strain yet on their web of ties

China and the United States should be kicking off 2009 with a celebration of three decades’ hard work building one of the world’s most crucial diplomatic relationships.

Instead the superpower and the rising power are fighting their way through an economic crisis that may be the biggest strain yet on the web of ties they have created.

Following a ground-breaking visit by former US President Richard Nixon in 1972, the United States switched diplomatic recognition from democratic Taiwan to Communist China on Jan 1, 1979, recognising “one China” and marking Beijing’s emergence from diplomatic and economic isolation.

It smoothed and accelerated reforms that would transform China from a Cold War backwater into the world’s fourth largest economy at astonishing speed.

“This is a very tough thing to manage because of historical precedents of rising powers and the reactions they provoke from other countries,” said Susan Shirk, a professor at the University of California San Diego and former US diplomat.

“Historically, rising powers almost always mean war.”

In the search for a relationship that will be the cornerstone of peace, they have weathered an embassy bombing and a spy plane crash, a military crackdown on pro-democracy protests, and more recently, tensions over trade and the value of China’s currency.

But US President-elect Barack Obama has vowed to put more pressure on China over export incentives and managed currency, and upbraided Beijing over human rights abuses and failure to enforce labour, environment and product safety standards. Analysts say a more aggressive US stance, particularly on trade, risks testing delicate relations amid rapidly rising unemployment and a gloomy economic outlook in both countries.

China’s leadership may be facing one of its biggest challenges since the Communists won the civil war in 1949. Struggling with unemployment amid the global economic crisis, short cuts to help Chinese products compete abroad, like subsidies and tax reductions, look increasingly attractive.

In the United States, protectionist calls are mounting as house prices tumble and pension savings collapse, but officially Washington trusts that mutual self-interest will keep either side from lashing out, said US Ambassador to China Clark Randt.

“The Chinese have understood clearly that they are our biggest creditor,” Randt told Reuters, referring to vast US debt accumulated in China’s coffers after years of trade surpluses.

“They are rooting for us, they hold a lot of dollars and they understand that we are in the same boat. If our economy is in trouble, they are in trouble.”

Political chasm

But the efforts needed to keep both sides talking as their economies fray risk being undermined by a basic mistrust, between advocates of democracy and communism.

“The fundamental problem, the challenge, is the real and perceived difference in each country’s political system,” said Wenfang Tang, political science professor at Iowa University.

Washington was once embraced as an ally and inspiration, when China began its slow recovery from Maoist policy experiments.

“In the 80s there was enormous naivety and a view of America as a very modern, democratic, corruption-free, intellectually vibrant epitome of what an advanced society looked like,” said Kenneth Leiberthal of the Brookings Institute.

Disillusionment for the Chinese government elite came in 1989, when they realised that Washington was prepared to openly support protesters in Tiananmen Square who sought their ouster.

For many ordinary Chinese, doubts set in a decade later, when Nato bombed the Chinese embassy in Belgrade during the war against Serbia. Washington said it was a mistake, caused by out-of-date maps, but China was unconvinced.

And good ties have not always been an easy sell in Washington either, particularly after the fall of the Soviet Union removed the bitter enmity that first united Washington and Beijing.

Repairing the Sino-US relationship is increasingly seen as one of the few clear foreign policy successes of a Bush administration bogged down in Iraq and Afghanistan.

Flexing muscles

With a growing economy and rising political clout, China has found big business increasingly tangled with strategic concerns, despite a doctrine of non-interference in other nations’ affairs.

Its firms are courting resource producers in Africa and have ventured far into Latin America, traditionally Washington’s “backyard”. Beijing says its interests are purely commercial, but strengthening ties with partners like top US oil supplier Venezuela have inescapable political implications.

China has also been discreetly flexing its military muscle with more peacekeepers overseas – from Haiti to Darfur – and its navy has joined an international crackdown on Somali pirates.

Nervous as these projections of power may make some hawks in Washington, Taiwan is the most volatile part of the relationship.

China has claimed self-ruled Taiwan since 1949 and vowed to bring the island under mainland rule, by force if necessary.

China long ago gave up regular shelling of Taiwan-held islands, and bilateral ties improved dramatically after the election of President Ma Ying-jeou, who opposes provoking China. But many in Taiwan still seek a formal declaration of independence from China and enough suspicion remains on both sides to make it one of the most dangerous flashpoints in Asia.

“The ‘Taiwan independence (movement)’ could destroy peace in the Taiwan Strait and severely damage the prosperity and stability of the Asia-Pacific region,” Tao Wenzhao, from the Chinese Academy of Social Sciences, wrote in a recent commentary. — Reuters

China, India and Russia factories slash jobs and output

2009-01-03T15:15:00.001+08:00

Factories in China, India and Russia slashed output and jobs at a record pace in December in another sign the world’s largest emerging markets were wilting under the recession that has gripped most industrialised nations.

Factory activity surveys in the United States and Europe yesterday are expected to show steeper contractions in December, as demand collapses at home and crushes growth in many of the developing nations that rely on Western consumption.

Economists and policymakers had seen China, Russia, India and Brazil, with their vast markets and rising wealth, as the engines of growth that could save the world from recession. Those hopes are fading fast and forecasts are getting gloomier.

For Chinese factories and policymakers looking to contain an economic slump, there was much cause for pessimism.

Manufacturing activity fell for a fifth month as the global financial crisis bludgeoned demand for exports, the Purchasing Managers’ Index (PMI) showed yesterday.

“With five back-to-back PMIs signalling contraction, the manufacturing sector, which accounts for 43% of the Chinese economy, is close to technical recession,” Eric Fishwick, head of economic research at CLSA.

PMIs in Russia and India offered similarly grim readings with the headline, employment and output indices sinking to record lows. — Reuters

The contraction in Russian manufacturing is deeper than the the slump during the 1998 financial crisis, which saw bank collapses and a default on sovereign debt. In India, factories cut jobs for the first time in the survey’s 3½-year history to reduce costs.

In all three countries, factories reported slumping export orders with recession chilling demand in the their largest markets — the United States, Japan and Europe. — Reuters

Singapore’s recession deepens

2009-01-03T15:14:00.000+08:00

Government warns economy may shrink further by 2% this year

Singapore’s recession deepened in the fourth quarter as the global financial crisis took its toll on manufacturers and the services sector, and the government warned the economy may shrink by as much as 2% this year.

The economy contracted at a seasonally adjusted, annualised pace of 12.5% during the October-December quarter, following a revised 5.4% decline in July-September, data showed yesterday.

It was the third consecutive quarter of decline in gross domestic product and was worse than the most pessimistic forecast of nine economists polled by Reuters which was for a decline of 8.6%.

The government now expects Singapore’s GDP to come in between a decline of 2% and growth of 1% in 2009, lower than the previous forecast of 1% to 2% made in November.

But some economists are predicting an even deeper recession.

“If we are correct, 2009 will mark the most severe recession in Singapore’s history, surpassing the Asian Financial Crisis (when GDP contracted 1.4%) and the 2001 tech recession,” said Citigroup economist Kit Wei Zheng, who predicts the economy would shrink 2.8% in 2009.

“This sets the stage for more aggressive fiscal stimulus on the Jan 22 budget, and further monetary easing by MAS (the Monetary Authority of Singapore) in April, or even before.”

Shipping vessels at the PSA International's Pasir Gudang terminal in Singapore. - Reuters

The economy grew 1.5% for all of 2008, compared with 7.7% in 2007.

From a year ago, fourth quarter GDP fell 2.6% following a drop of 0.3% in the third quarter, advance estimates from the Ministry of Trade and Industry showed.

Meanwhile, Singapore private home prices fell for a second consecutive quarter in October-December according to advance government estimates, hurt by a drop in investor sentiment amid the global economic downturn.

The Urban Redevelopment Authority said yesterday its private residential property index declined 5.7% in the fourth quarter from the previous three months, worse than the drop of 2.4 % in July-September. — Reuters

Gold prices dip

2009-01-03T15:13:00.002+08:00

NEW YORK (AP) - Gold prices edged lower in light post-holiday trading Friday as the dollar showed some strength against other major currencies.

Despite the slight dip, analysts were quick to note that the metal continues to show underlying strength as investors harbor fears of rising inflation.

George Gero, vice president at RBC Capital Markets Global Futures in New York, attributed Friday's decline in gold to some minor profit taking and short covering ahead of the weekend.

"Most people were more interested in book-squaring today, and not having positions be carried over for the weekend,'' he said.

Gold prices have been trending upward after dropping in mid-November due to heavy selling by hedge funds and other large investors.

Though still far from the $1,033.90 record high reached in March, gold managed to end the year up 5.4 percent.

"Looming on the horizon is a tremendous increase in money supply, which could in many countries weaken currency, so there has been underlying support for gold,'' Gero said.

Gold is often used as a hedge against inflation and a weak dollar, but it is uncertain how the U.S. currency will fare in 2009.

While inflation is a concern now that the Federal Reserve has sent U.S. interest rates about as low as they can go, central banks across Europe and Asia are also eyeing interest rate cuts.

This would further undermine their own currencies and potentially give the greenback a boost.

On Friday, the dollar rose against the euro and the British pound, but fell against the Japanese yen.

Gold for February delivery fell $4.80 to settle at $879.50 an ounce on the New York Mercantile Exchange.

Other precious metals prices advanced. March silver rose 19.5 cents to $11.49 an ounce, while March copper futures rose 5.1 cents to $1.4610 a pound.

On Wall Street, investors brushed off a weak report on manufacturing and sent stocks higher in light trading.

The Institute for Supply Management said Friday that its manufacturing activity index fell to the lowest level in 28 years in December - much worse than economists had expected.

But the reading did little to discourage investors, who have recently been looking past downbeat 2008 data and instead looking ahead for signs that the recession isn't worsening.

The Dow Jones industrial average rose 258 points to 9,034, its first close above 9,000 in two months.

Meanwhile, bond prices fell as investors bought up riskier assets.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.41 percent from 2.22 percent late Wednesday.

Energy prices rebounded on the Nymex, boosted by expectations that OPEC will carry out its largest production cut ever.

The Organization of the Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months.

Ongoing violence in Gaza also sent prices higher.

Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel.

One year ago Friday, crude prices surpassed $100 a barrel for the first time - beginning a climb that would peak at more than $147 a barrel by July.

Prices have since tumbled on fears of waning global demand amid a deepening recession.

In other Nymex trading, gasoline futures rose 3.15 cents to $1.0935 a gallon, while heating oil rose 3 cents to $1.472 a gallon.

Grain prices mostly rose on the Chicago Board of Trade, boosted in part by the climb in crude prices.

March wheat futures inched up 0.25 cent to $6.11 a bushel, while corn for March delivery rose 5.25 cents to $4.1225 a bushel.

March soybeans slipped 3 cents to $9.77 a bushel.

How to make unit trusts work for you

2009-01-03T15:13:00.001+08:00

MANAGING finances is a very personal thing, and financial consultants and planners will tell you that different people have different risk profiles and criteria where managing their finances and investment is concerned.

Investors today have a number of financial products to choose from to fit their risk profile and criteria for returns and one of the more straight-forward ones is the unit trust fund.

A unit trust fund is an investment trust formed to invest in a portfolio of securities in which retail investors can participate by buying units of a fund. The trust fund is managed by professional fund managers.

However, investors may be put off by unit trusts due to the current turmoil in the equity and financial markets. Furthermore, unit trusts require long-term investment and patience, which at this point is a hard-sell because of the volatility of the markets.

In fact, according to the Federation of Malaysian Unit Trust Managers’ (FMUTM) website, the industry has seen its net asset value (NAV) drop by 20% over the year to RM135bil as at Oct 31, 2008.

However, the FMUTM says concurrent with the drop in the NAV, the industry NAV compared to Bursa Malaysia’s total market capitalisation increased to 20%.

This may be due to the KLCI having dropped 39.84% year-to-date because of the impact of the economic slump and the financial crisis that took a turn for the worst in mid-September when Lehman Brothers Holdings Inc collapsed and American International Group Inc needed a bailout.

A worker is seen carrying a box out of the US investment bank Lehman Brothers offices in the Canary Wharf district of London after it collapsed. – Reuters

Several financial planners StarBizWeek spoke to recently counselled that dollar-cost averaging or investing a fixed sum over a long period is the trick to reducing exposure to risk rather than making a single large investment.

The idea behind this is that the fixed sum can be spent on investing in a portfolio regardless of the price because the investment will eventually balance out in terms of cost.

These experts have heard stories of how investors have put all their money in one basket, thereby violating the most basic of investment rules, which is to diversify into different asset classes and also to diversify within a particular asset class.

In this respect, unit trust funds are generally divided into three types – fixed income, balanced/diversified and equity unit trusts.

“It all falls back on why you want to invest,” CTLA Financial Planners Sdn Bhd managing director Mike Lee said. “If you feel that the 5% dividend on average that you’re getting from the Employees Provident Fund (EPF) is not enough, than you may want to take a bit of a risk by taking money out from the EPF and invest long-term in unit trusts,” he says.

Lee says the issue is what type of unit trust to invest in. “At this point, due to the volatility of the equity markets, it is better to put more money in fixed income or balanced trust funds. I would advise to put at least 80% into fixed income,” he adds.

Lee says another way to secure a fairly stable income but that involves more risk is to invest in a mix of unit trusts where fixed income make up half the basket, balanced unit trust funds made up 30% and equity unit trusts made up another 20%. “This way you’ll be able to get a gross return of 7% to 8%, which is fair considering the fact that the KLCI is down by nearly 40%,” he says.

Lee says investing in the mix will allow for some risks and conservatism without speculating or trying to time the market. “At the same time you don’t want to miss the boat,” he says.

Gary Low, a senior financial consultant with Great Eastern Life Assurance (M) Bhd, says Malaysians in general prefer to invest in short-term, high-risk products that give higher returns than conventional savings such as fixed deposits or EPF dividends.

“You need to have invested at least five years before you can see any meaningful returns,” he says, adding that in more financially-matured markets, people invest for at least three years.

Low says a lot of people here are aggressive in their investments even though they say they are conservative. “These investors, if they had put their money into equity funds, would have lost it since the KLCI is down up to 40%,” he says.

“It’ll take them the next five years just to break even assuming an average 8% return on investment,” Low points out. His advice is to put 80% into fixed income and the rest into balanced trust funds. “Lets wait and see what next year would be like,” he says.

Strengthening CPO prices

2009-01-03T15:12:00.001+08:00

Datuk Peter Chin Fah Kui

The Plantation Industries and Commodities Ministry and the Malaysian Palm Oil Board (MPOB) came under heavy criticism lately from planters badly affected by the sharp fall in crude palm oil (CPO) prices. Planters are urging the Government to consider relaxing the payment of MPOB cess, CPO sales taxes and regulating the high fertiliser prices. Minister Datuk Peter Chin Fah Kui talks at length on the latest strategies and measures taken by his ministry.

The crux of the local planters’ problem is the sharp fall in CPO prices amid historically high palm oil inventory at about 2.3 million tonnes. How will the Government address this issue?

At this juncture, the ministry believes that palm oil prices could be strengthened through supply management activities. The immediate measures undertaken to stabilise prices and improve demand for palm oil include the RM200mil oil palm replanting incentive scheme, Malaysia’s biofuel implementation and Malaysia-Indonesia joint-cooperation particularly on the biofuel programmes.

We are also seeking assistance from independent power producers to use CPO as their energy feedstock.

I believe it is incumbent upon the ministry and the Government to make sure strategies that can influence the CPO price are put in place to ensure price will not slide and hit the bottom like in 2001, when it trades at RM800 to RM900 per tonne level.

In 2008, I think Malaysia’s early intervention i.e. announcement on the replanting and implementation of biofuel does help to influence the CPO price.

In the case of biodiesel, despite Malaysia having the capabilities to implement it years ago, we had to re-consider because at that point of time CPO (raw material for biofuel) was too high.

With CPO currently trading RM1,500 to RM1,600 per tonne, the Government will still need to subsidise “a bit” on the biodiesel initiatives which we will tap from the MPOB cess under the palm oil price stabilisation fund.

If the crude oil prices remain at current lows, then we will have to subsidise our biofuel initiative quite a bit. But if crude oil move up to US$65 to US$70 per barrel, then Malaysia will be in a comfortable position with its biofuel drive.

What are the new strategies in the pipeline for 2009?

Our short term strategy going into 2009 is about stabilising the CPO prices, of which we have undertaken via new measures like replanting, biofuel intiatives and the availability of fertiliser at not-too-costly prices.

The longer term strategy (which Malaysia is working closely with Indonesia) will be to ensure that CPO prices de-coupled from crude oil prices. Since the biodiesel hype, CPO has been tied down too much to fossil fuel prices.

The reason is simple. CPO is currently trading at a huge discount of about US$350 per tonne to its rival soybean oil.

The price of soybean is highly inflated by huge subsidies given to the soybean farmers in the US. Malaysia like to see CPO discount narrowing back to US$100 to US$150 per tonne – a more comfortable trading band for us. This will indeed be the long term challenge for the Malaysian oil palm industry.

Do you expect CPO demand to slowdown in 2009 given the current global economic turmoil?

Contrary to what is happening now, many palm oil users are still buying as reflected by our good export figures. The volume is poised to be higher going into 2009 as the cheaper priced CPO at current level is attractive to consumers.

Major consumers like India has started buying again significantly but China still has yet to come into the market in a big way. I’m told those importers who defaulted on their CPO orders recently, have also started buying from other parties at cheaper price.

This is what is happening now in the real consumers’ world market unlike previously, where the commodity market is played up by speculators.

Another major point is that Malaysian oil palm planters were able to counter criticism from the Western non-governmental organisations (NGOs) on climate change, deforestation, greenhouse gas emissions and the loss of biodiversity.

It will be a constant battle for planters to arrest these issues. Local big oil palm planters are aware of the importance in sustainability, whereby many are in the race to attain the Roundtable on Sustainable Palm Oil (RSPO) “green” certifications.

This will ensure speedier and better access to the stringent and environmentally conscious consuming nations like the European Union and the US.

Once the RSPO certifications on the local planters are completed, it will cover about 700,000ha of oil palm planted in Malaysia with a production of three million tonnes of CPO.

I personally believe that Malaysia has developed palm oil into such a sophisticated commodity.

It is so versatile in the usage in food, oleochemicals and the latest, biofuel. I don’t think there will be a substitute commodity as versatile as palm oil for Malaysia for a long time to come.

In your personal opinion, has the CPO price hit the bottom at RM1,400 per tonne recently and has since been traded above RM1,500 per tonne?

I believe that CPO price has hit the bottom. We can safely say that once CPO touched the RM1,400 per tonne, this level can be considered as bottom. Now prices have gone up to over RM1,500, we still have to wait and see whether this price level can sustain.

If the CPO price can stabilise between RM1,500 and RM1,700 per tonne range within the next six months, it will definitely be good news, given the slow recovery rate in the world economy despite various rescue packages put in place by countries worldwide.

Personally, I would like to see CPO price stabilising at RM2,000 to RM2,600 per tonne.

If the prices can move within these range, it will be good enough for local planters and they need not be too greedy to wish for higher prices than that.

In fact, major producers like Malaysia and Indonesia can progress satisfactorily if CPO stabilises above RM2,000 per tonne.

But realistically speaking, the RM2,000 level seems so far fetched now with palm oil prices creeping to stay above RM1,500 as excess inventory continues to dampen market sentiment.

I think over the next six months, CPO prices will be trade at RM1,500 to RM1,600 per tonne. This is taking into account the measures implemented by Malaysia including cutting down oil palm trees which are above 25 years old and implementation of the biofuel programme.

In addition, the global liquidity scenario is expected to improve which will make available more resources for trade financing.

At current spot CPO prices of around RM1,600, Malaysian planters will continue to see good profit estimated at RM1,600 per ha based on production cost RM1,200 per tonne and oil yield at 4 tonnes per hectare.

Stable CPO prices will sustain the rural economy from organised smallholders schemes under Felda, Felcra, Risda and independent smallholders.

Do you expect new form of attacks or allegations from Western NGOs on palm oil will intensify in 2009?

The NGOs will continue to focus their attention on questioning the sustainability of palm oil.

This is despite the fact that Malaysia on numerous occasions had provided numerous occassions had provided clarifications on the sustainability of palm oil produced by Malaysia.

In addition, the RSPO certification is a testimony to Malaysia’s effort to produce sustainable palm oil.

Malaysia and Indonesia will continue to collaborate in hosting joint seminar overseas to address this issue.

The Star

Consumer spending holds key

2009-01-03T15:10:00.000+08:00

WHEN Malaysia faced an economic downturn in the late 1990s as a result of the Asian financial crisis, then Prime Minister Datuk Seri Dr Mahathir Mohamad (now Tun) urged Malaysian consumers not to pull back their spending so as to help the country get out of recession.

And even now, as the country faces another challenging phase caused by the global financial crisis, economists say Malaysian consumers still hold the key to sustaining the country’s economic growth.

In fact, consumer spending is the key solution to the current economic turmoil in which the world is embroiled.

That explains why the governments of various countries have been introducing measures that promote consumer spending.

For instance, Australia and Taiwan have resorted to using cash handouts to encourage their consumers to spend. While the former targets groups most likely to spend immediately, Taiwan is providing vouchers to all its citizens.

China, on the other hand, has adopted measures that directly support household budgets such as providing education and health assistance to rural households.

The Malaysian government is also seen as supporting local household budgets, with one of the initiatives under its domestic stimulus plan being the option for consumers to reduce their monthly EPF contributions from 11% to 8%.

Consumer spending is seen as an important engine of growth because it encourages investments by businesses, and business expansion creates employment opportunities.

But when there is an accelerated pullback of consumer spending, businesses would be unwilling to invest, and some would scale back their operations.

TA Securities head of research Kaladher Govindan in his recent report said the performance of equity markets around the world and the global economy in 2009 hinges on a single factor – consumer spending – adding that the path to economic recovery would not be visible as long as people do not start spending. But the question is whether they are willing to spend in these times of uncertainty. The deteriorating global economic conditions have already depressed consumer sentiment.

And given the weak labour market conditions, where job security is at stake, households tend to tighten their purses, while some consumers would scale back spending because of a negative wealth effect resulting from falling asset prices. Moody’s recently said in its report that it expected private consumption in the Asia-Pacific region to either grow modestly or contract this year.

The financial research company added that it was unclear about the effectiveness of the measures introduced by the respective governments to encourage consumer spending as households may add to their savings instead of spending the extra money that they gain.

In Malaysia, where private consumption accounts for about 50% of the gross domestic product, signs of a weakening consumer spending have already emerged since the past few months as reflected in the sales of passenger cars.

According to the Malaysian Automotive Association, sales of passenger cars had declined a further 9.5% year-on-year to 36,254 units last November after contracting 14.7% y-o-y in the previous month. (Sales of passenger cars are one of the major indicators of private consumption in the country.)

Consumer sentiment remains dampened as indicated by the consumer sentiment index from the Malaysian Institute of Economic Research – 70.6 for the second quarter of last year and 88.9 for the third quarter.

The consumer sentiment index is expected to remain below the threshold level of 100 points in the coming quarters, especially since there have been announcements of staff retrenchment mostly in the electronics industry. For instance, the closure of the Western Digital plant in Sarawak is expected to affect 1,500 workers.

Against this backdrop, analysts are expecting the Government to announce additional fiscal stimulus in the first quarter to complement its easing monetary policy.

This expectation is further strengthened by the announcement by Deputy Prime Minister Datuk Seri Najib Razak over the week that the Government was prepared to introduce additional stimulus measures if and when the need arose.

Meanwhile, Bank Negara over the week announced that Malaysia’s current account surplus for the third quarter of 2008 stood at RM38.7bil, representing an increase of 4.5% or RM1.7bil from the previous quarter.

The central bank attributes the increase in the current account surplus to lower net payment on income and higher surplus on its goods accounts, which have offset the deficit in its services account and the higher leakage on current transfers.

The Star- Cecilia Kok

World economies in 2009

2009-01-03T15:08:00.002+08:00

We have just bid farewell to 2008, the year that marked the escalation of the global financial crisis which wreaked havoc on economies worldwide and caused several industrialised countries to slide into recession.

But 2009 holds even greater challenges as the world lives through the effects of the financial crisis. The International Monetary Fund chief Dominique Strauss-Kahn said in a recent interview with BBC radio that the organisation was going to cut its economic growth forecasts, due this month.

The World Bank has already pegged its growth forecast for the global economy at 0.9% for this year. The weakest outlook will be for the high-income countries, such as the United States, Japan and the European Union (EU), whose overall economy is expected to contract 0.1%, while developing economies as a whole are expected to register growth of about 4.5%.

World Bank chief economist Justin Lin says in the Global Economic Prospects report that “the global economy is at a crossroads, transitioning from a sustained period of very strong developing country-led growth to one of substantial uncertainty as a financial crisis rooted in high-income countries has shaken financial markets worldwide.”

So, StarBizWeek takes you through the major economies in the world to gauge their positions as they step into 2009.

The land of freedom where the American dream thrives, but where the global nightmare began.

US: Where it pays to fail

Faced with an increasingly gloomy outlook, unemployment in the United States is expected to hit 8% to 10% this year, compared with 6.7% as of November last year. The world’s biggest economy is also expected to contract further this year, with the Organisation for Economic Cooperation and Development forecasting a decline of 0.9% and Morgan Stanley Research, a 1.9% drop, for 2009.

(For the third quarter of 2008, the country’s gross domestic product (GDP) shrank 0.5% as reported by the US Commerce Department recently.)

But with US President-elect Barack Obama taking office on Jan 20, hopes for a shorter period of a languishing economy are arising. The new administration is expected to unleash a new massive fiscal plan, focusing on long-term infrastructure and job creation projects, next month to revive the country’s slumping economy.

According to Obama’s top advisers, David Axelrod and Lawrence Summers, the new economic stimulus package, spread over two years, could exceed US$775bil in value. The main goal of the package is to create or save three million jobs. In addition, Obama is expected to introduce tax policies that will favour the middle class to boost private consumption.

To date, the outgoing Bush administration has pumped in about US$1.3 trillion, including the US$700bil rescue package announced last October to bail out financial institutions that have failed due to their own reckless risk-taking activities, namely the subprime mortgage and its related businesses.

Furthermore, the US government had extended a US$17.4bil package to rescue its ailing motor industry at the end of last year, while the country’s benchmark interest rates have been slashed to the current levels of zero to 0.25% to boost its economy.

Japan: Riding into the sunset

The Bank of Japan (BoJ) said last month the country’s economic conditions were deteriorating due to poor business sentiment, weakened private consumption and the decreasing trend of industrial production.

The country’s central bank added that those conditions were likely to become even more severe in the near term as the declining exports continue to erode Japan’s national income.

Japan’s exports in November fell 26.7% from a year earlier as global demand for cars and electronics products collapsed, signalling more factory shutdowns and job cuts.

The world’s second largest economy has entered a recession since the second quarter of last year, with a contraction of 0.9% for the quarter, followed by another decline of 0.5% in the subsequent quarter.

Morgan Stanley’s bull-case scenario depicts Japan’s GDP as experiencing zero growth for 2008 and a contraction of 1.2% for 2009, while its bear-case scenario estimates Japan’s GDP to contract 0.2% and 3% for 2008 and 2009 respectively. Recovery in 2010 is expected to be tepid.

In an effort to cushion the country’s failing economy, Japan’s Prime Minister Taro Aso last month announced an economic stimulus package worth 23 trillion yen. Prior to that, the Aso government had rolled out a stimulus plan worth 11.7 trillion yen in August and another that was worth 26.9 trillion yen in October last year. On top of that, the country’s benchmark interest rate has been slashed to 0.1% currently.

EU: An empire on a bumpy road

While the outlook for the 27-nation EU remains bleak, with several of its member countries slipping into a recession this year, the empire’s economy overall appears to be in a better shape than the economies of the United States and Japan.

The European Commission forecasts the economy of the 15 countries using the euro to grow by only 0.1% this year and 0.9% in 2010. Of these countries, Germany, France and Italy are expected to post zero growth rates for 2009, while Spain and Ireland are likely to continue posting negative growth rates this year. (Slovakia will be the 16th member state to join the euro club this month.)

Among the EU member countries that do not use the euro, the UK’s economy is expected to shrink 1% this year, while Baltic states Estonia and Latvia are also likely to see negative growth this year.Last month, British Prime Minister Gordon Brown reportedly said the EU leaders had unanimously agreed on a 200 billion euros economic stimulus plan to ward off recession in the region.

In addition, the EU government-funded European Investment Bank is expected to release loans worth up to 30 billion euros between this year and 2010 to support small businesses and increase lending for projects that support renewable energy and cleaner transport, while the European Central Bank is likely to cut its main lending rate to below 2% from the current 2.5%.

Asia-Pacific: Wounded Tigers, rising Dragon

Morgan Stanley says in its report that China’s economic outlook for this year is best characterised as “getting worse before getting better.” It expects China’s economy to experience further deceleration in the first half of this year, before regaining momentum in the second half.

The massive policy stimulus implemented since last October, including progressive interest rates cuts and the four trillion yuan package, are expected to help sustain the dragon economy’s growth, albeit at a slower rate. Morgan Stanley forecasts China’s GDP this year to grow 7.5%, compared with 9.4% last year.

India, as the new tiger economy of Asia, is also expected to experience growth this year, sustained by improving domestic demand, and assuming its tension with Pakistan will be defused.

Morgan Stanley’s bear-case scenario pegs India’s GDP growth at 4.3% and bull-case scenario at 6.3%. The Indian government’s economic stimulus packages have thus far laid more emphasis on monetary than fiscal measures because of the country’s huge deficit. Hence, the government is expected to announce further cuts in key interest rates throughout this year.

Meanwhile, the outlook for the original four tiger economies of Asia remains bleak even with the various monetary and fiscal stimulus plans announced by their respective governments. Singapore and Hong Kong are expected to remain in a recession this year before recovering in 2010, while South Korea and Taiwan may manage minimal growth for the whole of this year despite a challenging first half.

On the other hand, Malaysia, Indonesia and Thailand are expected to grow slower than anticipated (not exceeding 2.5% on the average). Thailand is plagued by domestic political unrest that affects its core industry - tourism, while Malaysia and Indonesia’s trade continues to decelerate. Declining commodity prices are also affecting the income of these economies.

Down Under, the Australian government is hoping that its interest rate cuts and recent fiscal stimulus plans will prevent the country’s economy from sliding into recession. Economists predict that Australia could still manage a GDP growth of less than 1.5% this year, while New Zealand will struggle to emerge from recession.

The Reserve Bank of New Zealand recently said the country could manage a weak growth this year, with economists predicting it to be less than 1%.

GCC: Flowing with milk and honey

Blessed with huge oil reserves, the Gulf Cooperation Council (GCC), which comprises Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates, is expected to show some resilience in the midst of the global financial turmoil. This is mainly attributable to the surpluses from oil revenues when oil prices reached their peak in the middle of last year.

In addition, the GCC governments have been proactive in implementing fiscal and monetary policies to boost their economies.

Nevertheless, economic growth in the GCC region this year is expected to be slower than previous years.

The World Bank estimates the GCC economy would grow around 4% this year, compared with around 7% last year or more than 5% in the past few years.

Meanwhile, the GCC is moving towards a broader economic unity and a common currency scheduled to be launched next year. The convergence is expected to further strengthen their position in a globalised economy.

Others: Bear awakening

The World Bank recently revised its GDP forecast for Russia from its earlier prediction of a 3% growth to 2% for this year. The US$20bil stimulus package announced last November by Russia’s Prime Minister and former President Vladimir Putin is expected to strengthen the country’s economy in the face of a global slowdown.

As for Latin America and the Caribbean, the region’s economy is projected to grow only 1.9% this year amid a rising unemployment, from 7.5% last year to 7.8%-8.1% this year, according to the Economic Commission for Latin America and the Caribbean.

However, Morgan Stanley paints a gloomier picture for Latin America, predicting the region’s economy to contract 0.4% this year. It says in its report that no country in the region is likely to escape the effects of the financial crisis unscathed.

For instance, the research house says, Mexico’s economy is expected to contract 1.5% this year, while Brazil is expected to experience zero growth and Argentina to suffer from a 2.2% decline.

South Africa’s economy, the biggest on the African continent, is expected experience sub-par growth this year. Citigroup in its recent research note forecasts the country’s economy to grow 2.3%, in line with World Bank’s forecast.

World Bank in its report says South Africa’s economic growth for 2009 is likely to fall below 3% for the first time in almost a decade, as a tighter monetary policy and high inflation cause household consumption to falter.

The Star-Cecilia Kok

Stocks picks for 2009

2009-01-03T15:08:00.001+08:00

Stocks picked for 2009 include IOI, Tan Chong, AirAsia, PPB Group, Petronas Dagangan, Fraser & Neave, Resorts, Petronas Gas and Public Bank.

IOI Corp Bhd

For exposure to one of the best managed conglomerates in Malaysia and a proxy to a recovery in crude palm oil (CPO) prices, there are few better stocks than IOI Corp Bhd.

The catalysts for a recovery in this include CPO prices increasing to a more reasonable range of between RM2,000 to RM2,500 per tonne, and the launch of its Sentosa Cove projects.

IOI was the worst casualty during the recent sell-off in the plantation sector due to its high level of foreign shareholding, recent foreign exchange losses and departure of key management personnel. It is trading some 20% lower than early 2007 but given the estimates that this plantation heavyweight is due to earn 25.2 sen, it is trading above the forecast price/earnings ratio for Bursa Malaysia in 2009 but that could be pinned to the premium the stock has commanded of late.

Tan Chong

Motor Bhd

Tan Chong’s nine months to September 2008 net profit of RM217.6mil beat the market’s estimates and its performance among motor firms is to be admired.

Its third-quarter revenue also hit the RM1bil mark for the first time in a single quarter, or a 69% increase to RM1bil, thanks to higher car sales driven by more launches of new models.

Despite a more challenging year, Tan Chong is expected to guard its margins in the range of 8% to 10% underpinned by higher efficiencies in production and yearly increase in autoparts localisation (from 20% now to a targeted 50% by 2012).

This will lead to further improvement in costs which will also be the company’s competitive edge to hedge against the strengthening of yen against the ringgit moving forward.

Tan Chong will continue to launch three new models every year for the next three to four years given its strategy to garner more market share going forward. And while its profit for 2009 is projected to be lower – it is expected to earn 26.2 sen a share – Tan Chong’s valuations will be at a deep, and somewhat unwarranted, discount.

AirAsia Bhd

Airline shares have had a rough few years as one woe after another has hit this sector. From sky-high oil prices to cut-throat competition, airlines have had to manoeuvre to stay aflot during these trying times.

AirAsia has not been spared as it, too, took a financial hit in 2008 but clearer skies might be just over the horizon for this counter.

A merger between Qantas Airways Ltd’s Jetstar and AirAsia Bhd, if talks end up with the airlines having some form of cooperation, will be a positive for AirAsia.

The other benefit for AirAsia is that despite the economic slowdown, demand for short-haul services remains resilient and low-cost travel is benefiting from downtrading from full-service carriers.

Costs will also be much lower for AirAsia as fuel prices have collapsed. AirAsia will be paying spot prices – US$40 – from January.

The risk of a cash call has also dissipated with the successful financing for a further 37 aircraft, and the airline is projected to post a profit to the tune of 10.2 sen a share in 2009.

PPB Group Bhd

In times of uncertainty, it is always good to look at a company that goes back to basics and PPB Group, a diversified palm oil-based company, offers investors exposure to a number of industries that would benefit in this downturn. This is a steady consumer-oriented stock maybe well known for its exposure to plantation giant Wilmar International Ltd but its other less glamorous businesses will be pulling in the profits as crude palm oil prices remain depressed.

PPB has a sizeable operations in flour milling, sugar refining and feedmills to go with an increasingly profitable cinema operations. These commodity processing businesses will see margins improve as commodity prices remain low and would offset a decline in CPO-related earnings from associate company Wilmar.

Estimates have this stock earning 81.3 sen a share this year and the dividend is forecast to be a healthy 30.3 sen a share.

Petronas Dagangan Bhd

It’s not a sexy stock but its steady earnings and rock-solid business model is something investors might want to have a look at during a period of economic uncertainty.

Petronas Dagangan is the leading petrol station operator in the country and its margins, even though they fluctuate, and its nature of business give investors the security of investing in a profitable business.

Its gross profit may take a hit with the decline in pump prices but volume growth, from an ever growing number of petrol stations in the country and lower fuel prices, will offer stability of earnings.

For its 2010 financial year (its 2009 year ends in March), the company is forecast to post higher profit of 75 sen a share and dividend of 44 sen a share.

Petronas

Gas Bhd

This is another stock that has a boring label tattooed onto itself but its defensive nature will offer investors protection during times of market and economic volatility. Deriving earnings from the volume of gas sold, the risk to its earnings is small even though an economic slowdown may lead to lower a consumption of gas. That is because there is already a shortage of gas in the country.

The shuttering of petrochemical plants in the east coast may see lower demand for industrial gasses from its centralised utility facilities but the impact is expected to be small. Helping future earnings will be the company’s foray into the power generation business via its maiden power plant in Sabah.

The steady nature of Petronas Gas’s business is reflected in its forecast earnings, as estimates derived from Bloomberg has pegged the company earning 54.5 sen a share for its 2010 financial year and declaring a dividend of 47.7 sen a share.

Public Bank Bhd

It may be among the most expensive banking stocks in the world but that does not mean the stock should be ignored. The fact that it has attained such a status when banking stocks around the world are looked at with more suspicion means there is something worth looking out for in this bank. The high valuation is also a sign of confidence in this counter, signalling the market is putting a high degree of certainty that this bank will survive.

The strength of Public Bank makes it a stock worth watching out for. Its business is deeply consumer and small business centric and it has ridden the wave of lending activity in those two segments for nearly the past decade, chalking up strong double-digit growth rates and super low non-performing loans along the way.

Whether this will continue bears watching but it will be tough picking against the most defensive-natured banking stock heading into 2009. It has a forecast earnings of 72.2 sen a share for 2009 and a dividend of 69.5 sen a share.

Fraser & Neave Holdings Bhd

One look at the stock chart of this counter and it’s almost a no-brainer pick. This stock has gained year-on-year for the past five years and the company’s profits continued to rise during the time.

It has without much fanfare done the business of giving growth while maintaining the hallmarks of good management. Expansion into neighbouring countries plus the steady defensive nature of its business - the company is a major bottler of soft drinks in the country - augur well for shareholders of this company.

As one analyst remarked, the major shareholders of this company are long-term investors and for good reason. The company is forecast to post earnings of 51.6 sen a share for its 2009 financial year ending Sept 30 while dividends are strong at 50.8 sen a share.

Resorts

World Bhd

With a net cash per share of 78 sen, Resorts World Bhd will still be viewed by investors as a safe stock to own during troubled times.

Resorts’ image was recently blemished by related-party transaction issues when it acquired 10% of Walker Digital Gaming (WDG) and 100% of Digital Tree (which earns royalties from WDG) for RM250.5mil.

If investors are willing to see beyond this “dishonour”, Resorts actually offers a cheap exposure to the solid domestic gaming operations, which continue to do well even in trying times.

It is also for this reason, that during market upturns, the stock tends to outperform the broader market, rendering it a firm favourite among foreign investors.

One broker said Resorts’ net cash hoard of more than RM4.3bil could be used for more acquisitions and capital management initiatives.

A check showed that 66% of analysts polled by Bloomberg have a buy call on the stock and have forecast the company earning 22 sen a share and declaring a dividend of 7.2 sen a share.

Opportunities for savy investors

2009-01-03T15:06:00.000+08:00

Malaysians who have gone through the financial crisis in 1998 know there are investment nuggets out there. The question is: Are we brave enough to grab them?

It’s time to wave goodbye to 2008 and hunker down for 2009. Just as you thought 2008 was as bad a year in living memory – looking at how much the stock market has fallen and reading how industrialised countries are seeing their economies skidding – it probably will get worse for Malaysia and economies in this part of the world that have only recently started to feel the effects of the subprime crisis which sparked the global turmoil.

But that does not mean there are no opportunities in bad times. Malaysians who have gone through the financial crisis in 1998 know there are investment nuggets out there. The question is: Are we brave enough to grab them?

The implosion that we saw in 2008 was somewhat unprecendented. All major asset classes – from equities to real estate to commodities – saw major declines. The only major asset class that has made investors huge amounts of money throughout 2008 was US Treasuries, but that bubble bears watching out for in 2009.

Considering that backdrop, it’s no surprise that fear and apprehension have taken hold in the psyche of investors. People are afraid to lose money and capital preservation has catapulted in terms of priorities.

Even so, activities in all major markets still continue and people are buying stocks and bonds as prices, yields and returns may be a little more palatable for them to make such an investment.

Singular Asset Management Sdn Bhd managing director Teoh Kok Lin believes that diversity, with a lot of emphasis on Asia, is the way to beat a volatile year.

For equities, he sees value in stocks in Hong Kong and China, given their likelihood for good economic growth and for bonds, he likes certain convertible bonds.

“The convertible bonds of top-rated Asian companies are trading at good yields,’’ he says.

Similarly, Teoh sees more potential for Asian currencies, especially China’s yuan, and the way to participate in that currency is through China-listed stocks in Hong Kong.

Teoh feels that commodities are in the bottoming out phase and he has a preferance for soft commodities, such as palm oil, over hard commodities, like steel.

“Next year, economies are going to be very volatile. It’s still very fluid and the key is to preserve capital,’’ he says.

Rajen Devadason, a licensed financial planner with MAAKL Mutual Bhd, and CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd says that if conditions deteriorate further this year, there is a good chance that some sectors of the economy would go into a deflationary spiral.

“Remember, when inflation is an issue, the problem with holding too much cash is that money tomorrow will be worth less than money today. However, in the case of deflation, the exact opposite is true, money tomorrow will be worth more – at least in terms of the stuff it can buy – than it is worth today. That’s why in these times cash is king.’’

Rajen says that taming the business cycle by the incessant expansion of credit had meant people had swept their growing debt problems under the carpet.

“Now that the financial system and the economic system of our inter-linked world are being forced to clean themselves out, more and more garbage is going to be expelled. In the long run, this is great news,’’ he says.

“Unfortunately, in the short term, things are rough and going to get much rougher. So it is imperative that cash be stockpiled aggressively to be used in the coming months, very tentatively, to nibble at only the highest quality cash-flow generating assets such as prime rental properties, the finest dividend-yielding stocks, and unit trust funds that invest in such assets.’’

Rajen notes that two categories of such funds would be dividend funds and real estate investment trusts. “My personal preference is for my best clients to carry out courageous dollar-cost averaging programmes utilising cash-based money market funds as large repositories of valuable liquidity and equity funds focused on dividend and value stocks.”

Although the beating that stocks on Bursa Malaysia have taken might scare a lot of investors, the flip side of it is that it has created an opportunity for others who feel there is long-term value right now.

“It’s for people who are willing to take some risks now,’’ says Jupiter Securities Sdn Bhd research head Pong Teng Siew. “There is a lot of money waiting on the sidelines and there are a lot of people waiting to buy distressed assets.’’

Pong also says that keeping an eye out on commodities might be wise as that investment class should rise at the next hint of a recovery in the global economy.

“Oil exploration is grinding to a halt and that will only help keep prices up later,’’ he says.

Pong’s view of stocks having a lot of value now is shared by Meridien Asset Management chief investment officer Tan Beng Ling. But she has a caveat.

“I will be putting my money into stocks of companies that have strong management,’’ she says, adding that cyclical stocks such as British American Tobacco (M) Bhd and Guinness Anchor Bhd should be considered.

Tan says investors should also look to buy shares in some of of the better known companies on Bursa Malaysia. Names that have been around for a long time have proven their resilience and she remembers how well investors who bought blue-chip stocks were rewarded after the market recovered from the Asian financial crisis in 1998.

“As a personal investor, it is better to look at bombed out stocks,’’ she says.

It’s no surprise that stocks still figure highly among the recommendations from experts, as Total Financial Planning Advisory Sdn Bhd managing director Ben Ng says Malaysians have a heavy reliance on the prime markets, which are the stock market and properties.

He says the one market that investors can bank on in 2009 is currencies. “It’s a bit more secure than stocks now,’’ he says.

“The normal man-in-the-street will go for unit trusts and other familiar investments. For systematic investors with a five to 10-year investment horizon, they can look at unit trusts,’’ he said.

But the big players don’t need to rely on just a few markets. They look for new markets and their investments can be determined by the urgency of such funds.

He also expects the crude oil market to rebound this year and following it will be the price of gold.

-Jagdec Singh Sidhu

Best way to invest RM50,000 now

2009-01-03T15:05:00.000+08:00

Have some cash to invest? Three experts were asked what would be the best way to invest RM50,000 and below are their responses.

Andy Tang

Executive Director

Head of Performance Development

Great Vision Advisory Group

First of all, we need to know what is the purpose of the savings? Is it for short-term use? Medium or long-term usage?

Our money should be allocated into three portions: liquidity, profit and security. Usually, money in the liquidity portion is meant for short-term use. The money allocated for the profit portion is mainly for investment, hedging for higher return (either to re-invest in business, the share market, etc.), whereas money allocated for security purpose is meant for long-term use such as retirement, long-term care, education and lifestyle.

For liquidity purposes, which is mainly for the short term, it usually involves savings accounts, current accounts, fixed deposits or short-term income funds.

Director Andy Tang

The ideal ratio of funds to be utilised is 20% for liquidity, 35% for profitability and 45% for security. Of course, the ratio is different from time to time and from one individual to another.

While making the allocation, it is a must to re-visit or review other essential planning such as a healthcare plan, family income protection plan, future income protection plan, critical illness coverage plan, debt cancellation, mortgage protection plan and mortgage review, life insurance and estate planning.

Before making any decision on the RM50,000, we need to identify the end in mind to avoid any disappointment.

First, we have to review and identify what other financial resources we have and only then proceed with the plan.

In conclusion, after checking and reviewing your personal cashflow, this is not only the RM50,000 that we should plan for but it could involve the ongoing securing of wealth from your yearly surplus in order to ensure wealth preservation and accumulation for the future. For a better picture of the entire planning, it is always advisable to look for the capable financial adviser.

Reginald Yoganathan Hunt

Senior Group Sales Manager

Great Eastern Life Assurance (Malaysia) Berhad

Investing RM50,000 over a period of six to 10 years. There are a number of financial instruments that yield higher than the fixed deposit and give a reasonable return of 7%–9% a year.

·Investment-linked single premium with a reputable life insurance company. Equity funds have shown to generate 8% to 10% return over a period of seven to 10 years but there is also the danger of a market crash where you may end up poorer. Bond funds give a lower return and are safer.

Reginald Yoganathan Hunt

·Real estate investment trusts (REITs) have recently sprung up and with quality buildings and high rental rates, a fair income can be assumed and reasonable returns could be expected.

·Unit trusts have been in the scene for quite some time. Most of them are life insurance or bank-backed organisations and they have also shown consistent returns.

·Structured products have recently come into the scene. Insurance companies and banks have moved into cash on low fixed deposit rates. As the experience is still in its infancy stage, we will have to wait to see if they perform well.

My recommendation would be to invest in investment-linked single premium product. Half of the RM50,000 can be invested in bonds and the other half in equities.

Robert Foo

Managing Director and Principal Consultant

MyFP Services Sdn Bhd

We should aim to get real returns of about 5% to 6% after deducting the inflation rate if our objective is to protect of our savings value from being eroded in times of high inflation.

Robert Foo

In the long term, however, we expect interest rates to moderate to about 2% to 3%, hence we would target to obtain about 7% to 8% in gross returns.

The financial instrument to achieve this would be unit trusts of different asset classes.

We would usually invest with about four to five different fund managers as well as varying asset classes as a form of risk diversification.

Despite the volatile market situation, it is possible to achieve notable returns in these investments provided we invest for the long term, generally more than five years.

It is also important to review our investment portfolio every six months and restructure according to the market’s performance.

Depending on one’s life stage, it would be necessary to plan for expenses as well as insurance before investing.

It is also crucial to have a timeframe in mind when investing.

For example, if we are planning for our retirement in 20 years’ time, we would target higher returns at the beginning by investing in riskier asset classes.

We would then gradually move to less riskier forms of asset classes as we near our retirement.

A year after US$100, oil prices cut in half

2009-01-03T15:04:00.001+08:00

HOUSTON: Exactly one year after crude eclipsed $100 a barrel for the first time, 2009 trading began Friday with prices roughly half their year-ago levels, and some believe oil could be headed even lower.

Oil markets kicked off the new year with crude climbing above $46 a barrel.

A variety of factors were likely at work, including continued violence in Gaza and expectations that OPEC would carry out its largest production cut ever to stem historic price declines.

Oil market activity was also light as many traders took a long holiday weekend, and that can lead to price swings.

"I have a feeling, more than anything, it's the thin trading conditions pushing the price higher,'' said Peter Beutel of energy consultancy Cameron Hanover.

Light, sweet crude for February delivery rose $1.74 to settle at $46.34 a barrel on the New York Mercantile Exchange.

In London, February Brent crude rose $1.32 to settle at $46.91 a barrel on the ICE Futures exchange.

Oil's surge into triple digits for the first time one year ago was the start of a climb that would peak above $147 a barrel by July.

Since then, amid fears of a prolonged global recession and crumbling worldwide demand, crude prices have plunged more than 70 percent.

"Thank goodness that's over!'' Raymond James & Associates said in a note to clients Friday, summing up what many traders feel after the most volatile year since crude futures were first offered on Nymex in 1983.

The same gloomy economic data that drove prices into the mid-$30s in the final month of the year continued into 2009.

A private group's measure of manufacturing activity fell more than expected in December, hitting the lowest reading in 28 years as new orders and employment continue to decline.

The Institute for Supply Management, a trade group of purchasing executives, said Friday its manufacturing index fell to 32.4 in December from 36.2 in November.

Wall Street economists surveyed by Thomson Reuters had expected the reading to fall to 35.5.

Any reading above 50 signals growth, while a reading below 50 indicates contraction.

The index has fallen steadily for the last five months.

A weakened manufacturing sector suggests demand for energy will not rebound any time soon.

Activity in the U.S. oilfield already reflects expectations for anemic demand. Baker Hughes Inc. reported Friday the number of rigs actively exploring for oil and natural gas in the United States fell by 98 last week to 1,623.

That's nearly 16 percent fewer rigs at work than when oil prices peaked in July, and 9 percent below the year-ago figure.

The February contract for crude rose $5.57 on Wednesday, the last trading day of 2008, to settle at $44.60 after Russia threatened to cut off natural gas supplies to Ukraine.

Russia followed through with that threat Thursday, though both countries pledged they would keep supplies to the rest of Europe flowing.

As of late Friday afternoon, no interruptions outside Ukraine were reported. Analyst Olivier Jakob of energy analysis firm Petromatrix in Switzerland said Ukraine has enough reserves to avoid an immediate risk to its supplies, as long as both parties find an agreement by the end of next week.

"If there is a disruption in natural gas supplies to Europe, then you will see an increase in the usage of oil instead of natural gas. It will have an impact on oil prices,'' Jakob said.

The European Union depends on Russia for about a quarter of its gas, with about 80 percent of that delivered through pipelines controlled by Ukraine.

Concerns that the week-old conflict between Israel and Hamas in Gaza could disrupt supplies in the oil-rich Middle East helped keep prices from falling further.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, has announced production cuts totaling more than 4 million barrels per day in the last few months.

Analysts say crude's direction in the early part of 2009 will be linked largely to whether the cartel adheres to the new quotas.

In other Nymex trading, gasoline futures rose 4.85 cents to $1.11 a gallon.

Heating oil rose 3.8 cents to settle at $1.48 a gallon, while natural gas for February delivery jumped 24.9 cents to $5.971 per 1,000 cubic feet.

Obama team polishing economic stimulus measure

2009-01-03T15:03:00.000+08:00

WASHINGTON: President-elect Barack Obama's transition team is putting the finishing touches on an economic recovery plan that could run from US$675 billion to US$775 billion.

Briefings for top congressional Democratic officials are likely this weekend or on Monday, a senior transition official said Friday.

Obama is slated to meet Monday with House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid in a Democratic strategy session likely to focus on the economic recovery package.

Democrats had hoped to get the recovery plan set for Obama's signature as close to Inauguration Day as possible, but it is plain that the schedule is slipping.

When Congress convenes next week there will only be two weeks before the inauguration. The earliest the measure could reach the House floor is the week of Jan. 12, said a Pelosi spokesman, and even that is looking doubtful.

Republican leaders have demanded time to scrutinize the measure, a request that seems likely to be granted, at least in part.

A separate Obama transition official promised "full transparency'' in considering the plan.

The Senate's top Republican, Mitch McConnell, again protested Friday that his party and the public need time to scrutinize the Obama plan so that "every dollar needs to be spent wisely and not wasted in the rush to get it spent.''

Congressional aides briefed on the measure say it's likely to blend tax cuts of $500 to $1,000 for middle-class individuals and couples with about $200 billion to help revenue-starved states with their Medicaid programs and other operating costs.

A large portion of the measure will go toward infrastructure projects, blending old-fashioned brick and mortar programs like road and bridge repairs and water projects with new programs such as research and development on energy efficiency and an expensive rebuilding of the information technology system for health care.

Despite the proposal's big price tag, a top lawmaker questioned whether the economic situation is so dire that Congress may not be able to pump money into the economy fast enough.

"My main worry is whether or not we can find enough places to responsibly put money so that you have a big enough effect to correct the problem or at least mitigate the problem,'' said House Appropriations Committee Chairman David Obey.

Obey said the focus is on getting taxpayer dollars into programs that can spend it quickly such as aid to states suffering massive budget gaps.

He declined to go into other specifics but said the measure won't lead to many permanent spending hikes.

"We are trying to focus on what can get out the fastest that will not be built into the budget baseline when the recession is over,'' Obey said.

Local funds should diversify portfolio

2009-01-02T15:19:00.000+08:00

KUALA LUMPUR: Malaysian institutional funds should take the opportunity to diversify their portfolios now as they are insulated to a certain extent from events in global markets, according to global financial consulting firm Watson Wyatt.

Its Asean practice leader for investment consulting Puah Ser Sze said a few things could happen with local funds under current extreme global market conditions, especially since their investments were mainly domestic.

“I hope funds will go with the first route by introducing diversity into their portfolio. This is what we have been encouraging our clients to do,” she said in a statement.

Puah Ser Sze

Watson Wyatt’s global practice director for investment consulting Carl Hess said good invesment managers should already be taking advantage of undervalued securities with prices that had been depressed through panicked selling.

“We are likely to see buying opportunities for funds that can identify them and move quickly enough to take advantage of them,” he said.

“One action they really should take now is to assess whether they or their delegates are well placed to seize that advantage,” he added.

The firm’s head of investment consulting for Europe Paul Trickett said funds should bear in mind that the best buying opportunities typically arise before economic stabilisation and recovery are clear.

He said pension funds should not react to short-term poor relative performance from high-quality managers.

“Historically, it’s often after such performances that these managers produce stronger returns,” Trickett said.

“We would also caution against reactionary like-for-like manager changes, because of recent significant increases in transition costs,” he said.

According to Trickett, it would be prudent to wait for some of the present uncertainty around shorting rules and costs to be resolved before investing new capital in funds with long lockups. – Bernama

China fuel price reform starts but where does it end?

2009-01-02T15:09:00.000+08:00

BEIJING: As China's long-awaited shift to a new fuel pricing regime took effect yesterday, the biggest question of all remained unanswered - will Beijing really allow pump prices to move with the market?

For the moment the question is moot. Crude oil prices have stabilised on either side of US$40 (US$1 = RM3.46) a barrel since China cut petroleum prices by 14 per cent and diesel by 18 per cent two weeks ago, knocking them roughly into line with global rates.

But further crude oil losses or a rally back to US$50 will put China's policy to the test.

Even after a month of debate, analysts say they're not much clearer on how often China's motorists could see price increases, or how stable profits will be for oil refiners Sinopec and PetroChina.

Those are key questions for a world oil market that will be looking closely for any signs that demand growth is slowing even further in the world's second-largest oil consumer, whose policy of subsidising fuel prices had sharpened its motorists' demand.

"The effectiveness of fuel pricing will only show up when oil prices change," said Yang Fuqiang, former vice president of US Energy Foundation, an energy consultancy.

"The reform package is a small step forward and may prove to be only transitional."

The core of the scheme is clear enough: a sharp rise in consumption taxes will replace road tolls and other charges in an effort to better match the cost of fuel with its use; a revised pricing scheme with a hard cap on retail rates should guarantee a lower but stable profit for refiners.

But hopes that China might fully liberate prices - allowing them to be set by the market or by a transparent, market-based mechanism - were dashed, suggesting policymakers remain skittish about the idea of a liberalised market despite promising for years to encourage energy efficiency and deter wasteful use.

In announcing the overhaul two weeks ago, Beijing said it would change the ceiling price "when changes in international oil prices exceed a certain level for a certain period of time". The government did not disclose either the level or the period.

The National Development and Reform Commission (NDRC), which sets energy policy and fuel prices, said that from January 1 it would follow a formula based on crude prices, processing costs, taxes and reasonable profits.

The formula is similar to one it established in 2006 - and subsequently almost completely ignored.

As oil rallied to a succession of record highs since 2003 China's fuel prices rarely budged, with policymakers anxious to avoid stoking inflation or stirring social unrest.

Such ambiguities have left the market wondering what the government's plan really is, whether it would be seriously implemented this time, and how it would help avoid the kind of shortages that have hurt the economy and consumers in years past, when refiners facing crippling losses cut back sales.

"Observations are best made when oil prices rally," said Qiu Xiaofeng, an oil analyst with China Merchants Securities.

"We do not know every detail including the level and period of crude price changes that the government's decision are based on, nor do we know the frequency of fuel price adjustment that might have been determined."

"Let's wait and see how things go to and find a clue to how the reform is implemented," Qiu said.

For now, motorists are seeing some benefits of lower prices and the competition that comes with them. - Reuters

'Exercise care but keep lending to viable firms'

2009-01-02T15:07:00.000+08:00

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Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz says its surveillance indicates that Malaysian banks are not tightening credit

LENDING by local banks remained strong last year, but lenders have been told to balance the need to be careful with loans with continued support of viable businesses, Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz said.

"There has been a growth in lending of 8-10 per cent across the board; household, small- and medium-sized businesses and outstanding loans have increased," Zeti said in an interview with Business Times.

The industry has the capacity to provide access to lending because domestic banks have experienced high profits for an extended period of time, are well capitalised and have less bad loans.

The global financial crisis spooked lenders initially, but Bank Negara has told them not to overreact.

"We have worked very hard to put in place appropriate governance, risk management practices, so banks must conduct prudent lending and also extend assistance to those viable businesses which experience difficulty due to the current environment."

On reports that banks were tightening credit, Zeti said its surveillance indicated that it was not so.

Many banks have put in place arrangements to restructure loans and provide advisory services to their clients.

Bank Negara expects prices to continue falling in the first half of this year and the Consumer Price Index, the barometer of inflation, to decline to three per cent.

Malaysian banks also have enough money, as reflected in the interbank market where banks go to borrow money. They are net lenders, meaning they lend more than they borrow.

This also means that it is unlikely for the central bank to provide funding to local lenders, which is now the norm in the West.

"We have absorbed liquidity during 2007 and early part of 2008 and have outstanding amounts of almost RM150 billion that we can unwind and provide to the system.

"And we have in place a robust liquidity management framework that provides access to liquidity not only to the banking sector but also insurance companies - for both normal and stressed conditions."

Zeti also pointed out that the financial system in Malaysia differed from others, especially in the mobilisation of deposits by the banking sector.

The deposit ratio to gross domestic product is 147 per cent, reflecting stable and robust growth, while the loan:deposit ratio is 75 per cent, far exceeding the loans that have been extended.

Deposits also enjoy 8.5 per cent annual growth, reflecting a propensity to save.

Business Times- Rupa Damodaran

Russia’s rouble policy may hurt economy further

2008-12-31T15:03:00.001+08:00

MOSCOW: Russian Prime Minister Vladimir Putin’s determination not to slash the rouble’s value comes at a price: it could send the spluttering economy even faster into recession, fuelling the public discontent he set out to avoid.

Despite intense pressure on the rouble from falling world oil prices, Putin has ruled out any sharp fluctuations in the currency, fearing that to take that step would revive voters’ painful memories of the economic turmoil in the 1990s.

His officials opted instead for a “salami slice” approach devaluing the currency in small increments over several months.

The central bank on Monday allowed the ninth mini devaluation of the rouble this month.

But analysts say that policy is freezing cash flow in the economy because banks, investors and consumers are expecting that the rouble will fall further and uncertain how far are hoarding their assets in foreign currency and refusing to spend.

“They (the government) are between the proverbial rock and a hard place,” said Chris Weafer, chief strategist with Uralsib.

“They are now having to balance what has become a fairly obvious need for a devaluation with the political risks of backtracking on a fairly clear statement from the prime minister,” he said.

The economic slowdown is already presenting the Kremlin with the biggest challenge to its rule in a decade, threatening to reverse the growth in incomes on which Putin had built his popularity and his firm grip on power.

The rouble has lost 17% of its value against a euro-dollar basket this year despite the central bank spending over US$100bil of its reserves on supporting it.

The country’s main stock markets are down about 70% from peaks in May, and analysts polled by Reuters predicted the economy next year to slip into recession for the first time in a decade.

Some analysts say the Kremlin’s fear of allowing a repeat of 1998, when the rouble crashed and the government lost that little public support it then had, is having the effect of making the problems worse.

“The central bank’s attempts to outplay the market will not only decrease reserves, but also suppress economic growth as money will not move,” Yevgeny Gavrilenkov, chief economist of investment bank Troika Dialog, wrote in a research note.

“Wage and tax arrears have started to appear as credit markets remain frozen, which is one more reminder of the 1998 situation,” he said.

Firms such as Toyota have already pegged their prices in Russia to the dollar in a major vote of no confidence in the rouble.

Unable to obtain credit or cash, Russian companies are laying off staff. The government said on Monday it expected the number of jobless claiming benefits to rise 69% next year.

That carries a political risk for Putin, still Russia’s dominant political force despite stepping down from the presidency in May to make way for his protege, Dmitry Medvedev.

Leonid Sedov, researcher with independent pollster Levada Centre, said popularity ratings for Putin and Medvedev are largely unchanged. But he added: “The protest mood, the readiness to take part in demonstrations, has grown.”

In the first half of this year, 18% of people polled by Levada said they believed anti-government protests were quite possible in their town or district. In the second half, that figure was up to 23%.

Protests earlier this month against a plan to raise import tariffs on foreign cars were a sign of the public mood.

Underlining the Kremlin’s nervousness on the issue, riot police in the Pacific port city of Vladivostok broke up an anti-tariff protest and arrested dozens of people.

“We are entering a phase when millions of people are losing their jobs, their savings, living standards will harshly decline,” said Garry Kasparov, a former world chess champion and Kremlin critic. “They have to blame somebody.”

Some market players speculate the central bank could use the long New Year break Russians are off work from Jan 1 to Jan 11 to push through a sharp devaluation of the rouble without attracting too much attention.

But analysts predict further mini devaluations. Economists polled by Reuters forecast that at the end of next year the rouble would stand at about 36 versus a euro-dollar basket, or only around 4% down on its level now.

“My guess is that they will continue that policy and go for a (gradual) devaluation for political reasons even though from the economic point of view it would be better just to have a one-off and say ‘We are done’,” said Uralsib’s Weafer.

“People associate devaluation with political crisis,” he said. “The government is simply paranoid that a devaluation could trigger these memories.” — Reuters

When will our stock market recover?

2008-12-31T15:02:00.001+08:00

THE world’s stock markets, including Malaysia’s, have recovered lately.

Some analysts have viewed this recovery as window dressing activities while others have called it bear market rallies.

And there are those who wonder whether we have seen the worst.

They are eager to know whether the current stock market level has reflected all the negative news, like the sharp drop in consumer spending, higher unemployment rates or lower sales and lower profits for most of the listed companies in the coming corporate result announcements.

Every investor wants to know when will the market recover.

Some investors may be excited about the current stock market level as a lot of good quality stocks have been hammered down to attractive levels, and are keen to start accumulating them.

However, if the stock market continues to dip for long periods, certain investors may run out of “bullets” to average down their purchasing prices.

Then, they will start losing interest in the stock market as they do not have cash to purchase further and their earlier purchases also start to show losses.

We need to prepare ourselves for the market turnaround.

However, we need to be patient and wait for the right time to invest.

In this article, we will look into the past two major downcycles: the 1998 crash and 2000 crash versus the current 2008 crash.

From the table, it can be seen that the Kuala Lumpur Composite Index (KLCI) tumbled by almost 80% in a period of 18 months during the 1998 crash versus a drop of 45% in a period of 13 months during the 2000 crash.

The percentage drop and duration of the 2000 crash were much less severe and shorter compared to the 1998 crash.

For the current 2008 crash, our KLCI has plunged by 47% to its lowest level of 801 points on Oct 28.

If investors believe that the current crash is quite similar to the 2000 crash, then we may have seen the worst as the current percentage drop of 47% is near the 2000 crash of 45%.

However, if the 2008 crash mirrors the 1998 crash, then we may have to wait until the KLCI touches about the 300-point level (assuming the same 79.4% drop in the 1998 crash) before we can see any real recovery.

Hence, we may have to wait for another nine months or until September 2009 (assuming the same duration of 18 months).

We do not think the 2008 crash is similar to the 1998 crash.

Our current economic situation, like central bank reserves, the health of the banking sector as well as economic fundamentals, are much better compared to 1998. However, as mentioned earlier, we need to prepare ourselves for the worst.

What to expect from here on?

Our market will try to absorb all the negative news.

As long as the market continues to drop as a result of negative news, we know we have not seen the bottom yet.

We have to wait for the day when the stock market refuses to come down even when it is loaded with massive negative news; that should be the right time to buy.

Unfortunately, based on our past observations, by then most investors may not have any more cash to purchase or they will still worry about the economic situation.

Investors need to understand that stock market cycles are always ahead of economic cycles.

Normally, when the stock market hits the bottom, the economic situation is uncertain or is still getting worse.

l Ooi Kok Hwa is an investment adviser licensed by the Securities Commission and managing partner of MRR Consulting.

First quarter stimulus crucial to economy

2008-12-31T15:01:00.000+08:00

TOMORROW is the dawn of 2009 and unlike recent years, it is filled with trepidation and uncertainty. There is no escape from the rampant destruction caused by the bursting of the financial and consumer bubble in the US.

Of grave concern will be the first three months of next year as people look out for more Government measures to stimulate the economy in Malaysia. The effects of a RM7bil stimulus package have yet to be felt while reports say the money should be released to the various agencies from next month onwards.

Allocations are being made to stimulate private investments and the construction of schools and hospitals as well as the upgrading of police stations. However, people are now questioning if a bigger package is required in view of the latest developments, especially in the export and jobs sectors.

At this time Malaysians may even be confused about whether to spend or save.

For many years, our economy had been driven by domestic consumption and investments. With so much fear over job security, it is going to be a challenge for the Government to get people to spend and invest. At this stage, they may even be confused about whether to spend or to save.

The positive effect from lower contributions to the Employees Provident Fund is expected to kick in soon. To what extent that will help remains to be seen as many have opted to retain their original contribution.

There is spending on mega sales but is the momentum strong enough to bring up the economy? What about spending on big ticket items?

With inflation numbers and oil prices coming off, there should be more spending power. Reports indicate that the Government is looking seriously into the issue while getting traders to lower their prices.

On the investment front, there are occasional reports of small amounts being invested. Companies are reluctant to commit to large figures.

Even if they quote considerable sums of money, these are usually spread over a number of years.

That leaves us with the all important role of the Government in reviving the economy. China, which just announced a whopping US$586bil stimulus package last month, may come up with a second package as early as next month to further spur consumption. Taiwan, where the electronics sector is severely hit, has taken drastic measures to help its economy, such as giving out shopping vouchers to its people.

All over the world, people are talking of coordinated actions. If we are too slow to respond, it could appear that we are falling behind while others are streaking ahead.

We cannot just sit back and take comfort in the fact that we are less hit this round compared with the 1997 Asian financial crisis, therefore, we do not have to take such drastic action to recover.

Some feel that the direction may be clear but the plan is not moving fast enough on ground level. There are views that the delivery system has yet to catch up with the momentum since major reforms were introduced.

The feeling lingers despite efforts by the leaders to dispel that notion. Observers also point to the need for federal and state governments to work more cohesively and quickly.

People with cash are unlikely to release it until they are confident of the road ahead. Governments cannot totally shield their people from the current crisis that has the world in shock. At the very least, they can cushion the impact and work towards a soft landing.

·Senior business editor Yap Leng Kuen would like to see happier times for Malaysian consumers with a better pricing scenario and greater job security.

CPO prices to get full La Nina effect by end-May

2008-12-31T14:56:00.000+08:00

PETALING JAYA: Crude palm oil (CPO) prices will get the full impact of the rising La Nina weather risks, which are threatening major oilseeds and grain growing areas in the US and South America, by end-May 2009.

La Nina, usually marked by wet weather and abnormal heavy rainfall, was expected to disrupt the 2009 planting season for oilseeds and grains like soybean and corn in the US in March and April, a plantation industry consultant told StarBiz.

He said La Nina could also affect the harvesting season for soybean in Brazil and Argentina from February to April.

“All will depend on the length (time frame) of the La Nina weather pattern in 2009,” the consultant added.

He expects any disruption in planting or harvesting of soybean crops in 2009 would help bolster the currently-weak prices in most agriculture-based commodities, including CPO.

The world encountered a lengthy La Nina phenomenon from 1998 to 2001.

In 2001, it was reported that US farmers planted 1.6% less acreage of soybean and 4.8% less acreage of corn due to the wet weather caused by La Nina.

An analyst with a bank-backed brokerage said that increasing weather volatilities worldwide such as heavy rainfall in South-East Asia and drought in Australia last year led world markets to raise the risk premium for agricultural commodities.

In Malaysia, he said, abnormal heavy rainfall early last year created floods in major oil palm plantation areas like Johor and Pahang, giving a short-term boost in CPO prices.

Meanwhile, plantation stocks were traded higher on Bursa Malaysia yesterday as the CPO price closed above RM1,600 per tonne in line with soybean oil gains on the overnight Chicago Board of Trade.

Plantation giant IOI Corp Bhd closed eight sen higher at RM3.58 while Kuala Lumpur Kepong Bhd and Sime Darby Bhd both rose 10 sen to RM8.85 and RM5.20, respectively.

United Plantations Bhd increased 20 sen to RM10.60 and Asiatic Development Bhd was 10 sen higher at RM3.52.

On Bursa Malaysia Derivatives, the benchmark CPO for March delivery closed RM81 higher at RM1,671 per tonne.

The Star- Hanim Adnan

Oil may rebound to average US$60 in 2009

2008-12-31T14:55:00.000+08:00

NEW YORK: Oil futures may rebound from their worst year to average US$60 (US$1 = RM3.48) a barrel next year as Opec makes record production cuts to counter the deepest economic slump since World War II.

The forecast, the median of 33 analysts compiled by Bloomberg, represents a 50 per cent gain from Tuesday's US$40.02. A 14 per cent reduction in supply, equal to 4.2 million barrels a day, pledged by the Organisation of Petroleum Exporting Countries will erode US crude inventories that rose 10 per cent this year as the slowing economy reduced world demand for the first time since 1983.

While oil tumbled from a record US$147.27 in July consumers in the US, Japan and Germany faced their first simultaneous recessions in six decades. The plunge risks curtailing investment in new rigs, refineries and alternative energy sources, setting the stage for a supply crunch later on.

Once we get through the crisis, we will find that support is higher than US$40 a barrel," said Sarah Emerson, managing director of Energy Security Analysis Inc in Wakefield, Massachusetts. "The decline in demand has already occurred. A lot of analysts were late coming to realise that. By next summer this market should be turning around."

Crude futures averaged US$100 this year, the highest since crude began trading on the New York Mercantile Exchange in 1983. Oil plunged along with commodities from copper to corn in the second half as world economies slowed in the credit crunch caused by US$1 trillion of losses and writedowns at the world's biggest financial companies.

TNK-BP, the Russian oil venture of London-based BP Plc, said December 11 it plans to cut investment next year and keep production "broadly flat." Saudi Arabia's 2009 budget has a deficit of US$17 billion as revenue at the world's largest oil exporter tumbles.

"A price extremely low today will mean prices very high three or four years from now," Paolo Scaroni, the chief executive of Eni SpA, Italy's biggest oil company, said in London on December 19. Royal Dutch Shell Plc, Europe's largest oil company, has postponed an agreement on extending its Athabasca oil-sands project in Canada and also delayed a plan to develop a US$3.5 billion coal-to-liquids project in Australia.

Analysts expect oil prices to rise through the year to US$70 a barrel in the fourth quarter as demand improves and Opec production curbs announced this month take hold. The US economy may return to growth in the second half of 2009, reviving consumption in the world's largest energy user.

"The main determinant of oil prices next year will be how deep is, and the duration of, the economic downturn," said Guy Caruso, who was administrator of the US government's Energy Information Administration from 2002 until September.

"Opec is trying very hard to stop the bleeding but it is chasing after something it can't control, another year of falling demand," Caruso said, now a senior energy and security adviser at the Centre for Strategic and International Studies in Washington. - Bloomberg

Malaysia can weather storm

2008-12-31T14:54:00.000+08:00

The Malaysian economy is not likely to slip into recession, but pro-growth policies must be in place to mitigate risks to the slower growth in 2009, says Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz.

"We believe the economy can ride out this challenging period because of the positive conditions that prevail - with our labour market relatively stable, access to financing and both the government and the central bank having the flexibility to implement stimulus," she told Business Times in an interview yesterday.

"Although there has been a slowing in our export growth in the second half of this year, our domestic demand has held its ground and we are still seeing some strong growth in the region of seven per cent," she added.

The central bank head also did not discount the possibility of a second round of stimulus package to boost growth for Malaysia.

"The key to achieving domestic demand is sustained private consumption and increased government expenditure. Should we require a further stimulus, the government has the flexibility to do so," Zeti said.

This is possible because the government's debt level is very low, at 34.8 per cent of gross domestic product (GDP). She said the central bank also has the flexibility to provide greater accommodation to growth.

Bank Negara estimates that the RM7 billion stimulus package announced by the government in November can contribute one per cent growth to the GDP next year if it is implemented effectively.

"When the stimulus package was announced, our assessment was based on a recovery in the global environment in the second half of 2009. So far, the policy response (in the West) has been piecemeal. With the resolution and stimulus measures, we believe recovery could occur in 2010.

"If conditions in the major economies worsen, then further stimulus will definitely be necessary to prevent our economy from slipping into negative territory," Zeti said.

While this would mean that the fiscal deficit to GDP (at 4.8 per cent in 2008) could widen further especially with reduced revenue from crude oil, it should be seen as temporary, she added.

"These are the times, during low level of indebtedness, that the government has to step in. It is very important not to allow the country to slip into recession where we'll have higher unemployment, negative growth and result in closure of businesses," Zeti said.

On the central bank's monetary policy, Zeti said it has the flexibility to lower interest rates and use other instruments to support growth, especially since it has projected inflation levels to decline to less than three per cent in the second half of 2009.

The central bank was strongly criticised in July for not cutting the benchmark interest rates amid soaring inflation levels of 7-8 per cent year-on-year but Bank Negara was one of the first to recognise a slower growth risk.

It cut the rate by 25 basis points in November to 3.25 per cent, to support domestic demand.

With the current stimulus package, the economy is on course to achieve a 2.5 to 3.5 per cent growth, but Zeti warned that external conditions could deteriorate further.

"That is why it is important to lend support to the domestic economy which has been able to hold its ground," she added.

Consumption in the second half of the year has been in the 7-8 per cent range, while investments have remained positive, growing 3-4 per cent.

Business Times- Rupa Damodaran

IPOs to struggle in first part of new year

2008-12-29T09:00:00.000+08:00

NEW YORK: The volatility in the stock market has eased, the banking system is steadier, and the most recent initial public offering (IPO) is holding up well.

Despite that good news, the slow US IPO market is unlikely to rebound until at least the middle of 2009, as investors traumatised by sharp drops in the stock markets this year will continue giving IPOs the cold shoulder, bankers say.

Much will hinge on the upcoming earnings season in late January, which will give investors a sense of how long the recession might last, and when companies give their outlook for the year, one banker said.

“We’re going to have the opportunity to test investor sentiment and market stability,” said Mary Ann Deignan, head of equity capital markets for the Americas at UBS Investment Bank.

Still, the VIX.VIX Market Volatility Index, has fallen to about 45 from a record close of 80.86 in November, an encouraging sign.

“The stock markets don’t need to be high, or even going up, they just need to be stable,” said Doug Baird, co-head of equity capital markets at Banc of America Securities LLC, adding that the VIX would need to fall below 30 to have any real effect on IPOs.

Another question mark will be the extent to which the current crisis curbs investors’ ability to invest in IPOs.

“If there’s been enough wealth destruction that it takes longer than normal for mutual funds to re-collect assets – that would prolong the drought,” Baird said.

That drought, which has worsened in recent months, led to a 43% decline in IPO volume over 2007. There has only been one IPO since August, a US$126mil deal by on-line university operator Grand Canyon Education Inc in November, one of the rare IPOs in 2008 still trading above its offer price.

The tough market in 2008 prompted 102 companies to pull out of the IPO pipeline, which now holds 127 IPOs estimated to raise US$26.2bil, according to Thomson Reuters data.

Of those, the larger, more established ones are most likely to be first out of the gate, the bankers said.

“Well-known, well-regarded brands are less risky than the start up doing the US$75mil IPO,” Bank of America’s Baird said. Such brands will get first crack at the market when it reopens, he added.

One of the largest deals in the pipeline is by Cloud Peak Energy Inc, a Wyoming-based coal producer, which is aiming for a US$1bil IPO. Another is by Mead Johnson Nutrition Co, a Bristol-Myers Squibb unit that makes children’s nutrition, also for a US$1bil stock flotation.

Energy companies make up the largest group in the pipeline, with 20 prospective IPOs. Other major sectors include high tech, with 19 companies, and the healthcare industry with 13.

The incoming Obama administration’s expected push for green tech and infrastructure increase the odds of IPOs in those sectors, UBS’ Deignan said.

“As the Obama administration articulates the kinds of programs it will support, and where stimulus program dollars are aimed, you will see Wall Street follow that money,” she said.

Deignan expects any resumption in IPO activity will lag follow-on offerings for the first few months of 2009, as struggling, already public companies fix their balance sheets.

After these companies recapitalize, there will be more room for IPOs.

“What will unlock the market is a for string of regular, straightforward companies to be able to go public and give investors good returns and trade well,” Deignan said.

And Baird, who has seen the IPO boom and bust cycle before, is sanguine about the market’s prospects.

“We’ve been through periods of time when IPOs disappeared, and then eventually came back with a vengeance,” he said. – Reuters

2008 could nail its spot as the worst year

2008-12-29T08:59:00.000+08:00

AS the US stock market heads into the last week of the year, what was inconceivable just 12 months ago is now a stark possibility: 2008 could be the worst year ever for Wall Street.

The US market’s most tracked benchmark, the S&P 500, is down 40.6% since last year’s close with only three trading days left in 2008. Given the market’s hair-trigger volatility this year, that’s just one bad day away from surpassing 1931’s 47.1% drop, the biggest yearly decline ever.

As it is, the market’s swoon this year will cement 2008’s place in history by at least one measure: eviscerated wealth. A record US$7.3 trillion of stock market value has been obliterated this year, according to the Dow Jones Wilshire 5000 index, the broadest measure of US equity performance.

Investors ran for the exits this year as a collapse originally thought to be contained to the US home mortgage sector morphed into a full-blown global credit crisis that now threatens global recession.

The fallout from frozen credit markets permeated all sectors from banks to autos to resources, while unemployment climbed, house prices plummeted and cash-strapped consumers curtailed their spending.

“How to sum up a year that has been plagued with financial crisis in every form and fashion that you could see and, at the same time, we have an economy that’s just imploding on itself,” said Jocelynn Drake, market analyst at Schaeffer’s Investment Research in Cincinnati, Ohio.

“If 2008 proved to be anything, I think it was a reality check for a lot of people.”

A cataclysmic year

Market watchers said it was a year unlike any they have ever seen. Among the casualties: the restructuring, acquisition or disappearance of such heavy hitters as Bear Stearns, AIG, Washington Mutual, Merrill Lynch and Lehman Brothers.

The global downturn forced central banks around the world to mount coordinated interest-rate cuts in an attempt to stimulate growth, pushing rates aggressively lower.

Earlier this month, the US Federal Reserve again cut rates to almost zero and pledged to undertake more unconventional methods to fight off the year-long recession.

While no one is feeling celebratory as the year draws to a close, analysts say the Fed’s offensive has bolstered optimism by showing the central bank is willing to take whatever steps are necessary to get credit flowing again.

Reasons for hope

The new year will also bring a new White House administration when Barack Obama is sworn in as president in January. Hopes for a new stimulus package have also buoyed the market of late as Obama’s picks for his economic team have been greeted favorably.

Obama is expected to unveil a government spending programme in areas including infrastructure building to reinforce boosts from the Fed.

Earlier this week, Vice president-elect Joe Biden said the new administration was close to nailing down a deal with congressional Democrats on the package, which aims to generate three million new jobs and could cost US$775bil or more.

“Next year, if it goes according to plan, will be a transition year from one of major disasters and financial distress to one of repair and gradual recovery,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

“Looking into the new year, the economic data is likely to continue to be very weak. However, the question really is: ‘How much of that bad news is already priced in, and how long will it last?’”

When Santa skips town

The lack of a significant year-end rally so far does not bode well for the market in the new year. With stocks unable to mount a Santa Claus rally this week, analysts said they will be looking to next week for a clue as to what to expect in 2009.

“A Santa Claus rally can offer clues as to what January, and thus the next year, might bring,” said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

Conversely, the absence of a rally could be a sign of more hefty losses to come, Zaro added.

Trading is expected to continue to be light this week, when markets will be closed on Thursday for the New Year’s holiday.

Among economic data on tap is Tuesday’s report on December consumer confidence index from the Conference Board, expected to read 45.0 versus 44.9 in November, according to a Reuters poll.

The Institute for Supply Management’s manufacturing index for December is expected on Friday, and is anticipated to show a reading of 35.5, down from November’s 36.2. A reading above 50 points to expansion, while a reading below 50 shows a contraction. – Reuters

Markerts mired in the economy

2008-12-29T08:35:00.002+08:00

BUSINESSMEN are bracing for a downturn next year, with many expecting business to be much slower than usual after Chinese New Year.

Economists expect economic growth to contract by about 50% next year compared with this year, while analysts are forecasting lower corporate earnings.

The Year of the Ox, which starts on Jan 26 on the Chinese calendar, looks like a year when most will have to slog at their work.

Amid the gloom, optimists among investors hope the US recession will come to a close by the end of next year, and as the stock market attempts to trade about six months ahead of the economy, it may bottom in mid-year.

Optimists have the market recovery of 1986 on their side. The bear market of the 1980s occurred in 1985 and 1986, both years when Malaysia’s nominal gross domestic product contracted, with 1986 seeing the more severe contraction. Yet, the market did not fall through the floor for the whole of that year.

In fact, it had hit bottom by May from which point, the Kuala Lumpur Composite Index (KLCI) rose about 40% at the end of 1986. From there, the KLCI ran all the way, by a further 80%, until the 1987 October crash.

In the more recent financial crisis, the market also took off, in September 1998, while the country was still in recession.

There is no consensus yet as to when the relentless recession in the US might retreat – there are optimists who see the recession ending next year and pessimists who do not see that happening till 2010.

The market has a fairly good record of efficiency – it seems able to sense when an economy in recession will soon recover.

Consumer speding shrivels

THERE is no sign yet when one of the key indicators for an economic recovery in the US will show up positive.

Data on consumer spending in most of the developed countries continue to deteriorate.

During the week, the US reported that sale of new homes in November was worse than any other month this year, in fact, it was worse than in any month in nearly 18 years.

It was also reported that disappointing retail sales in the US are likely to show that this December will be one of the worst holiday shopping seasons on record, while auto sales had plunged 37% in November. This is also the pattern of retail sales in Europe and Japan.

The US economy, an unusual one which grows by consumer spending, will not stabilise until consumers do not hold back their shopping even more.

The recession in the developed countries has caused all manner of economic activity to plummet – exports from Asia, commodity prices and transport movements.

Everyone knows that recessions recur through the years regardless of what governments do to prevent them – they can only try to make it less painful or prolonged.

It is also known that in time, recessions will pass, after all the excesses have been spent. It remains to be seen the extent to which consumer spending will recover in the US, but if consumers are burdened with debts and can’t spend as they did in the good years, the recovery will be a weak one.

Spending in Mexico

MEXICO and Malaysia have something in common – their people like spicy food.

They are also both dependent on oil revenue in their government budgets.

Oil experts forecast that Mexico will no longer be exporting oil by the end of next year.

Considering that Mexico has been one of the world’s biggest oil exporters, it must be pumping oil massively and consuming a lot of it domestically.

Like Malaysia, Mexico’s government relies on oil revenue for about 40% of its budget. That’s a very heavy dependence.

Several articles were published on websites last week on American concerns of economic and political instability south of the border when the Mexican government is deprived of surplus oil revenue.

That’s an experience for Malaysia to watch although its reserves for oil and gas should last longer than Mexico’s.

It is not unusual for countries to turn from oil exporter to importer. Indonesia is an example, having become an importer in recent years.

Different commodity-exporting countries maintain their own policies. Norway, the world’s third largest oil exporter, keeps most of its oil revenue in fixed deposits.

Chile also has a prudent policy in its export revenue of copper, its principal commodity. It has US$25bil in its sovereign wealth fund that was accumulated mainly when copper prices were high. That now stands the economy in good stead at a time of global crisis.

>C.S. Tan is an associate editor of The Star. He thinks everyone, including governments, should save for rainy days. He also hopes companies will not be too unkind to employees next year.

Analysts: Oil prices may slide further in 2009

2008-12-29T08:35:00.001+08:00

LONDON: Oil prices, which hit record highs above US$147 (US$1 = RM3.48) a barrel this year before plunging under US$33, risk slumping more in 2009 as recession curbs the world's appetite for energy, analysts say.

"We expect oil prices in early 2009 to remain under pressure given the weakening demand outlook and as global economies continue to slow," said Nimit Khamar, analyst at the Sucden brokerage in London.

"By the end of the second quarter, we expect prices should stabilise and find a floor, provided Opec can comply with their recent cuts and continue cutting output."

The crude market plunged in late December to reach the lowest points for almost five years as weak economic data around the world stoked concerns that a sharp global slowdown will ravage the market.

The Organisation of Petroleum Exporting Countries (Opec) oil producers' cartel, which pumps 40 per cent of the world's crude, is keen to prevent prices sliding further, as member nations look to protect their incomes.

However, Opec production cuts agreed in September, October and December have failed to stop the market sliding under US$33 earlier this month.

"Heading into 2009, we believe many commodity prices are set to overshoot to the downside in response to the worst downturn in economic activity since the Great Depression," added Deutsche Bank analyst Michael Lewis.

The market scaled record heights earlier this year on supply worries in key producing nations, sparking fears about runaway inflation globally.

But economists now fear that a plunging crude market will spark deflation - a prolonged drop in prices - that will further damage a global economy that is reeling from the impact of a credit crunch.

"2008 will go down as one of the most volatile and difficult years, ever for oil," said Peter Beutel, analyst at energy consultancy Cameron Hanover.

"It was a year that started with runaway prices and all the makings of the worst inflation in nearly three decades. It is ending with imploding deflation and the worst recession in seven decades," he added.

The market has plunged by as much as 78 per cent since hitting record heights five months ago, as traders fretted about the threat of a global recession - defined as two straight quarters of negative economic growth.

Recession has so far infected the eurozone, Japan and the US, while even Asian powerhouse China is experiencing slower growth as a global financial crisis takes its toll.

Major world powers have responded to the ongoing crisis with coordinated interest rate cuts and "stimulus" spending plans designed to lift their economies out of the doldrums.

US investment bank Merrill Lynch forecasts oil prices to average US$50 a barrel in 2009, as energy demand tumbles in the face of shrinking economic growth. - AFP

Mida woos Middle East investors

2008-12-29T08:34:00.001+08:00

As the year comes to an end, Malaysian Industrial Development Authority director-general Datuk Jalilah Baba talks to HAMISAH HAMID about foreign direct investment flows, what to expect in 2009 and the promotion of Malaysia’s growth corridors.

QUESTION: WHAT are some of the biggest capital-intensive projects in Malaysia this year?

A: Major projects approved by Mida in 2008 include those by National Instruments, Honeywell, Ibiden, SunPower, First Solar and Q-Cell.

The benefits from the inflow of FDIs are tremendous. For instance, the solar panel manufacturers such as QCell and SunPower are creating opportunities for local companies to be suppliers, vendors and service providers such as glass manufacturers and wafer fabricators.

Their products are for export. This means that they use a lot of services such as ports, airports, freight forwarders and others.

When these investors set up their operations in other countries, their vendors (in Malaysia) follow them. Some of the spin-off from FDIs can't be quantified with money.

Q: As the major sources of FDI such as the US, Germany and Japan are facing recession, do you expect to see more FDI from the Middle East next year?

A: All this while, Middle East investors have been investing in Western countries but due to the development there, they are diverting to Southeast Asia. We want to attract them, but unfortunately, they are portfolio investors and not technology-based.

But they are opening up to manufacturing and high-tech sectors. They ask us for projects that they can invest in. So, we have packaged 14 projects for potential investors in the Middle East and they are evaluating them. Project owners will also give presentations to the investors. Hopefully, 2009 will be more successful (in attracting FDI from Middle East).

Q: Could you please elaborate on the promotion of growth corridors that has been creating confusion among investors?

A: It is a good idea to develop the growth corridors with their own strength and niche. However, when each corridor claims to be the one-stop centre (for investment), it has created some confusion among investors.

Actually, Mida is the main coordinator for all these growth corridors in terms of investment promotion. Investors who want to explore opportunities in these growth corridors can go to Mida.

Iskandar is a bit ahead (of all growth corridors) and they have their own committee that approves investments. Mida's deputy director-general is part of the committee. This committee only approves services projects and for the manufacturing projects, investors still have to go through Mida.

Q: You expect a slight slowdown in domestic investment this year. Why is that so?

A: In 2007, the domestic investment was RM26.5 billion, which was mainly contributed by three big projects by Petronas in the petrochemical industry. Between January and October this year, domestic investment was RM15 billion, but this is not due to global slowdown.

If we look at the trend, last year's domestic investment was a record high due to the three lumpy projects. In 2001, the domestic investment was RM5.2 billion, in 2002 it was RM6.3 billion, in 2003 RM13.5 billion, in 2004 RM15.6 billion, in 2005 RM13 billion and in 2006 RM25.7 billion.

We also need to see more participation of local companies under the umbrella of government-linked companies (GLCs). The GLCs are supposed to open doors for other local companies.

Q: Could you elaborate on the programme with Human Resources Ministry to retrain retrenched workers?

A: With retrenchment expected to increase, we are talking to the Human Resources Ministry on how to come out with a programme to re-train the workers in new technology. For the past two years, we have been reporting to the ministry, where we identify skills from the (FDI) projects, so the ministry can come out with specific training programme (for the workers).

Mida expects FDI inflow to be stable

2008-12-29T08:33:00.000+08:00

Malaysia expects to maintain this year's foreign investment figures in 2009 despite the challenging global and domestic economic outlook.

Malaysian Industrial Development Authority (Mida) director-general Datuk Jalilah Baba said that approved foreign direct investment (FDI) of RM41.3 billion in the first 10 months had already surpassed last year's RM33.4 billion.

"So far, there are no withdrawals of projects or pulling out of negotiations," she told the media in Kuala Lumpur.

Mida had earlier targeted FDI this year to be the same as in 2007.

Jalilah said Malaysia was still attractive to foreign investors despite the global economic downturn and recession faced by major sources of FDI.

This was evident in the sustained inflow of foreign investment into the country, she said, adding that it reflected the conducive and cost-competitive business environment here.

To date, multinational corporations from more than 60 countries have invested in over 3,000 companies in the manufacturing sector.

Nevertheless, Jalilah anticipates a challenging year ahead given the global economic scenario and competition from new developing economies, European countries and some states in the US that are competing for high value-added industries.

However, she is optimistic that with concerted efforts, strategy and improved infrastructure to meet the changing nature of investment and business models, Malaysia will continue to draw foreign investors.

"We want to get more (FDI than in 2008), but we hope to maintain it," she said in response to a question.

Next year, Mida trade and investment missions will be more targeted and focused to include roundtable meetings with pre-identified high net worth companies and sectors.

It may also help foreign investors facing problems in securing financing from troubled foreign banks to obtain financing locally to ensure that the global credit crunch will not hobble FDI projects here, Jalilah said.

"We will introduce the companies to local financial institutions and see how the projects can be financed temporarily by these institutions. This way, the inflow of FDI into Malaysia will continue."

To date, Mida has matched three companies undertaking huge projects with domestic and Malaysia-based foreign financial institutions.

According to Jalilah, the failure rate of approved investment projects taking off is usually about five per cent.

"Last year the failure rate was five per cent, while 75 per cent of projects were already implemented; the balance are in various stages of implementation," she said.

Business Times- Hamisah Hamid

'We are trying to build a better market'

2008-12-29T08:31:00.000+08:00

The local stock exchange has had a roller-coaster year, hitting a record high and then taking a turn for the worse as sentiment weakened after the general election and the global economic slowdown. As 2008 draws to a close, Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff tells GOH THEAN EU what’s in store for the new year.

QUESTION: 2008 has been a challenging year. Bursa's earnings (for the first nine months) have gone down by 52 per cent against last year. What's the outlook for 2009?

A: If the global economic situation does not improve, a sign of recovery does not appear. Maybe within the next few months, then potentially 2009 will be worse. But, if signs of recovery do appear within the next few months - as you are aware, the market tends to recover faster than the real economy - then you can expect the market to pick up. Then, there is a possibility next year may not be worse than this year. At the moment, it is still quite hard to predict. My view is that a lot of these signals or signs that we are looking would come out from the US.

Q: Analysts are saying that the market will be weaker in the first half and expect a recovery to begin in the second half. What are your thoughts?

A: What is important is for people to be able to see the bottom, because once we are able to see the bottom, we will know that things will start getting better. I think the assumption for today is that nobody is quite sure if we have hit the bottom, or when the bottom will be reached.

Hopefully, that will happen over the next few months. Once there's an agreement that a bottom has been reached, then you can expect the market to start picking up. So, first quarter of 2009, there will be a lot of focus on the data coming out from the US. As far as our economy is concerned, the government had announced a stimulus package. The focus here is to make sure the domestic economy remains fairly robust, and to keep the domestic economy robust, it is important for Malaysians to keep supporting the industry. So, we hope that the stimulus package will have a desired impact on the people.

A recession will happen if everything is sort of stagnant. That means people stop spending.

Q: Which area of Bursa's business do you expect to see growth next year?

A: Equities, because the situation is not clear at the moment. We are expecting probably less transaction in the business and stable revenue. We are hoping it will be similar. As for the derivatives, we are hoping that the derivatives market will do better next year.

Q: Why are you expecting the derivatives market to do better next year?

A: So far this year, we have seen the derivatives volume has been stable. Infact, for our palm oil contracts, we have seen slightly higher volume than last year. As you know, we have launched direct market access for derivatives, and we expect the amount of volume to increase over time.

We also expect the interest in crude palm oil futures contract to continue to grow, because as a commodity, it has become more and more popular.

Q: Bursa has big plans for 2009. There will be launching of direct market access for equities, introduction of a unified board and new Mesdaq, as well as launching of two new FTSE palm oil indices. Why introduce these products and services at a time when market sentiment is expected to be weak?

A: We believe that the current environment is the best time for us to do all these such as launching of the new system. Because, really, what we are trying to do is to play catch-up with the other markets. We want to take advantage of the current environment. At the same, the proposal of a unified board is also part of improving the market structure and to improve the quality of the company. As you know, companies in the second board have lost a lot of its shine since the crisis. As for the revamp of Mesdaq market, we want to make it easier for companies to list.

Q: Any further liberalisation next year?

A: I think liberalisation is an ongoing thing. So, as we progress, every aspect of our rules, may it be listing requirement or process, we will continue to engage with the industry and the market to get the feedback.

Wherever possible, we will look at relaxing the rules. We want to make it as easy as possible for people to do business here.

At the same time, if you notice some of the incidents that are going on, we might need to tighten some of the things. One of the areas would be corporate governance. Although we have made a lot of improvement on corporate governance over the last 10 years, there're still incidents of breach going on. When this type of things happen, we look at our rules, to see whether our rules are too relaxed or is it because our enforcement is not strong enough or is it something else.

We really don't want to tighten any more rules, if we can help it. We feel that certain things cannot have so many rules. If there are too many rules, then it will be more costly for companies to maintain their listing status.

Q: Some of the remisiers and brokers are calling for shorter trading hours. What's your view on that?

A: The shorter trading hours is something we have been looking at. We are currently discussing with the industry. We found that not everyone wanted shorter hours. So, we are still continuing our dialogue. If we can get majority of the players to agree on shorter trading hours, then we won't stand in the way. If we can have same amount or more amount of trading in shorter period, then why not? You could save the industry a lot of money.

Q: So, what can Bursa investors expect from you and the company in 2009?

A: We are working on a number of initiatives. Basically, we are trying to build a better quality market. The infrastructure will be better and the product range will be better.

But it all depends on the market conditions. If market condition improves, then we might see an improvement. But if the market condition stays the same or becomes worse, then be prepared for a tougher year.

Q: What is your current staff strength? Any plans to reduce workforce to cut costs?

A: We have about 600 people now. We have no plans to downsize. Obviously, we want to increase productivity and efficiency. We are trying to manage our costs and we are looking at ways to cut variable costs. This means we've got to be more careful with our travel costs, promotion costs, and advertising costs.

Q: You have been the CEO of Bursa for almost five years. Is this the toughest year so far?

A: Yes ... (but) every year has been different. This year, interestingly, it started out with a bang, our index hit the highest level. Then, unfortunately, it has been downhill ever since. But, having said that, because our market fell early (due to the) kneejerk reaction to the general election, so we had reached a lower level before the other market started to go down. What was comforting was that we seemed to have stabilised when the other market started falling.

Q: What are the challenges you have come across since you joined Bursa?

A: We have had our challenges. One of the biggest challenges we had was the launching of our system. Ideally, we wanted to launch our system earlier, at least a year earlier. In terms of retail participation, we have not made as much progress as we should have. What is important for the market is the quality of the retail investors, not quality in terms of how much money they have, but quality in terms of how much knowledge they have to invest. That is one aspect we think we did not gain as much progress as we wanted.

Business Times

Right time to buy equities

2008-12-27T09:45:00.000+08:00

WILL the year of the Ox be better for financial markets?

Typically, the Ox signifies prosperity achieved through fortitude and hard work.

The Ox is unswervingly patient, tireless and capable of enduring hardship without complaint. So, it is less surprising when JP Morgan chief Asian and Emerging Markets Equity Strategist Adrian Mowat says that the Ox holds better prospects than the Rat.

So strong is his conviction, that at about this time next year, he says investors will be having a banquet because equity markets have improved, and investors are feeling better about life.

“2008 was a horrible year for investors. The D word was not decoupling, it was deleveraging,” says Mowat.

Hence, just when everyone is giving up on fundamental analysis, Mowat says, it’s time to pay even closer attention.

Now, he says, is the best time to look at equity markets, as confidence is low and economic data have yet to show an improvement.

“You want to own equity. Come Chinese New Year onwards, you need to be having the right stocks. You need to start looking at stocks with resilient earnings. When the turn comes, the dispersion is going to be very high. Get out there and do the analysis,” urges Mowat.

He says Asia is right smack in a situation where there is a crisis happening in the West, hence asset prices in Asia are suffering.

“Investors can now buy stocks with good earnings stream at heavily discounted prices because of the crisis in the West. This crisis only makes the Asian economy stronger. Emerging markets will outperform other markets,” he says.

On a valuation basis, stocks are now cheaper than they were during the Asian financial crisis and the tech boom bust.

When the recovery sets underway, price earnings (PE) of stocks will trade above their discount levels.

“We’re potentially going to be seeing large dispersion of returns. This is going to be good for equities,” he says.

Mowat says investors are seeing the worst down leg this quarter.

The first quarter of 2009 won’t be as bad as this quarter.

He sees the recovery happening below potential growth rates because the US will be in the process of rebuilding its balance sheet.

“Yes, we’ll still be seeing bankruptcy and defaults, but these are lagging indicators and have already been priced in.

“What we’ll be seeing is a stabilisation of policy in the US. Incoming US president, Barack Obama has been quick to announce the people for his administration.

“This gives the market some comfort, and also helps confidence,” he says.

Mowat says it won’t be a surprise if technology stocks make a comeback.

As expectations in the sector have been so beaten down, it takes only a small change in demand to see a big difference.

“Technology stocks in emerging markets will return, and it won’t need to wait for demand from the US and Europe to return,” he says.

He advises investors to stay underweight on the cyclical and material stocks as in current times, one needs to invest in resilient companies.

“Companies that say, yes we are affected and we’re modifying our plans to cope with the challenging environment – buy these companies.

“Companies that say, no we’re not affected – sell these companies, as they have no sense of realism!” says Mowat.

Recovery soon ...

Emerging markets may be seeing a powerful V shape recovery in the making. Boosting this recovery is an environment of lower interest rates and fiscal stimulus policy.

He says the world is cyclical, and 2008 is what he calls the big ugly experiment.

In the US and the developed economies, consumption was holding up pretty well until the recent quarter.

Initially, US exports were holding up due to the growth in emerging markets up until the final quarter where demand and growth dropped.

He says the economy was losing momentum because of the measures taken to counter inflation.

“The derating happened because of a monetary derating policy, and we subsequently saw declining industrial production. Companies needed to get rid of their inventory. How do you do that? You stop production,” says Mowat.

The problem was made worse with the credit crunch unfolding. It was harder for companies to get letters of credit and working capital to finance their operations.

He says what investors are seeing so far is government policies responding to the market turmoil, and these include aggressive monetary policy and fiscal stimulus such as tax cuts.

When it comes to some of the measures taken, Mowat cautions to be careful of new infrastructure projects that are only just beginning.

“If these projects were only just implemented, it’s not going to make a difference until 2010. So unless they have already started, the people aren’t going to feel anything.

“If governments announce an infrastructure project, be critical. Make sure it can make a difference.

“Tax cuts are more important because it puts more money in people’s pockets,” he says.

An important indicator he notes is that in the last few months, investors have been in a situation where equities were dropping as economic data were worsening.

The cycle has now changed where capital markets are improving even as economic data had yet to improve. Inflation is also no longer an issue.

“We are now seeing a V shape recession. Things are beginning to improve. We’ve seen the worst selling in October. I think its time to position oneself in the market,” says Mowat.

“Don’t be surprised if markets are 50% higher in 2009 as we see a gradual normalisation of risk appetite. I don’t believe in paradigm shifts. I believe in long and short term cycles.”

Mowat, who tracks China closely, says that the biggest risk is if China fails to respond to its four trillion yuan stimulus package. However, he believes, the Chinese economy will respond.

Countries in financial surplus, he says, will clearly have a funding advantage as it means they have not over borrowed or over consumed.

With emphasis on that, Mowat favours China, Singapore, Taiwan, Thailand and the Philippines. On the other hand, countries in a savings deficit namely India, South Korea, Russia and Indonesia, he says, may see a “very uncomfortable credit cycle.”

“For emerging markets that have relied too much on commodities, you’re going to be seeing growth that was initially supernormal to almost non-existent.

“I worry about material and energy stocks. These are stocks from the last bull market and a lot of people still own them,” says Mowat.

Malaysia good but unlikely to lead

Malaysia will unlikely be the leader in this recovery. China will lead the story as it makes up some 30% of emerging market’s GDP.

In Malaysia, Mowat sees an acceleration in loan growth, aided by lower interest rates.

He says Malaysia is in a good position, as it has a meaningful surplus, and also the flexibility to adjust its monetary policy.

“It’s a story of pent-up demand, and the fiscal benefits that are coming through.

“Consumers now have more money to spend because of the lower petrol prices. Confidence is returning and the political risk aversion has also reduced,” says Mowat.

He says the stock market is typically 3 months ahead of the economy.

At end 2007, equity markets were falling when data were still strong.

“Right now, equity markets are climbing while data are still weak. So maybe the recovery is already happening.

“In Malaysia, I feel that the political risk is already priced in, hence the market may even surprise (to the upside),” Mowat says.

He is neutral on Malaysia. This is because when the recovery takes place, funds normally head first to the big liquid markets.

“Malaysia also has the issue of uncertain politics. For some of the commodity companies, you may see a very dramatic contraction in profits,” says Mowat.

“As countries move to a zero interest rate policy, what we’re seeing is a situation of the wheels spinning, but no traction because the appetite for risk is zero.”

“As risk appetite increases, we’re going to start seeing the ringgit appreciate. We’re now seeing a low point in currencies but by mid-2009, I see an improvement,” he says.

Mowat says redemptions are not leading indicators of an economy.

Nonetheless, with the amount of outflows Malaysia has seen, it’s equal to the 2006 and 2007 outflows combined.

So in essence, Malaysia is back to 2005 levels.

Buy low, buy low, buy at the bottom!

2008-12-27T09:44:00.000+08:00

“Equities on SALE!!!” – screamed most stock markets earlier this year. “Equities – Further Reduction!!!”, the announcements continued into mid and late 2008, yet, investors watched from the sidelines. In retrospect, waiting was wiser than jumping in. What about now? After all, many stock markets have already lost more than half their values!

You, the rational investor, are thinking it’s crazy to buy now when stock markets are in a pool of red.

Alternatively, you, the ultimate bargain hunter, are waiting for the sign that says, “Equity on Final Sales, last 3 days only!”

It is exactly what millions of other investors are thinking as well. So when is the best time to buy so that you are buying at the low?

But then, when can we expect equities to be at their cheapest?

They are cheapest when the market is at its “worst” or the outlook is at the “bleakest” – where it is impossible for things to get any worse.

Let’s cast our minds back and think of the world economy after the technology crash in 2000, Sept 11, 2001, Enron and Worldcom crisis in 2002 and the Asian SARS episode in 2003.

Each crisis seemed to signal the end of the world as we know it. This crisis is no different! SARS caused the Asian markets to plunge but shortly afterward, they shot pass their previous highs.

If you had waited because you thought that SARS would plague Asia for a long time, you would have missed out on some of the most spectacular growth. Does it mean one should just take an early plunge during a crisis?

Then looking back further at 2001 after the technology crash – one could have easily believed it was the “final sale” and entered the market then.

Unfortunately, the markets continued to be shocked by acts of terrorism (Sept 11) and then betrayed by corporate giants like Enron and Worldcom.

Even the most rational investor who bought at these perceived low points may call it quits.

When the situation could not get any worse, it just did! Does it mean one should just wait and see? After all, I did describe the current crisis as the “First world financial tsunami” – have the waves stopped or is it an interlude before the next big one?

The equity market is like a roller-coaster ride, as it plunges headlong into a great fall, investors will lament and throw their hands up in despair.

A friend of mine jokingly said that her long-term investments may now be so long term that they would only benefit her grandchildren.

Are you prepared to buy when the situation is bad, so bad that it cannot get worse? That, by definition, is to buy at a low and maybe even the absolute lowest point.

Unless you are still on the roller coaster, you will not be able to enjoy the upswing when it passes the bottom of the great fall. And if you choose not to be on the roller coaster, then don’t complain that you are always unable to buy at a low.

In fact, the stock markets have always recovered months before the real economies hit the bottom.

A sensible approach is needed, coupled with great mental and emotional strength to overcome the fear of loss in such instances.

While it is silly to buy simply because markets are falling, sticking to fundamentals does work. Buy in anticipation of future re-growth at reasonable prices and persevere through possible set-backs – this is likely to succeed over the longer term.

If you have what it takes, I would suggest a regular drip into the market.

For example, if you have RM100,000, divide it into 10 lots of RM10,000 and then invest each lot into the market monthly. As you ride the market down, you can be assured that you are buying cheaper.

Of course, the best outcome is that, in the course of such regular investing, you manage to “catch” the bottom.

As I always believe, if you get value for your money, then you don’t have to worry about whether it’s cheap or expensive.

Tay Han Chong is senior vice-president and senior head of division, Personal Financial Services Division, UOB

Your 10 questions

2008-12-27T09:32:00.003+08:00

Datuk Seri Nazir Razak has become synonymous with the CIMB Group. His pedigree and achievements have made him a highly-regarded personality in corporate Malaysia. Readers get to find out a little more about this man from his answers to their questions

1. People say you grew up in a well-known and rich family and therefore, may not quite understand nor have experienced a fall or real challenges. Is that true?
KHLow

I value my family background not for material comforts but for the emotional security and set of personal code of ethics it has instilled in me. As for career challenges, I can assure you that life as a rookie at CIMB was no bed of roses. To be honest, I struggled and almost surrendered a few times.

By now though I believe that I have demonstrated the track record, character and ability to do the job entrusted to me.

2. Set of rules is normally redefined by the person(s) in-charge, be in the corporate world or family unit. Do you use the same principle at home as you do at work?
Zaharah Rashid, Subang Jaya

Although I try to assist, due to my work schedule I leave home matters largely to my wife.

3. We have heard so much about your life at work. Can you tell us more about your life outside the office?
See Gaik Eng, KL

Life outside work centres around my family. I have been married to Azlina since 1992 - we met while studying together at Bristol University. Her father is Tan Sri Aziz Taha, a former Governor of Bank Negara and we have 2 kids, Arman and Marissa. I try to spend as much time as possible with them. We are not good at glitzy social events and are actually very private, preferring time with our extended family and a small circle of close friends, many of whom date back to our youth.

It is important to have a good work/life balance and working long hours at the office also means working harder to obtain quality time with your family.

As for sports, I find squash the most efficient form of exercise and Chelsea the best football team in the world!

4. Family support is key in one’s success. How do you reconcile that with the huge benefits it may bring you as your brother will be Prime Minister of Malaysia not too long from now?
Yasir Tamizi

Indeed, the most important influence in my career has been my wife Azlina. She believed in me even before I had a job. She’s very smart but more importantly we both grew up in families which value integrity and a strong sense of duty. So she has been a great sounding board and conscience. As for my brothers, we are close but have each deliberately kept separate career paths. This won’t change even when Najib becomes Prime Minister.

As for CIMB, I am determined that my family relationships must not detract from the very real successes that CIMB staff have worked so hard and for so long to attain.

5. How do you distance yourself or CIMB Group from the perception of having strong political connections in securing high-profile business mandates? Are other investment banks really in the same playing field with CIMB, then?
Mustaqim Zain

CIMB was Malaysia’s leading investment bank before I became its CEO in 1999. Since then we have not only successfully defended that position in Malaysia but we have expanded to become number 1 in M&A advisory in Singapore and a leading investment bank in Indonesia. I do not have any relatives in government in other countries.

I do not deny that connections of whatever form helps open doors but it’s always what you do in the room that matters. If you look at the team we have at CIMB Investment Bank, you will see a set of bankers with a track record that can justify winning any mandate. CIMB has also been successful at consumer banking – surely that cannot be attributed to political connections.

6. You are one of the few who practises meritocracy in staff recruitment/promotion. Have you had problems implementing this policy? How can you persuade others to do the same to raise our competitive advantage?
S. Paul

CIMB has always strived to be meritocratic. A successful organisation is one that keeps its people motivated. We try our best to ensure that those who do well are rewarded financially and in career progression, irrespective of gender, race or age. Every employee must believe that it is worth working hard.

Implementing a merit-based organisation in Malaysia and our other banks in the region is not easy; it is human to be biased towards one’s race, gender or even friend.

So management has to continuously intervene to keep managers objective and fair. For instance, we question managers who can’t run multi-racial or multi-gender teams. We remind our people of the need to challenge what comes naturally to them as individuals.

So, my best advice to others - Admit this human failing and take steps to counter it because it will enhance your organisation’s performance.

7. You have been in the banking industry for almost 20 years and during that time you have been instrumental in propelling CIMB to great heights. What are your plans for the next 10 years? Do you see yourself as a regulator, for instance?
Ratha

Over the next 10 years, I see myself continuing to spearhead CIMB Group and in particular, its transformation into an ASEAN banking group and then hand-over to an able successor. I am very committed to the CIMB agenda that has consumed me since 1989 and do not see myself in any other full-time role after this.

8. Your late father is seen as a people’s leader and you are seen as the single force behind CIMB’s success locally and abroad. Like your father, how can that be meaningful to you when there are people out there in your own country who are trying to make ends meet?
Ahmad Safuan Mokhtar, Project Management Consultant

I am very proud of the role that CIMB Group plays. Banks are crucial to any economy, not least for channelling savings for investments that enable economic growth. And economic growth drives employment and wealth creation without which we can’t even begin to discuss distribution of wealth.

CIMB is a socially responsible organisation and strives to supplement the Government’s welfare efforts through our RM100 million charitable foundation. Our CSR programme is acknowledged as one of the best in the country. Our Community Link is currently running 198 projects throughout Malaysia such as helping single mothers in Pulau Tuba, sponsoring English lessons for underprivileged kids in Sentul and so on.

9. What measures would CIMB take to tackle the current global crisis to avoid it becoming a victim of the “falldown”?
By Katherine, Selangor

We have limited exposure to international assets and dependence on foreign financing. This ensured that we were not materially hurt from the crisis itself. But as the crisis will have a severe impact on the economy as a whole next year, we have to watch our loan books, be vigilant about all types of risks and contain our operating costs.

10. What is your view of the NEP? Should it be abolished?
Hussein Hamzah, Johor

The NEP was meant to be a 20 year exercise that, according to Tun Razak in 1971, is “… not aimed at promoting any sectional interest but is a blueprint for the progress and unity of our Nation”.

The NEP has had many successes against poverty and in uplifting the economic well-being of Malays but it has now gone on for 18 years longer than the founding fathers planned and is sadly seen by too many as a major cause of national disunity.

Furthermore, since the NEP was introduced, the competitive landscape of nations has changed dramatically, the complexion of our economy has transformed and Malaysians are quite different too.

I would suggest that we set-up a closed door forum of the best and brightest Malaysians to openly discuss the future of the NEP. At the very least we need to change some out-dated implementation policies. On a related note, I also feel disturbed that we can’t even seem to talk about vernacular schools. Again, why not set-up a parallel forum to openly discuss all aspects of the education system so that future generations have a real chance of realising Bangsa Malaysia?

Further interest rate cut seen

2008-12-27T09:30:00.000+08:00

Government tries to sustain growth in worsening economic outlook

THE world’s leading economies are screeching to a halt, dragging down growth in the developing nations as well. In most countries, efforts to revive their economies or mitigate the effects of a global slowdown are aplenty.

Governments have been making a greater effort, from fiscal pump priming to drastic monetary policies, over the past few months to survive what is expected to be the worst recession since World War II.

And desperate situation calls for desperate measures. Several countries have slashed their interest rates to near zero levels recently, effectively making cheap money available as a means to stimulate their ailing economies.

The US started the ball rolling after the Federal Reserve pegged the key interest rate at a range of 0% to 0.25%. Hong Kong’s central bank followed suit by slashing its key interest rate to an all-time low of 0.5%, while Japan’s central bank has its key interest rate slashed to 0.1%.

While other countries have yet to resort to such unprecedented low interest rates, they have also reduced their key rates over the week.

For instance, China has already lowered its benchmark one-year lending and deposit rates by 0.27-percentage point to 5.31% and 2.25% respectively, while the European Central Bank will be reducing its interest rates early next year.

In Malaysia, another round of overnight policy rate (OPR) cut by Bank Negara is also looking more likely against this backdrop of global interest rate cuts amid a worsening economic outlook. Local economists are expecting the OPR cut next month to range between 50 and 75 basis points (bps) to 2.5% to 2.75%.

By reducing the country’s benchmark interest rate, the Government can enhance its efforts in sustaining Malaysia’s gross domestic product as the economic environment becomes increasingly challenging in the months ahead.

Theoretically, a lower interest rate, which implies a lower cost of borrowing, can help boost a country’s economy by stimulating business investment and consumer demand. Businesses will find more incentives to invest when interest rates are low, while consumers will be induced to apply for loans for big-ticket purchases such as cars and houses.

For the existing borrowers, on the other hand, the lower loan repayment would leave them with more disposable income to spend on other goods and services.

Last month, Bank Negara slashed the OPR – which had remained at 3.5% since March 2006 – by 25bps to 3.25% when the inflationary pressure began to ease in October.

Inflation, as measured by the consumer price index (CPI), fell from 7.6% year-on-year (y-o-y) in October to 5.7% y-o-y in November. This is mainly attributable to lower fuel prices, which the Government has gradually reduced since August when crude oil prices began to fall. The pump price of petrol is now RM1.80 per litre while diesel is sold at RM1.70 per litre, compared to their highs of RM2.70 and RM2.58 per litre respectively in June.

The CPI is expected to slide further in the months ahead as the lower commodity prices begin to have a wider effect on more goods and services. For instance, over the week, Domestic Trade and Consumer Affairs Minister Datuk Shahrir Abdul Samad said the Government was expecting food manufacturers to start reducing their prices early next year.

The continuous slide of inflationary pressure provides a conducive environment for Bank Negara to lower interest rates. On top of that, with the US interest rates near zero levels, the Government can maintain a wide positive interest rate differential with the US, which helps limit the outflow of portfolio funds from the country.

The Star- By Cecilia Kok

Risks of Treasuries bust in 2009

2008-12-27T09:25:00.000+08:00

Any signs of less-than-dire economic outcome would batter govt bonds

THE US government bond market, which towers above other assets as the only bastion of strong returns this year, may crumble in 2009.

As the Panic of 2008 wreaked havoc with stocks, commodities and corporate bonds, fearful investors flocked to the perceived safety of government securities, powering the Treasury long bond to its best performance in a generation.

The Federal Reserve’s signals that it may buy longer US government maturities have added momentum to the epic rally, sending the benchmark 10-year Treasury note’s yield tumbling a huge 150 basis points to near 2% in just one month.

Since bond yields and prices move inversely, these plunges have delivered stellar gains to those holding Treasuries.

Meteoric gains

But with the US government expected to issue between US$1.5 trillion and US$2 trillion of debt into the US$5 trillion Treasury market to fund its unprecedented rescues for the financial system next year, the risk of a sudden drop in prices is growing, analysts warn.

“As an investor in the Treasury market I would be very careful,” said Carl Kaufman, portfolio manager for fixed income with Osterweis Capital Management in San Francisco.

Through Dec 19, the Barclays Capital US Treasury Index was up 14.96% year-to-date, a meteoric return compared with the US Standard & Poor’s 500 stock index, down about 40%, and US investment grade corporate bonds’ loss of about 7.4%.

US Treasuries are heading for their strongest year since 1995, but the market has already priced in a deflationary scenario akin to Japan’s “lost decade” of economic growth, most analysts agree.

The total return of the 30-year bond in the year to date is nearly 45%, putting the long bond on course for its best year since 1982, according to Barclays Capital. Then, former Federal Reserve chairman Paul Volcker started to win his battle against inflation, igniting a huge bond market rally.

Now, the long end of the Treasury market has had its best annual rally in more than a quarter century on investors’ deep fears of the global credit crisis and an unusually protracted and painful recession raising the risks of deflation.

Any signs of a less-than-dire economic outcome would batter Treasuries.

The deflation question

“Either we get deflation or not. If we get meaningful deflation, Treasuries will still be the place to be,” said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee, Wisconsin.

Deflation, an environment of broadly falling prices such as Japan experienced in the 1990s, exacerbates economic weakness because consumers and companies put off purchases. This scenario could push US yields down further, even matching the Japanese 10-year government bond’s 1.22%, Kaufman says.

However, “if we don’t get the deflation, that will make current Treasury yields look unrealistic and you will do a lot better in spread product (corporate bonds),” Mueller says.

During 2009, it will likely become clear whether deflation can be avoided, he says. Mueller puts the chances of the US economy skirting sustained deflation at about 60%.

If that near-miss happens, the economy will probably be very weak but not depressed, pushing up the US 10-year yield to about 2.25% a year from now, Kaufman says. — Reuters

On Tuesday, the 10-year note was yielding 2.17%, not far above its five-decade yield low of 2.04% hit on Dec 18.

No rich pickings

”From here, I don’t think you will get rich on the 10-year,” Kaufman says.

If the US economy were to show some feeble signs of recovery during 2009, then the 10-year note yield could rebound to say 3%, handing its holders a loss of 4.5% in total return, Kaufman adds.

If the United States were like 1990s Japan with enough economic weakness and deflation, then nominal government bond yields could stay very low despite hefty issuance, says Mueller. But Japan’s savings rate is very high, compared with a near-zero savings rate in the United States, which could make demand for US government debt weaker and allow Treasury prices to fall more easily, he warns.

“If you have enough weakness and deflation, Japan at least was able to float enough debt with nominal interest rates staying very low,” Mueller says. But he adds: “Japan’s domestic savings rate was much higher. Could we pull the same trick off?” — Reuters

Financial tips for the family to handle expected tough times

2008-12-27T09:24:00.000+08:00

IN July, families were wondering how they were going to make ends meet once the price of petrol bolted to RM2.70 a litre. The fuel hike caused prices across the board to surge and people had to redo their budgets to cope with higher costs.

The days of budget adjustments, sadly, are not over. In fact, things are taking a more serious tone. The subprime-induced US recession is now wreaking havoc throughout the world and families are now bracing for tougher times.

Job cuts, wage freeze and cost-cutting measures have accelerated as companies are being hit by what many consider to be the worst economic downturn since the depression of the 1930s. This also has an effect on families, especially when uncertainties might surround the job security of a family’s breadwinner.

“Some readers will definitely be retrenched in 2009. While it is likely the total number of unemployed in Malaysia will be relatively low compared to those now losing their jobs in the developed world, to the affected that will be no comfort whatsoever,’’ says Rajen Devadason, a licensed financial planner with MAAKL Mutual Bhd. He is also CEO of corporate mentoring consultancy RD WealthCreation Sdn Bhd.

“Therefore, it is crucial that while there is still viable employment, household breadwinners decide now to adopt a well-thought out budget that will help them preserve cash.’’

While there is limited room to cut expenses for most people, Devadeson says what is often more pragmatic is to simultaneously try to increase sources of income.

His four ideas are:

·Utilise EPF’s Account 2 options to reduce the principal sum outstanding on existing home loans. If possible, pay off the home mortgage as fast as possible.

·In homes with multiple cars, consider selling – quickly – any extra vehicles. If the older cars which are fully paid for are still in reasonably good shape and capable of running safely for at least another three years, then it makes sense to keep those and to sell the newer cars if doing so generates sufficient cash to pay off the existing hire purchase loans.

·Encourage teenage children to work around the neighbourhood by doing chores for cash. Urge them to contribute their added earnings into a family pool to build up cash reserves.

·In single breadwinner households, if the children are old enough to fend for themselves, having the traditional caregiver, usually the wife, also join – or rejoin – the workforce will be helpful in increasing cash inflows into the family coffers.

“Whatever unutilised additional cash flow generated should be channelled into a safe interest-bearing bank account or into a money market fund to build up an urgently needed family cash reserve buffer,’’ says Devadeson.

There is chance that the number of available jobs in 2009 may contract and if getting additional employment proves difficult, Devadeson suggests that people start a small family business.

“In really tough times, common options include running a food stall, washing cars, baking and selling cakes and cookies, cleaning houses, gardening and giving tuition,’’ he says.

He adds that many people will find such viable cash-generating options beneath them but such pride is something to be dispensed with during the tough times.

“Also, unnecessary expenses need to be slashed before doing so becomes unavoidable because of a job loss. That way extra cash can be channelled into savings even while normal income continues,’’ he says.

“As savings grow, the option to judiciously invest in ever cheaper cash-generating investment assets as the economy worsens will rise. Eventually, doing just that will plant the seeds for long-term future family prosperity in 2010 and beyond.’’

Abacus Advisory Sdn Bhd founder and CEO Carol Yip says the upcoming lean times will be an opportunity for families to take stock of what they have and to make substantive changes.

Yip says a family is like an organisation in which each member has an important role to play, and families should sit together and discuss any financial issues they face. “This can be used as a chance to educate your children and set financial goals for them,’’ she says.

Yip also says simple cost-saving rules such as switching off lights, cutting down on electricity and Internet usage could be set. “Families can use the money they have saved instead of their bonuses to pay for their next holiday,’’ she suggests.

She says parents have to lead by example, and practise what they are telling their children. “Action and behaviour is as important as words,’’ she says.

Another important advice is that both parents have to be on the same page. There is no point in one parent making the sacrifice while the other is out buying a second widescreen TV for the house. “Both parents must have common goals in savings and cost-cutting,’’ she says.

The fastest way to save as a family is to look at the activities the family does together. If a family goes out often to have expensive meals, a fast way would be to cut back on that.

The next tip to parents is to reassess the children’s extracurricular activities. “If parents are sending children for, say, piano lessons for the parents’ own fulfilment, perhaps they might want to reconsider if the child does not have any interest in pursing learning such an instrument,’’ she says.

A sensible thing might be for the non-working parent or an existing parent to take a second job should finances take a dip, but Yip says that might not be so easy. Firstly, a downturn means fewer job opportunities. And if one were to find employment, it could have an effect on family ties.

“It depends whether children are understanding or not. Some might feel more appreciative of the sacrifices being made by a parent to support the family,’’ she says.

Other issues will revolve around providing medical care for aging family members and a downturn might mean seeking cheaper but not necessarily lower quality heathcare.

“Family members also have to be aware of the current state of financial affairs in order to make a decision on what to do when an emergency arises,’’ she says.

the Star-By JAGDEV SINGH SIDHU

2009 Set To Be Tough For Asia-pacific Economies

2008-12-26T10:41:00.000+08:00

KUALA LUMPUR, Dec 24 (Bernama) -- Asia-Pacific economies are in for a tough 2009 as weak external demand will weigh on the region's export performance and investment.

In a report, 'Asia-Pacific Outlook 2009: Slowing on all cylinders' released here Wednesday, Moody's Economy.com economist, Sherman Chan, said the second half of 2008 was difficult, but 2009 would be even more challenging.

"Aggressive fiscal and monetary policy measures may help prevent a further deterioration in economic conditions, but much of 2009 will feel recession-like in most Asia-Pacific economies," she said.

Chan said no economy was immuned from the US-led downturn.

"Growth is expected to decelerate sharply in the first half of 2009, as all engines run out of steam.

"Those economies already in recession will continue to see harsh conditions through much of the year," she said.

She said Asia-Pacific economies would record sluggish growth at best in 2009 and some outright contraction.

Chan said rising unemployment would depress private consumption.

She said exports would slow considerably in the first half of the year and further fiscal stimulus and monetary policy easing would be implemented.

-- BERNAMA

Bleak economic picture emerges from new data

2008-12-25T22:38:00.001+08:00

WASHINGTON (AP) - A series of gloomy economic reports Wednesday showed U.S. consumers holding tight to their wallets with job losses expected to mount in the months ahead.

There was one glimmer of good news, however. Lower gas prices and widespread holiday discounts are giving consumers greater buying power.

Consumer spending, when adjusted for those price drops, rose last month after five months of declines, the Commerce Department said Wednesday.

But as companies in a wide range of sectors lay off workers, economists don't expect consumers to ramp up spending anytime soon.

November's inflation-adjusted increase in spending is "a temporary, one-month aberration in the downward trend of consumption,'' said Brian Fabbri, chief economist at BNP Paribas.

Brian Bethune, an economist at IHS Global Insight, predicted that consumer spending would fall at an annual rate of 2.5 percent to 3 percent in the current quarter, after a 3.8 percent drop in the third quarter, the worst in 28 years.

Consumer spending is closely tracked by economists because it accounts for two-thirds of gross domestic product, the broadest measure of economic output.

Without adjusting for inflation, the Commerce Department said consumer spending fell by 0.6 percent in November, the fifth straight month of decline.

Separately, the Labor Department said the number of Americans who filed initial claims for unemployment benefits rose to the highest level in 26 years, though the labor force has grown by about half since then.

New claims for jobless benefits jumped to a seasonally adjusted 586,000 in the week ending Dec. 20, from an upwardly revised figure of 556,000 the previous week.

The financial markets took the news in stride.

The Dow Jones industrial average closed up nearly 49 points, to about 8,468.

The economy has been mired in recession since last December, dragged down by declining home prices and clogged credit markets.

Consumers have lost trillions of dollars in household wealth as the stock markets and home prices have sunk this year.

On Tuesday, the government reported that the overall economy, as measured by GDP, declined at an annual rate of 0.5 percent in the July-September quarter although analysts think the contraction will accelerate dramatically in the current quarter.

Some economists are forecasting that GDP will plunge at an annual rate of 6 percent for the October-December period.

That would be the worst quarterly showing since 1982, though others estimate the decline for the fourth quarter about 4.5 percent.

In another report released Wednesday, the Commerce Department said orders for large manufactured goods dropped by 1 percent, less than the 3 percent economists had expected.

But that followed a large drop in October that was revised upward Wednesday to 8.4 percent.

The November decline was led by a huge drop in orders for aircraft and a smaller drop in autos.

Excluding the big decline in transportation, total orders rose 1.2 percent in November, the best showing since June.

And orders for non-defense, non-aircraft capital goods - a measurement that economists consider a proxy for business investment - rose 4.7 percent.

But durable goods orders are considered volatile and can be heavily revised, economists said.

"It takes more than one (month) to turn that report around,'' said Peter Kretzmer, senior economist at Bank of America.

A Labor Department analyst said auto-related layoffs were a key factor behind the rise in jobless claims.

The four-week average of initial claims, which smooths out fluctuations, rose to 558,000.

That's the highest since December 1982, when the economy was emerging from a steep recession.

There was some improvement in the number of Americans continuing to seek unemployment benefits, which dropped slightly to 4.37 million from 4.39 million the previous week.

Wall Street economists had expected that number to increase to 4.4 million.

Economists consider jobless claims a timely, if volatile, indicator of the health of the labor markets and broader economy.

A year ago, initial claims stood at 353,000.

The elevated level of new jobless applications is one of several signs that the labor market has deteriorated fast in recent months.

The Labor Department said earlier this month that employers cut a net total of 533,000 jobs in November, sending the unemployment rate to 6.7 percent, highest in 15 years.

Mass layoffs are taking place in a wide range of industries. Industrial conglomerate Textron Inc. on Tuesday said it has cut 2,200 jobs, while technology services provider Unisys Corp. said Monday it will eliminate 1,300 jobs.

Sovereign Bancorp Inc.'s bank unit said last week it is laying off 1,000 employees.

In the meantime, federal regulators are moving to sell the remnants of failed IndyMac Bank before year end, mopping up from the second-largest bank failure this year.

It was unclear Wednesday whether the government would sell off IndyMac as a whole or in pieces.

The Pasadena, Calif-based lender, which specialized in loans made with little down payment or proof of assets, failed in July as the U.S. housing market bubble collapsed.

Rates on 30-year fixed-rate mortgages fell to a record low for the second straight week, causing refinancing applications to surge to the highest level in more than five years, a month after the Federal Reserve pledged to channel billions to prop up the sinking U.S. housing market.

Freddie Mac, the mortgage company, reported Wednesday that average rates on 30-year fixed-rate mortgages dropped to 5.14 percent this week, down from the previous record of 5.19 percent, set last week.

The rate was the lowest since Freddie Mac's weekly mortgage rate survey began in April 1971 and the eighth straight week of declines.

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Rise and fall of commodities gives hints for 2009

2008-12-25T20:31:00.000+08:00

JUST a year ago the debate about grain prices was simple: how high was high?

Huge global demand for grains, governments hoarding food, climate fears amid droughts, storms and floods, basically every bullish factor one could imagine hit the markets.

The psychology of short supplies carried over to other commodities as well, especially industrial metals as China and India drew in a rapidly rising share of materials as their economies raced to modernise and transform.

The final element for the “perfect storm” sending commodities to stratospheric heights was the tsunami of Wall Street and other speculative money that, frustrated by stagnant stocks and bonds, finally bought into the commodities story.

The benchmark Reuters Jefferies CRB index of 19 commodity futures was at 358.71 on Dec 31, 2007, up 17% for the year. It jumped another 32% to hit record high of 473.97 on July 3, 2008.

Then, as investors blinked, it was over. The index started sliding and by early December fell to a 6½-year low of 208.58, down 56% from the mid-summer highs.

The global economic crisis tied to dried up bank credit – the lifeblood of all markets – rocked Wall Street but also rolled over commodities, bursting bubbles right and left.

”A great start and an unexpected finish,” said Rich Feltes, director of MF Global Research in Chicago.

Gold had soared past US$1,000 an ounce. US wheat prices had gone past US$25 a bushel – the previous record was $7.50 – amid a 60-year low in US wheat stocks. Midwest floods and a biofuels boom pushed corn above US$7 a bushel, triple the average price for decades. In July, crude oil neared US$150 a barrel.

“The main negative for all of these commodities is the demand side of the equation with the economic malaise,” said Bill O’Neill, managing partner of Logic Advisors LLC and former head of commodities research at Merrill Lynch.

The question for the coming year? How low is low?

“As we head into 2009 I think an important question to ask is will that fund money come back?” MF Global’s Feltes said.

“Commodities are not going to be a lead indicator,” he said, pointing to gross domestic product instead. “The economy has to turn around first. There has to be fundamental justification for higher GDPs for improving commodity demand before investors feel comfortable coming back to commodities.”

In US commodity markets, weekly data from the Commodity Futures Trading Commission has told the story of shell-shocked investors fleeing commodities or cashing out to secure funds.

Open interest in the CBOT’s largest contract, corn, for example, had grown to 1.4 million contracts by spring. Today, the total is 800,000 contracts as commodity funds downsized to meet the global margin call that came as economies collapsed.

The credit contagion shows no signs of being solved any time soon, with the hopes of most investors pinned to the new policies and measures a Barack Obama administration says it will aggressively put in place starting in January.

How quickly that might spur economic growth and investor confidence is an open question. But among commodities, one place to keep an eye on may be grains. Several factors might make food and biofuels a trigger for a commodities recovery.

For one thing, the single biggest demand force in the recent commodities craze – China – is not going away. Neither is food or biofuels demand, although the latter may cool down.

“The theme we’ve had in the last half of this year was all about demand destruction,” said Dan Basse, president of Chicago-based consultancy AgResources. “We’re concerned about supply destruction starting mid to late winter and having a bull market in agriculture the last half of 2009.”

Basse said supply destruction referring to lower global grain plantings was a key to watch. But so are biofuels.

Obama, from a top corn and soybean state, has promoted biofuels. But using food crops to produce them has been increasingly attacked by food inflation watchers and even environmentalists, saying it does little for global warming.

“Ethanol has been one of the big drivers of the bull market,” Basse said.

Another factor that will have a huge influence over whether commodity prices recover is the value of the dollar. A weak dollar makes US grain exports cheaper, for example.

“The US dollar will continue at least early in the year to drive all commodity markets,” said Bill Lapp, president of consultancy Advanced Economic Solutions. – Reuters

The Star

Oil prices near $35 on more dour economic news

2008-12-25T10:40:00.000+08:00

HOUSTON (AP) - Crude prices tumbled Wednesday following a raft of bad economic news and growing stockpiles of unused gasoline that suggested demand for energy has continued to erode.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 a barrel in a shortened day of trading. Prices fell as low as $35.13 just before the market closed for the holiday.

It was the ninth straight day that crude has fallen.

Investors expecting more evidence of slowing U.S. energy demand got a bit of a surprise as the Energy Department reported crude inventories dropped last week.

But Americans continue to cut back on driving amid the worst recession in a generation, leading to growing stockpiles of gasoline and eroding demand for motor fuel.

Gasoline futures plummeted below 80 cents a gallon.

"I don't see anything out of this report that's really going to change this downward move,'' said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates.

"Things are going to remain under downside pressure through the balance of this year and probably into the new year.''

A steady stream of dismal U.S. economic and corporate data during the past few months has hammered investor confidence and sent oil prices reeling 74 percent since July.

More bad news emerged Wednesday with consumer spending falling for a fifth straight month in November, the longest weak stretch in a half century, while incomes declined under the weight of massive job layoffs.

Separately, new claims for unemployment benefits rose more than expected last week, as layoffs spread throughout the U.S. economy, more evidence the labor market is weakening as the recession deepens.

The Labor Department reported initial requests for jobless benefits rose to a seasonally adjusted 586,000 in the week ending Dec. 20, from an upwardly revised figure of 556,000 the previous week.

That's much more than the 560,000 economists had expected.

Manufacturers are slashing energy use as well. Orders at U.S. factories for big-ticket manufactured goods fell again in November, reflecting further setbacks in the battered auto industry and a big drop in demand for commercial aircraft.

For the week ended Dec. 19 crude inventories fell by 3.1 million barrels, or 1 percent, to 318.2 million barrels, which is 9.1 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.

Analysts had expected a boost of 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Gasoline inventories rose by 3.3 million barrels, or 1.6 percent, to 207.3 million barrels, which is 2.4 percent below year-ago levels.

Analysts expected stockpiles of the motor fuel to rise by 900,000 barrels.

Demand for gasoline over the four weeks ended Dec. 19 was 2.7 percent lower than a year earlier, averaging nearly 9 million barrels a day.

In a separate weekly report, the EIA said natural gas storage levels in the U.S. tumbled last week but remain 3.4 percent above the five-year average for this time of year.

The EIA said natural gas inventories held in underground storage in the lower 48 states slipped by 147 billion cubic feet to about 3.02 trillion cubic feet.

Analysts had expected a drop of between 142 billion and 147 billion cubic feet.

Oil traders so far have brushed off attempts by OPEC to boost prices through production cuts.

The Organization of Petroleum Exporting Countries, which accounts for about 40 percent of global supply, said last week it would slash production by 2.2 million barrels a day, its largest single cutback ever.

The most recent round of cuts would reduce OPEC production by more than 2 million barrels per day.

OPEC may meet in Kuwait City on Jan. 19 to discuss further production cuts.

The group's next official meeting is March 15 in Vienna.

The fall of benchmark crude on the Nymex has been paralleled by steep declines in Brent futures traded on London's ICE exchange.

Trader and analyst Stephen Schork noted that Brent crude has dropped "in 79 of the last 123 sessions ... by a total of $108.05 a barrel'' - a 73 percentage point loss.

On Wednesday, February Brent crude slumped $3.75 to settle at $36.61 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures tumbled by 6.3 cents to settle at 79.27 cents a gallon.

Heating oil plunged 12.8 cents to settle at $1.1983 a gallon while natural gas for January rose 17.3 cents to settle at $5.91 per 1,000 cubic feet.

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Gold prices inch higher, energy futures tumble

2008-12-25T10:39:00.000+08:00

NEW YORK (AP) - Gold prices inched higher Wednesday in a shortened session as investors looked past discouraging economic reports and made small bets on the metal.

Economic concerns have pressured many commodities prices in the past few months, particularly energy, as investors fear a prolonged recession will lead to further declines in demand.

But gold prices have been able to attract moderate investment demand in recent weeks, boosted by the prospect of rising inflation. Investors often use commodities, especially gold, as a hedge against a weak dollar.

Price movements have been relatively modest though. The contract has traded within a tight range of about $60 since earlier this month.

"Given how far other things have fallen, gold has held up pretty well,'' said Stephen Platt, futures strategist, with Archer Financial Services.

"You are seeing some shifting of interest from some sectors back into gold.''

Gold for February delivery rose $9.90 to settle at $848 an ounce on the New York Mercantile Exchange.

March silver gained 9 cents to $10.35 an ounce, while March copper futures slipped 0.7 cent to $1.2740 a pound.

Many financial markets closed early for Christmas Eve.

On Wall Street, stocks made a modest advance despite government reports showing an increase in U.S. joblessness and a decline in consumer spending.

Investors have largely factored in bad numbers for the fourth quarter, analysts say, so the figures didn't come as a surprise.

The Dow Jones industrial average finished up about 49 points at the 8,468 level.

The dollar was mixed against other major currencies, while the yield on the benchmark 10-year Treasury note rose slightly to 2.19 percent from 2.18 percent late Tuesday.

Energy prices tumbled on the Nymex, still plagued by demand concerns.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 a barrel.

In other Nymex trading, gasoline futures slipped by 2.5 cents to 83 cents a gallon, while heating oil fell 4.4 cents to $1.2826 a gallon.

Grain prices gained on the Chicago Board of Trade.

March wheat futures rose 7 cents to $5.8225 a bushel, while corn for March delivery rose 3.25 cents to $3.98 a bushel.

March soybeans rose 14 cents to $9.19 a bushel.

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World markets mixed after gloomy US economic data

2008-12-25T08:34:00.000+08:00

LONDON (AP) - World stock markets were mixed in lackluster Christmas Eve trading Wednesday, finding little holiday cheer in the latest data on the slumping U.S. economy.

Wall Street managed to shrug off readings on rising U.S. joblessness and declining consumer spending, with the Dow Jones industrial average finishing a shortened session up 48.99 points, or 0.58 percent, to 8,468.48, after falling for five straight sessions.

The blue-chip index is well off its November lows, but is still down for the typically strong month of December.

The Labor Department said initial applications for unemployment benefits rose more than anticipated to a seasonally adjusted 586,000 last week.

The Commerce Department, meanwhile, said consumer spending dropped 0.6 percent in November - the fifth straight monthly drop - and durable goods orders fell 1 percent in November.

In Europe, Britain's FTSE 100 index closed down 0.9 percent at 4,216.59 after a shortened trading day, while France's CAC-40 ended down 0.4 percent at 3,116.21.

Germany's stock market was closed.

British drug maker AstraZeneca's shares fell 3.1 percent after it disclosed it had received a request for more information from the U.S. Food and Drug Administration on its application for new uses for its Seroquel anti-psychotic drug.

In Latin America, Mexico's IPC index closed a shortened session up 0.8 percent at 22,341, while Chile's IPSA ended barely changed, up 0.1 percent at 2339, also in a shortened session.

Markets in Argentina and Brazil were closed for the holiday.

Earlier, Japan's Nikkei 225 stock average dropped 206.68 points, or 2.4 percent, to 8,517.10, after being closed Tuesday for a holiday.

Shares in Toyota Motor Corp. tumbled 4 percent in their first trading day since Monday, when Japan's biggest automaker said it expected to post its first operating loss in almost 70 years this fiscal year.

Wednesday's news that Toyota's global sales plunged almost 22 percent in November added to the sector's gloom, dragging down car companies around Asia.

Many investors in Asia found little reason to buy after reports released overnight in the U.S. showed no signs of a turnaround in the world's largest economy, already in recession.

The government said gross domestic product, the broadest measure of the economy, shrank at an annual rate of 0.5 percent in the third quarter.

America's hard-hit housing sector also continued to deteriorate.

New home sales weakened last month to the slowest pace in nearly 18 years, while prices of new homes dropped by the biggest amount in eight months. Sales of existing homes weakened.

Hong Kong's Hang Seng Index closed down 0.3 percent to 14,184.14, while South Korea's Kospi lost 1.4 percent 1,128.51.

"The end-of-the-year, bear-market, feel-good rally is ending sooner than many expected,'' said Kirby Daley, senior strategist at Newedge Group in Hong Kong.

"Investors are being hit in the face with the reality of just how bad the U.S. economy is and they're seeing firsthand the effects this is having on the consumer and, as a result, companies like Toyota and U.S. retailers,'' he said.

Elsewhere, Shanghai's benchmark lost 1.8 percent and India's main stock measure lost 1 percent; key indices in Australia, Taiwan and Singapore gained.

Worries that demand would sink further well into 2009 pulled car companies lower. Honda Motor Co., Japan's No. 2 automaker, plummeted 5.7 percent, while South Korea's Hyundai Motor Co. shed 2.4 percent.

Oil prices continued to erode in the face of the litany of weak U.S. economic data.

Light, sweet crude for February delivery fell $3.63 to settle at $35.35 in a shortened day of trading.

Prices fell as low as $35.13 just before the market closed for the holiday. It was the ninth straight day that crude has fallen.

Meanwhile, the dollar fell against most major currencies in light holiday trading. The euro rose to $1.3999 in late New York trading, up from $1.3967 late Tuesday, while the British pound edged up to $1.4752 from $1.4735.

The dollar fell to 90.39 Japanese yen from 90.68.

In addition to markets in Europe, the U.S. and Latin America, many across Asia will be closed Thursday for Christmas, including Hong Kong, Singapore and Australia.

Japan's stock market, however, will be open.

Volatility hurting global currencies

2008-12-25T08:30:00.001+08:00

Economic performance will determine strength

PETALING JAYA: The volatility of the global equity and financial markets in the past months has make it hard to predict what currencies to invest in.

This is especially as governments worldwide cut key interest rates to boost their economies and their currencies are, in turn, affected by the loose monetary policies.

“For 2009, the determinant for currency strength will be economic performance,” AmBank Group FX and interbank senior manager Yee Ming Shen told StarBiz.

He said any economy that recovered first should be targeted.

“It is not easy to predict which currencies are going to be the ones to look out for at this point because the economic slump and financial crisis are far from over,” Yee added.

He said currencies were being used as “tools” to manage the economy and “it is close to impossible to know where they’re headed at this time”.

“It will be a tough year for currencies whose strength is based on commodities while the Japanese will prefer their currency to be weak to boost exports,” Yee said, adding that this might fuel more speculation on the yen carry-trade.

A currency exchange worker holds a handful of euro notes. - AFP

The yen carry-trade is the strategy of borrowing money in yen due to its low interest rates and then converting it into another currency. Japan’s historically-low interest rate was recently cut to nearly zero again after its economy slipped into recession.

According to Bloomberg, quoting an economist with Moody’s Economy.com, the won and rupee would be Asia’s biggest gainers from improved appetite for emerging market assets and a recovery in global economy.

The won and rupee have plunged over 30% and 19% respectively against the US dollar while foreign funds have sold US$37bil worth of South Korean stocks and more than US$13bil of Indian equities.

The economist said India had a strong domestic market with strong growth potential and was one of the most attractive destinations for foreign direct investments.

Meanwhile, Citigroup Inc vice-president for Asia-Pacific economics and market analysis, Kit Wei Zheng, said the global economy was going through a sustained downturn and this had affected local exports.

On Malaysia, he said that from a purely fundamental perspective and ignoring any interest rate cut angle, the current market situation did not really favour a strong ringgit. “In the kind of environment where growth is very weak, I don’t think Bank Negara will allow it to happen.”

Furthermore, the ringgit traded broadly in line with the Singapore dollar and, at this point, the Monetary Authority of Singapore would prefer a weaker dollar, AmBank Group FX’s Yee said.

“The ringgit outlook depends on how the Singapore dollar is faring since both currencies trade within a narrow range and Singapore is Malaysia’s second-largest trade partner,” Yee added.

The Star- Fintan Ng

Volatility hurting global currencies

2008-12-25T08:30:00.000+08:00