US Federal Reserve rate rise, Malaysia and regional equity markets in the red


 

Fed’s big balance-sheet unwind could be coming to an early end

NEW YORK: The Federal Reserve’s balance sheet may not have that much further to shrink.

An unexpected rise in overnight interest rates is pulling forward a key debate among US central bankers over how much liquidity they should keep in the financial system. The outcome will determine the ultimate size of the balance sheet, which they are slowly winding down, with key implications for US monetary policy.

One consequence was visible on Wednesday. The Fed raised the target range for its benchmark rate by a quarter point to 1.75% to 2%, but only increased the rate it pays banks on cash held with it overnight to 1.95%. The step was designed to keep the federal funds rate from rising above the target range. Previously, the Fed set the rate of interest on reserves at the top of the target range.

Shrinking the balance sheet effectively constitutes a form of policy tightening by putting upward pressure on long-term borrowing costs, just as expanding it via bond purchases during the financial crisis made financial conditions easier. Since beginning the shrinking process in October, the Fed has trimmed its bond portfolio by around US$150bil to US$4.3 trillion, while remaining vague on how small it could become.

This reticence is partly because the Fed doesn’t know how much cash banks will want to hold at the central bank, which they need to do in order to satisfy post-crisis regulatory requirements.

Officials have said that, as they drain cash from the system by shrinking the balance sheet, a rise in the federal funds rate within their target range would be an important sign that liquidity is becoming scarce.

Now that the benchmark rate is rising, there is some skepticism. The increase appears to be mainly driven by another factor: the US Treasury ramped up issuance of short-term US government bills, which drove up yields on those and other competing assets, including in the overnight market.

“We are looking carefully at that, and the truth is, we don’t know with any precision,” Fed chairman Jerome Powell told reporters on Wednesday when asked about the increase. “Really, no one does. You can’t run experiments with one effect and not the other.”

“We’re just going to have to be watching and learning. And, frankly, we don’t have to know today,” he added.

But many also see increasingly scarce cash balances as at least a partial explanation for the upward drift of the funds rate, and as a result, several analysts are pulling forward their estimates of when the balance sheet shrinkage will end.

Mark Cabana, a Bank of America rates strategist, said in a report published June 5 that Fed officials may stop draining liquidity from the system in late 2019 or early 2020, leaving US$1 trillion of cash on bank balance sheets. That compares with an average of around US$2.1 trillion held in reserves at the Fed so far this year.

Cabana, who from 2007 to 2015 worked in the New York Fed’s markets group responsible for managing the balance sheet, even sees a risk that the unwind ends this year.

One reason why people may have underestimated bank demand for cash to meet the new rules is that Fed supervisors have been quietly telling banks they need more of it, according to William Nelson, chief economist at The Clearing House Association, a banking industry group.

The requirement, known as the Liquidity Coverage Ratio, says banks must hold a certain percentage of their assets either in the form of cash deposited at the Fed or in US Treasury securities, to ensure they have enough liquidity to deal with deposit outflows.

The Fed flooded the banking system with reserves as a byproduct of its crisis-era bond-buying programs, known as quantitative easing, to stimulate the economy. The money it paid investors to buy their bonds was deposited in banks, which the banks in turn hold as cash in reserve accounts at the Fed.

In theory, the unwind of the bond portfolio, which involves the reverse swap of assets between the Fed and investors, shouldn’t affect the total amount of Treasuries and reserves available to meet the requirement. The Fed destroys reserves by unwinding the portfolio, but releases an equivalent amount of Treasuries to the market in the process.

But if Fed supervisors are telling banks to prioritise reserves, that logic no longer applies. Nelson asked Randal Quarles, the Fed’s vice-chairman for supervision, if this was the Fed’s new policy. Quarles, who was taking part in a May 4 conference at Stanford University, said he knew that message had been communicated and is “being rethought”.

If Fed officials do opt for a bigger balance sheet and decide to continue telling banks to prioritise cash over Treasuries, it may mean lower long-term interest rates, according to Seth Carpenter, the New York-based chief US economist at UBS Securities.

“If reserves are scarce right now, and if the Fed does stop unwinding its balance sheet, the market is going to react to that, a lot,” said Carpenter, a former Fed economist. “Everyone anticipates a certain amount of extra Treasury supply coming to the market, and this would tell people, ‘Nope, it’s going to be less than you thought’.” — Bloomberg

Malaysia and regional equity markets in the red

 

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow
stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

PETALING JAYA: It was a sea of red for equity markets across the region after the Federal Reserve raised interest rates by a quarter percentage point to a range of 1.75% to 2% on Wednesday, and funds continued to move their money back to the US. This is the second time the Fed has raised interest rates this year.

In general, markets weren’t down by much, probably because the rate hike had mostly been anticipated. Furthermore for Asia, the withdrawal of funds has been taking place over the last 11 weeks, hence, the pace of selling was slowing.

The Nikkei 225 was down 0.99% to 22,738, the Hang Seng Index was down 0.93% to 30,440, the Shanghai Composite Index was down 0.08% to 3,047.34 while the Singapore Straits Times Index was down 1.05% to 3,356.73.

In Malaysia, the selling streak has been ongoing for almost a month. As of June 8, the year to date outflow stands at RM3.02bil, which is still one of the lowest among its Asean peers. The FBM KLCI was down 1.79 points yesterday to 1,761.

Meanwhile, the Fed is nine months into its plan to shrink its balance sheet which consists some US$4.5 trillion of bonds. The Fed has begun unwinding its balance sheet slowly by selling off US$10bil in assets a month. Eventually, it plans to increase sales to US$50bil per month.

With the economy of the United States showing it was strong enough to grow with higher borrowing costs, the Federal Reserve raised interest rates on Wednesday and signalled that two additional increases would be made this year.

Fed chairman Jerome H. Powell in a news conference on Wednesday said the economy had strengthened significantly since the 2008 financial crisis and was approaching a “normal” level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity.

Rate hikes basically mean higher borrowing costs for cars, home mortgages and credit cards over the years to come.

Wednesday’s rate increase was the second this year and the seventh since the end of the Great Recession and brings the Fed’s benchmark rate to a range of 1.75% to 2%. The last time the rate reached 2% was in late 2008, when the economy was contracting.

“With a slightly more aggressive plan to tighten monetary policy this year than had previously been projected by the Fed, it will narrow our closely watched gap between the yield rates of two-year and 10-year Treasury notes, which has recently been one of a strong predictor of recessions,” said Anthony Dass, chief economist in AmBank.

Dass expects the policy rate to normalise at 2.75% to 3%.

“Thus, we should potentially see the yield curve invert in the first half of 2019,” he said.

So what does higher interest rates mean for emerging markets?

It means a flight of capital back to the US, and many Asian countries will be forced to increase interest rates to defend their respective currencies.

Certainly, capital has been exiting emerging market economies. Data from the Institute of International Finance for May showed that emerging markets experienced a combined US$12.3bil of outflows from bonds and stocks last month.

With that sort of global capital outflow, countries such as India, Indonesia, the Philippines and Turkey, have hiked their domestic rates recently.

Data from Lipper, a unit of Thomson Reuters, shows that for the week ending June 6, US-based money market funds saw inflows of nearly US$34.9bil.

It makes sense for investors to be drawn to the US, where the economy is increasingly solid, coupled with higher yields and lower perceived risks.

Hong Kong for example is fighting an intense battle to fend off currency traders. Since April, Hong Kong has spent at least US$9bil defending its peg to the US dollar. Judging by the fact that two more rate hikes are on the way this year, more ammunition is going to be needed.

Hong Kong has the world’s largest per capita foreign exchange reserves – US$434bil more in firepower.

By right, the Hong Kong dollar should be surging. Nonetheless, the currency is sliding because of a massive “carry trade.”

Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the US, where 10-year Treasury yields are near 3%.

From a contrarian’s perspective, global funds are now massively under-weighted Asia.

With Asian markets currently trading at 12.3 times forward price earnings ratio, this is a reasonable valuation at this matured stage of the market.

By Tee Lin Say StarBiz

Related:

 

PBOC Seen Mirroring Fed With Hike While Keeping Other Taps Open  Bloomberg

  

Foreign investors more willing to hold yuan assets: FX regulator

Reuters ·

 

 Faster Indian Inflation Puts Analysts on Watch for Rate Hike – Bloomberg

Abenomics’ impact fading at sensitive moment for Japanese economy –
Business News

 

Bank Negara governor a short but memorable stint – Business News | The Star Online

Malaysia should first check yen loan terms, advises economist – The Star

 

 

Related posts:

 

Advertisements

Malaysian new hope for the housing industry with new government


MALAYSIANS have been in an uplifting mood, with the various measures announced by the new government since the new Cabinet was formed.

Out of my passion for the housing industry, I am paying special interest and attention to Pakatan Harapan’s proposals on housing matters. There are several initiatives which will give a new breath of life to the industry if they are implemented successfully.

In its manifesto, Pakatan Harapan promises to build one million affordable homes within two terms of their administration. This is a realistic and encouraging move to address the affordable housing issue in Malaysia.

As mentioned in my previous article, I often wondered why the previous government didn’t directly drive affordable housing. I was enlightened when a friend told me last year, “The reason is that there isn’t any ‘money’ involved in affordable housing”. Given the new government’s promise of a cleaner government, I believe this is the right time.

To build one million affordable houses within two terms means that the government needs to build an average of 100,000 homes every year. This exceeds our yearly residential housing production recorded for the past few years.

To make this a reality, the government needs to put in real money to make it happen. The previous government depended on the private sector to drive that number. However, as we have seen from successful public/affordable housing models from Hong Kong and Singapore, our government should be the main driving force in providing affordable homes.

The reasons for such success are obvious. Governments have control over land, approval rights, public funds and development expertise. Given enough political will, and backed by tax payers’ funds, we can achieve these targets.

According to the manifesto of the new government, the above mission will be carried out by a National Affordable Housing Council chaired by the Prime Minister. Setting up a central authority has been suggested by Bank Negara and also in this column before. A centralised system will ensure effective planning and allocation of affordable homes, just as is done by the Housing and Development Board (HDB) in Singapore.

Currently, we have different agencies looking at affordable housing, such as the various State Economic Development Corporations (SEDCs), Syarikat Perumahan Negara Bhd (SPNB), Perbadanan Kemajuan Negeri Selangor (PKNS) and 1 Malaysia People’s Housing Scheme (PR1MA).

Many of them are working in isolation from one another and some have strayed from their original purpose.

In Singapore, prior to the formation of the Housing and Development Board (HDB) in 1960, less than 9% of Singaporeans stayed in government housing. Today, HDB has built more than a million flats and houses. About 82% of Singaporeans stay in HDB housing, according to HDB’s annual report. It is a great example for reference.

Based on the recently published statistics from the National Property Information Centre (Napic), the total residential homes in Malaysia as at the end of 2017 was 5.4 million. Low-cost houses and flats accounted for 21% or 1.15 million of the total.

Some may question whether the number of low-cost homes is sufficient. However, there may be some “leakages” or misallocation in the previous distribution system that caused qualified applicants to face difficulties when buying or renting a low-cost home.

Many years ago, The Star reported that thousands of government housing units in Kuala Lumpur were being sub-let to third parties at five times above the control rental price. It stated that the number of applicants for low-cost units in Kuala Lumpur had reached 26,000, and that many of them had been on the waiting list for more than a decade.

It was even rumoured that some low-cost housing units across Malaysia were sold to political nominees, instead of going towards the rakyat who really couldn’t afford housing. If this practice did actually happen, it is disgusting and should be reviewed.

It is timely for the new government to inspect whether our low-cost homes have fallen into the wrong hands. It is essential to repair the allocation system and stop any form of corruption while building more low cost and affordable homes.

The new government’s manifesto to coordinate a unified and open database on affordable housing, can be one of the solutions to the matter.

In addition, the idea of managing a rent-to-own scheme for lower income groups is a positive measure to encourage residents to take care of their houses, as they will eventually own them.

I am glad to see the manifesto of the new government addressing many areas of concern in building homes for the rakyat. We understand that it takes time to implement these new measures. The rakyat will need to be patient for these new measures to reap their full results. We hope that a fresh start in the right direction will finally shine some light at the end of the tunnel.

By Alan Tong – Food for thought

Datuk Alan Tong has over 50 years of experience in property development. He was the World President of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.
Related:

Planning for a home

 

Planning for a home

Related posts:

Leaving a legacy by buying a house first before a luxury car

Restructuring our household debt

If it’s too good to be true, something’s wrong 

Too good to be true? Think twice

A challenging year ahead

Malaysia can’t extradite Jho Low, key people in 1MDB saga


Deep discussion: Dr Mahathir, Deputy Prime Minister Datuk Seri Dr Wan Azizah Wan Ismail and National Centre for Governance, Integrity and Anti-Corruption director-general Tan Sri Abu Kassim Mohamed having a chat after a ministry event in Putrajaya. — Bernama
Deep discussion: Dr Mahathir, Deputy Prime Minister Datuk Seri Dr Wan Azizah Wan Ismail and National Centre for Governance, Integrity and Anti-Corruption director-general Tan Sri Abu Kassim Mohamed having a chat after a ministry event in Putrajaya. — Bernama

KUALA LUMPUR: They know where he is. But they can’t get their hands on him.

That is the predicament that the authorities face in bringing back Malaysia’s most wanted man these days – Low Taek Jho better known as Jho Low.

Low is at the centre of the debt-laden and scandal-ridden 1Malaysia Development Bhd (1MDB) that is a thorn in the administration of the previous Barisan Nasional government.

Prime Minister Tun Dr Mahathir Mohamad said Low is in a country in which Malaysia does not have an extradition treaty with.

“We are trying to arrest Jho Low, but he is not in the country. And we do not have extradition rights in the country where he is at,” said Dr Mahathir without disclosing the country.

Legal experts say while it is not impossible to bring him back despite the absence of extradition treaty with the country, they cautioned this can be a long and tedious process.

Low has been identified as the mastermind behind 1MDB, which is the subject of investigations by Malaysian as well as international authorities for alleged corruption and money laundering.

1MDB accumulated debts of more than RM35bil in ringgit and US dollar denominated bonds in less than five years from 2009. Most of the money raised were placed outside Malaysia, which the Government is trying to recover.

Apart from Low, the principal officer in another 1MDB-related company is also on the wanted list.

The Malaysian Anti-Corruption Commission (MACC) has issued an arrest warrant for SRC International director Nik Faisal Ariff Kamil.

SRC International was a former subsidiary of 1MDB, which had allegedly transferred RM42mil into the personal account of former prime minister Datuk Seri Najib Tun Razak.

It issued two tranches of RM2bil debt papers in 2011 and 2012. The money was to be used to purchase resource based assets in the region. However, there are no assets to back the purchases.

MACC deputy chief commissioner (operation) Datuk Seri Azam Baki told Bernama there is no excuse for Low and Nik Faisal not turn up to facilitate investigations into the SRC International case.

“I refuse to comment on what action can be taken against both of them (Low and Nik Faisal Ariff Kamil). As far as I know, they cannot give any excuses and must present themselves,” he said.

Nik Faisal, 47, last stayed in Alam Impian, Shah Alam.

Low, 37, previously resided in Tanjung Bungah, Penang.

The Prime Minister’s Office in a statement earlier announced the setting up of a special task force to conduct detailed investigations, detection and seizure of assets and prosecution of individuals who committed any criminal offence in the management of 1MDB.

Meanwhile, sources said Low’s lawyers have yet to get in touch with the MACC.

It was earlier reported that Low had instructed his lawyers to make contact with the MACC after he was made aware they were seeking him for assistance.

By Mazwin nik anis, Wddie chua, Joseph kaos jr, and Royce Tan The Star

Other key people in the 1MDB saga

 

Related stories:

 

 

Chinese projects in Malaysia may stay intact


 
Illustration: Liu Rui/GT

Newly-elected Malaysian Prime Minister Mahathir Mohamad has decided to scrap the Kuala Lumpur-Singapore Railway project despite the huge losses. He also announced the overhaul of other big railway projects, including a Chinese company-led East Coast railway project. As a result, some are worried about the fate of Chinese-funded companies in Malaysia.

During the election, the style of governance that Mahathir-led Pakatan Harapan proposed was in contrast to many policies of the previous government. Since Mahathir was elected, there has been growing concern about the new policies. While Malaysia has brought in big Chinese-invested projects, people are also concerned about the new government’s attitude toward foreign funds.

To my knowledge, Mahathir has formed many consulting teams and task forces since his re-election, which shows his prudence in dealing with such affairs. The government will clarify core policies and strategy in the next few weeks.

Pakatan Harapan was the opposition before and during the election. Its attitude toward foreign capital, especially Chinese funds in Malaysia, was obviously not thorough enough. Its opposition to big projects was aimed at the large sums they involved, not the projects themselves. To be more specific, what the political alliance opposed was actually ex-prime minister Najib Razak’s improprieties when approving the projects. Other problems involved in this process can be addressed by talks.

In the first press conference after his swearing-in ceremony, Mahathir promised that reviewing Chinese-funded projects would not harm China-Malaysia relations, and said that the new government will support the Belt and Road initiative as usual.

But Malaysia’s new finance minister and minister of economic affairs both started overhauling the big projects that the former government had signed, and outsourcing government projects through direct bidding is no longer permitted, including railway projects. It shows that the new government wants to overhaul official projects, while private investment projects are not affected.

The new government’s re-examination of big projects shows its intention to win more bargaining chips for negotiations. Any party that wants to cooperate with the new government needs to be more patient to retain the contract. Malaysia’s further development is closely linked to other countries’ continued participation, and China is certainly included.

Although China hopes that the current projects will stay intact, the two countries might still strategically revise their contracts to satisfy both sides as politics in Malaysia has changed. Besides, abolishing a contract is bound to cause political and economic upheaval as the Malaysian people realize the importance of the Kuala Lumpur-Singapore Railway and the East Coast railway projects. The new government will certainly evaluate the opinion in a prudent way.

The future of Chinese-funded enterprises in Malaysia may not change greatly. The previous discussion focused on big government projects, but neglected hundreds of Chinese-funded enterprises that have invested in Malaysia since the 1990s. Most of these firms operated under local laws and regulations. They purchased local materials and hired locals, and some even provided technology transfer and staff training.

They are model enterprises that aimed at developing the market in the long-term. This should have been given more publicity.

In the future, the Malaysian government will certainly welcome investment by foreign-funded enterprises that abide by the local laws, but will differ from practices in the past decades in terms of bidding and contract talks. Most importantly, all parties should believe in the principle that business is business, and win-win cooperation is the key to the issue. Malaysia will definitely let investors enjoy the dividends of its reform and development.

By Ling Tek Soon Source: Global Times – VIEWPOINT

The author is a research fellow with Institute of China Studies, University of Malaya. opinion@globaltimes.com.cn

Related:

At least RM15bil to be shaved from ECRL – Business News

 

Gas pipeline scandal: Guan Eng and MACC to visit China

ECRL-linked construction stocks up

What is a Turnkey Contract? – Global Negotiator

Turnkey Contract Definition from Financial Times Lexicon

Design-Build and Turnkey Contracts

TURNKEY CONTRACT – USM HBP

Turnkey – Wikipedia

Related posts:

https://youtu.be/Joi3euZ6DIU https://youtu.be/_drCqrquWPM PUTRAJAYA: On top of paying RM6.98bil to bail out 1Malaysia Developmen…
https://youtu.be/ZKoNfVcq5EQ PUTRAJAYA: Newly appointed Malaysian Anti-Corruption Commission (MACC) chief commissioner Datuk Seri Mohd…
Analysts say new government needs to quickly introduce measures to reduce the country’s liabilities ASSUMING the government repays it…

Jobs ahead for Pakatan’s first 100 days fiscal reform

Dr Mahathir moves swiftly to inject confidence and stability into the market WHEN the results of the 14th general election were final…

BTN up in the Air, the writing is on the wall for BTN

https://www.thestar.com.my/news/nation/2018/05/29/the-writing-is-on-btns-wall-controversial-agency-has-

MCA had no room to say ‘no’, down but not out: HSR cancellation should have followed due process


 

In the driver’s seat: Dr Wee is widely seen to be the next to helm the party. — ONG SOON HIN/The Star

HIS office is a small room with a great view of the capital city’s central business district. Within its four corners, MCA deputy president Datuk Seri Dr Wee Ka Siong is racing against time to plan the road ahead for the embattled party.

He is now MCA’s sole Member of Parliament after winning the Ayer Hitam seat in Johor.

The party also won the Titi Tinggi and Cheka state seats.

MCA contested 39 parliamentary seats and 90 state seats in the May 9 polls. The defeat has been bruising and Dr Wee has spent the last three weeks charting the road ahead for the 69-year-old party.

“Changing government is not a nightmare, not an impossible thing and can be done overnight,” says 50-year-old Dr Wee in his first media interview after the polls.

He adds that all is not lost following the party’s worst outing, and said MCA is ready to pick up from where it fell, and evolve as a completely reformed and independent entity.

“Our party is now our priority and not the coalition like before.

“There is no more political baggage. In the past there was no room to say ‘no’ or you would be deemed as going against the coalition’s whip.

From his office on the 9th floor of the MCA headquarters in Wisma MCA, Dr Wee says his major task is to put up a team that can move forward to rebuild the party.

“I have been encouraged by people to take up the challenge to provide the leadership, and I am duty-bound to do so,” he said during an interview.

Party president Datuk Seri Liow Tiong Lai announced that he would not seek re-election at the party polls this November, and Dr Wee as his deputy and sole survivor of GE14 is widely seen as his successor.

Dr Wee, a civil engineer who joined MCA in 1992, rose to become the party’s Youth chief in 2008 and deputy president in 2013.

MCA is the second largest component party of Barisan Nasional which lost its hold on the government for the first time since Independence in 1957 following the crushing defeat in GE14.

As one of three MCA ministers in the last four years, the former Minister in the Prime Minister’s Department explains that the party, bound by the Barisan Nasional spirit, seldom spoke openly on what transpired in the Cabinet.

This, unfortunately, was perceived by people that MCA had not been able to speak up for them or do anything for them.

Dr Wee said the perception had been compounded by negative statements on MCA and the Chinese community made by other Barisan component party leaders.

Statements which openly ridiculed the Chinese community and renowned figures like Robert Kuok and even MCA as a party in the run-up to the polls were certainly damaging.

The damage control also did not help at all.

“Saying that such issues had been voiced out or dealt with in the Cabinet were grossly insufficient.

“Some justice needs to be done and seen to be done.”

Dr Wee conceded that the Barisan spirit had also turned into a form of constraint on MCA and a baggage most of the time in a modern society where people demand openness and action against issues deemed unfair to the community.

At times, he adds, this “behind closed doors diplomacy” was done with the intention of not wanting to prolong an ugly episode and also to preserve harmony in a multiracial society.

“But obviously, this did not augur well for us.”

Going forward, Dr Wee says the role of the party is how to be an effective Opposition and provide the check and balance in the new regime.

He says he believes this is what the people want from the party and what the party can do for them now that it is in the Opposition.

Dr Wee says he will also be going to the ground to identify the party’s weaknesses and drawbacks that contributed to the defeat of the party.

He points out that these constitute important feedback in the party’s bid to reform itself and move forward.

The MCA central committee – the party’s highest decision-making body – has appointed him to helm the party’s reform committee following the GE14 defeat.

Dr Wee envisages a team of young and talented MCA leaders that can take on the new role of an effective Opposition in a new set-up.

The party, he adds, can provide a platform for them.

He says universal values, public policies and the party’s core struggle will remain the foundation.

Dr Wee also says the party will be rebuilt on all levels.

For instance, he says the party will be preparing for local elections (councillors) as the Pakatan Harapan Government has been pushing for it prior to GE14.

On Chinese education and Chinese new villages, of which MCA has been the guardian since its inception in 1949, Dr Wee says he hopes the new Government can do a better job in taking care of the two institutions close to the hearts of the Chinese.

He is willing and ready to provide help and cooperate with the new Government in the two areas upon their request.

“We (MCA) do what is best for the people. We exist because of the people.”

On the scrapping of two mega projects like the High Speed Rail between Kuala Lumpur and Singapore (HSR) and MRT 3 announced by Prime Minister Tun Dr Mahathir Mohamad just 22 days after Pakatan Harapan took over Putrajaya, Dr Wee feels the decisions needed in-depth study.

On the merits of HSR, he notes that Kuala Lumpur and Singapore are the two busiest Asean cities, and boosting their connectivity would be a step in the right direction and for mutual economic growth and benefits.

He points out that there are more than 30,000 flights between the two cities a year.

The HSR was scheduled to be completed in 2026, and it would have been just a 90-minute ride between the two cities.

The 350km track, which was to start in Bandar Malaysia in Kuala Lumpur and end in Jurong East, Singapore, would have passed through stations in Putrajaya, Seremban, Melaka, Muar, Batu Pahat and Iskandar Puteri.

On the MRT 3, Dr Wee said the people are enjoying the convenience of MRT 1 and looking forward to MRT 2 which is under construction.

Like any other big city in the world, Dr Wee said, MRTs are the desired mode of transportation.

He hopes the Pakatan Harapan Government can reconsider the scrapping of MRT 3 for the sake of the eight million Kuala Lumpur folk and the development of the capital city.

By Foong Pek Yee The Star

MCA think-tank: HSR cancellation should have followed due process – Centre For A Better Tomorrow (Cenbet)


 

CENBET – Centre For A Better Tomorrow  says the cancellation of the Kuala
Lumpur-Singapore High-Speed Rail should have been announced after the
cabinet’s approval in accordance to due process. – The Malaysian Insight
pic by Najjua Zulkefli, June 1, 2018.

THE cancellation of the Kuala Lumpur-Singapore High-Speed Rail project should have been made by the cabinet prior to its announcement as a matter of good governance, said the Centre For A Better Tomorrow (Cenbet).


The think tank said while it supported the new government’s efforts to review potentially wasteful projects and lopsided deals, such decisions should have followed due process.

“If decision on a RM110 billion mega-project can be made without stringent due process, we are worried that this may set a bad precedent in deciding other government projects.

“Such decision undermines institutional integrity which should have never been compromised for political expediency,” said Cennbet co-president Gan Ping Sieu in a statement today.

Based on news reports, Dr Mahathir Mohamad’s May 28 announcement to call off the project was made after chairing his party’s supreme council meeting and not in his capacity as prime minister announcing a Cabinet decision.

Transport Minister Anthony Loke was also reportedly said that the matter was not discussed in a cabinet meeting prior to the Prime Minister’s May 28 announcement that the project would be shelved.

“Rightfully, cancelling a project of such magnitude, involving transnational interests, ought to have gone through a more structured decision-making process. This includes preparing a cabinet paper and getting feedback from all relevant agencies and state governments,” explained Gan.

He pointed out that the federal constitution was clear that the cabinet is the highest executive body and the manner in which the announcement was made contradicted the spirit of accountability and transparency pledged by the new federal government.

“The eventual May 30 cabinet decision can be perceived as an afterthought and clearly without going through sufficient consultation,” said Gan.

He added that institutional decision-making process was an integral part of good governance, which Cenbet promotes.

“All major national decisions must be made by the cabinet after due process and consultation to prevent abuse of power and leakages,” he added. – Bernama, June 1, 2018.

Source: The Malaysian Insight

Related post:

Chinese projects in Malaysia may stay intact

Newly-elected Malaysian Prime Minister Mahathir Mohamad has decided to scrap the Kuala Lumpur-Singapore Rail

Related:

‘Cancellation of HSR should have followed due process’ – Nation 

Co-president Gan Ping Sieu –CENBET – Centre For A Better Tomorrow   MCA Think Tank

MEDIA STATEMENTS
Co-President Gan Ping Sieu on the Cancellation of the HSR Project

Friday, June 01, 2018

The cancellation of the High Speed Rail project should have been made by the Cabinet prior to its announcement, as a matter of good governance. While we support the new government’s efforts to review potentially wasteful projects and lop-sided deals, such decisions should have followed due process.  >> read more


Related posts:

 Malaysia scraps MRT3 project, reviews HSR, ECRL mega projects to reduce borrowings

 

Chinese are the unsung heroes of South East Asia, Robert Kuok Memoirs

From Industrial 4.0 to Finance 4.0


 

MOST people are somewhat aware about the Fourth Industrial Revolution.

The first industrial revolution occurred with the rise of steam power and manufacturing using iron and steel. The second revolution started with the assembly line which allowed specialisation of skills, represented by the Ford motor assembly line at the turn of the 20th century.

The third industrial revolution came with Japanese quality controls and use of telecommunication technology.

The Fourth Industrial Revolution, or first called by the Europeans Industry 4.0, is all about the use of artificial intelligence, robotics, genomics and process, creative design and high speed computing capability to revolutionise production, distribution and consumption. Finance is a derivative of the real economy – its purpose is to serve real production. Early finance was all about the finance of trade and governments to engage in war.
It is no coincidence that the first central banks (Sweden and England) were established in the 17th century at the start of the First Industrial Revolution. Industrialisation became much more sophisticated as Finance 2.0 brought the rise of credit and equity markets in the 18th and 19th centuries. Industrialisation and colonisation came about at the same time as the globalisation of banks, stocks and bond markets.

Again, with the invention of first the fax machine, then Internet that speeded up information storage and transmission in the 1980s, finance and industry took a quantum leap into the age of information technology. Finance 3.0 was the age of financial derivatives, in which very complex (and highly leveraged) derivatives became so opaque that investors and regulators realised they became what Warren Buffett called “weapons of mass destruction”. Finance 3.0 stalled in 2007 with the Global Financial Crisis and was only propped up with massive central bank intervention in terms of unconventional monetary policy with historically unprecedented interest rates.

We are now on the verge of Finance 4.0 and it may be useful to explore what it really means.

The common definition of Industry 4.0 is the rise of the Internet of Things, in which cloud computing, artificial intelligence and global connectivity means that cyber-physical systems can interact with each other to produce, distribute and trade across the world in a massively distributed system of production.

But what does Finance 4.0 really mean?

What truly differentiates Finance 4.0 from the earlier version is the arrival of Blockchain or distributed ledger technology. The best way to think about the difference is the architecture of the two different systems.

Finance 3.0 and earlier versions were all about a top-down or hierarchical ledger system, like a pyramid, in which trade and settlements between two parties are settled across a higher ledger.

A simple example is payment from Joe in bank A to Jim in bank B is finally settled across the books of the central bank in local currency. But in international trade and payments, the final settlements (at least more than 60%) are settled in US dollar finally across the ledgers of the Federal Reserve bank system.

Finance 3.0 was not perfect and those who wanted to avoid regulation, taxation or any official oversight basically moved trading and transactions off-balance sheet and also off-shore. This was the “shadow banking” system that financial regulators and central banks conveniently blamed on their failure to see or stop the last global financial crisis.

Although technically the shadow banking system is the non-bank financial system, which would include bond, stock and commodity markets, the bulk of illegal, illicit transactions traditionally was done in cash.

Welcome to the technical innovation called cyber-currencies, which was made possible for peer-to-peer (P2P) transactions across a distributed ledger system (commonly known as blockchain). In architectural terms, this is a bottom-up system which technically can avoid any official oversight. Indeed, cyber-currencies or tokens were invented precisely because the users do not trust the official system.

As the populist philosopher Stephen Bannon said, “central banks are in the business of debasing the currency”. Hence, those who want to avoid the debasement of their savings prefer to deal with either cash or cyber-tokens like bitcoin (pic).

What is happening in the rapidly evolving Finance 4.0 is that as the world moves from a unipolar order to a multi-polar world in which other reserve currencies also contend for trade and store of value, the top-down architecture is fusing (or merging) with a bottom-up architecture in which trade, transactions and stores of value are shifting towards the P2P shadow system.

Why this is taking place is not hard to understand. Post-global financial crisis, the amount of financial regulations have tripled in terms of number of rules and complexity on what the official sector can regulate, which is mostly the banking system. It is therefore not surprising that all the innovation, talent and money are moving to outside the banking system into the asset management industry, which is much more lightly regulated.

No talented banker, however dedicated to the values of banking probity, can resist the temptations of working in asset management, away from the heavily regulated environment where he or she is 24×7 under regulatory internal and external oversight.

Another reason why the cyber-P2P business is flourishing is because the official sector is worried that further regulation would hinder innovation. But those who want to increase the complexity of regulation must remember that for every 50 foot wall, someone will invent a 51 foot ladder.

So competition in the 21st century has already moved from the physical and financial space into cyber-space.

If there is one thing I learnt as a former regulator, it is that if the banks are behind the curve in terms of technology, the regulators are even further behind, since they learn mostly from those whom they regulate. But if financial regulators deal with financial innovation through “regulatory sandboxes” where they allow their regulated banks to experiment in sandboxes, they are treating their regulated institutions as kids in an adult game of ruthless technology.

Time for the official sector to make their stand clear or else Finance 4.0 promises to be very different from the orderly world that they are used to imaging. Nothing says this clearer than a recent survey by the Chartered Financial Analyst Institute, which showed that 54% of institutional investors surveyed and 38% of retail believe that a financial crisis in the next one-three years is likely or very likely.

You have been warned.

– Tan Sri Andrew Sheng writes on global issues from an Asian perspective.

Related

 

With blockchain’s rise, regulators must keep up with Industry 4.0 or lose
control

 

With blockchain’s rise, financial regulation must keep up with Industry …

How Industry 4.0 will change accounting – Journal of Accountancy

Finance 4.0: Mastering the Fourth Industrial Revolution | Oracle ERP …

Five ways Industry 4.0 financing unlocks productivity bonus – YouTube

 

Related posts:

 

What is Blockchain Technology, its uses and applications?

 

BLOCKCHAIN beyond Bitcoin

On Mcoin, Bitcoin and points of investment

Malaysia’s RM1.09 trillion debt, 80.3% of GDP demystified


Analysts say new government needs to quickly introduce measures to reduce the country’s liabilities

ASSUMING the government repays its debt by RM1mil a day, it would take Malaysia 2,979 years to pay off its debts.

Malaysia’s new Prime Minister Tun Dr Mahathir Mohamad revealed on May 21 that the country’s debt level has breached the RM1 trillion mark during his first address to civil servants.

The statement, which was nothing less than alarming, has since raised concerns among Malaysians on the country’s fiscal sustainability. Bursa Malaysia was hammered for four consecutive days, as investors frantically sold off their stakes.

The benchmark FBM KLCI saw the biggest year-to-date decline on May 23, tumbling by 40.78 points or 2.21% to 1,804.25 points.

Total gains made by the index this year were all wiped out in just four days following Dr Mahathir’s announcement.

The ringgit, which has weakened since early April, continues to decline as concerns on public debt loom.

Big impact: The benchmark FBM KLCI saw the biggest year-to-date decline on May 23, tumbling by 40.78 points or 2.21 to 1,804.25 points.
An economist tells StarBizWeek that Dr Mahathir’s public announcement on the high debt figure is “not helping”, as anxiety intensifies among Malaysians and in the market.

For context, Malaysia’s real gross domestic product (GDP), an indicator of the size of economy, was RM1.35 trillion as at end-2017 – close to the said RM1 trillion debt amount.

Meanwhile, the federal government’s revenue this year is projected at RM239.9bil as per Budget 2018.

Several critics, including Umno Youth deputy chief Khairul Azwan Harun, claim that Dr Mahathir’s statement on the federal government debt was exaggerated and far-fetched.

AmBank Group chief economist Anthony Dass says that although the current scenario shows some signs of similarities to the 1997/98 Asian Financial Crisis, he would not conclude that the current fiscal condition is somewhat similar to the downturn 20 years ago.

At a glance, the “RM1 trillion debt” remark stands in sharp contrast to Bank Negara’s debt tally of RM686.8bil as at end-2017, putting the federal government’s debt-to-GDP ratio at 50.8% – lower than the 55% self-imposed debt limit.

Dr Mahathir refutes this, saying that the national debt-to-GDP ratio has shot up to 65.4%. A day after his announcement, Finance Minister Lim Guan Eng put the ratio at 80.3% of GDP, or about RM1.09 trillion in debt as at end-2017.

Why is there such an obvious difference in the debt amount now that a new government is in place?

Here is where “creative accounting” comes into play.

The lower official debt figures released under the previous Barisan Nasional government had excluded the contingent liabilities and several other major “hidden” debts from the direct liabilities, which amounted to RM686.8bil as at end-2017.

Contingent liabilities, which were released separately prior to this, basically refer to government-guaranteed debt and do not appear on the country’s balance sheet. Examples of contingent liabilities are the loans under the National Higher Education Fund Corp (PTPTN) and certain debt of the controversial 1Malaysia Development Bhd (1MDB).

As at end-2017, Malaysia’s contingent liabilities stood at RM238bil.

Funding for several government mega-projects such as the mass rapid transit (MRT) projects was also categorised as contingent liabilities. The MRT lines were funded by DanaInfra Nasional Bhd, the government’s special funding vehicle for infrastructure projects.

DanaInfra raises money from the market through sukuk, which are, in turn, guaranteed by the government. The guaranteed amount is classified as a contingent liability.

In the event of less-than-expected revenue collection from the MRT lines moving forward, the government will have to intervene to repay the sukuk holders.

The current ruling government believes that RM199.1bil out of the RM238bil contingent liabilities deserves attention to ensure proper debt repayment.

The 1MDB alone comes with an estimated contingent liability of RM38bil.

High figure: The 1MDB alone comes with an estimated contingent liability of RM38bil. — Reuters
High figure: The 1MDB alone comes with an estimated contingent liability of RM38bil. — Reuters 

On the remaining government guarantees, the Finance Ministry says they have been provided by “entities which are able to service their debts such as Khazanah Nasional Bhd, Tenaga Nasional Bhd and MIDF”.

Apart from contingent liabilities, there are several major “hidden” debts, which do not fall under both direct liabilities and contingent liabilities.

An economist with a leading investment bank in Malaysia calls the debts “off-off-balance sheet” government debt.

These are the future commitments of the federal government to make lease payments for public-private partnership projects such as schools, roads and hospitals.

Examples of such debt would include the debt of Pembinaan PFI Sdn Bhd, a company owned by the Finance Ministry. Pembinaan PFI was established in 2006 under the previous Tun Abdullah Ahmad Badawi administration to source financing to undertake government construction projects.

According to its latest available financial statement for 2014, Pembinaan PFI held a total debt of RM28.75bil.

Interestingly, at end-2012, the company’s debt was the third highest among all government-owned entities, just behind Petronas (RM152bil) and Khazanah Nasional (RM69bil).

With no independently generated revenue, the interest payments on Pembinaan PFI’s debts would eventually come from the federal government’s coffers.

The Finance Ministry puts the debt under this third category at RM201.4bil.

All together, Malaysia’s debt and liabilities are said to amount to a total of RM1.09 trillion.

Actually, for those in the loop, the different debt categories and total liabilities are not something new.

Lawmakers from Pakatan Harapan, particularly current Bangi MP Ong Kian Ming, have alerted the authorities about the debt figures over that past few years.

Ong is also currently the special officer to the Finance Minister. The layman might ask, what was the former government’s relevance of classifying these debts into separate off-balance sheet items?

The motive is to make sure the national balance sheet looks healthy and lean.

Economists’ take

Many have questioned the new government’s move to lump contingent liabilities and debt obligations with the direct liabilities. It should be noted that as per the standard procedure of credit rating agencies, only the direct liabilities are taken into the calculation of the debt-to-GDP ratio.

In a StarBiz report this year, Moody’s Investors Service sovereign risk group assistant vice-president Anushka Shah said that by carving out certain expenditures off its budget, the government would be able to optimise its expenditure profile and minimise the associated impacts from its spending.

However, she pointed out that Malaysia’s federal government debt burden remains elevated at 51%, relatively higher than the median of other A-rated sovereign states at 41%.

On the country’s contingent liabilities, Anushka described them as “low-risk” at the current level, and added that the government has been prudent and careful in managing the guaranteed debts.

“We find that the government has adopted rigorous selection criteria when it grants the guarantees to the respective entities.

“The companies which have received guarantees from the government are relatively healthy and have strong balance sheet positions,” she said.

Ever since Dr Mahathir shocked the market with the “RM1 trillion debt” remark, the focus among Malaysians has largely centred on the nominal value of the debt.

A greater emphasis should instead be given on “debt sustainability”, which basically refers to the growth of debt against the growth of the economy.

Economists who spoke to StarBizWeek have mixed opinions on the level of seriousness of Malaysia’s public debt problem.

Suhaimi: Malaysia’s debt has risen faster than economic growth.
Suhaimi: Malaysia’s debt has risen faster

than economic growth.

According to Maybank group chief economist Suhaimi Ilias, Malaysia’s debt has risen faster than economic growth over the last 10 years.
“In the past decade, officially published government debt and government-guaranteed debt have risen by 10% and 14.5% per annum, respectively, faster than the nominal GDP growth of 7% per annum, which raises valid sustainability risk.“On the government’s debt service costs relative to the operating expenditure, the ratio was 12.7% as at end-2017 and based on Budget 2018 is projected to rise to 13.2%. It has been rising steadily from 9.5% in 2012.

“There is a 15% cap on this under the administrative fiscal rule, while the 11th Malaysia Plan target is to lower the ratio to 9.8% in 2020. The government is looking at the debt issue from this sustainability perspective in our opinion,” he says.

 

Lee: Malaysia’s rising public debt level warrants close monitoring.
Lee: Malaysia’s rising public debt level

warrants close monitoring.

Meanwhile, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says that various indicators of debt burden suggest that Malaysia’s rising public debt level warrants close monitoring to contain the long-term risks of fiscal and debt sustainability.

“High levels of government debt over a sustained period will have economic and financial ramifications over the longer term. Rising public debt could crowd out private capital formation and, therefore, productivity growth.

“This occurs through the competition for domestic liquidity, higher interest rates, a shifting of resources away from the private sector or investment in low-impact projects. This situation is made worse if the government wastes borrowed money on unnecessary projects,” he tells StarBizWeek.

In contrast to Suhaimi and Lee, Alliance Bank Malaysia Bhd chief economist Manokaran Mottain points out that Malaysia’s debt sustainability scenario is yet to be a cause for concern.

 

Manokaran: Debt sustainability scenario is yet to be a cause for concern.
Manokaran: Debt sustainability scenario is

yet to be a cause for concern.

This is because debt repayments are made on an annual basis as opposed to a colossal one-off payment of RM1 trillion.

“Malaysia’s economic growth of above 5% is sufficient to cover government debt. As long as the economy is growing while the government is able to service the debt charges, it is not really that alarming.

“Even in the United States, the government debt-to-GDP level exceeds 100% at US$21 trillion against the real GDP of US$18.57 trillion,” he says.

Manokaran adds that while total government debt has risen over the years, Malaysia’s annual debt growth rate has been growing slower in recent years.

Deleveraging Malaysia

The government must now move fast to introduce measures to reduce and manage the country’s debt levels. This is highly crucial in assuring creditors and investors that the country’s fiscal health remains uncompromised.

Given the fact that the world is currently at the tail-end of the 10-year economic cycle, it is timely for the government to focus on its ability to fulfil its debt obligations.

In the event of an economic turmoil, a heavily-indebted country would be adversely affected.

Lim has emphasised the federal government’s commitment to honour all of the country’s debts.

“This new government puts the interest of the people first, and hence, it is necessary to bite the bullet now, work hard to solve our problems, rather than let it explode in our faces at a later date,” he said in a statement earlier.

Economists believe that the government must strictly embark on reforming the national expenditure in carrying out debt consolidation.

This includes cutting down on unnecessary expenditure, plugging leakages in the federal government’s finances and containing public-sector wage bills.

Lee has recommended an overhaul the current pension system, considering the unsustainable current trend.

“On revenue reform, the design of tax policy should be fair and equitable in order to be sustainable.

“The push for a wide and investment-friendly reform to boost potential growth should be expedited, as strong investment and economic growth has a huge effect on enhancing revenue growth and reducing public debt.

“On budget planning and development, an oversight body needs to be set up to ensure better fiscal rules, budgetary processes and closer fiscal monitoring to ensure fiscal discipline,” says Lee.

Manokaran says the new government should consider expenditure cuts through the privatisation and reformation of the numerous government-linked corporations, as well as the reduction in size and budget allocation of the Prime Minister’s Office.

On the national mega-infrastructure projects, Manokaran and Suhaimi say that the renegotiation and review of such projects will be vital in managing future debt growth.

Time will tell whether the government can live up to its promise of reducing the public debt dilemma. Pakatan must now balance its “populist” electoral promises and stellar fiscal management policies.

As for now, the government deserves to be complimented for calling a spade a spade, acknowledging the problem at hand.

By ganeshwaran kana The Star

Related stories:

%d bloggers like this: