Forex losses by Bank Negara Malaysia, Facts were concealed; Mahathir, Anwar and Nor Mohamed implicated: RCI


Important report: RCI Secretary Datuk Dr Yusof
Ismail speaking to media after submitting a police report over Bank
Negara forex trade losses in Putrajaya.

THE Royal Commission of Inquiry into the foreign exchange losses suffered by Bank Negara Malaysia (BNM) back in 1990s has recommended that three people be probed over their involvement and liability.

They are former prime minister Tun Dr Mahathir Mohamad, his then finance minister Datuk Seri Anwar Ibrahim and ex-Bank Negara advisor Tan Sri Nor Mohamed Yakcop, whom the report also named as “principally liable for criminal breach of trust”.

The 524-page report also called out Tun Daim Zainuddin, who served as finance minister from July 14, 1984 to March 15, 1991, for having aided and abetted Nor Mohamed by leaving BNM “to its own devices”.

The commission found that the Cabinet in the 1990s was not given the full picture by Anwar on the forex losses, adding that he had “deliberately concealed facts and information and made misleading statements”.

“The Commission is of the opinion that there was deliberate concealment as BNM’s annual reports did not state the actual losses incurred from the forex dealings from 1992 to 1994.

“It is also of the opinion that the then prime minister (Dr Mahathir) had condoned the actions of the finance minister,” it said.

The RM31.5bil losses, it said, were hidden using “unconventional accounting treatments”, such as booking losses to reserves in the balance sheet and the absorption of the remaining losses by the transfer of shares from the Government to BNM as well as the creation of a “Deferred Expenditure” to be repaid in instalments over a decade.

“All the actions to conceal the losses were discussed and approved by the board of directors before the accounts were signed off by the Auditor-General.

“No further action was taken by the Finance Minister and Treasury secretary-general (as a board member) despite being informed by the Auditor-General on the losses and the unusual accounting treatments,” said the report.

Anwar, noted the Commission, had been informed about the actual forex losses suffered by BNM.

Dr Mahathir, it said, was informed by Anwar together with then Treasury deputy secretary-general Tan Sri Clifford Francis Herbert in late 1993 that BNM had suffered estimated losses of RM30bil on the forex dealings for 1992 and 1993.

However, in the extract of minutes from three Cabinet meetings on March 30, April 6 and 13 in 1994, Anwar had made “no mention of the actual losses of RM12.3bil for 1992 and RM15.3bil for 1993.”

Anwar had chaired the March 30 meeting as the deputy prime minister. The losses for 1993 were reported as RM5.7bil.

“The prime minister, who chaired the meeting on April 6, did not correct or offer more information when the forex losses for 1993 were recorded as only RM5.7bil,” it pointed out.

“The Commission is of the view that it is the finance minister’s responsibility to inform the Cabinet the significant financial affairs about BNM as the Cabinet has collective responsibility with the finance minister and the prime minister for the country’s affairs.”

Dr Mahathir, it said, claimed to have no knowledge of the real amount of losses, which was untenable with his meticulous nature, as well as that under the law, BNM was the banker and financial agent to the Government with the remainder of its net profit to be paid into the Federal Consolidated Fund.

The report said as pointed out by Herbert, he had expected Dr Mahathir to be outraged but his reaction was quite normal with him uttering “sometimes we make profit, sometimes we make losses”.

“His reaction to and acceptance of the huge forex losses suggest that he could have been aware of the forex dealings and its magnitude,” said the report.

The RCI also found Dr Mahathir’s claim that he could only remember the amount of RM5bil forex losses when informed about it in a meeting with Anwar and Herbert in late 1993 to be “questionable”.

It said this was because based on testimonies of other witnesses and documentary evidence, the RM5.7bil only surfaced when Bank Negara’s 1993 annual report was presented to the Cabinet on March 30, 1994.

“Despite his denials, the Commission is of the opinion that a thorough investigation should be carried out to determine the extent of his involvement and liability,” said the report.

By Martin Carvalho, Hemananthani Sivanandam, Loshana K. Shagar, and Rahmah Ghazali The Star

Police set up taskforce to probe possible criminal offences over Bank Negara’s forex losses

Inspector-General of Police Tan Sri Mohamad Fuzi Harun says police will
open investigation paper following a report that was lodged by Royal
Commission of Inquiry (RCI) secretary Datuk Dr Yusof Ismail. (Image is
for illustration purpose only).

KUALA LUMPUR: Police have set up a taskforce to investigate possible criminal breach of trust and cheating which may have been committed during Bank Negara Malaysia’s foreign exchange losses in 1990s

Inspector-General of Police Tan Sri Mohamad Fuzi Harun said police would open investigation paper as the forex Royal Commission of Inquiry (RCI) had lodged a police report this afternoon.

“A taskforce has been formed and it will lead the investigation. We are investigating the case under Section 409 of the Penal Code for criminal breach of trust,” he told the New Straits Times when contacted.

RCI’s secretary Datuk Dr Yusof Ismail, who is the Finance Ministry Strategic Investment Division director, had lodged a report at Putrajaya police headquarters at 4.10pm asking police to start an official investigation.

In the police report, it was stated that those who were involved in the alleged wrongdoings were Bank Negara Malaysia (BNM) officers, BNM Board of Members, National Audit Department, Finance Ministry and the prime minister who served during the period.

Royal Commission of Inquiry (RCI) secretary Datuk Dr Yusof Ismail seen
leaving the Putrajaya police headquarters after lodging a report. Pic by
AHMAD IRHAM MOHD NOOR

The RCI, in its 528-page report that was tabled in Parliament today, said it believed that Datuk Seri Anwar Ibrahim, who was Finance Minister at the time, had misled the government and concealed the actual losses suffered by BNM.

RCI also said it believed that the prime minister at the time, Tun Dr Mahathir Mohamad, had approved Anwar’s “misleading statements”.

The commission also revealed that the losses were far larger than that what was initially reported by the central bank, RM31.5 billion as against RM5.7 billion, in the period of three years.

Yusof spent almost 40 minutes at the police headquarters and later spoke to reporters who were waiting outside.

He said in the report, the commission had requested the police to start a official investigation on the possible criminal breach of trust, forgery and other wrongdoings which may have been committed during the forex activities.

“Our report is basically requesting the police to start investigation and for the Attorney-General Chambers to take action based on the findings by the police,” he said.

Putrajaya OCPD Asst Comm Rosly Hassan who confirmed that the report was made, said a special unit in Bukit Aman would investigate the case.

By TEOH PEI YING and HASHINI KAVISHTRI KANNAN New Straits Times
Related Links:

 PROBE NOR MOHAMED, DR Mabatbjr, ANWAR – PressReader

It recommends that they be investigated for possible CBT, fraud

FILE PIC
Former finance minister Tun Daim Zainuddin after giving his statement to the Royal Commission of Inquiry in September.
THE RCI believes Datuk Seri Anwar Ibrahim had concealed Bank Negara’s actual forex losses from the cabinet, and that Tun Dr Mahathir Mohamad condoned his actions. The panel, in confirming that RM31.5 billion was lost, says there are grounds to investigate them for criminal breach of trust and fraud.
THE Royal Commission of Inquiry (RCI) into Bank Negara Malaysia’s (BNM) foreign exchange (forex) losses in the 1990s has recommended investigations against former prime minister Tun Dr Mahathir Mohamad and his one-time deputy, Datuk Seri
Anwar Ibrahim.
The RCI, in its 528-page report that was tabled in the Dewan Rakyat yesterday, said the duo had
concealed facts from the cabinet.
It also recommended that Dr Mahathir and Anwar be investigated for criminal breach of trust and fraud.
“There is a basis for an official police investigation into BNM board of directors, National Audit Department, then finance minister and prime minister for criminal breach of trust and fraud in the performing of the speculative forex transactions and in hiding the losses from the cabinet and Parliament,” the report said.
Former BNM adviser Tan Sri Nor Mohamed Yakcop was also implicated as the commission found that he was responsible for the billions of ringgit in losses.
RCI had recommended that Nor Mohamed be investigated for alleged criminal breach of trust and for allegedly contravening the Central Bank Ordinance 1958.
The commission also found that former finance minister Tun Daim Zainuddin had allegedly abetted Nor Mohamed. Daim was finance minister until 1991 before he was replaced by Anwar.
BNM lost RM31.5 billion in forex trading between 1992 and 1994. Nor Mohamed was
in charge of several portfolios in BNM at the time, including the management of external reserves.

 

BN and Opposition reps at loggerheads over report – Nation

RCI says Dr M helped in concealing RM31.5bil forex losses 

RCI says Dr M helped in concealing RM31.5bil forex losses …

‘Probe Nor Mohamed for possible CBT’ – Nation

Royal commission recommends CBT probe on Nor Mohamed over ..

RCI: Daim abetted Nor Mohamed in committing CBT | Free Malaysia …

Royal commission recommends criminal probe against Anwar …

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Recalling Bank Negara’s massive forex losses in 1990s

The Asian financial crisis – 20 years later

Malaysia must retool education, skills to adapt to knowledge economy

Angry & frustrated investors lodged report, tell off staffs trying to buy time!

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Malaysia must retool education, skills to adapt to knowledge economy


KUALA LUMPUR: Malaysia needs to reinvent its education system to adapt to the knowledge economy, which has led to a sharp reduction in unskilled jobs and spike in demand for data analysts.

Tan Sri Andrew Sheng, Distinguished Fellow of Asia Global Institute, University of Hong Kong, said Malaysia needs to retool its education and skills, and experiment across the spectrum, in positioning itself in the new economy.

“Formal education is outdated because of the speed of new knowledge. Companies do not spend on ‘on the job’ training, because of cost cuts and staff turnover,” he said during his presentation at the NCCIM Economic Forum 2017 yesterday.

Between 2007 and 2015, the loss of unskilled jobs was 55% relative to other jobs while demand for data analysts over the last five years has increased 372%.

In the global supply chain, old economy companies are quickly losing their edge as digitisation moves faster than physical goods while unskilled jobs will be quickly replaced by robotics due to the fast adoption of artificial intelligence (AI).

“Moving up the global value chain is about moving up knowledge intensity. If you don’t get smarter you won’t get the business.

“We are already plugged into the global value chain. We are very successful in that area but we cannot stay where we are. Remaining still is no longer an option. We need to move from tasks to value added growth to high value added production. In order to do that, we need to learn to learn.”

Sheng said the Malaysian economy is doing well but faces many challenges, including subdued energy prices, growing trade protectionism, geopolitical tensions and is still very reliant on foreign labour.

“Are we ready for the new economy? The way trade is growing is phenomenal but the new economy’s challenges are great and very complicated politically because technology is great for us as it gives us whatever we want but at the cost of our jobs,” he said.

When education fails to keep pace with technology, the result is inequality, populism and major political upheaval.

“What the new economy tells us is that robotics or AI (artificial intelligence) calls for Education 4.0, which means that we have to learn for life,” he said.

Sheng noted that Malaysia has successfully moved quietly into education services, medical tourism, higher quality foods, all through upgrading skills, branding and marketing.

“But formal education has become bureaucratised, whereas we are not spending enough on upgrading our labour force, prefering to hire imported labour,” he said.

Although Malaysia cannot compete in terms of scale and speed, especially against giants such as China, it can compete in terms of scope with strength in diversity, soft skills and adaptability.

“We are winners … but have we got the mindset?” Sheng questioned.

He said Malaysia must upgrade its physical technology through research and development, harness its unique social technology and digitise its business model in order to create wealth.

While the government can help, he added, true success comes from community self-help irrespective of race or creed, and retired baby boomers who have wealth of experience must mentor the youth to start thinking about the new economy.

Eva Yeong, sunbiz@thesundaily.com
Related Links:

 Andrew Sheng – Institute for New Economic Thinking

Andrew Sheng
is a distinguished fellow at Fung Global Institute, chief adviser …
member of Khazanah Nasional Berhad, the sovereign wealth fund of Malaysia.

MALAYSIA should leverage on social technology, which is its true strength, … Tan Sri Andrew Sheng, who is a distinguished fellow at Asia Global Institute, … the new economy as it involves lifelong learning to adapt, innovate and create. … To enhance the skills of the civil service, he pointed out Singapore’s …

Andrew Sheng – Project Syndicate

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The Asian financial crisis – 20 years later




East Asian Economies Remain Diverse

 

It is useful to reflect on whether lessons have been learnt and if the countries are vulnerable to new crises.

IT’S been 20 years since the Asian financial crisis struck in July 1997. Since then, there has been an even bigger global financial crisis, starting in 2008. Will there be another crisis?

The Asian crisis began when speculators brought down the Thai baht. Within months, the currencies of Indonesia, South Korea and Malaysia were also affected. The East Asian Miracle turned into an Asian Financial Nightmare.

Despite the affected countries receiving only praise before the crisis, weaknesses had built up, including current account deficits, low foreign reserves and high external debt.

In particular, the countries had recently liberalised their financial system in line with international advice. This enabled local private companies to freely borrow from abroad, mainly in US dollars. Companies and banks in Korea, Indonesia and Thailand had in each country rapidly accumulated over a hundred billion dollars of external loans. This was the Achilles heel that led their countries to crisis.

These weaknesses made the countries ripe for speculators to bet against their currencies. When the governments used up their reserves in a vain attempt to stem the currency fall, three of the countries ran out of foreign exchange.

They went to the International Monetary Fund (IMF) for bailout loans that carried draconian conditions that worsened their economic situation.

Malaysia was fortunate. It did not seek IMF loans. The foreign reserves had become dangerously low but were just about adequate. If the ringgit had fallen a bit further, the danger line would have been breached.

After a year of self-imposed austerity measures, Malaysia dramatically switched course and introduced a set of unorthodox policies.

These included pegging the ringgit to the dollar, selective capital controls to prevent short-term funds from exiting, lowering interest rates, increasing government spending and rescuing failing companies and banks.

This was the opposite of orthodoxy and the IMF policies. The global establishment predicted the sure collapse of the Malaysian economy.

But surprisingly, the economy recovered even faster and with fewer losses than the other countries. Today, the Malaysian measures are often cited as a successful anti-crisis strategy.

The IMF itself has changed a little. It now includes some capital controls as part of legitimate policy measures.

The Asian countries, vowing never to go to the IMF again, built up strong current account surpluses and foreign reserves to protect against bad years and keep off speculators. The economies recovered, but never back to the spectacular 7% to 10% pre-crisis growth rates.

Then in 2008, the global financial crisis erupted with the United States as its epicentre. The tip of the iceberg was the collapse of Lehman Brothers and the massive loans given out to non-credit-worthy house-buyers.

The underlying cause was the deregulation of US finance and the freedom with which financial institutions could devise all kinds of manipulative schemes and “financial products” to draw in unsuspecting customers. They made billions of dollars but the house of cards came tumbling down.

To fight the crisis, the US, under President Barack Obama, embarked first on expanding government spending and then on financial policies of near-zero interest rates and “quantitative easing”, with the Federal Reserve pumping trillions of dollars into the US banks.

It was hoped the cheap credit would get consumers and businesses to spend and lift the economy. But instead, a significant portion of the trillions went via investors into speculative activities, including abroad to emerging economies.

Europe, on the verge of recession, followed the US with near zero interest rates and large quantitative easing, with limited results.

The US-Europe financial crisis affected Asian countries in a limited way through declines in export growth and commodity prices. The large foreign reserves built up after the Asian crisis, plus the current account surplus situation, acted as buffers against external debt problems and kept speculators at bay.

Just as important, hundreds of billions of funds from the US and Europe poured into Asia yearly in search of higher yields. These massive capital inflows helped to boost Asian countries’ growth, but could cause their own problems.

First, they led to asset bubbles or rapid price increases of houses and the stock markets, and the bubbles may burst when they are over-ripe.

Second, many of the portfolio investors are short-term funds looking for quick profit, and they can be expected to leave when conditions change.

Third, the countries receiving capital inflows become vulnerable to financial volatility and economic instability.

If and when investors pull some or a lot of their money out, there may be price declines, inadequate replenishment of bonds, and a fall in the levels of currency and foreign reserves.

A few countries may face a new financial crisis.

A new vulnerability in many emerging economies is the rapid build-up of external debt in the form of bonds denominated in the local currency.

The Asian crisis two decades ago taught that over-borrowing in foreign currency can create difficulties in debt repayment should the local currency level fall.

To avoid this, many countries sold bonds denominated in the local currency to foreign investors.

However, if the bonds held by foreigners are large in value, the country will still be vulnerable to the effects of a withdrawal.

As an example, almost half of Malaysian government securities, denominated in ringgit, are held by foreigners.

Though the country does not face the risk of having to pay more in ringgit if there is a fall in the local currency, it may have other difficulties if foreigners withdraw their bonds.

What is the state of the world economy, what are the chances of a new financial crisis, and how would the Asian countries like Malaysia fare?

These are big and relevant questions to ponder 20 years after the start of the Asian crisis and nine years after the global crisis.

But we will have to consider them in another article.

By Martin Khor Global Trend

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.
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Recalling Bank Negara’s massive forex losses in 1990s


The government is moving ahead to investigate whether there were any wrongdoings in the massive foreign exchange losses suffered by Bank Negara some 25 years ago. Many people today may not have a good recollection of what happened, while many others probably had no knowledge of it until it became news again recently as the sitting government took aim at this nasty episode under Tun Dr Mahathir Mohamad’s rule.

I was a reporter with Reuters then and had covered the losses that surfaced when the central bank released its annual reports for 1992 and 1993 in March 1993 and March 1994, respectively. I recall that those losses first puzzled me and others because bank officials did not come forward to talk about them at the press conference nor was the information contained in the press release. They were, however, disclosed in the last few pages of the 1992 report on the bank’s financial statement, which normally do not attract attention, as reporters would focus on the earlier parts that touched on the performance of the economy and banking sector.

But that year, we took a cursory look at those back pages and spotted something odd. Bank Negara’s financial statement showed its Other Reserves had plunged from RM10.1 billion in 1991 to RM743 million in 1992, or a loss of RM9.3 billion. There was also a Contingent Liability of RM2.7 billion.

When we asked about this, I recall that both then Bank Negara governor, the late Tan Sri Jaafar Hussein, and his deputy, Tan Sri Dr Lin See Yan, said it was nothing serious, as they were mere paper losses that could be recovered later. We were not convinced, but we were unable to challenge them, as we did not under stand the manner in which Bank Negara presented its accounts.

The next day, however, the market was abuzz with talk that the bank had lost billions in foreign exchange transactions and I remember writing stories on this for the next week or so. But nothing more came of it, although opposition MPs led by Lim Kit Siang continued to press the Ministry of Finance and Bank Negara for answers.

The matter really blew up a year later when Bank Negara tabled its 1993 report and disclosed another forex loss of RM5.7 billion. Here is what Jaafar said:

“In the Bank’s 1993 accounts, a net deficiency in foreign exchange transactions of RM5.7 billion is reported, an amount which will be written off against the Bank’s future profits. This loss reflected errors in judgment involving commitments made with the best intentions to protect the national interest prior to the publication of the Bank’s 1992 accounts towards the end of March 1993. As these forward transactions were unwound, losses unfolded in the course of 1993. In this regard, global developments over the past year had not been easy for the Bank; indeed, they made it increasingly difficult for the Bank to unwind these positions without some losses. For the most part, time was not on the Bank’s side. Nevertheless, this exercise is now complete — there is at this time no more contingent liabi lity on the Bank’s forward foreign exchange transactions on this account. An unfortunate chapter in the Bank’s history is now closed.”

Jaafar took responsibility for what happened and resigned, as did the bank official directly responsible for its foreign exchange operations, Tan Sri Nor Mohamed Yakcop.

How did Bank Negara lose the billions?

Jaafar said the losses were owing to commitments made to protect the nation’s interests. He was referring to the bank’s operations in the global forex market to manage the country’s foreign reserves and, obviously, something went wrong in a big way.

Forex traders and journalists who covered financial markets in the late 1980s knew that Bank Negara had a reputation for taking aggressive positions to influence the value of the ringgit against the major currencies. When the bank is not happy with the direction of the ringgit, up or down, it makes its intentions known by either selling or buying ringgit.

One question I had always asked forex dealers when writing market reports for Reuters was, “Is Negara in the market today?”

Bank Negara has always maintained that its market operations were to prevent volatility and undue speculation. Its critics, on the other hand, said it also did so for profits, which it enjoyed for years.


What went wrong in 1992?

That was the year George Soros and other hedge funds bet heavily against the British pound on the basis that it was overvalued. The Bank of England (BOE) fought back by buying billions of sterling while Soros and gang shorted the battered currency.

As it did not want to deplete too much of its reserves to defend the fixed rate of the pound within the European Exchange Rate Mechanism, BOE capitulated by withdrawing from the ERM on Sept 16, 1992, since called Black Wednesday.

It was widely believed then that Bank Negara had bet on the wrong side of the fight between BOE and the hedge funds. It never thought that central banks could lose against specu lators, but BOE lost and Soros was said to have pocketed at least US$1 billion.

Bank Negara has never confirmed nor denied that this was indeed what happened but the evidence, although circumstantial, points to this as the reason for the loss of RM9.3 billion in its 1992 accounts and the subse quent loss of another RM5.7 billion in 1993, bringing its total loss to RM15 billion.

Was the loss more than RM15~30 bil?

Former Bank Negara assistant governor Datuk Abdul Murad Khalid was reported as saying recently that the losses were actually US$10 billion. That would work out to RM25 billion at the then exchange rate of RM2.50 to a dollar. Murad also alleged that there were no proper investigations into the matter.

Following his allegations, the Cabinet has now set up a task force led by former chief secretary to the government, Tan Sri Sidek Hassan, to investigate whether there were wrongdoings that caused the losses, whether there was a cover-up on the size of the losses, and whether Parliament was misled.

So, who should the task force call up as part of its probe? I am guessing the following:

  1. Tun Mahathir, who was the prime minister then;
  2. Tun Daim Zainuddin, who was the minister of finance from 1984 to 1991 when Bank Negara was active in the forex market;
  3. Datuk Seri Anwar Ibrahim, who was the minister of finance when the losses surfaced in 1992 and 1993;
  4. Dr Lin, who was deputy governor of the central bank then;
  5. Tan Sri Ahmad Don, who succeeded Jaafar as governor;
  6. Murad, who made the allegations; and
  7. Nor Mohamed, who was head of forex operations.


Who is Nor Mohamed?

Nor Mohamed is the man who lost billions for Bank Negara and resigned along with Jaafar in 1993. He then kept a low profile with short spells at RHB Research Institute and Mun Loong Bhd.

In an ironic twist, the man who lost billions for the country was later credited with helping save the ringgit from currency speculators in 1998.

Frustrated by the year-long failure of governments and central banks to fight off speculators, who had devalued Asian currencies (the ringgit plunged to as low as 4.80 to the dollar), Tun Mahathir turned to Nor Mohamed for help. The doctor did not understand how the currency market worked and Nor Mohamed took him through it in great detail. The two men then confidentially devised the plan that shocked the world — the imposition of controls on Sept 1, 1998.

Widely criticised at the time (Ahmad Don and his deputy Datuk Fong Weng Phak resigned in protest), some now say the move helped bring an end to the crisis, as speculators feared other affected countries would do the same.

Nor Mohamed’s star shone again and he later became Minister of Finance 2 under Tun Mahathir and Tun Abdullah Ahmad Badawi. He is now deputy chairman of Khazanah Nasional.

But now, a ghost from his past has been dug up as fodder for the political contest between Prime Minister Datuk Seri Najib Razak and his biggest nemesis, Tun Mahathir. The objective is obvious. Tun Mahathir has attacked Najib incessantly over 1Malaysia Development Bhd. The current administration is fighting back by saying billions were also lost under Tun Mahathir’s watch. Tun Mahathir says there is a 1MDB cover-up and his foes are accusing him of doing the same.


Will the task force unearth anything that is not already known?

The task force needs three months to complete its work, so we will just have to wait for the full picture before we can come to any conclusion that can bring closure to something that happened 25 years ago.

Perhaps, one day, we will be lucky enough to also have the full picture of the affairs of 1MDB. Current Minister of Finance 2 Datuk Seri Johari Abdul Ghani did say this month that no action had been taken against anyone in Malaysia over 1MDB because we have only “half the story” so far.

In that case, should we not have a task force on 1MDB as well so Malaysians can have the full picture?

By: Ho Kay Tat

Ho Kay Tat is publisher and group CEO of The Edge Media Group

This article appears in Issue 772 (March 27) of The Edge Singapore which is on sale now.

RCI can shed more light on forex losses

 Figures could be even greater than what had been disclosed, says STF chairman

KUALA LUMPUR: A Royal Commission of Inquiry (RCI) can reveal more details on the foreign exchange (forex) losses suffered by Bank Negara (BNM) in the 1980s and 1990s, said Tan Sri Mohd Sidek Hassan.

The chairman of the Special Task Force (STF) to probe the forex losses said the figure was greater than what was disclosed.

However, the STF was unable to scrutinise further due to the limitations that it had, he said in an interview on Friday.

“As a task force, we have limitations. We were established on an administrative basis and not under any legislation.

“As such, the STF had no power to coerce anyone to come forward for any discussion or to give any information,” he said, adding that it only had access to documents that were available to the public, such as BNM’s annual reports and consultations between the central bank and the International Monetary Fund.

“We also cannot compel anyone to come forward. Even if you ask them to come and they don’t want to come, there is no issue about it.

“And even if they came and we questioned them, and they refused to answer, we cannot do anything about it.

“And it was not under oath. Even if they answered, we don’t know if that was the truth.

“So, that is why the RCI is better, although it is safe to say that the STF has reason to believe that the actual loss is different and much more than the figures given earlier,” said Sidek, a former Chief Secretary to the Government.

He added that the RCI could have access to documents relating to the forex losses, for instance from the Finance Ministry or BNM.

On Jan 26, former BNM assistant governor Datuk Abdul Murad Khalid revealed that the central bank suffered US$10bil (RM42.9bil) in forex losses in the early 1990s, much higher than the figure of RM9bil disclosed by BNM.

Subsequently, a seven-member STF headed by Sidek was formed in February.

Sidek, who is Petronas chairman, said the STF focused on the three points in the terms of reference, one of which was conducting preliminary investigations into losses by BNM related to its speculative fo­­reign currency transactions.

It also investigated whether there was any action to cover up the losses and whether the Cabinet and Parliament were misled and it had to submit to the Government recom­mendations for further action, including the establishment of an RCI.

On June 21, the STF submitted its findings, concluding that it found that a prima facie case to merit in-depth investigations by establishing an RCI.

Explaining the process of the investigation, Sidek said 12 people, including former BNM governor Tan Sri Zeti Akhtar Aziz, were interviewed by the STF, and all coopera­ted well.

Among the others who were summoned by the STF were PKR adviser Datuk Seri Anwar Ibrahim, DAP adviser Lim Kit Siang, and former Finance Minister II and BNM assistant governor at the time Tan Sri Nor Mohamed Yakcop.

Asked on the need to investigate something that happened about two decades ago, Sidek said though it took place a long time ago, it had been revealed that the losses were huge.

“I feel that the people need an explanation on the matter, and the Government had decided to conduct an investigation.

“Therefore, an RCI is the only way for a complete understanding. If this is not done now, the matter will prolong.

“Five or 10 years from now it will crop up again.

“With a full investigation through an RCI, there could be closure to this,” Sidek said. — Bernama

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Bitcoin, digital currencies rally, caution prevails; virtual currency in property


Bitcoins As Digital Currency's Rally Crushed Every Other Currency in 2016
A collection of bitcoin tokens. Bloomberg—Bloomberg via Getty Images

Digital currencies rally, but caution prevails

While investing in the future is the way to go, it comes with risks and rewards. The best strategy would be to not be in a rush. Do your homework.

THIS week, the rally in crypto currencies is at its all-time high.

Bitcoin, the pioneer in digital currency, surged to over US$1,700 per coin in
anticipation of a reversal in United States financial regulators’ ruling to allow for an exchange-traded fund for Bitcoin and other factors.

Bitcoin was trading at US$935 on March 24. It rose 82%, pushing its market capitalisation to over US$28bil.

Ether, another such currency, surged from US$8 on Jan 1 to US$90 this week, gaining 1,125% in five months.

The market capitalisation of the 700-over currencies is over US$50bil. The promoters believe it is the currency of the future, hence the rise, but the naysayers believe it is entering a speculative bubble.

But there are some who are ditching gold to mine Bitcoins.

It is a fact that crypto currencies are gaining traction from their inception in 2009. Now, at least 150 organisations including Apple, Walmart, Sears, eBay, Overstock.com,  Microsoft, Steam, Expedia and even Subway accept them in exchange for goods.

So, what is Bitcoin then?

It is a form of digital currency, created and held electronically, not blocked by any nation or government, not printed like dollars and ringgit but produced by people. Crypto currencies are digital currencies that use encryption to secure transactions and control how new coins are made.

You and I can get Bitcoins by “mining” computers that validate blocks of transactions using software to solve mathematical puzzles every 10 minutes. If you solve it first, you are rewarded with new Bitcoins.

Bitcoin is the mother of all crypto currencies – also known as virtual currencies, digital currencies and private currencies.

Other than Bitcoin and Ether, there is also Dogecoin, Augur, Chinacoin, Litecon, Dash, Waves and Zcash. There are over 40 exchanges globally to trade in Bitcoins.

All this came about because of fintech, the financial services technology that is  disrupting the financial services sector with faster, cheaper and so-called “reliable”
transactions for money transfers, bank exchange rates and other money-related transactions. The average clearance is a 12-hour period, which apparently the banks cannot match.

In Brazil, people use Zcash to pay for their taxes, electricity bills and purchases.

This week, Australia said there would be no double taxation for crypto currencies and to treat it just like other currencies from July 1, paving the way for greater usage.

Many are betting on crypto currencies because of the lure that they are the currency of the future. Would you?

Since 2009, there have been gainers and losers, so you decide.

All these digital currencies came about because of the Internet and data.  The value of data and digital services is becoming more apparent, and in the digital era, data is the new currency.

Amid all this is blockchain, which is simply a digital ledger that keeps track of Bitcoin transactions and transfers it globally. It boasts of instantaneous transactions, transparent and cheaper than the traditional ways. This is why banks are hurriedly getting their acts together in the area of fintech so as to not miss the boat.

There is a growing number of mergers and acquisitions and crowdfunding for blockchains. Last month, music-podcast-video streaming service Spotify  bought over blockchain technology company Mediachain Labs to help reward  online content owners with royalty payments.

Other telcos and IT firms are getting into blockchain because they don’t want to miss out on anything. Other payment companies are getting into the act too. There is just too much interest in this new wave of doing things.

The journey of crypto currencies, however, is not without hurdles, and there are plenty out there that cannot be ignored. Even blockchain’s growth cannot be ignored, especially since it is being positioned by those championing it as the de facto technology of the future.

But will it really be all that or will it just add another layer to the overall cost?

All these transfers do not need regulation as yet, something that central bankers don’t like. In fact, Bank Negara is already in the thick of things where fintech is concerned.

While investing in the future is the way to go, it comes with risks and rewards. The best
strategy would be to not be in a rush. Do your homework, as there is also the other side of Bitcoin – fake websites, fake online gaming sites, trading, etc.

I bet you would know of someone who has lost money mining Bitcoin or Ether. You honestly wouldn’t want to be put in a spot like those caught up in the recent forex scam and the earlier gold scam.

It would be good too to bear in mind that the sweet spot of crypto currencies has been linked to terrorism financing, money laundering, tax evasion and fraud.

Trust and transparency have been the bedrock of financial institutions all these years. Ensure your bedrock is solid, but at the same time, remember what the former US Federal Reserve chairman Ben Bernanke had said in a letter to US senators about virtual currencies, that they “may hold long-term promise, particularly if the innovations promote a faster, more secure, and more efficient payment system”.

Do you think blockchain will bring trust and transparency to the world of crypto currency? Share your thoughts with me at bksidhu@thestar

Source: The Star by b.k. sidhu

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Property in a digital era

WITH digital technology all the rage and taking the world by storm, we look at how science and automation has managed to change and revolutionise the way we do things, in this section, property.

While the internet has changed the way we receive information and connect with others and the smart phone transformed the whole concept of a phone, we now look at the evolution of finance and how purchasing items, including a house, is going through reform with the introduction of bitcoin.

Introducing bitcoin

When people hear terms like “bitcoin” and “blockchain”, many are vague while some may not even be familiar with these words. But for the technology industry adept, bitcoin and blockchain is common as these new-age technology concepts and modus operandi have been around, perhaps less widely known in Southeast Asia as it is in the West and China.

For the uninformed and in the dark, bitcoin is a technology that has established a new electronic payment method using “digitised money” made with digital cryptography, otherwise known as cryptocurrency.

This system of payment is carried out when a user uses “bitcoin currency” (or cryptocurrency) to pay for goods by transferring the currency to another user (seller) within the bitcoin community.

Each transaction is recorded in a public data ledger known as “blockchain” and it is here where all the transactions that have taken place within the bitcoin community are stored.

The amazing thing about this system is that anyone in the bitcoin community is able to validate transactions that take place without the need of an intermediary.

Sound too good to be true and a little risky? Well, the reason there is no intermediate party necessary is due to the network bitcoin technology is regulated on.


Modus operandi and more

The bitcoin network is founded on a “peer-to-peer network system (P2P network)” which is explained as “a network of computers/ mobile configured to allow certain files and folders to be shared with everyone or with selected users”.

As a result, the “participants” are in control of their transactions, making everyone equal within the bitcoin community, which is also transparent.

It is said that bitcoin technology was first created in 2008 by a person or a group of persons under the pseudonym “Satoshi Nakamoto” in a research paper. The research stated that there was need for a new electronic payment method, one using digitised money. The analysis also included the future of bitcoin, its benefits, capabilities and potential.

The system was implemented on Jan 3, 2009. And after just a few years, bitcoin grew to become a whopping US$12 billion (RM52.7 billion) globalised economy.

Bitcoin attributes

While not much has been said about bitcoin in this part of the region, the system has been around, slowly developing and growing. Like many things that are cloudy and not often talked about, people are weary hence, there will be sceptics who dissuade others about the system they themselves are unclear about.

With that, theSun’s Brian Chung shares what he learnt of this new method of transaction and currency when he attended a talk by renowned entrepreneur, author and expert on bitcoin Andreas M. Antonopoulos.

Below, Antonopolous shares important information on bitcoin.

1) Bitcoin is an open system of payment: It is a system that anyone can access, participate and innovate, and does not require permission. Bitcoin allows anyone to join in and use the system, validate the transaction and create different kinds of cryptocurrency.

2) Bitcoin is borderless: Like the internet, bitcoin is not restricted to a country’s rules and regulations as it has its own protocol with no distinction across countries.

3) Bitcoin is neutral: Bitcoin does not take the identity of the participant into any consideration. It only validates the transaction that takes place between participants. This attribute also allows participants to remain anonymous.

4) Bitcoin is censorship resistant: Every transaction in the bitcoin network cannot be frozen, censored or canceled. Like the internet, the bitcoin system is a global digital economy with one currency.

5) Bitcoin is a decentralised system: The bitcoin network has no central institution or centre point of control. This trait ensures that there is no one major target for hackers to concentrate their attacks on. Instead, hackers have to create attacks on every single participant’s software with different forms of virus and codes to hack into one computer.

6) Bitcoin is scarce and limited: Bitcoin is a system of value like gold but in digital form. This makes it a system that is not based on credit and debit. It also makes bitcoin a singular global currency with no exchange rate between countries.

7) Every bitcoin transaction is permanent and immutable: The transaction of everyone in the community is verified by everyone in the system. Once it is verified, the transaction will be permanently recorded in the blockchain.

8) Bitcoin is a constantly innovative technology: The open source nature of the bitcoin technology allows other people to further improve on it. There are many other cryptocurrencies based on the bitcoin technology. Moreover, the bitcoin technology is dependent on the internet, which makes improvement and innovation necessary.

Bitcoin transactions can be done via smart phones and computers by downloading the application and software. Users do not need to register themselves to be part of the bitcoin network as all “participants” are referred to by codes and “signature of one’s device”.

However, iPhone users need to remember their iTunes password to download the application. In addition, the device that one has downloaded the bitcoin software on must remain connected to the internet in order for one to use the bitcoin method of payment.

Follow our column next week on the application of bitcoin in property.

[Note: All charts courtesy of Bitcoin Malaysia.]

 

The application of bitcoin in property

 

WHILE last week, we introduced the term bitcoin to those oblivious of this new age cryptocurrency and system of payment, this week, we share bitcoin whiz Andreas M. Antonopoulus’ insights on how this technology is applied in property. Here is what he had to say:

Permanent records

“One very common application is the registration of assets or ownership of tangible and
non-tangible things like the registration of title over land and the ownership of assets
like homes.

When you record something on blockchain, it cannot be modified … it is immutable. Once recorded on the blockchain, the system of trust prevents anyone from reversing or overwriting it. That makes a record on blockchain permanent, an immutable record which is really important in real estate transaction as it allows one to pass the title of a piece of land from person to person independently with no one being able to falsify the record or steal land through paper,” Antonopoulos said.

Moreover, he mentioned that this technology can benefit the industry tremendously as it is able to resolve a huge problem in real estate and property transactions – the falsification of strata titles and property documents.

His view is further enhanced with the emergence of another bitcoin-based system, ethereum. Like bitcoin, ethereum has its own cryptocurrency known as ether. However, ethereum adopts a different technology that is based on the blockchain public ledger system known as Smart Contract.

According to Antonopoulos, a smart contract is an electronic contract with all the contractual obligations of the buyer and seller. The contract is written and coded into an application, which will ensure both parties fulfill their obligations.

Like blockchain technology that is built on trust and verification, these contracts are encoded in a public ledger in the ethereum community. If anyone tries to forge the contract, the ledger will reject it. As such, this smart contract cannot be rewritten and altered as it is a permanent and immutable contract.


Direct transactions

Besides the use of a contract, the technology will make transactions direct, fast and secure.

Antonopoulos also shared about the removal of third parties and its altered role. He said, “Another example relevant to real estate application is the function of escrow. In order to do make transactions for real estate today, people have to use a third party agent, an escrow agent. This escrow agent charges a significant amount of money in most countries. During the process, that agent holds custody of the entire fund, which is dangerous. This means that the escrow agent has to be carefully vetted and have foresight.

Bitcoin can replace all of this by using multi-signature, which allows the seller and buyer to transact escrow programmatically, with the third party acting as mediator only in the case of a dispute.

Buyer and seller will be able to execute a transaction on their own without the need of an escrow agent and without any of the parties having custody of the entire fund. Through bitcoin, you do not need to spend that additional one percent of the sale of the house – the escrow agent is no longer necessary.

It can also change the speed of escrow by doing it in hours instead of a month and changes the security because no one of the three parties can run away with the money. It is faster, cheaper and secure. It can be done in other industries related to real estates like purchasing assets, corporation, mergers and acquisitions.

International property purchase

With the use of decentralised digital currency, one can assume that purchasing items and properties is a little easier, and it is.

The chance of purchasing international property is further reinforced by the fact that bitcoin is not controlled by anyone, not even political and banking institutions. This attribute of bitcoin makes it easier for people buying property from another country. Although each country has its regulations, the use of bitcoin to purchase property abroad saves time and money as one does not need to change currency.

The Australia Real Estate website has stated that there are properties in the United States and Latin America being sold using bitcoin. The Wall Street Journal wrote an article in 2014 regarding a Lake Tahoe property, which was sold for US$1 million in bitcoin.

Follow our column next week for more interesting information on bitcoin, its challenges and how stable a cryptocurrency it is.

By rian Chung

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Be wary of these four types of financial predators


REGRETTABLY Malaysia seems to be fertile ground for all sorts of scammers. Just yesterday I received a text message from Bank Negara Malaysia, warning me not to open emails that claim they are from BNM and ask for payment verification.

The newspapers report every month on hundreds of Malaysians losing millions of Ringgit to all sorts of financial predators.

These are the four types of financial predators you should be aware of.

Financial predators that are selling you something amazing (for them). Some financial predators are trying to sell you something and only later you find out that the item is not the best use of your money at all.


Watch out for these financial predators
:

* The pyramid scheme operator who is selling you products which sound expensive and technologically sophisticated, but are worthless.

* The shop owner, who recommends expensive or high margin products, which turn out to be unpopular or old products to increase his profit or clear his inventory.

* The property agent, who pushes you to purchase a house despite knowing that there is a price correction coming. He just cares about getting his commission.

* Financial predators that want to make you rich (but make you poor instead).

Other financial predators are not selling you a product, but a dream: to be rich one day. You would be amazed to find out how much people are willing to spend in their pursuit of this dream. You can get rich in many ways, but not nearly as many, as ways in which you can get scammed.

For instance, consider:

*The investor or trader that is selling you currency, gold, stock or property with the promise of extremely high returns. Sometimes they don’t sell the assets, but a “secret” formula or (software) tool to always make a winning trade. Don’t fall for it!

* The prince, minister, lottery winner, retired general and other personalities which will reward you with a slice of their wealth. If first you pay some legal / custom fees.

* The fake lottery / contest predator, that tricks you into thinking you won a sizeable sum of money. You just need to pay up some administration fees before you can redeem your prize.

* The scratch & win agent and casino operator. “The house always wins.” You will bring more to the casino operator than he will give back.

* The (soccer) bookie, who extends upfront credit for you to place more bets and win back your losses. But if you keep losing, his friendly helpfulness will quickly vanish.

Financial predators that “just” want to help you (into bigger problems)

Some financial predators pretend they just want to help you – some may even say they have nothing to gain from it. Be aware of these sophists!

* The financial planner that gets more commission the more financial products you buy. Never mind whether you really need all that insurance and other financial products.

* The loan shark that will give you better rates or quicker disbursement than the bank, but asks much higher interest rates in return.

* The salesman that is selling you expensive insurance on top of your car / phone etc that already have guarantee from the manufacturer.

* The car dealerships and stores who encourage you to take their own (more expensive) financing plans instead of your bank’s instalment plans.

* The financial predator that is in love with you (or is it your money)?

* And then finally, the financial predator that lures you with dreams of romance. This one is the saddest of all, because doesn’t everyone deserve more genuine love in their life?

And isn’t it heart-breaking to see how scammers toy with people’s strongest desires, just for monetary gains?

Be aware for online girlfriends and boyfriends that contact you out of nowhere. Don’t be surprised when you find scammers that try to deceive you with romantic talk in the darkest of alleyways on the Internet (or just around the corner on Facebook and other social media apps).

Especially be wary if you have never seen your new love in real life or (s)he is a foreigner and needs your money in order to pay for visa or flights or to pay off local debts before (s)he is allowed to leave.

As you can tell, Malaysia and the world are full of financial predators. Don’t fall prey to them and become their lunch.

By Mark Reijman The Star/ANN

Mark Reijman is co-founder and managing director of https://www.comparehero.my/dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, loans and broadband plans in Malaysia. Keen on joining the team as a writer, then email mark@comparehero.my

Global Reset 2016~2017


In a world facing challenges and uncertainties, embrace opportunities for success through innovation.

“I went looking for my dreams outside of myself and discovered, it’s not what the world holds for you, it’s what you bring to it. –Anne Shirley”

THE world is currently at a paradox. Tensions and uncertainty for the future are rising in times of prevailing peace and prosperity. While changes are taking place at an incredibly fast speed, such changes are presenting unprecedented opportunities to those who are willing to innovate.

Recently, most global currencies had weakened against the US dollar (USD). This may give rise to some concern, but it is worth placing in proper perspective that most countries would trade with a few countries instead of just one. Furthermore, we are living in a world with low economic growth, increased mobility and rapid urbanisation.

In such a global landscape, it is important to embrace change and innovation in a courageous way to shape a better future. In L.M. Montgomery’s Anne of Green Gables, Anne Shirley said, “I went looking for my dreams outside of myself and discovered, it’s not what the world holds for you, it’s what you bring to it.”

Paradox, change and opportunity

In the World Economic Forum Global Competitiveness Report 2016-2017, World Economic Forum head of the centre for the global agenda and member of the managing board Richard Samans stated that at a time of rising income inequality, mounting social and political tensions and a general feeling of uncertainty about the future, growth remains persistently low.

Commodity prices have fallen, as has trade; external imbalances are increasing and government finances are stressed.

However, it also comes during one of the most prosperous and peaceful times in recorded history, with less disease, poverty and violence than ever before. Against this backdrop of seeming contradictions, the Fourth Industrial Revolution brings both unprecedented opportunity and an accelerated speed of change.

Creating the conditions necessary to reignite growth could not be more urgent. Incentivising innovation is especially important for finding new growth engines, but laying the foundations for long-term, sustainable growth requires working on all factors and institutions identified in the Global Competitiveness Index.

Leveraging the opportunities of the Fourth Industrial Revolution will require not only businesses willing and able to innovate, but also sound institutions, both public and private; basic infrastructure, health and education, macroeconomic stability and well-functioning labour, financial and human capital markets.

World Economic Forum editor Klaus Schwab stated in The Fourth Industrial Revolution that we are at the beginning of a global transformation that is characterised by the convergence of digital, physical and biological technologies in ways that are changing both the world around us and our very idea of what it means to be human. The changes are historic in terms of their size, speed and scope.

This transformation – the Fourth Industrial Revolution – is not defined by any particular set of emerging technologies themselves, but by the transition to new systems that are being built on the infrastructure of the digital revolution. As these individual technologies become ubiquitous, they will fundamentally alter the way we produce, consume, communicate, move, generate energy and interact with one another.

Given the new powers in genetic engineering and neurotechnology, they may directly impact who we are, and how we think and behave. The fundamental and global nature of this revolution also pose new threats related to the disruptions it may cause, affecting labour markets and the future of work, income inequality and geopolitical security, as well as social value systems and ethical frameworks.


A dollar story

When set in a global landscape where there is uncertainty for the future, when compared to other countries, Malaysia’s economy is performing quite well.

ForexTime vice president of market research Jameel Ahmad said, “When you combine what is happening on a global level, the Malaysian economy is in quite an envious position.”

For 2016, the USD has moved to levels not seen in over 12 years. The dollar index is trading above 100. This was previously seen as a psychological top for USD.

The Malaysian ringgit (MYR) is not alone in the devaluation of its currency. All of the emerging market currencies have been affected in recent weeks.

Similarly, the British £(GBP) has lost 30% this year, falling from US$1.50 to US$1.25 per GBP. The Euro (EUR) has fallen from US$1.15 to US$1.05 in three weeks.

The China Yuan Renmenbi (CNY) is hitting repeated historic lows against the USD. The CNY is only down around 5%.

Jameel believes that the outlook for the USD will be further strengthened. While the dollar was already expected to maintain demand due to the consistent nature of US economic data, the levels of fiscal stimulus that US Presidentelect Donald Trump is aiming to deliver to the US economy will encourage borrowing rates to go up.

This means that it is now more likely than ever that the Federal Reserve will need to accelerate its cycle of monetary policy normalisation (interest rate rises).

Most were expecting higher interest rates in 2017. Trump has also publicly encouraged stronger interest rates. However, when considered that Trump is also promising heavy levels of fiscal stimulus, there is a justified need for higher interest rates, otherwise inflation in the United States will be at risk of getting out of control.

The probability for further gains in the USD due to the availability of higher yields from increased interest rates will mean further pressure to the emerging market currencies.

With populism resulting in victories in both the United States’ presidential election and the EU referendum in the United Kingdom in 2016, attention should be given to the real political issues in Europe and the upcoming political elections in 2017, such as those in Germany and France.

Jameel said, “Until recently, political instability was only associated with developing economies. We are now experiencing a strong emergence across the developed markets. This might lure investors towards keeping their capital within the emerging markets longer. Only time will tell.”

In Malaysia’s case, the economy is still performing at robust levels, despite slowing headline growth. Growth rates in Malaysia are still seen as significantly stronger than those in the developed world.

There are going to be challenges from a stronger USD and other risks such as slowing trade, but the emerging markets are still recording stronger growth rates than the developed world.

Adapting to creative destruction

In a world where changes are taking place rapidly, the ability to adapt to changes plays an important role in encouraging innovation and growth. Global cities are achieving rapid growth by attracting the talented, high value workers that all companies, across industries, want to recruit.

In an era where 490 million people around the world reside in countries with negative interest rates, over 60% of the world’s citizens now own a smartphone and an estimated four billion people live in cities, which is an increase of 23% compared to 10 years ago, these three key trends are shaping our times.

Knight Frank head of commercial John Snow and Newmark Grubb Knight Frank president James D. Kuhn shared that the era of low to negative interest rates has reduced investors’ expectations on what constitutes an acceptable return. The financial roller coaster ride that led to this situation has made safe haven assets highly sought after.

A volatile economy has not stopped an avalanche of technological innovation. Smartphones, tablets, Wi-Fi and 4G have revolutionised the spread of information, increased our ability to work on the move, and led to a flourishing of entrepreneurship.

Fast-growing cities are taking centre stage in the innovation economy and in most of the global cities, supply is not keeping pace with demand for both commercial and residential real estate.

Consequently, tech and creative firms are increasingly relying upon pre-let deals to accommodate growth, while their young workers struggle to find affordable homes.

As the urban economy becomes increasingly people-centric, regardless of a city being driven by finance, aerospace, commodities, defence or manufacturing, the most important asset is a large pool of educated and creative workers.

Consequently, real estate is increasingly a business that seeks to build an environment that attracts and retains such people.

Knight Frank chief economist and editor of global cities James Roberts said, “We are moving into an era where creative people are a highly prized commodity. Cities will thrive or sink on their ability to attract this key demographic.

“A characteristic of the global economy in the last decade has been the phenomenon of stagnation and indeed decline, occurring alongside innovation and success. If you were invested in the right places and technologies, the last decade has been a great time to make money; yet at the same time, some people have lost fortunes.

“The locations that have performed best in this unpredictable environment have generally hosted the creative and technology industries that lead the digital revolution, and disrupt established markets.” The rise of aeroplanes, automobiles and petroleum created economic booms in the cities that led the tech revolution of the 1920s and 30s. Yet elsewhere, recession descended on locations with the industries that lost market share to those new technologies like ship building, train manufacturing and coal mining.

In a world where abundant economic opportunities in one region live alongside stagnation elsewhere, it is not easy to reconcile the fact that countries that were booming just a few years ago on rising commodity prices are now adapting to slower growth.

Just as surprising are Western cities that are now thriving as innovation centres, when they were dismissed as busted flushes in 2009 due to their high exposure to financial centres.

Roberts said, “This is creative destruction at work in the modern context. The important lesson for today’s property investor or occupier of business space, is to ensure you are on-the ground where the ‘creation’ is occurring and have limited exposure to the ‘destruction’. This is not easy, as the pace of technological change is accelerating at a speed where the old finds itself overtaken by the new.

“However, real estate in the global cities arguably offers a hedged bet against this uncertainty due to the nature of the modern urban economy, where those facing destruction, quickly reposition towards the next wave of creation.”

The industries that drive the modern global city are not dependent upon machinery or commodities but people, who deliver economic flexibility.

A locomotive plant cannot easily retool to make electric cars, raising a shortcoming of the single industry factory town. Similarly, an oil field in Venezuela has limited value for any other commercial activity.

However, a modern office building in a global city like Paris can quickly move from accommodating bankers in rows of desks to techies in flexible work space. Therefore, there is adaptability in the people in a service economy city which is matched by the city’s real estate.

In the people-driven global cities, a new industry can redeploy the ‘infantry’ from a fading industry via recruitment. Similarly, the professional and business service companies that served the banks, now serve a new clientele of digital firms.

In contrast, manufacturing or commodity-driven economies face greater barriers when reinventing themselves.

Today, landlords across the world struggle with how to judge the covenants of firms who have not been in existence long enough to have three years of accounts, but are clearly the future.

Consequently, both landlord and tenant need to approach real estate deals with flexibility. Landlords will need to give ground on lease term and financial track record, and occupiers must compensate the landlord for the increased risk via a higher rent.

Another big challenge for the Western global cities will be competition from emerging market cities that succeed in repositioning themselves away from manufacturing, and towards creative services. The process has started, with Shanghai now seeing a rapid expansion of its tech and creative industries.

The big Western centres still lead in services, but the challenge from emerging markets cities did not end with the commodities rout. They are just experiencing creative destruction and will emerge stronger to present a new challenge to the West.

From Mak Kum Shi The Star/ANN
 

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