Recalling Bank Negara’s massive forex losses in 1990s

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

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

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

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

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

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

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

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

How did Bank Negara lose the billions?

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

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

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

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

What went wrong in 1992?

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

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

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

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

Was the loss more than RM15~30 bil?

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

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

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

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

Who is Nor Mohamed?

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

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

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

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

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

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

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

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

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

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

By: Ho Kay Tat

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

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

RCI can shed more light on forex losses

Bernama pic of Sidek

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

R
elated Links:
 

Royal Commission of Inquiry to probe 1990s forex losses - Nation ..

 

“Bank Negara Forex Scandal–When Government Becomes ...

 

White Paper on RM30 billion Bank Negara forex losses - Mohamed ...

 

Cabinet approves RCI on Bank Negara forex losses | Free Malaysia ...

 

Mahathir says willing to be investigated over Bank Negara forex losses

 

List of scandals in Malaysia - Wikipedia 

 

Nor Mohamed Yakcop spends 45 minutes at Bank Negara forex probe

Anwar willing to cooperate with task force on Bank Negara forex losses

 

Related posts:

Money game scourge

Easier option: Poor experience with regulated investment product providers may be the reason for investors to go for ‘alternative’ Po...

Two virtual coin get-rich schemes red-flagged by Malaysian Central Bank

With the inclusion of the two investment schemes run by a company with international investors, there are now 302 firms in Bank Negara’s...

 

Two virtual coin get-rich schemes red-flagged by Malaysian Central Bank

With the inclusion of the two investment schemes run by a company with international investors, there are now 302 firms in Bank Negara’s financial consumer alert list.

RM177mil from 91 bank accounts frozen in nationwide MBI raids ...

Be quiet, MBI members told - Nation | The Star Online

Five-hour shock at virtual money mall - Nation 

MBI Group's Ampang store raided - Nation

More shoppers seen at MBI's M Mall, three JJ Mart stores close ...

GEORGE TOWN: Two more popular financial schemes in Penang have been red-flagged by Bank Negara Malaysia (BNM).

A check on the financial consumer alert list yesterday showed MBI International Sdn Bhd and Mface International Sdn Bhd to be the latest additions.

Both are subsidiaries of MBI Group International, a company with investors worldwide, many of them from China.

To date, 302 companies have been listed under the BNM financial consumer alert list, for suspicion of not adhering to relevant laws and regulations administered by BNM in their operations.

Under the Financial Services Act 2013, individuals or businesses involved in illegal financial activities can be fined up to RM50mil and jailed for 10 years.

When contacted by a Chinese daily, MBI International chairman Tedy Teow’s special assistant Alfa said he did not think that the company would face any problem.

“And it is unnecessary for us to hold a press conference to explain the situation to our investors.

“We are always doing our work and we believe that our investors can see how we are performing so far,” he told Sin Chew Daily.

An investor, H.L. Teoh, said he put in RM22,500 early this year and was given 10,000 game redemption credits.

“Actually, I can start selling it every six months, but I was advised to wait for it to grow bigger in three years.

“When you have lots of credit, it is like having a lot of virtual shares.

“Now, I will have to wait for further instructions from the company before my next course of action,” he said.

Members are allowed to spend their loyalty points, which are converted from virtual money or coins, in exchange for goods and services at affiliated companies, including a supermarket, restaurants, a gym and even a durian stall.

Meanwhile, a press conference called by a branch representative of another controversial financial scheme operator, JJPTR, was cancelled at the last minute.

Press members in Penang had received an invitation from a man known only as Lim at 8.30am yesterday.

However, no reason was given for the cancellation.

JJPTR has been grabbing headlines in the past few weeks since its founder Johnson Lee claimed that the company had lost US$400mil (RM1.738bil) due to a purported “hacking job”.

Lee and two of his top aides have been detained by the police to facilitate investigations following several police reports lodged against JJPTR.

In another case, 19 Chinese nationals lodged police reports in Kuala Lumpur against another multi-level marketing company, claiming that they had lost hundreds of thousands of ringgit.

They claimed to have lost between 100,000 yuan (RM62,536) and 700,000 yuan (RM437,754) since investing in the scheme by Monspace last year.

Founded in 2014, Monspace is listed as a multi-level marketing company, according to the Com­panies Commission of Malaysia.

In an immediate response, Monspace said it would take legal action against any group or individual making defamatory statements against it.

The company said in a statement to the media that it was functioning professionally and had engaged a law firm to keep track of statements made about it.

Source: The Star/ANN by Crystal Chiam Shiying

Related Link:

Whereabouts of JJPTR founder unknown

Related posts:

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

A collection of bitcoin tokens.   Bloomberg—Bloomberg via Getty Images Digital currencies rally, but caut...

Money games over for JJPTR! Operator closes shop, founder Johson Lee arrested, demanded!

JJPTR boss and aides freed and rearrested to be handed to Penang cops  - The Star Online   Remand on founder and aides extended by...

Malaysia's jobless rate on the rise as economic expansion slows

Unemployment in Malaysia is rising, the latest data released by the Statistics Department show.

The obvious correlation to the rise in the jobless rate, which in Malaysia is counted as those who are unemployed but remain actively looking for a job, is the slower pace of economic growth.

The economy, up until the second quarter ended June 30, has slowed for five quarters in a row with weak exports the main drag on growth.

Although private consumption and investments supported the economy in the second quarter, economists are not very confident that this will drive growth in the coming quarters without supportive government policies and improvement in overseas consumer demand.

This will have implications for jobs and the economy.

There could be reason for short-term cheer with data exceeding expectations, as August trade data released yesterday show but there are indications that downside risks remain.

Positive sentiments as reflected in the Malaysian Institute of Economic Research’s (Mier) business conditions index, which is now above the 100-point threshold, indicating that businesses’ confidence levels are up, can just as easily dissipate.

Consumers do not share the same sentiments as businesses, as the Mier’s consumer sentiments index show.

Although rising steadily since the beginning of the year, the index is still below the 100-point threshold, largely reflecting benign inflation and the fading impact of the goods and services tax implemented last year.

Standard Chartered plc Asean economic research head Edward Lee says private consumption growth momentum will not be sustainable because of the weak labour-market conditions.

Besides the higher unemployment rate, weak wage- and job-growth together with the slowdown in the property market and financial-market volatility to also affect spending sentiment.

Lee, who expects the economy to grow 3.8% this year compared to the official estimates of 4% to 4.5%, adds that the weakening labour market will be a drag on economic growth.

“Private consumption will be key to achieving this target, and we think it may come in weaker than the central bank expects due to weaker labour-market conditions.

“We will therefore monitor consumption metrics closely over the next few months,” he says.

Cautious consumer sentiment largely reflects the state of the job market and high household debt.

Different views: Consumers do not share the same sentiments as businesses, as Mier’s consumer sentiments index shows.

Data from Bank Negara and the Nikkei Malaysia manufacturing purchasing managers index (PMI) compiled by IHS Markit Ltd paint a bleaker picture.

While the September Nikkei Malaysia manufacturing PMI, which was released at the end of last month saw an improvement from August, it is still below the 50-point threshold, indicating that the manufacturing sector is still contracting.

But what is interesting is the press statement following the release of the August data, in which IHS Markit economist Amy Brownbill says the Malaysian manufacturing sector saw a sharper deterioration in operating conditions underpinned by quicker declines in output, new orders and employment with the rate of job shedding the fastest in over three years.

The August PMI report noted that firms cut back on payroll numbers as part of efforts to make cost savings.

Bank Negara report

A Bank Negara report also showed that labour market conditions have become challenging, with the recent high unemployment rates coinciding with lower job vacancies available per active job seekers.

AllianceDBS Research chief economist Manokaran Mottain said in a report released last week that while the manufacturing sector was shedding jobs, selected services subsectors has added headcount and could be cushioning job losses in the manufacturing sector.

More than half of the workforce are employed in the services sector with the manufacturing sector employing about 16%.

Further evidence of the deteriorating conditions in the job market comes from the Employees’ Provident Fund (EPF).

Manokaran says the monthly contribution value growth rate from the EPF’s members have moderated, signalling weak wage growth in recent years.

This also mirrors the slowdown in the economy over the past few quarters as businesses will not give higher increments or pay out bonuses.

Manokaran says based on trend-growth estimates, seasonally and inflation adjusted monthly EPF contribution growth has tapered to 2.7% in February on a year-on-year basis before the voluntary employees contribution rate reduction effective in March, down from around 10% growth in 2011.

He noted that while average household income grew 9.6% per annum between 2012 and 2014 in inflation adjusted terms based on the Statistics Department’s household income survey, this was largely propped up by government cash transfers (Bantuan Rakyat 1Malaysia payments) to the bottom 40% of earners.

“On average, given that 65% of household income is from paid employment, signs of wages growth moderation could weigh on household income growth going forward,” Manokaran says.

He adds that the state of labour market and income growth are among the key underlying factors in assessing the state of economic growth outlook.

Earlier this week, the World Bank slashed its growth forecast for Malaysia from 2016 to 2018 on the weak exports and commodity-price outlook. Its chief economist for the East Asia and Pacific Region, Sudhir Shetty, says despite the region’s favourable prospects, growth is vulnerable to a sharp global financial tightening, a further slowdown in world growth or a faster-than-anticipated slowdown in China.

By Fintan Ng The Star/ANN

Related: 


BNM governor: Take long-term view on adjustment of ringgit

 

Bank Negara’s international reserves at RM405bil 

Bank Negara reserves at RM392.49b 

Banknotes with new governor’s signature out soon 

 
Ombudsman for financial services starts Oct 1
 
Budget 2017 expectations

Sabah corruption – another reason why the ringgit is weak


Related posts:

Water fiasco: RM114 million seized from Sabah water officials

https://youtu.be/01stOYgM9x0 It was a record haul by the Malaysian Anti-Corruption Commission – RM114mil seized from two top officer... 

 

No water but officials flush with funds: abuse of power, nepotism, cronyism, bribery and money laundering

Jabatan Air Negeri Sabah - http://malaysianlogo.blogspot.my/2014/06/jabatan-air-negeri-sabah-sabah.html KOTA KINABALU: Everywhere in Sab... 

 

Water theft: 60% of RM3.3bil project allocation stolen by senior officers

  Jabatan Air Negeri - Customer Service How the millions were stolen? 1. Contracts broken down to small packages of RM100,000 ea...


PBA in a fix over Penang water cut; billion litrea Water waste via leaky pipes  

To fellow US interest rate hike or to cut rates?

Emerging economies in a dilemma on whether to follow suit or cut rates

“Specifically, we expect rate cuts in India, Indonesia, South Korea, Taiwan and Thailand in 2016. We also project a further 75bps of rate cuts and a 200bps reduction in RRR in China'. - Credit Suisse

THE big question is what happens next?

The much anticipated hike in US interest rates on Thursday meant that for the first time in almost a decade, US interest rates are on the way up. The 25 basis point (bps) rise in US interest rates by The Federal Open Market Committee (FOMC) to between 0.25% and 0.5% was made as the US economy showed tangible signs of improvement.

Such gains in the US economy through lower unemployment and higher forecast inflation has meant that the target for interest rates by the end of 2016 has been pegged at 1.5%, meaning that rates are expected to rise by 25 basis points every quarter until the end of next year.

The implications of what the US FOMC does reverberates throughout the world. Conventional thinking of the past is that higher rates in the US does put pressure on central banks elsewhere to follow suit.

But times have changed. Countries today have their own domestic economies and issues to manage and that has taken precedence over what the US does with its monetary policy.

It is clear that the de-coupling has taken place a long time ago. The European Union and Japan are still engaged in quantitative easing and are keeping rates near zero or in the case of the EU, in negative territory.

For Malaysia, the thinking is that with the difference between domestic and US interest rates still having a nice cushion, the focus of Bank Negara will be on the Malaysian economy.

Rate pressure: Should the path of the US rate cycle starts to steepen, economists say it will put pressure on Bank Negara as the ringgit may be pressured by inaction. – Reuters Countries such as China cut its interest rates in October to 4.35% as it grapples with a slowing economy. Different priorities call for different action.

But analysts feel the move by the US does create a bit of a dilemma for policy makers. Raising rates does cool an economy, which is already shifting to a lower gear given the tangible cooling of major economic indicators.

Trimming interest rates further, while will help the economy, will put more pressure on the flow of capital. Analysts feel that might not be what the central bank will want to do at the moment considering the weakness of the ringgit not only against the US dollar this year but also against the currencies of its major trading partners.

“Our rate is accommodative for economic growth and Bank Negara can raise rates when the economy is slowing down,” says an economist with a local brokerage.

To each its own

The United States has been the traditional locomotive of growth for the world for much of recent history. But the emergence of China has changed that equation. Trade of the emerging world increases with China as the second largest economy of the world grows, its influence on Malaysia and the rest of Asia has become more affixed.

It is for that reason that some are speculating that emerging economies, such as Malaysia, will keep its eyes focused on what the People’s Bank of China does while having the US action in its periphery vision.

“We argue that Asian central banks’ monetary policy stance next year will be more influenced by economic and monetary policy cycles in China than in the past, and will diverge from the US. Unlike the previous US Fed hiking cycle when virtually all Asian central banks tightened their policies, we think this time Asian policy rates will stay lower for longer,” says Credit Suisse in a report.

“Specifically, we expect rate cuts in India, Indonesia, South Korea, Taiwan and Thailand in 2016. We also project a further 75bps of rate cuts and a 200bps reduction in RRR in China.

“Given the challenging environment for exports, we expect growth in trade-dependent economies including Hong Kong, Malaysia, Singapore, and Thailand to surprise the consensus on the downside. Meanwhile, more domestic-oriented economies with policy catalysts, including Indonesia and the Philippines, could outperform expectations considerably,” it says.

For Malaysia, the FOMC decision was keenly watched. Any time US interest rates move, Bank Negara pays close attention to it.

Is it the key determinant for the direction of domestic interest rates?

No, say economists. “Local conditions override what the US does,” says an economist.

For Malaysia, economists believe that the current overnight policy rate of 3.25% is appropriate to support growth. But they do too acknowledge that Malaysia is in a dicey situation depending on what happens next.

The general view is that the US will continue to push rates upwards. Just how rapidly will be important and as US rates goes up, the differential with Malaysia will narrow.

“If the local economy does as it is predicted, then there is a possibility of a small hike next year but there is no urgency to do that,” says an economist.

The question is what happens after next year should the path of the US rate cycle starts to steepen?

Economists say that will put pressure on Bank Negara as the ringgit might be pressured by inaction. As it is, the drop in crude oil prices is the most pressing issue affecting the value of the ringgit.

The effect on emerging currencies

Emerging markets have had a series of bad press over the past year. With sentiment souring and the outlook in the US getting brighter, it was no coincidence that the US dollar surged, gaining about 40% on average against emerging market currencies since May 2013.

But is it time for things to change?

Schroders thinks that might happen.

“It is difficult to argue that the Fed has been the sole factor in emerging market debt weakness. China hard landing fears, plummeting commodity prices, Brazilian political disarray, Russian policy concerns and general weakening of growth across all regions created a near perfect-storm for emerging market debt investors.

“However, a more predictable and less fraught path going forward for the Fed should help steady investor nerves and risk appetite. If developed market bond yields remain very low – as seems likely with a very slow hiking path, set out with some confidence – emerging market dollar yields may remain one of the few places to look for meaningful income generation for years to come,” it says.

Schroders says the move by the US Federal Reserve comes at a time when emerging market dollar debt seems particularly attractive.

“Yields in the primary sovereign dollar index are at highs not seen since 2010, when Treasury yields were much higher than today. Yield spreads over Treasuries for investment grade sovereign debt are just under 300 basis points, and remain at elevated levels that were last seen consistently during the European crisis of 2011. High yield sovereign debt currently has a yield to maturity of 8.5%.

“The divergence between developed market monetary policies has driven the dollar nearly 20% higher on a trade-weighted basis since July 2014. Emerging market currencies have fallen in lock step.

“With the European Central Bank now charting a path towards a steady dose of quantitative easing as growth in Europe stabilises, Fed predictability should help curb that dollar appreciation. Emerging market currencies should then likely steady at attractive levels, boosting sentiment towards the asset class. Even a modest virtuous cycle led by these factors could make emerging markets one of the strongest global fixed income performers next year, given today’s generous yield levels.”

By Jagdev Singh Sidhu The Star/Asia News Network

Related post:

The global impact of the US interest rate rise

Fear factor: Traders working in the S&P options pit at the Chicago Board of Options Exchange in Chicago, illinois. The prospect of th...

Making Malaysia’s Base Lending Rate more relevant

 New interest rate framework expected to be more linked to funding cost

BANK Negara is moving ahead with the times by replacing the outdated base lending rate (BLR) with a more relevant interest rate benchmark.

“The BLR has become less meaningful as a basis for the pricing of loans, as the retail lending rates on new loans being offered by the industry are at a substantial discount to the BLR,’’ The Star reported, quoting governor Tan Sri Dr Zeti Akhtar Aziz.

For the third quarter this year, the average lending rate (AVL) was 5.4% compared with the BLR of 6.53% and fixed deposit (FD) rate of 3.15% for 12 months.

For the corresponding quarter last yer, the AVL was 5.55% while the BLR was still at 6.53% while the FD rate for 12 months was 3.16%.

The current BLR reflects other costs such as overhead costs.

The new framework will be more related to funding cost, especially marginal funding cost, which is actually how banks are pricing their loans, Zeti said.

While work is underway to come up with a new BLR, the intervention rate under the current BLR framework is expected to nudge upwards, said Nazlee Khalifah, the chief corporate strategist of Affin Bank.

Under the current BLR regime, the intervention rate of 3% is expected to increase 25 basis points by next June, said Nazlee.

The upcoming BLR is being discussed with a concept paper expected next month.

‘“They have to think of how to prevent capital flight as interest rates in the United States may rise and attract capital back to the country,’’ said Nazlee.

Beginning next January, the Fed announced it would start pulling back its bond buying from US$85bil per month to US$75bil.

Instead, it will provide forward guidance on interest rates which are expected to remain low, in view of US unemployment being above 6.5% and inflation kept low.

The US$1 trillion stimulus programme has been a huge success but this is the journey back to fundamentals.

The world economy is being weaned of easy money and every player has to play his part in ensuring recovery and sustainability.

It is not enough for just the regulators to be keeping an eagle eye on miscreants but the participants themselves have to know their limits.

The Hong Kong Securities and Futures Commission is cracking down on insider trading.

In a landmark ruling, a Hong Kong court has ordered Du Jun to pay 297 investors almost HK$24mil for the money he earned from his illegal dealing in 2007, said the South China Morning Post (SCMP).

Last year, 7,700 investors who bought shares of Hontex International were paid back after a court ordered the sport fabric maker to pay HK$1.03bil to small shareholders for allegedly misleading information in its listing prospectus, said the SCMP.

There have been many instances of insider trading but the punishment has become more severe in view of the trend towards investor protection and reimbursement worldwide.

Contributed by Columnist Yap Leng Kuen applauds the tapering off of the era of easy money.

Asian banks remain to be seen more scandals will surface

HSBC, Standard Chartered and DBS were among 20 banks at which 133 traders tried to manipulate the Singapore interbank offered rate (Sibor). Photo: Bloomberg

HSBC, Standard Chartered, JP Morgan Chase, Barclays and DBS were among 20 banks at which 133 traders tried to manipulate the Singapore interbank offered rate (Sibor), swap offered rates and currency benchmarks in the city state, [the Monetary Authority of Singapore] said.

BANKING scandals are surfacing in Asia, this time in the form of a US$250mil (RM799mil) fine on Mitsubishi UFJ Financial Group Inc on claims that it had transferred money to countries facing US sanctions.

According to the South China Morning Post, The Bank of Tokyo-Mitsubishi UFJ Ltd, the main lending unit of Japan's biggest bank by market value, moved an estimated US$100bil through the state for government and privately owned entities on the Specially Designated Nationals list.

This list was issued by the US Treasury Department's Office of Foreign Assets Control between 2002 and 2007, the New York State Department of Financial Services and New York Governor Andrew Cuomo said in a statement recently.

Just about two weeks earlier, the Monetary Authority of Singapore (MAS) had cracked down on the rigging of the Singapore Interbank Offered Rate or Sibor.

HSBC, Standard Chartered, JP Morgan Chase, Barclays and DBS were among 20 banks at which 133 traders had tried to manipulate the Sibor, swap offered rates and currency benchmarks in the city-state, MAS said in a statement recently.

Greedy

These incidents within Asian banks are significant, as the European and US banks have been bearing the brunt of criticism.

The major UK banks have been fined for the Libor (the London equivalent of Sibor) rigging and the mis-selling of products.

Due to their role in the churning of derivatives, these banks in the West have been described as greedy, careless and manipulative.

The recent scandals seem to involve only a few Asian banks, but it remains to be seen how many more names will surface and what sort of rules have been flouted.

In view of their important role in the economic growth of Asia, they will be closely watched in terms of risk exposure and ethical banking practices.

So, Asian banks, some of which have become very profitable, beware on all fronts.

In Europe, overnight talks aimed at ensuring shareholders and bond holders bear the brunt of bank failures collapsed after almost 20 hours of discussion, reports The Telegraph.

After investors, the proposals would impose losses on savers with more than 100,000 euros in their account, but France and non-eurozone countries want the ability to tailor the rules, the report says.

Discussing possible bank failures may not be the most urgent agenda, although extreme stress testing and estimation of potential bank losses should be conducted.

This is tied to the capital position of the bank.

However, there should be a constructive approach to boosting capital buffer and ensuring that the bank does not fail rather than what to do if it fails.

It is like pointing a gun at a man's head even before the crime is committed.

Bond bubble

There is said to be a “bond crisis” out there, where the bond bubble is about to burst, with investors looking for other asset classes to invest in.

With the impending halt to the US quantitive easing programme of additional liquidity, this search for other asset classes has become more urgent.

Nevertheless, 'We see improving US gross domestic product as a positive support to risk' assets such as shares, but would expect liquidity reductions to remove some of the froth' from current valuations, including in corporate bonds.

“Where we have the biggest concern is some of the riskier banks.

'Even five years on from the financial crisis, we cannot with any confidence say we are happy with the quality of their balance sheets; this is where risks of capital losses are highest,'' says Chris Bowie, manager of Ignis fund management.

Such is the reality of investing. It involves constant assessment of risk, changes in the markets and valuations.
Micromanagement is usually discouraged but may be useful in this case.

 By Yap Leng Kuen
Columnist Yap Leng Kuen cautions on the headwinds.
Related post:
For the sake of money people will risk anything

Malaysian banks tighten the screening of loans

THE local property sector is expected to see some “cooling down” in the number of transactions this year following the implementation of the responsible lending guidelines by Bank Negara on Jan 1.

According to Real Estate and Housing Developers Association (Rehda) president Datuk Seri Michael Yam, transactions are now taking a longer time to crystallise as banks are grappling with more data required for processing loan applications.

Yam says transactions are taking a longer time to crystallise.

“Buyers are also not committing to purchases until they get clearance from banks that they will be offered the loan applied for, which may or may not be sufficient for them to purchase the property they desire.

“The first segment to be affected is obviously the residential component. For the non-residential, especially commercial properties which may be bought by companies or partnerships, we understand the new formula is not applicable,” he tells StarBizWeek.

Yam feels that the new ruling will have a huge impact on the middle-income segment.

“However, it is common for this group to actually have double (or even) triple incomes from their second and third jobs, but may not have documents to support higher loan eligibility. While prudent risk
management is good, financial institutions must also play a facilitative role in the home ownership agenda by assessing each application on its own merit and not blanket applications across the board.”

He adds that the affordable housing segment will probably be the most affected segment as borrowers are likely to be less affluent, with lower income and disproportionately higher expenditure.

“We predict headwinds for sales in this critical segment, which is contradictory to the wish of the Government to encourage home ownership,” Yam says.

Chang says the entry level market will be the most affected.
In light of this situation, Federation of Malaysian Consumers Association (Fomca) chief executive officer Datuk Paul Selvaraj is urging the central bank to perhaps ease the loan application process, such as making it easier for consumers to switch banks if necessary.

“Consumers, if they feel that they can get a better deal with another bank for their housing or car loan, should be able to do so with ease and at minimum costs. Consumers often feel overwhelmed at the procedures for changing banks. The process should be simplified. The ease of bank switching would promote better quality of services from the banks through competition.

“There should be greater emphasis not only on policy measures but on financial education. Not enough is being done to provide appropriate financial knowledge and skills to consumers,” he says.

One industry observer concurred that the responsible lending guidelines will have the biggest impact on the lower income group.

“This group of people are already earning a low salary and with stricter lending rules, getting loans could be made more difficult.”

National Housebuyers Association (HBA) secretary-general Chang Kim Loong says the responsible lending guidelines will have an impact on the local property sector, especially in the entry level market where aspiring job seekers purchase their first home and for married couples hoping to be able to purchase or upgrade their homes.

Selvaraj urges the central bank to ease the loan application process.
“Depending on location and from state to state, the price ranges from RM150,000 to RM500,000. This is the price range that speculators have been targeting in the past and have artificially inflated such property prices, but it's still too early to gauge the effectiveness or effects of the responsible lending guidelines.

“It is hoped that as property speculators are denied financing to purchase such homes and with only real demand in the picture, the prices of such properties will gradually decline to more realistic prices.”

According to reports, applications for loans for the purpose of purchasing residential properties contracted 6.3% in January from a growth of 11.3% in December 2011.

Yam says Rehda understands that the implementation of the rationale for responsible lending guidelines was due to the large household debts and the 40% increase in transaction value (from RM100bil to RM140bil) between 2010 and 2011.

“On the short to medium term, this restriction would ultimately cause a slowdown in borrowing which is the intended effect, and it will cause a negative effect on home ownership.

“The mixed signal arising from this new lending rule is that while on the one hand the Government is encouraging the building of more affordable medium-cost housing by introducing “My First Home Scheme” and “PR1MA” homes to stimulate demand, on the other we have this Bank Negara announcement,” he says.

Yam feels that the central bank's new lending criteria seems to be in contradiction to the earlier Budget announcement in October last year.

“This does not sit well with developers who are taking the cue and feel positive about home-buyers being offered greater opportunity and various incentives to own homes only to be somewhat dampened by this new requirement,” he says.

Positive measure?

Khong & Jaafar Sdn Bhd managing director Elvin Fernandez says he is supportive of Bank Negara's responsible lending guidelines.

“The new rulings are good because they are pre-emptive measures to prevent a housing bubble. The measures are making themselves felt as price increases in some hot spots that were a cause for concern have now stalled and also the trend from it spreading down the line or to other areas have also been curtailed.

Fernandez supports the guidelines as they prevent a housing bubble.
“House prices rising are not good. Prices rising with fundamentals such as household income and rental returns are good,” he says.

Chang also applauds Bank Negara's responsible lending guidelines.

“The guideline requires the financial services providers (FSPs) to provide assessment of individual affordability and provide suitable and responsible advice to customers on their capacity to take on additional financing,” he says.

According to Chang, the FSPs or banks will be required to undertake a comprehensive assessment on borrowers' sources of income and verify against independent sources to ensure that they have the ability to repay the loans throughout the tenure of the loan.

Income assessment shall be based on the borrowers' net income, which is the gross salary minus the statutory deductions such as Employees Provident Fund contributions and tax deductions.

“HBA has been advocating for a very long time for FSPs to exercise prudence and good judgment when disbursing loans. Due to stiff competition and key performance indicators set by the board and senior management, (FSPs) have been too lenient and aggressive in providing financing, resulting in artificially inflated property prices and many young adults being declared bankrupt due to their inability to repay their debt obligations,” says Chang.

Chang says that as part of the responsible lending guidelines, Bank Negara has repealed its requirement of a maximum debt service ratio (DSR). For the uninitiated, the DSR means that the debt repayments are divided by the borrower's income.

According to him, prior to the responsible lending guidelines, the maximum DSR was set at one-third (or 33%) of gross income for single loan repayments and half (or 50%) of gross income for all loan repayments combined.

The exception was given to civil servants who could borrow from the cooperatives with a DSR of up to 60% of their gross income.
“Hence, if the borrower's gross income is RM3,000, the maximum single loan repayment is RM990 and maximum aggregate of all loan repayments cannot exceed RM1,500 per month,” Chang says.

Under the responsible lending guidelines, the DSR based on gross income has been repealed and FSPs are now free to set their own DSR based on the net income of the borrower.

Chang says the issue now will be that prospective borrowers do not know if they would qualify for a loan as different FSPs have different DSR guidelines.

“There is a shock-effect with FSPs being told to totally disregard all forms of variable income such as discretionary bonuses, commissions and overtime and prospective borrowers that are dependent on these types of income are adversely affected.

“Based on our market sources, some FSPs are willing to consider these types of income but at a discounted rate and this causes great confusion to prospective borrowers as they attempt to shop around for loans,” he says.

Rehda feels the affordable housing segment will probably be the most affected.

 

Chang says HBA is urging the central bank to retain its “maximum DSR” requirement “to set a cap” as guidance for FSPs to follow.

“As it is, even with the previous guidelines on one-third and half, many FSPs have openly flouted the guidelines with reckless financing, resulting in artificially-inflated property prices and many young adults being declared bankrupt due to unmanageable debt levels.

“With the caps removed and FSPs being free to set their own lending policies, the situation of reckless financing may get even worse. Although HBA agrees that market forces are the best form of regulation, it has been shown that we operate in an imperfect market and hence the need to retain DSR limits for FSPs to follow,” he says.

As a means to improve lending, the HBA is also calling on the central bank to issue additional guidelines on the recognition of variable income, where the borrower can show a good track record for such income.

“This is because certain industries such as in the sales and manufacturing sectors, the basic income is often very low and the discretionary income serves as an incentive for employees to perform.

“If such discretionary income is to be totally disregarded, it is feared that such employees may never qualify for any sort of loan from legal channels and end up resorting to loan sharks.”

By EUGENE MAHALINGAM eugenicz@thestar.com.my

Related posts/stories:
Reining in household debt by Bank Negara Malaysia
Bank Negara Malaysia lending guideline is a blessing in ...Mar 03, 2012
Principles and targets of lending guidelines
MAA says new rules already impact sales of new vehicles 

Malaysia's GDP Growth 5.1% in 2011, pretty okay?

Malaysia's growth beats consensus

By FINTAN NG fintan@thestar.com.my

PETALING JAYA: Malaysia's gross domestic product (GDP) expanded by 5.2% in the fourth quarter of 2011 despite the challenging external environment as domestic demand continued to support growth.

Bank Negara said in a press statement that full-year growth came in at 5.1% after expanding 7.2% in 2010 as domestic demand conditions remained favourable supported by both private and public sector spending.

The fourth-quarter GDP figures came in slightly higher than the 4.8% median estimate in a Bloomberg survey while the full-year growth was largely in line with a separate survey, where the median estimate was 5% and in line with official estimates of 5% to 5.5% growth.

“Domestic demand expanded by 10.5% during the quarter, driven by the continued expansion in household and business spending, and public sector expenditure,” the central bank said.

Private comsumption increased by 7.1% supported by favourable income growth while public consumption rose by 23.6% following higher expenditure on emoluments and supplies and services.

Gross fixed capital formation, which measures the net increase of fixed or physical assets, increased by 8.5% supported by continued expansion in capital spending by the private sector and the non-financial public enterprises.

“The federal government development expenditure during the quarter was mostly channelled into the transportation, trade and industry sectors,” the central bank said.

The services sector grew by 6.4% for the quarter (6.8% for the year), manufacturing expanded by 5.2% (4.5%), construction rose 6.4% (3.5%), agriculture expanded by 6.9% (5.6%) while the mining sector's pace of decline narrowed compared to the third quarter, falling by 3.3% and declining 5.7% for the year.

The headline inflation rate, as measured by the annual change in the consumer price index, declined to 3.2% in the fourth quarter with inflation in the transport category ower at 3.2% reflecting the absence of further adjustments on prices of RON95 petrol, diesel and LPG in the quarter.



“Inflation in the food and non-alcoholic beverages category, however, rose to 5.3% during the quarter, mainly due to higher prices in the fish and seafood subcategory,” Bank Negara said.

Economists said the latest data confirmed earlier reports of the country's growth being on a slower trend largely due to the drop in external demand as global growth slowed.

They said this trend would continue into the first half of this year before recovering gradually in the second half as conditions globally improved with more clarity on the issues surrounding the eurozone sovereign debt crisis.

CIMB Investment Bank Bhd economic research head Lee Heng Guie told StarBiz that the main drag to growth in the fourth quarter and the whole year was the volatile external environment which resulted in stagnant demand for consumer electronics.

He said domestic demand would continue to sustain the economy although there was “a slight let-up” in consumer spending. “The question is how sustainable is consumption going to be and this will depend on key drivers such as commodity prices and income,” Lee said, noting that the Malaysian Institute of Economic Research consumer sentiments index was trending down.

“In summary, we see quite uneven growth in the first half of this year before the economy picks up in the second half,” he said, expecting full-year GDP to come in at 3.8%.

AmResearch Sdn Bhd director of economic research Manokaran Mottain said the latest data showed that the “fear factor” was rising with households becoming more cautious about spending.

However, he was more sanguine compared to his peers where exports were concerned, pointing to the export growth in goods and services (where the current account suplus, although narrowing in the fourth quarter, stood at RM22bil for the year) but said the data showed the economy was geared to domestic activity with government handouts playing a crucial role in supporting consumption.

“Going forward, well-crafted domestic strategies and the timely rollout of the Economic Transformation Programme projects will now be more urgent as they will create multiplier effects especially in the services sector,” Manokaran said.

He added that the data clearly showed that the economy, while experiencing moderating growth, was not “falling off the cliff” with full-year growth in 2012 coming in at 5%. “The worst-case scenario is global growth dropping to below 3% and project implementation delays at home, which means growth of around 4%,” Manokaran said.

Meanwhile Affin Investment Bank Bhd chief economist Alan Tan said growth this year would still be affected despite signs of nascent recovery in the United States and the improvement in global purchasing managers' indices.

“For this year, the first half will still show signs of moderation in exports as consumer electronics demand slows down,” he said, adding that growth for the full year would still be a healthy 4% considering the challenges.

For Bank Negara statements click here

Malaysia should do pretty okay

Making a Point - By Jagdev Singh Sidhu

THE report card for the economy in 2011 is out and by all accounts, Malaysia did pretty okay.

With the official forecast of growth at between 5% to 5.5%, there was much scepticism throughout 2011 whether that could be achieved. Who can blame the tea-leave readers out there whose job is to forecast where the economy is heading?

There was so much external fear with Europe on the brink, America seeing greater economic trouble and China teetering on a bubble bursting that expectations were slashed, and on average far less than what the Government had predicted.

As it turns out, maybe after the gravity-defying performance in the third quarter where the gross domestic product (GDP) expanded by 5.8%, people began to say “hold on. Maybe things aren't so bleak.”

As it turns out, they were mostly right when the GDP data was released yesterday.

The economy expanded by 5.2% in the fourth quarter and for the whole year, growth was 5.1%. There are numbers where things could be better. Industrial production and export growth isn't the best.

 

But what drove the economy upwards was domestic demand, basically what the Government, people and companies spend and invest.

Domestic demand jumped 10.5% in the fourth quarter compared with 9% in the third. Capital investments surged 8.5% compared with 6.1% in the previous quarter and higher investments will mean more production, jobs and better economic strength.

The troubles of Europe might have lost its fear factor and America appears to be repairing itself steadily. There are reasons to be more optimistic but the official tune has turned, surprisingly, a little sour.

Bank Negara in its statement said; “Growth prospects, however, have become increasingly uncertain with the emergence of greater downside risks.”

The warning calls for more caution but there is still enough policy measures to keep domestic demand intact.

There are policies of putting cash in the hands of the people through direct cash handouts. There is a base effect from the consumption boom to worry about and whether that can continue into 2012.

But there are indicators out there to suggest domestic demand might still do well but maybe not at the same breakneck speed.

First, there is the stock market. Yes, people might say its not a perfect barometer of what an economy is doing but it does show there is confidence in how corporate Malaysia might be performing.

With direct investments abroad by Malaysian companies jumping to RM14.4bil in the third quarter from RM12.9bil previously, it shows Malaysian companies are taking advantage of growth opportunities outside Malaysia. That can point to higher profits and maybe salaries in the future.

The other is property. We might have been cautious last year about property prices falling off the cliff at some point in 2012 but there is no indication that might happen. Prices might soften but if we were to see our neighbours down south, it might not freeze the market.

For January, Singapore registered the highest sales of private homes in the past 14 months, despite increasing clamps on foreigners buying homes there.

With jobs steady and likely to increase with more investments being made, the stock market doing alright and property prices holding firm, these are ingredients that will allow people to continue spending.

If the Private Sector Retirement Age Bill gets passed, that should create more consumption by people whose earnings lifespan will increase by a further five years. The mass rapid transit system which is kicking off will also boost construction and the GDP.

Economists do wonder if the growth forecast of 5% to 6% for 2012 will be maintained given the risks and challenges. There might be a revision downwards in March but whatever the case, Malaysia like last year, should do pretty okay.

● Deputy news editor Jagdev Singh Sidhu is lapping up the Linsanity! Jeremy Lin's play for the New York Knicks has been a fantastic story. Hope that continues until he meets the Detroit Pistons.