Too good to be true? Think twice


 

HAVE you ever grabbed an offer without any hesitation, simply because the price is too cheap to resist?

Many of us have this experience especially during sales or promotional campaigns. We tend to spend more at the end or buy things which we are uncertain of their quality when the deal seems too good to say no.

It may be harmless if the amount involved is insignificant. However, when we apply the same approach to big ticket items, it can cause vast implications.

Recently, I heard a case which reinforces this belief.

A friend shared that a property project which was selling for RM300,000 a few years ago is now stuck. Although the whole project was sold out, the developer has problem delivering the units on time.

The developer is calling all purchasers to renegotiate the liquidated and ascertained damages (LAD), a compensation for late delivery.

One of the homeowners said he is owed RM50,000 of LAD, which means the project is 1½ years late. When we chatted, we found that he purchased the unit solely due to its cheap pricing without doing much research in the first place.

The incident is a real-life example of paying too low for an item which can leave us as losers, especially when it involves huge sum of investment, such as property.

To many, buying a house maybe a once-in-a-lifetime experience, a decision made can make or break the happiness of a family.

A good decision ensures a roof over the head and a great living environment, while an imprudent move may incur long-term financial woes if the house is left uncompleted.

Nowadays, it is common to see people do research when they plan to buy a phone, household item, or other smaller ticket items.

Looking at the amount involved and implication of buying a house, we should apply the same discretion if not more.

It is always important for house buyers to study the background of a developer and project, consult experienced homeowners regarding the good and bad of a project before committing.

I have seen many people buy a house merely based on price consideration.

In fact, there are more to be deliberated when we commit for a roof over our heads. The location, project type, reputation of a developer, the workmanship, the future maintenance of the property etc, are all important factors for a good decision as they would affect the future value of a project.

Beware when a discount or a rebate sounds too good to be true, it may be just too good to be true and never materialised. If the collection or revenue of a housing project is not sufficient to fund the building cost, the developer may not be able to complete the project or deliver the house as per promised terms. At the end of the day, the “price” paid by homeowners would be far more expensive.

In general, the same principle applies elsewhere. It is a known fact that when we pay a premium for a quality product from a reliable producer, we have a peace of mind that the product could last longer and end up saving us money. Some lucky ones will end up gaining much more.

For instance, when we purchase a car, we should consider its resale value as some cars hold up well, while others collapse after a short period. Other determining factors include the specifications of the car, the after sales service, and the availability of spare parts.

Quality products always come with a higher price tag due to the research, effort, materials and services involved.

In addition to buying a house or big ticket items, other incidents that can tantamount to losing huge sums are like money games, get-rich-quick scheme, or the purchase of stolen cars or houses with caveats.

When an offer or a rebate sounds dodgy, the “good deal” can be a scam.

Years of experience tells me that when what is too good to be true, we should think twice. I always remind myself with a quote from John Ruskin (1819-1900) who was an art critic, an artist, an architect and a philosopher. “It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.

“The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

Food for thought by Alan Tong

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.

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The rail economics of East Coast Rail Link (ECRL)


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Rail link seen as game changer but cost is a concern.

TOK Bali, a fishing village in Kelantan with its beautiful sandy beaches and pristine blue waters has long been a hidden gem among well-travelled backpackers. But that may soon change. The idyllic town is one that is touted to potentially become a tourist hotspot, as it sits along the alignment of the East Coast Rail Link (ECRL), a multi-billion infrastructure project that promises many economic spin-offs.

After almost a decade in planning, ECRL was launched with great pomp this week.

Touted as a key game-changer for the east coast states of Peninsular Malaysia, the interstate ECRL is expected to help the economy of the four states that it covers by an additional 1.5% per year over the next 50 years.

On a micro level, more employment opportunities, particularly skilled jobs, will be made available to Malaysians. Domestic industry players especially in the construction sector, can now anticipate construction contracts to the tune of RM16bil, at least.

   
Another milstone:Najib checking out a train model at the ground-breaking ceremony this week.He called ECRL ‘another milestore in the country’s land public transport history”.

The ECRL is expected to benefit freight transport because it would link key economic and industrial areas within the East Coast Economic Region such as the Malaysia-China Kuantan Industrial Park, Gambang Halal Park, Kertih Biopolymer Park and Tok Bali Integrated Fisheries Park to both Kuantan Port and Port Klang.

Prime Minister Datuk Seri Najib Tun Razak called it “another milestone in the country’s land public transport history”.

Despite the much highlighted economic benefits from the rail network, the venture is attracting its own share of controversies from the way the contract was awarded to the price of contract.

For one, China’s state-owned China Communications Construction Company (CCCC) has been appointed for the construction of ECRL via a direct negotiation method.

Detractors have labelled ECRL – at a cost of RM80mil per kilometre – as the world’s costliest rail project. Note that, the Gemas-Johor Baru double-tracking stretch costs RM45mil per km.

ECRL, however, will go over hilly terrain and has several tunnels to be built.

There are questions on whether the 688km rail venture, at RM55bil, will be financially feasible.

Sources say the price tag is unlikely to have included land acquisition costs.

They indicate that close to half of the land plots required for the rail link sit on private land and would require land acquisition. At this point, the total land acquisition cost is unknown.

No money in rail

The concerns of the critics are understandable, given the fact that public infrastructure projects, namely rail projects are usually not commercially viable.

A quick check on the finances of Malaysia’s very own Keretapi Tanah Melayu Bhd (KTMB) and a number of major rail operators abroad, affirms the fact that rail projects do not promise easy money.

The loss-making KTMB which was corporatised in 1992, has not been able to financially sustain itself, resulting in the deterioration of its level of service despite attempts to turn around the company.

According to the railway service operator’s latest publicly available audited report for financial year 2013, the group registered a total net loss of RM128.2mil. However, note that, the net loss had narrowed by 46% from RM238.5mil in the previous year.

Had it not been for the government’s subsidy which kept it afloat, KTMB would find it difficult to continue its operations without a further raise of its fare.

In India, where railway is a favoured mode of transportation, the Indian Railways has been incurring losses on passenger operations every year. Earlier this year, the lower chamber of the Indian parliament was told that the state-owned rail operator recorded a loss of Rs359.18bil (RM24.04bil) in the period of 2015 to 2016.

This was slightly higher than its loss of Rs334.91bil (RM22.42bil) in the period of 2014-2015.

On the other hand, China’s state-owned rail operator, China Railway Corp, was reported to have recorded a 58% increase in earnings last year despite huge losses in the first nine months. However, a zoom into its finances reveals that the high profit made was only possible due to a significant annual government subsidy.

Similarly, Singapore’s SMRT Corp which manages the city-state’s rail operations posted a profit of S$7.4mil (RM23.33mil) in its financial year of 2016. This was on the back of a revenue of S$681mil (RM2.15bil), which rose by 4.1% year-on-year.

While the rail operations saw higher ridership in that year, SMRT Corp would have registered a loss of S$9.6mil (RM30.26mil) for its rail business, if not for the net property tax refund of S$17.1mil (RM53.9mil).

Considering the lack of commercial viability in such rail projects, ECRL would ultimately require assistance from the government in ensuring smooth operations, while maintaining an affordable service for its users. This is akin a crucial trade-off, to complement the government’s move to provide an integrated transportation system in Malaysia, which is long overdue.

AmBank Group’s chief economist Anthony Dass tells StarBizWeek that for every ringgit spent on capital projects such as transportation, it generates a return or multiplier effect of around 5% to 20%.

In his estimation, he says the ECRL should create around RM50-55bil in terms of gross domestic product.

“The impact of this project to the economy will be multilevel. Impact on the respective states’ GDP and national GDP will be evident, though the magnitude of the impact on the respective states is poised to vary.

“On a longer term, once the entire project is completed, we expect strong benefits seeping into services related activities. Properties in the major towns is likely to enjoy more especially the port-connected towns, driven by logistics- and trade-related businesses.

“Other areas would benefit from the movement of tourism. As for the smaller towns, they are more likely to enjoy from the spillovers of this connectivity through movement of people commuting to work and new areas of business growth especially in areas like the small and medium businesses,” says Anthony.

High cargo projections

By the year 2040, an estimated 8 million passengers and 53 million tonnes of cargo are expected to use the ECRL service annually as the primary transport between the east coast and west coast.

By 2040, ECRL is projected to support a freight density of 19 million tonnes.

The freight cargo projections of the rail network stands in stark contrast to the total cargo volume running through the entire Malaysian railways today.

As of 2015, the entire Malaysian railways operations handled a sum of 6.21 million tons of cargo, according to a study related to the ECRL.

To note, the revenue from the operation of the venture is projected to be obtained through a transportation ratio of 30% passengers and 70% freight.

If the projections of ECRL are anything to go by, the planners are anticipating a ballistic growth in volume of cargo being moved along the tracks.

Is this realistic?

Socio Economic Research Centre executive director Lee Heng Guie remains concerned on the details of the project financing, albeit the expected trickle-down benefits of ECRL.

“While ECRL has been identified as a high impact public transport project that will connect east coast states with the west coast, especially Greater KL and Klang Valley, the high cost of RM55bil requires further justification. More clarity on the cost structure and terms and conditions of the loan is needed to ease public genuine concerns.

“It must be noted that the high costs, low profits and long gestation periods of transportation projects do not always make them financially viable. The financial viability of the ECRL would depend on the revenue generated to cover operating cash flow, including interest expenses.

“As the loan will have a seven year moratorium, the bunching of loan repayment together with interest payment will be substantial in the remaining 13 years,” he says.

Lowering cost the key

In terms of funding, 85% of the total project value of RM55bil would be to be funded by Exim Bank of China’s through a soft loan at a 3.25% interest.

The balance 15% would be financed through a sukuk programme by local banks.

There is no payment for the first seven years, and the government starts paying after the seventh year over a 13-year period.

At 3.25% interest per annum, the interest servicing bill for the project is huge.

“Hence the main challenge to this project will be to bring down cost as low as possible. The lower the cost, the lesser it would be the burden on the government’s balance sheet,” says an industry player.

Echoing a similar view, Lee noted the ERCL project loan is expected to be treated as “contingent liability” as it will be taken by Malaysia Rail Link Sdn Bhd, a special purpose vehicle owned by the Ministry of Finance.

This is also to ensure that the Federal Government will not breach the self-imposed debt to GDP ratio of 55%.

As at end-March 2017, the Federal Government’s debt stood at RM664.5bil or 50.2% of GDP.

At the end of the day, despite the concerns on the possible cost overrun in the ECRL project, proper management and efficiency in project delivery could lead to cost savings and ultimately lower overall expenditure for ECRL.

History has shown that Malaysian companies can lower the cost, especially on rail projects compared to foreign players.

In the late 1990s, a consortium of India and China state-owned companies were awarded the contract to build a double track electrified railway system from Padang Besar to Johor Baru. The cost was estimated at RM44bil and paid through crude palm oil.

However, an MMC Corp Bhd-Gamuda Bhd joint venture managed to win the job in 2003 with a RM14.3bil proposal. However this project was shelved and subsequently continued after a lull of few years.

ECRL is a seven year project to be built in stages. Many factors can come into play in that period like delay in construction and rise in material costs.

However in the bigger picture, the infrastructure venture should not merely be seen from a commercial-viable lens alone. The trickle-down benefits on the economy and the Malaysian population should also be factored into the calculations.

The lower the cost, the higher the multiplier effect.

Source: The Star by ganeshwaran kanaandgurmeet kaur

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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
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The ugly side of the digital economy


ALMOST everybody is addicted to the digital world of connectivity. Only a handful can dare say that they are not dependent on the Internet or the connectivity that comes with the digital age.

To those not convinced that they are addicted to technology and the Internet, they should try asking themselves a few questions.

When was the last time they accessed the computer to search for something through Google? When was the last time they accessed Facebook or Whatsapp to stay connected? How long have they gone without getting “an anxiety attack” without having their handphones with them?

If an uneasy feeling creeps into them without having their computers or mobile phones with them, then the chances of them being reliant on the digital world is high. If they are lost at work without “Mr Google” and feel handicapped, then they are hooked on the digital world.

From the hundreds of people I know, only two do not carry a mobile phone with them. One is a seasoned lawyer while the other is a retired factory manager. They are exceptions to the norm.

The digital age is here to stay and grow. The advantages of digital connectivity in terms of accessing instant information and staying in touch with others seamlessly are just too great to be without.

These days, even people in their late 50s and 60s are active users of Facebook, which they see as critical touch points of their lives with others. The instant response to their postings is a gratification of sorts.

These are new touch points that they would normally not be able to enjoy without digital connectivity. However, there is a downside to this digital addiction in both the social and economic sense.

There is a book going into the details of how more people are depressed without digital connectivity, how people have gone berserk without having access to Internet connectivity. This is one of the many social downsides of the digital age.

However, more shocking is the unconventional work ethics, sexual harassment and culture of idolising individuals that have become rampant with the rise of the digital economy.

Last week, the former chief executive of the Malaysian Global Innovation and Creativity Centre (MaGIC), Cheryl Yeoh, revealed that she was a victim of sexual assault by a venture capitalist, Dave McClure, three years ago.

The revelation only came after The New York Times reported that McClure had stepped down from 500 Startups following allegations of sexual harassment against him.

500 Startups is a Silicon Valley-based early-stage venture fund and seed accelerator. Generally, the principals of venture funds tend to exert their influence over those seeking their money.

It is rampant in the world of the new economy where funding from banks is not easily available. Banks would want to see profits and a strong balance sheet before they lend money to start-ups. Start-ups in the digital economy rarely have both financial elements.

Yeoh said that she did not come public with the incident earlier fearing that many would not believe her. She also did not want to jeopardise the business venture between MaGIC and 500 Startups.

McClure is not the only venture capitalist who has faced the brunt of unethical work practices. Travis Kalanick, the founder and prime force behind ride-hailing app company Uber, has also been forced out by shareholders after a series of scandals in the company.

Among those who complained against the work culture of Uber was software engineer Susan Fowler Rigetti, who in her blog posting stated that the company’s work environment was hostile towards women, leading to many of them leaving.

The hostility went beyond sexual harassment. It was even to the point of the women not getting leather jackets as their numbers were small compared to the men who had received theirs from the company.

Because the number of women working in Uber was small, the company, which is touted as the most valuable unlisted new economy entity, could not get the discounts required and hence did not order the leather jackets.

In a company engaged in the old economy of brick-and-mortar businesses, such reasoning would not have been tolerated. But it has happened in Uber, where Kalanick held a position so strong that the way he managed the company was not questioned.

Hero-worshipping the founders is quite common in new-economy companies. Whatever the founders decide is not questioned. It has come to the point where even when deals are concluded at lofty valuations, hardly any murmurs are raised.

No questions asked: Jeff Bezos of Amazon purchased a grocery chain, Whole Foods Market, for US14bil two weeks ago and nobody batted an eyelid or raised any questions. – AFP

Jeff Bezos of Amazon purchased a grocery chain, Whole Foods Market, for US$14bil two weeks ago.

Nobody batted an eyelid or raised any questions as to why a new-economy heavyweight was buying into a matured company in an industry that was facing huge challenges because of Amazon.

Amazon, with its online shopping platform for anything from books to groceries and even movies, has disrupted the retail industry. The likes of Wal-Mart and Tesco are reeling from the growing dominance of Amazon.

So, why is Amazon buying into a grocery chain operating in the industry that it is destroying?

Nobody knows the answer. They only rely on the faith that Bezos can do no wrong. Blind faith is the biggest downside to the digital economy.

Digital economy companies tend not to give dividends and spend a lot on research and development under the excuse that the business is still growing and needs all the financial resources.

Investors believing that mantra follow blindly. They are encouraged by the rising share prices even though there are little fundamentals.

One day, such blind faith will lose its lustre and the price will fall. Only then will investors realise that the old-fashioned way of valuing companies is still way better.

The alternative view by M.Shanmugam

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China’s Baidu taps Partners for Driverless Car Project


Growth strategy: A fleet of vehicles equipped with Baidu’s autonomous driving technologies conduct road testing in Wuzhen, Zhejiang Province. Widely considered the Google of China, Baidu is hoping research into artificial intelligence will create a new generation of products to help revive revenue growth.

https://www.bloomberg.com/api/embed/iframe?id=bf6ae8a1-432c-4499-a8aa-47932c408ae0

  • Partners include Bosch, Continental, Chinese automakers
    Company also showed off a voice-activated speaker device
  • Partners include Bosch, Continental, Chinese automakers
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Baidu Inc has enlisted more than 50 partners for its Apollo driverless project, signing up major players in areas from mapping and ride-sharing to automaking to aid the Chinese search giant’s foray into AI-powered vehicles.

The program aims to open up part of Baidu’s autonomous car software in the same way that Google released its Android operating system for smartphones. By encouraging more companies to build products using them, Baidu hopes to fine-tune its nascent systems and overtake rival research efforts by the likes of Google parent Alphabet Inc.’s Waymo.

Baidu listed four Chinese carmakers, suppliers Robert Bosch GmbH and Continental AG and technology companies including Microsoft Corp. as part of the Apollo alliance. Southeast Asian ride-hailing giant Grab and mapping systems company TomTom NV are also joining the program, which aims to get fully autonomous vehicles on city streets as early as in 2018.

Widely considered the Google of China, Baidu is hoping research into artificial intelligence will create a new generation of products to help revive revenue growth. It has a stated goal of releasing a driverless car by 2018 with mass production to begin by 2021, but some analysts believe its technology still lags that of competitors like Waymo. At a Baidu conference Wednesday, developers showed off the Chinese search provider’s personal assistant, DuerOS.

Baidu’s shares traded in New York rose 2.7 percent to $184.76 at 10:14 a.m. The stock has risen 12 percent so far this year.

The raft of Apollo agreements unveiled Wednesday at Baidu Create cover virtually every automotive field. Dutch company TomTom said in a statement it will help Baidu with high-definition mapping in the U.S. and Western Europe. Several of Apollo’s members already have separate cooperation agreements in place with Waymo and other driverless car providers.

“As we and our partners contribute to the platform in our areas of specialty, we all gain more, with the results far greater than just our own,” Baidu group president Qi Lu said in a statement.

— Bloomberg News With assistance by David Ramli

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Dollar bulls face perilous start to second half of 2017


Losing streak: The greenback finished the first half of 2017 on a four-month losing streak – the longest such stretch since 2011. – AFP

https://www.bloomberg.com/api/embed/iframe?id=386fc1f7-12e9-49ed-b7d6-f4a868fc9d5c

After the worst start to a year for the greenback since 2006, the end of the first half couldn’t come quick enough for the dwindling ranks of dollar bulls. Yet if history is any guide, it could soon get even worse.

A week that’s certain to get off to a slow start with U.S. markets closed Tuesday will culminate with Friday’s jobs report. The release hasn’t been kind to those wagering on greenback strength. The Bloomberg Dollar Spot Index has slumped in the aftermath of nine of the past ten, despite above consensus reports as recently as February, March and May.

“The dollar has not been responding to positive data surprises, but continues to weaken substantially on negative news,” said Michael Cahill, a strategist at Goldman Sachs. “As long as that persists, the risks are skewed to the downside going into every data release.”

The greenback finished the first half on a four month losing streak — the longest such stretch since 2011 — wiping out its post-election gain. The currency’s 6.6 percent decline in the six months through June were the worst half for the dollar since the back end of 2010. Unraveling optimism around the Trump administration’s ability to boost fiscal growth has outweighed Fed policy or positive data, according to Alvise Marino, a strategist at Credit Suisse.

“What’s happening on the monetary policy front is not as important,” said Marino. “It’s more about the dollar remaining weighed down by the unwinding of financial expectations.”

The sudden hawkish tilt by global central banks hasn’t helped. The dollar weakened more than 2 percent against the euro, pound and Canadian loonie last week as officials signaled a bias toward tightening monetary policy.

Yet there are reasons for optimism, according to JPMorgan Chase analysts led by John Normand, who recommended staying long the greenback in a June 23 note. A cheap valuation relative to global interest rates, the market underpricing the likelihood of another Fed hike this year, and a still positive growth outlook make for a favorable backdrop to motivate dollar longs in an “overstretched” unwind, the analysts wrote.

Hedge funds and other speculators disagree. They turned bearish on the dollar for the first time since May 2016 last week. Wagers the greenback will decline outnumber bets it’ll strengthen by 30,037 contracts, Commodity Futures Trading Commission data released Friday show.

Source: Bloomberg

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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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