What Crisis? Honky Dory Dude!

Bank Negara said that the banking system is strong enough to withstand the turmoil of the global financial crisis. It stood ready to pump liquidity into banks if needed. It has a fully developed supervisory and surveillance system and is closely engaging other monetary authorities in the region to monitor and respond with coordinated measures to deal with the current challenging environment. Several years of reforms, capacity building, and continuous efforts to enhance corporate governance and risk management practices have significantly strengthened the banking system.

With immediate effect, the following measures are being implemented:
•all deposits will be fully guaranteed by the Government through Perbadanan Insurans Deposit Malaysia (PIDM) until December 2010
•access to Bank Negara liquidity facility will be extended to insurance companies and takaful operators regulated by the Bank.

Non-performing loans in the banking system had improved to 2.5%. There is ample liquidity to facilitate the orderly functioning of economic and financing activities as the net interbank placements was RM198.5bil. The banking and insurance industries are therefore operating with adequate capital and liquidity buffers that have negligible exposure to both subprime-related securities and affected overseas financial institutions. More than 90% of total assets of these companies are in ringgit-denominated assets. Additionally all foreign financial institutions were locally incorporated (not operating as foreign branches).

The risk weighted capital ratio of the banking system was 13.2% and exceeded the minimum of 8% by RM42.3bil. It was an indication that the leverage position of the industry was manageable. The insurance industry posted a solvency surplus of RM16.5bil at the end of August.

The Association of Banks in Malaysia (ABM) is singing the same tune. The tune goes like this- there is no credit crunch in the country and that the banking sector remains strong and well capitalised despite the turmoil in the global financial markets. It is business as usual and commercial banks are not putting any brakes on lending.

As at end-August, loan-to-deposit ratio stood at 74.5% compared with the high 90% in 1997. The stable and low three-month domestic interbank rates, and relatively narrow spreads against the three-month Malaysian Government Securities yields are also indicative of the robustness of the banking system.

The additional strength is that credit extension is more diversified today between business and household loans, with no heavy exposure to any single segment. Malaysia has a savings rate of 37% which is high by international standards.

In summary, the strong liquidity, backed by high domestic savings rate and mid-September external reserves of US$119bil, will continue to facilitate the orderly functioning of transactional and lending activities so as to spur domestic economic growth, albeit at a more moderate pace.

However Tun Mahathir begged to differ. He doubted the claim that all is honky dory.

He said; " I am glad to hear that Malaysia will be spared from the fallout of the systemic collapse of the whole world's financial system. This ability to isolate Malaysian banks from the effect of the bankruptcies of all the biggest banks in the world must be regarded as a miracle. Our ability to manage our financial system better than others must earn us the admiration of the world. I hope we are right in forecasting the effect on us of the collapse of the world's financial system. But I have a sneaking feeling that all is not well."

So is there a crisis? No – then don’t worry be happy. Yes - can we survive the crisis?

Going In Is Easy, Coming Out, How La?

What is the difference between what Valuecap is trying to do, with what the Federal Reserve is doing to save the collapsing banks?

The American bailout is simply injecting much-needed fresh capital directly into the banks and not buying shares in the open market. The Fed is getting new shares and existing shareholders are diluted. The share prices continue to be determined by market forces.

In contrast, Valuecap will be trying to boost stock prices by buying up shares from shareholders eager to get out of the market. Mmm, an exit plan for the shareholders. They will be laughing all the way to the bank and it will be double whammy, if the sellers remit the money overseas. Would this move shores up the market and maintain share prices above critical levels? You decide.

Then would we, the EPF contributors know whose shares were bought? The good and fundamentally strong counters or the buddies’ counters?

And how will Valuecap exit from its positions in the future? Any exit plan? It acts as saviour to the exiting shareholders but who is going to ‘save’ it?

In a further cloud of secrecy, there was news that 20 per cent of its RM330 billion funds has been invested in shares. However we do not know how much has been invested in loans for infrastructure projects with low or questionable returns? Think Bakun, Pelabuhan Tanjung Pelepas, Left Right Centre corridors! Etc.

Perhaps the RM5b would be much better used injected directly into the economy itself, via tax breaks for SME enterprises or short-term loans to help smooth over the rocky road ahead.

Throwing Good Money After Bad?

Last week the Government announced that it has doubled the amount of money available to Valuecap Sdn Bhd (Value *who?) to buy undervalued stocks to RM10bil. At last a positive move to move the market but wait a minute, where is the money coming from?

*Valuecap is a fund management firm established in 2003 to invest in the stock market. It is jointly owned by Khazanah, PNB and Retirement Fund (Incorporated).

The bombshell - The Government would borrow RM5bil from the EPF. Another national service! It claimed that EPF will make a profit based on the past performance of Valuecap which has grown its portfolio from RM5bil initially to RM8bil now.

(Not sure about the claim as past performance does not guarantee profitability, it is only use as an indication!)

Perhaps make public the detailed financial statement before the RM5 billion is channeled. If indeed it is in the black with RM3bil profit, it should feel proud to disclose the book. Show us which counters it has invested in. Fair deals, we only want transparency - if they want to use our money. Without it, how can we hope to inspire confidence?

The other question: why use EPF funds, which is public money held in trust? What kind of return can the EPF expect to get and how does that expected return compare with more stable, less risky investments – opportunity costs?

Another article on EPF was posted on 5 September. Please read EPF 8th Largest Fund in the World.

Falling Oil Price - Good & Bad News

First the good news to the consumers - oil and commodity prices are falling.

Then the bad news to the government - it means a shortfall of billions of Ringgit in revenue. Crude oil price dipped as low as US$67.40 per barrel last Thursday. Palm oil prices have fallen by as much as 65%. In March, it was at RM4,486 per ton. Last Thursday it was US$1,565.

Now, the scary part - when the government planned its 2009 budget, it did so by calculating its revenue based on oil prices at US$125 per barrel. To take it worse, petroleum-based revenue account for 40% of the government’s projected income.

The full impact from falling petroleum price would only be felt in 2010 as government revenue should remain good next year because petroleum companies would pay the taxes based on their 2008 incomes, where on average the crude oil price remained at a reasonably high level.

However, in 2010 it could become an issue if the crude oil price in 2009 were to stay at US$70 per barrel level as the companies will pay taxes and dividends based on a lower crude oil price. (Based on the above, there is definitely a case for a review of 2009 budget although the full impact would only be felt in 2010!)

Lastly, the government must find new streams of revenue to meet this shortfall to balance the book!

Come Fly With Me

THE Federal Territories Minister revealed yesterday that Kuala Lumpur mayor spent about RM1.5 million in travelling expenses and allowances on 11 overseas trips in 20 months after he took office last year. Seven trips in 2007 and four in 2008.

Quick arithmetic - close to 2 trips per month, spending close to RM140,000 per trip!

The expenses were as follows:
Tokyo (travelling expense paid by Tokyo Government/Allowance RM12,309.46);
Perth (RM199,526/RM16,822.56);
Dubai (RM45,171/RM22,214.12);
Istanbul (RM219,225/RM13,608.03);
Stockholm, Helsinki, London (RM240,625/RM23,202.70);
South Korea, Japan (RM166,134/RM13,433.80);
Manila (RM25,297/RM3,405.53);
Shanghai (RM43,586/RM3,903.71);
Bangkok (paid by KL Sports Council);
Canada, UK, Germany (RM370,315/RM19,873.50);
Beijing (RM19,318.04/RM4,717.50).

Save the best for last – Apparently the trips were required in order to observe best practices to improve City Hall’s delivery service system.

Yeah, we did see some changes.
A) Change road name lor! Alor!
B) Increase parking charges by 35% around city centre
C) Impose parking charges in residential areas, i.e. we need to find coins and parking machine and feed them each time we need to feed ourselves or when we grab our daily bread and groceries.
D) Increase rental of sports facilities – badminton courts etc. by 100%

Perhaps, these increases are to ‘sponsor’ more trips!!! Some questions - Is there a travelling budget? If yes, is there anyone keeping track of it? If there is still unused money budgeted and before it is reallocated before year end, go get invitation to 'lawatan sambil belajar' these countries and ‘import’ followings :

a) South Island, New Zealand – to introduce bungee jumping in Gombak river and to count sheep.
b) Mumbai & Delhi, India – to study the traffic situation and tell KLites – don’t complain about the traffic jam here, it is worse in India blah!blah!
c) Phnom Penh, Cambodia – to visit the genocide museum and set up something similar aka Japanese occupation museum to remind the so called ‘mudah lupa’ 'lupa daratan' youth who do not know the history.
d) Liverpool, England – to watch a Liverpool derby football match and try to recreate the atmosphere in Klang Valley derby (KL vs Selangor)!

Or cut down the travelling and reallocating some of these money to improve the road conditions, improve public transport system, alleviate flash flood etc?

For better or for worse - you decide.