Fintech - disruptive technology

http://www.thestar.com.my/business/business-news/2016/05/21/fintech-disruptive-technology/

Businesses are embracing it by coming up with their innovations and startups

A BUZZWORD growing in popularity in the financial world today is “fintech”, short for financial technology, which in a nutshell refers to the use of technology to deliver faster and cheaper financial services.

Going by some predications, fintech could take a big chunk of business away from traditional banks as it is being run by smaller more nimble start-ups. But the debate is still out there as to how much that chunk will be. In Malaysia in particular, fintech’s presence is still nascent and small. Fintech transactions totalled a mere US$6.37mil this year compared with a global figure of US$769.3bil, according to Statista, an online statistics provider.

It however predicts that fintech transaction values to grow to US$14.4bil by 2020. A significant number of fintech companies, especially those in the digital payments space, actually work alongside local banks.

Still, fintech is not to be taken lightly. Top bankers themselves are speaking of its imminent threat to their business. Former Barclays CEO Anthony Jenkins referred to it as banking’s “Uber moment” to describe technological advances that could see bank branches close down and people laid off.

Last April, Jamie Dimon the CEO of the US’ largest bank JP Morgan in his letter to shareholders warned that “Silicon Valley is coming.” “There are hundreds of start-ups with a lot of brains and money working on various alternatives to traditional banking,” Dimon wrote.

On the home front, just last month prominent banker Datuk Seri Nazir Razak echoed such views. Speaking at the Star Media Group’s PowerTalk: Business Series held at Menara Star, Nazir opined that fintech companies are disrupting banking.

“Bankers must respond to this Uber moment. People actually dislike banks today, since the global financial crisis. Recent data suggests that in the US, the cost of banking intermediation has not changed for 100 years in real terms. This simply means banks have not gotten more efficient over the years, so its right that banks get attacked by ‘Silicon Valley’, which has identified banking as an industry that is very ‘ripe’ or juicy to disrupt.”

Even the central bank is echoing these views.

In his maiden keynote address at an Islamic finance conference in Kuala Lumpur last week, Malaysia’s newly-appointed Bank Negara governor Datuk Muhammad Ibrahim gave a grim reminder to banks of the threats posed by fintech. In particular, Muhammad quoted from a report by McKinsey that 10% to 40% of banking revenue is possibly at risk by 2025 due to innovations outside banking institutions that are able to offer a significant pricing advantage and that technologically-driven applications had spread to nearly every segment of the financial sector, with the number of fintech start-ups having doubled in the last year. “Fintech is challenging the status quo of the financial industry,” he said.

To be fair, Malaysian banks are quick to point out that while fintech does represent a disruption to business, they are embracing the movement, by coming up with their own fintech innovations or by working with fintech startups.

So what is fintech?

In a nutshell, fintech is an economy of companies using technology to improve efficiencies and effectiveness in the financial services industry. To illustrate the offerings of fintech companies, consider the business model of homegrown start-up MoneyMatch, which is modelled after UK-based TransferWise which began in 2011 and today moves US$10bil a year through its platform.

MoneyMatch has created a platform to match individual buyers and sellers of currencies, with the attraction of both sides enjoying better exchange rates than what banks and even money changers offer. The rate used by the MoneyMatch site is the middle rate of the currency exchange spread. So an individual for example, willing to buy US$100 for his travels will be matched with someone wanting to change his US$100 into ringgit. The parties will be matched on this application and then proceed to make their exchange in an agreed location. MoneyMatch is also entering the area of cross border fund transfers.

“For example, someone in Singapore wishing to transfer money to Malaysia can be matched with someone here wishing to send an equal amount of money across the Causeway. Hence the parties can make the respective transfers to local accounts of their choice after an exchange of information. This means the transfer is done minus any cross-border transfer fees,” explains MoneyMatch co-founder Naysan Munusamy, who had spent many years as a forex trader with a number of banks before venturing out to start MoneyMatch.

Peer lending

One key growth area in fintech is peer to peer or P2P lending, online platforms that match borrowers with lenders, bypassing the traditional financial institutions. The business had even attracted big names such as Goldman Sachs. The most notable name in this space is Lending Club, which had launched its service as far back as 2007 and became the US’ largest technology IPO in 2014, raising around US$1bil.

Lending Club claims that its platform – which enables borrowers to get unsecured loans of US$1,000 to US$35,000 – has now helped originate close to US$16bil in loans.

Locally, last month the Securities Commission (SC) launched a regulatory framework for P2P lending, paving the way for small and medium-sized companies to access this new avenue of debt funding. Under SC’s rules though, individuals are not allowed to raise money on the local P2P platforms. Rather it is meant to only fund projects and businesses and a number of safeguards are in place. For example, those behind the operator of the P2P platform need to pass the “fit and proper” test; the rate of financing cannot be more than 18% (as that would be deemed predatory lending) and that the P2P operator has to disclose information related to the issuer and the risk assessment and credit scoring parameters adopted by the operator. There is no authorized P2P platform in Malaysia yet as parties wishing to run such platforms have to submit their application to the SC soon.

In China, P2P lending has virtually exploded. As a recent report by Citibank highlights, “China is past the tipping point”, with fintech companies having similar number of clients as the major banks. The report notes that China is the largest P2P lender in the world, with transactions topping US$66bil, compared with the US with only US$16.6bil.

 Regulating fintech

But there are problems. Some unregulated P2P platforms in China had run scams. Others helped fuel an equity roller-coaster by offering funding for stock investments. This led to the Chinese benchmark index rallying more than 150% in the 12 months to last June before abruptly crashing. The Chinese authorities are now cleaning up the P2P sector.

So what are the risks of fintech regulation in Malaysia? And do companies like MoneyMatch need be regulated and licensed?

In an emailed reply to StarBizWeek, Bank Negara says: “Fintech start-ups that engage in activities under the purview of the central bank must comply with existing laws”. Bank Negara explains that regulated businesses include banking, insurance or takaful, money changing, remittance, operating a payment system or issuing payment instruments.

“A fintech company that engages in any activity that falls within the definition of a regulated business must be properly authorised to do so under the relevant laws.

“As an example, collecting deposits via a fintech platform would require approval from Bank Negara.

“A fintech company that is authorised to conduct a regulated business under the laws that Bank Negara administers will be subject to the oversight of Bank Negara pursuant to those laws.”

What this indicates is that Bank Negara is going to regulate fintechs the same way it does banks. But exactly how, it still isn’t clear.

But the good news is this: Bank Negara says it is engaging with firms in this space (and presumably that includes the likes of MoneyMatch), “to understand and where appropriate facilitate their business and provide guidance on aspects on regulation that would be applicable to them.”

Bank Negara adds that it is in the process of formulating a framework that “encourages innovation without undermining financial stability, the integrity of the financial system or the adequate protection for financial consumers.”

The SC has also been pushing for fintech innovation to develop in Malaysia. Last year, Malaysia became the first country in the region to introduce the regulatory framework for equity crowd funding. (While P2P is about companies raising debt, crowd funding is for entrepreneurs to sell equity to investors.)

The SC has also launched aFINity@SC, a fintech community aimed at industry engagement and more recently launched the P2P financing framework, which is aimed at addressing the funding needs of small businesses.

Chin Wei Min, the SC’s new head of innovation and digital strategy, says: “We think fintech can provide solutions to some of the unserved and underserved needs in the capital market.”

Chin adds: “We are also mindful of the risk, fraud and all the pitfalls. We continue to enhance our engagement model. We want to remain very close to the industry.”

Fintech’s hiccups

Some recent developments in the fintech space, however, point to weaknesses in fintech companies. LendingClub, the poster boy company for P2P lending has seen its shares tumble, wiping out about a third of its market value.

This came as it faces scrutiny after its founder and CEO resigned following an investigation into improper loan sales.

The US Treasury has released a report criticising the P2P lending business, recommending it to be more tightly regulated. Some commentators are liking P2P lending to the early days of the subprime mortgage bubble of 2006-07.

It is more likely though that the experiences of fintech in mature markets like China and the US will serve as good guides as to how this business will grow in this part of the world, with the requisite regulations put in place.

And the jury is still out as to whether traditional banks here will lose significant parts of their businesses to fintech start-ups.

Or as one industry observer puts it, fintech is more likely to usurp the business of the shadow banking market here, as some unserved borrowers now have the option to move away from loan sharks or “Ah Longs” and into the crowd funding or P2P platforms. But after that, banks could be next.

By Risen Jayaseelan, Wong Wei-Shen, and Zunaira Saieed The Star


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Where does the money go?

RECENTLY I was offered an easy loan with just 5.8% interest rate after activation of my credit card.

There was no pre-qualified questions asked when the sales personnel approached me through the phone. As I had no intention to get funding, I did not take up the offer.

It is understood that the “attractive” rate was offered to attract potential customers. If there is a delay in repayment eventually, the rate would jump up according to the interest incurred on the credit card outstanding balance, which ranges from 15% to 18% per annum.

When I asked around, I found most of my family members had on at least one if not more occasions being offered an easy loan, credit card balance transfer, personal loan, or other credit facilities via phone calls every month.

This contrasts with what I had heard from friends and peers from the property industry regarding housing loan. There have been complaints about stringent requirements for housing loan application and low approval rate. They have this question in mind – where does the money go?

Their concerns are understandable when I see the home loan approval rates was only hovering around 50% for the past few years. In 2013, the approval rate was at 49.2%, it improved slightly to 52.9% in 2014 but went down to 50.2% in 2015.

According to the group president of the Real Estate and Housing Developers Association (Rehda), Datuk Seri FD Iskandar, rejection rate for affordable housing loan applications was more than 50%, and the strict housing/mortgage lending conditions were denying aspiring owners their first homes.

Based on Rehda’s survey in the second half of 2015, loan rejection was the number one reason for unsold units, and affordable homes top the list.

For example, an individual or family with a combined household income of between RM2,500 and RM10,000 are eligible to apply for PR1MA homes that cost between RM100,000 and RM400,000. However, with loan eligibility based on net income, many with their existing commitments such as car loan or credit card outstanding payment, are not able to secure a loan for an affordable home. This dampens the effort of helping qualified households in owning their first homes.

Looking at the situation, I am puzzled with different treatments given to loan application. At one end, there is an easy access for personal loan and credit card financing. On the other, stringent requirements are imposed on housing loan. It seems like the priority has been given to spending on liability instead of asset.

If we look at it from the business perspective, credit card, personal loan and easy loan offer higher profit margin to the banks with interest rates ranging from 12% to 18%, compared to housing loan interest which is about 4.5% to 5%. This may explain the shift of focus among the banks.

Central bank concerned

Reports show that our household debt stood at an alarming 87.9% of GDP as at end of 2014 – one of the highest in the region. It is comprehensible that Bank Negara is concerned with the situation, and would like to impose responsible lending with housing loan.

However, when we look at the details, residential housing loans accounted for 45.7% of total debt, hire purchase at 16.6%, personal financing stood at 15.7%, non-residential loan was 7.7%, securities at 6.5%, followed by credit cards and other items at 3.9% respectively.

A recent McKinsey Global Institute Report highlighted that in advanced countries, housing loans comprise 74% of total household debt on average. As a country that aspires to be a developed nation by 2020, our 45.7% housing loan component is considered low.

Looking at the above, it is ironic that our authorities and banks are strict on funding a house which is a basic necessity and asset for people, but lenient on car loan, personal loan, credit card and other easy financing with higher interest rate, that tend to encourage the rakyat to overspend on depreciating items.

It is common nowadays to see young adults paying half of their salary for car loan, and people go on extravagant holidays or purchase luxury items which rack up their credit card balance. As such it is not surprising that the number of counselling cases took on by Credit Counselling and Debt Management Agency has also shown a worrying upward trend, with the number of cases leaping by 20,000 from 2013 to 2014. There was an average of about 35,000 counselling cases annually from 2008 to 2014, but that figure rose to approximately 60,000 in 2014.

It is important for the authorities and banks to encourage prudent lending and spending, re-look into high housing loan rejection rate, and consider to tighten lending conditions of other loans, such as personal loan and credit card. These will encourage the rakyat to channel their money into assets instead of liabilities, and improve the financial position of the people and the nation in the future.

By Alan Tong

Datuk Alan Tong has over 50 years of experience in property development. He is the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.



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Public Bank Q4 profit up 19%; RM5bil earnings for 2015

Public Bank Head Office in Kuala Lumpur - Founder and chairman Tan Sri Teh Hong Piow said expectations were for intense competition for market share

Public Bank Q4 profit up 19% but warns of challenges ahead

Public Bank Bhd, the country’s third largest bank, reported an increase of 19% in its fourth quarter net profit which stood at RM1.49bil compared to the net profit of RM1.25bil for the same period a year earlier but warns of challenges ahead.

Founder and chairman Tan Sri Teh Hong Piow said expectations were for intense competition for market share.

“And the more stringent capital and liquidity requirement will continue to put pressure on net interest margin and return on equity,” Teh said in a statement.

The bank’s increase in its fourth quarter ended Dec 31, 2015 net profit was boosted largely by a net writeback of loan impairment allowances and higher net interest income, it said in the statement yesterday.

It also announced a second interim divided of 32 sen per share for shareholders, bringing total dividends for the year to 56 sen per share or a total payout of 42.7% of the bank’s net profit last year.

For the entire FY15, Public Bank’s net profit stood at RM5.06bil which translates to a net return on equity of 17.8%, against a net profit of RM4.52bil in FY14 while revenue stood at a higher RM19.18bil compared with RM16.86bil earlier.

Public Bank continued to be the most efficient banking group in the country with its low cost-to-income ratio of 30.5% compared to the banking industry’s average cost-to-income ratio of 45.5%. It also continued to maintain a healthy level of capital with its common equity Tier 1 capital ratio, Tier 1 capital ratio and total capital ratio standing at 10.9%, 12.0% and 15.5% respectively as at the end of 2015, after deducting the second interim dividend, it said.

In FY15, the bank grew its loans by 11.6%, aided by its retail banking segment and extension of credits to small and medium enterprises while total customer deposits saw a growth of 8.9%.

Its domestic customer deposit grew by 7.5%, higher than industry’s growth of 1.8%.

As at the end of 2015, the group’s impaired loan ratio was at 0.5%, significantly lower than the industry ratio of 1.6% while its loan loss coverage ratio of 120.8% as at the end of last year was also higher compared to the local banking industry’s ratio of 96.2%.

Teh said growing fee-based revenue remained a key strategic focus of the Public Bank group.

“Arising from the group’s initiative to drive growth of its non-interest income in order to sustain better return for its shareholders, the group’s non-interest income increased by 22.4% in 2015 as compared to 2014, mainly contributed by higher income from its unit trust business, foreign exchange related transactions and fee income from banking operations,” he said.

Shares of Public Bank finished yesterday higher at RM18.38, up 4 sen.

Public Bank's 2015 earnings cross RM5bil mark 

 

 

Public Bank's Founder and chairman Tan Sri Teh Hong Piow

KUALA LUMPUR: Public Bank Bhd recorded a stellar set of results, with net profit surpassing RM5bil for the financial year ended Dec 31, 2015. It rewarded shareholders by declaring a second interim dividend of 32 sen per share, bringing the full-year dividend to 56 sen.

The total dividend paid and payable for 2015 amounted to RM2.16bil and represents a total payout of 42.7% of the group’s net profit for 2015.

Public Bank posted a net profit of RM5.06bil, up 12% from RM4.52bil it recorded a year ago, translating to a net return on equity of 17.8% for 2015. Revenue was 13.8% higher at RM19.18bil compared with RM16.86bil in 2014.

In its filing with Bursa Malaysia on Wednesday, the bank said it owed its improved earnings to higher net interest income, higher non-interest income and lower loan impairment allowances.

However, these were partially offset by higher operating expenses due to higher personnel costs.

Gross loans grew 11.6% to RM273.4bil driven by growth in property financing, financing of passenger vehicles and lending to SMEs.

Deposits from customers were 8.9% higher to RM301.2bil, which partly contributed to the higher net interest income during the year.

"The results reflected the consistent execution of the group’s organic growth strategy which continues to deliver favourable results to our customers and our shareholders,” said founder and chairman Tan Sri Teh Hong Piow in a statement.

He added that the bank's robust funding position was mainly supported by its strong retail franchise and large domestic depositor base of over five million customers who continue to place their trust and confidence in the group in safeguarding their funds.

Public Bank’s impaired loan ratio improved to 0.5% as at end-December 2015.

For the fourth quarter, the bank posted a 19% year-on-year gain in net profit to RM1.49bil while revenue was 8.8% higher at RM4.93bil.

Moving forward, the group said it will leverage on its internal strength and capitalise on its customer service and service delivery to maintain its leading market share in the domestic retail segment, supported by steady demand for home mortgages, vehicle financing and SME lending.

By Wong Wei-Shen The Star/Asia News Network

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Asian Infrastructure Investment Bank, opens to lay down milestone for global economic governance

  Xi pushes for 'perfection of the system


BEIJING: China has pledged US$50mil (RM221.25mil) to the Asian Infrastructure Investment Bank (AIIB) to support infrastructure projects in less developed countries.

Launching the China-led bank here yesterday, Chinese President Xi Jinping said this proved China’s willingness to shoulder more international responsibility and “push for the perfection of the international system”.

“This is a historic moment,” he added.

With an authorised capital of US$100bil, AIIB was proposed as a global multilateral financial institution by Xi in 2013 to finance infrastructure development in Asia, including energy/power, transportation/telecommunications, rural infrastructure/agriculture development, and water supply/sanitation.

Representatives from 57 founding members, including Malaysia, attended the ceremony at the Diaoyutai State Guesthouse.

Malaysia, which holds 0.11% share and 0.36% of voting share in AIIB, was represented by Treasury deputy secretary-general Datuk Mohd Isa Hussain.

The three largest shareholders of AIIB are China, India and Russia, with a 30.34%, 8.52% and 6.66% stake respectively.

Each allocation is based on the size of the member country’s economy.

The bank, based here, is largely seen as a rival to the US-led World Bank and Interna­tional Monetary Fund.

The United States and Japan have shunned the AIIB while US allies – including Britain, France and Germany – have signed up as founding members.

AIIB president Jin Liqun promised to run AIIB as an organisation that is “lean, clean and green”.

“The bank will make a positive and significant difference in Asian development,” he said.

Speaking on behalf of the non-regional founding members, Luxembourg Finance Minister Pierre Gramegna said the fact that the idea to form AIIB came from the east was a testament to the rebalancing of the world’s economy.

“Without basic infrastructure, markets cannot function well and growth is limited. AIIB will be a boost to the Asian economy, and become a platform for cooperation that will foster economic integration and inter-regional connectivity,” he said.

By Tho Xin Yi The Star/Asia News Network

AIIB opens to lay down milestone for global economic governance

BEIJING, Jan. 16, 2016 (Xinhua) -- Chinese PresidentXi Jinpingaddresses the opening ceremony of the Asian Infrastructure Investment Bank (AIIB) in Beijing, capital of China, Jan. 16, 2016. (Xinhua/Li Xueren)

BEIJING, Jan. 16 (Xinhua) -- The Asian Infrastructure Investment Bank (AIIB), a China-initiated multilateral bank, started operational on Saturday, marking a milestone in the reform of global economic governance system.

Representatives of the 57 founding countries gathered in Beijing for the AIIB opening ceremony in Diaoyutai State Guesthouse. Chinese President Xi Jinping made a speech.

With joint efforts of all the members, the AIIB will become "a professional, efficient and clean development bank for the 21st century" and "a new platform to help foster a community of shared future for mankind, to make new contribution to prosperity of Asia and beyond and lend new strength to improvement of global economic governance," Xi said.

During the ceremony, Chinese Finance Minister Lou Jiwei was announced to be elected as the first chairman of the AIIB board of governors. Jin Liqun was elected the first AIIB president.

In addition to subscribing capital according to plan, China vowed to contribute 50 million U.S. dollars to the project preparation special fund to be established soon, to support the preparation for infrastructure development projects in less developed member states.

The AIIB will promote infrastructure related investment and financing for the benefit of all sides, Xi said, keeping Asia's enormous infrastructure development demand in mind.

Calling the initiative to establish the AIIB "a constructive move," Xi said it will enable China "to undertake more international obligations, promote improvement of the current international economic system and provide more international public goods."

Statistics from the Asian Development Bank (ADB) show that between 2010 and 2020, around eight trillion U.S. dollars in investment will be needed in the Asia-Pacific region to improve infrastructure.

Xi expected the China-initiated institution and other existing multilateral development banks to complement each other for mutual strength and cooperate on joint financing, knowledge sharing and capacity building.

In his address at the founding conference of the AIIB council on Saturday afternoon, Chinese Premier Li Keqiang said the operation of the new multinational development bank is "of positive and constructive significance for the global economic governance reform."

Hailing Asia "an engine" for the global economic growth, Li said the sustainable development of the Asian economy and regional economic integration rely on the infrastructure construction and connectivity, which would help facilitate the flow of trade, investment, personnel and information.

The aim of China initiating the AIIB is to widen financing channels, expand general needs and improve supply so as to bring along the common development in the region and promote world economic recovery with its own achievements, he said.

The premier called on the AIIB to integrate the China-proposed Belt and Road initiative with each country's development strategies, promote international cooperation on production capacity and innovate more modes to realize a diverse and inclusive cooperation.

Global leaders extended congratulations to the opening of the multilateral development bank.

"The ADB will cooperate closely with AIIB in supporting the development of the Asia Pacific region," said ADB President Takehiko Nakao in a congratulatory message to the opening of the AIIB.

"We will cooperate closely to provide support and constructive suggestions for the AIIB development," said Yoo Il-ho, deputy prime minister of the Republic of Korea at the opening ceremony.

China's Vice Finance Minister Shi Yaobin said in an interview with Xinhua that China does not intend to apply for financial support from AIIB in the initial stage.

"Though as the biggest shareholder of AIIB and the biggest developing country in the world, China is fully qualified to gain loans from the AIIB, but we made the decision mainly because that many other countries in the region are in more urgent need for infrastructure development," said Shi.

Shi said China holds 30.34 percent of the whole capital stock, with the first batch of capital stock worth 1.19 billion U.S. dollars already in place.

The AIIB was proposed by President Xi Jinping in October 2013. Two years later, the bank was formally established as the Articles of Agreement took effect on Dec. 25 last year.

As its name suggests, the AIIB will finance construction of infrastructures -- airports, mobile phone towers, railways and roads -- in Asia.

Amid the evolving trend of the global economic landscape, Xi expected the AIIB will help make the global economic governance system more just, equitable and effective. - Xinhuanet

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Spotlight: AIIB to promote vitality in regional development, opportunities for emerging economies 

BEIJING, Jan. 16 (Xinhua) -- The newly-inaugurated Asian Infrastructure Investment Bank (AIIB) will bring vitality to regional growth and opportunities for global development, especially for developing economies, overseas experts and scholars have observed.

Chinese President Xi Jinping on Saturday attended the opening ceremony for the international development bank in Beijing.Full Story

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The AIIB groundswell; Asian development to the fore

Washington's Lobbying Efforts Against China's 'World Bank' Fail As Italy, France Welcomed Aboard. The cheese really does stand alone. Every single U.S. ally with the exception of Japan have all hopped on board the Asian Infrastructure Investment Bank, or AIIB. Italy and France were approved on Thursday to become founding members, bringing the total membership base to 33 from the original 21.

The AIIB groundswell

Just in time for the deadline, an impressive coalition of countries have signed on for the newest development bank on the block

THE deadline of March 31 has passed, and 52 countries are now on the list of would-be founders of the Asian Infrastructure Investment Bank (AIIB).

The China-led bank was launched in October last year at the Great Hall of the People in Beijing, a year after Chinese President Xi Jinping proposed a bank to offer funds for development projects during his official visit to Indonesia.

The initiative would promote regional inter-connectivity and economic integration, he said when delivering a speech at the Indonesian Parliament.

In the past few days leading up to the deadline, news of more countries hurrying to join the AIIB made headlines, especially when a few of them announced the decision at the recently concluded Boao Forum in Hainan province, which Xi officiated.

The world was watching closely to see if the United States and Japan would sign up as founding members just before the deadline, but both have decided to opt out of the bank that is seen as a rival to the Western-dominated World Bank and International Monetary Fund.

Back in October last year, the bank had confirmation from 21 countries to participate as founding members – Malaysia was one of them – all of which are in the Asian continent.

The tipping point came when the United Kingdom announced its decision to join the AIIB in the middle of March, to the surprise of many.

More countries followed suit right after that, including France, Italy, Germany and Switzerland.

Martin Jacques, a senior fellow at the Department of Politics and International Studies at Britain’s Cambridge University, said the rise and growing awareness of the Chinese possibility in the context of a multilateral initiative pressed Britain to act the way it did, making AIIB not just an Asian institution but a global one.

“I think this is an extraordinary historical moment,” he said in a panel discussion during the Boao Forum.

“The new institutions (AIIB and the New Development Bank operated by Brazil, Russia, India, China and South Africa) do not necessarily conflict with the Bretton Woods institutions. They are very different.

“The developing countries now account for nearly 60% of global Gross Domestic Product and they represent 85% of the world population.

“The new institutions, unlike the Bretton Woods institutions, are being defined as relevant to the needs of this 85% of world population, most of whom are concentrated in this continent.”

Countries which have missed the March 31 deadline can still join as ordinary members, while those that have already submitted their application will find out if they are on the final list of founding members by April 15.

With an initial capital of US$50bil (RM184bil), AIIB is scheduled to be officially established at the end of the year, after the rules are finalised and signed in mid-2015.

New Zealand’s former Prime Minister Jenny Shipley said there is a need to define “infrastructure” to determine the types of projects that are qualified to obtain funding from the AIIB.

“If I could be provocative – if you were to put a diverse group of qualified women and men together and ask them the question, you’ll get a broader definition than if you just ask the question of classical male concept of buildings,” she said.

“We need to stand in the shoes of the people whose lives will be unleashed if we get this right. Just bringing in the classical morals of the same thing would not give us the breakthrough.”

Josette Sheeran, the president and Chief Executive Officer of the Asia Society, chipped in on this, citing Indian Prime Minister Narendra Modi’s agenda of building more toilets as an example.

“The reason young girls don’t go to school in India is that there is no toilet. That’s the kind of infrastructure that would really capture the mind of humanity and transform hope in the world,” she said.

Former Pakistan Prime Minister Shaukat Aziz was more concerned about the governance of the new banks, placing emphasis on professionalism, transparency and quality leadership.

“The people hired for AIIB must be professionals who know what infrastructure financing is all about,” he said.

“The quality of people will determine the ability of these banks to analyse risks to give money and to make credible loans which are payable back.”

Transparency, in the opinion of Deloitte global chairman Steve Almond, is also key to attract the private sector to come onboard.

“The regional or sub-regional projects are arguably the ones that bring the greatest impact to economic development. But because they go across the borders, they are also harder to manage and least likely to attract private sector capital,” he said.

“We need the mechanism to provide confidence to the private sector, and transparency governance is one of the compelling reasons to encourage them to come and join the projects.”

And what is the magic that would make good governance work?

Li Ruogum, former chairman and president of Export-Import Bank of China, believes in understanding.

“This newly established institution cannot just clone the older one, as we are working in a very different environment.

“We have to accumulate our experiences and need to have a mind of innovation. All should come together and understand each other, and try to achieve good governance.”

Check-in-China by Tho Xin Yi

 
Asian development to the fore

Chinese President Xi Jinping. - AFP  
Hungry for development: In 2013, President Xi Jinping proposed a new development bank, the Asian Infrastructure Investment Bank. One year later, 22 Asian countries had signed up, including 10 Asean countries - Blooberg

Asia’s need for better infrastructure and more development is too important to be held to ransom by outdated big power politics and petty posturing.

FOR many observers, the US “pivot” (later renamed “rebalancing”) to the Asia-Pacific was classic Obama: the rhetorical flourish was more dramatic than the policy substance.

In the second half of its first term, the Obama administration sought to assign two-thirds of its military assets to the Asia-Pacific theatre, up from the standard half from the even split between the Pacific and the Atlantic.

By the middle of its second term, officials were struggling to maintain a semblance of a policy largely left to coast under its steadily diminishing momentum. US foreign policy, and by extension US defence policy, appeared distracted by other concerns.

The State Department and the Pentagon seemed consumed at once by the Syrian debacle, Iraq’s instability, rising terrorism everywhere, civil war in Ukraine, Europe’s problems with Russia, Iran’s nuclear programme and an uppity Israel.

Then there were the ever-present ­budgetary constraints. Deploying another 16% of military assets to the Asia-Pacific, from half to two-thirds, seemed hardly noticeable or achievable.

Meanwhile, officials were anxious to insist that the rebalancing had nothing to do with the rise of China and its growing assertiveness in the region. It was, they said, part of efforts to preserve US strategic interests.

Whatever the choice of words, and however implicit China may be as motivation, rebalancing was fast becoming history. By March last year, a Pentagon official admitted it was going nowhere.

However, the Obama administration’s gift of verbalising policy intent made US intentions clear enough.

President Obama had famously said the US should be writing trade rules in the Asia-Pacific rather than let China do it.

Thus, the Trans-Pacific Partnership, a trade pact with controversial demands that swiftly became synonymous with US trade preferences. But China had not been idle either.

In 2013, President Xi Jinping proposed a new development bank, the Asian Infrastructure Investment Bank (AIIB). One year later, 22 Asian countries had signed up, including all 10 Asean countries.

In Asia, the world’s most promising continent for rapid economic growth, infrastructure needs for development are peaking. The IMF, World Bank and Asian Development Bank (ADB) can serve only a fraction of its needs: between 2010 and 2020 alone, some RM30tril is needed.

China set a deadline of March 31 this year for countries around the world to sign up as Prospective Founding Members (PFMs) before operations begin later in 2015. China would provide the biggest contribution to the authorised capital of US$100bil (RM363.49bil) and initial subscribed capital of US$50bil (RM181.75bil).

The US immediately saw this as a game-changer challenge to its dominance in global lending. For decades, it has controlled the World Bank, and through its European allies, the IMF and through its ally Japan, the ADB.

These institutions have been known to set tough conditions on debtor countries that may not serve domestic aspirations or national interests. A cash-rich China also felt it remained under-represented in these institutions even after becoming a leading global economy.

Washington had hoped, even expected, that its allies and friends would stay away from the AIIB as a rival institution. But like its pivot or rebalancing strategy, that hope steadily faded.

In Europe, Britain as the closest US ally was the first to sign up to the AIIB early last month. Soon, other major European economies like France, Germany and Italy followed, as did all the Scandinavian countries.

Washington then quietly pressured Japan, South Korea and Australia to stay away. But Seoul and Canberra signed up anyway. By then, the US had started to soften its stand, denying that it had ever pressured any country to stay away. It was only unsure if the AIIB would adhere to best practices in international lending.

Then, other US allies like Taiwan and Israel also signed up. The US was becoming increasingly isolated, with only Japan as the other major economy for company.

But not for long, perhaps. Last Monday, Japan’s ambassador to China, Masato Kitera, said in a Financial Times (FT) interview that Japan would join the AIIB as well, probably around June.

That came as a bombshell to the conservative Japanese government. It would seem too much of a betrayal of yet another US ally, the final one being the “unkindest cut of all”.

The next day, on the deadline for countries to sign up as PFMs for the AIIB, Tokyo denied that Ambassador Kitera ever said such a thing. Chief Cabinet Secretary Yoshihide Suga said Japan had no imme­diate plans to join the AIIB.

Besides being a US ally, Japan was also wary of the prospect of the AIIB undercutting the ADB.

Whatever the actual chances of Japan joining the AIIB, Tokyo would want to underplay it as much as possible.

Like the US, Japan said it was reluctant to sign up because of uncertainty over the AIIB’s standards. But countries such as Britain and Singapore that have joined said the best way to ensure high standards was to get on board and be part of the decision-making process.

To be part of that process, it was necessary to sign up early before the big decisions were made. The terms and conditions of lending and borrowing have still to be firmed up as dozens of countries including giants like India and Russia are already in.

The FT report also revealed that Japanese business leaders were pressuring their government to join the AIIB. Mitsubishi bosses, for example, had expressed confidence in Jin Liqun, a former senior ADB official who will head the AIIB.

On the deadline last Tuesday, China announced that 30 countries had been admitted as PFMs. More than a dozen others were in the queue.

Then a flood of criticisms and denuncia­tions of the stubborn US position came, mostly from within the US itself. Analysts and commentators, including in Forbes and The Economist, said the US administration had miscalculated badly in staying out, only damaging US long-term interests in East Asia and the Pacific.

Former US Secretary of State Madeleine Albright also condemned the US position, lamenting the way Washington had scored another own goal by rebuffing the AIIB. The US had placed itself behind the curve in changes in the Asia-Pacific rather than stay at the leading edge.

If and when Japan finally signs up, the US may have to be resigned to becoming a part of the AIIB. But as a latecomer, it may be limited to playing only a bit part such as an observer rather than sit at the main table.

China has long regretted the US fixation with what it calls a Cold War “them against us” bipolar mentality that frustrates progress on many fronts. For the countries of Asia hungry for more development, progress must not be held hostage to big power rivalry.

Ultimately, any rivalry between the US and China today is not over political ideology but economic ideology: the Washington Consensus of free trade rhetoric where the state and private industry are at odds with each other versus the emerging Beijing Consensus of close public-private partnerships that have worked so well for so much of Asia already.

US opposition to a proven formula for Asia is most unlikely to win friends and supporters anywhere, least of all in Asia.

By Bunn Nagara Behind the headlines

> Bunn Nagara is a Senior Fellow at the Institute of Strategic and International Studies (ISIS) Malaysia.

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Chinese President Xi Jinping's (C-R) meeting with the members of the Asian Infrastructure Investment Bank (AIIB) in the Great Hall of the People in Beijing, China 24 October 2014. 21 Asian countries are the founding ...

Not all debts are bad

Rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

Construction workers at work in Kuala Lumpur. About 46 of household debt is for the purpose of financing purchase of residential properties.

Rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

FEDERAL government debt, external debt, household debt, non-financial corporate debt – these debts amount to billions of ringgit each and there should be proper context and understanding of the different classifications of debts to be fully informed of the economic issues at stake.

At face value, debt is money owed that has to be repaid in principal and interest. To look at debt from a more constructive point of view, debt is also future consumption brought forward. Furthermore, the benefit derived from consuming at the expense of expected future income should equal or even outweigh its associated costs of financing.

The point is, there are good debts and there are bad debts. Debts raking in billions or outstanding loans growing at an increasing rate could potentially be alarming. However, it would be misleading to label huge debts as unsustainable and destabilising before making sense of the origins and the purposes of the money borrowed.

Debts continue to pile up

A recent research on global debt and leverage by the McKinsey Global Institute in February highlighted that global debt continues to grow post-global financial crisis. These debts – the sum of money owed by governments, households, corporates and financial sectors in the 47 countries under the research – have grown to US$57 trillion since 2007 and a significant portion of the growth came from the public sector.

Overall, the research pointed out that only five developing economies showed signs of deleveraging while most of other countries saw increased debt to GDP ratio during the period.

With hindsight, global growth recovery post-global financial crisis has been rather slow and a handful of governments had pursued expansionary fiscal programmes funded through debts.

Unfortunately, as the global pace of growth is still relatively tentative, high level of government indebtedness would take longer time to deleverage.

Meanwhile, the increase in household and corporate sector debts could signal deeper financial system penetration and also recovery in household and corporate balance sheets for private sector expenditure to grow again.

As of end-2014, Malaysia’s federal government debt amounted to RM583bil (54.5% of GDP); external debt totalled RM744.7bil (69.6% of GDP); household debt increased to RM940.4bil (87.9 % of GDP).

In the past four years, the compounded annual growth rate for government debt was 9.4%; 14.4% for external debt and 12.2% for household debt.

While these numbers seem alarming, the major concern over debts arises when they are unsustainable.

While there are concerns over the sustainability of our fiscal deficit over the long term, the Government has embarked on a fiscal consolidation effort in recent years. Because of this, government debt should be under control in line with its commitment to achieve a balanced budget by 2020.

The Government operates on a few crucial self-imposed budgetary rules and it caps the maximum limit of government debt to GDP ratio at 55%.

On external debt, Bank Negara has adopted the new debt definition in early 2014, keeping in line with the International Monetary Fund’s (IMF) new guidelines of widening its definition to better reflect the depth in financial markets and the real economy.

In essence, external debt refers to the debts owed by residents to non-residents, be it denominated in ringgit or foreign currencies.

Therefore, the public and private sector’s offshore borrowings, Malaysian Government Securities held by foreigners are included in the classification of the external debt.

Since the last quarter of 2013, the external debt growth has been on a downward trend, easing to 6.9% in the last quarter of 2014, down from the peak of 15.7% growth recorded in the last quarter of 2013.

Besides, the bulk of the growth in external debt since 2013 was primarily from offshore borrowings as it made up almost half of the total external debt.

Bank Negara, in its recent annual report, guided that private sector offshore borrowings are sound and sustainable, given that 70% of the corporate sector’s offshore loans were sourced from associated companies, parent companies and shareholders.

High household debts a concern

However, Malaysian household sector indebtedness undoubtedly tops the chart in the region.

According to McKinsey’s study, Malaysia’s household debt to income ratio is highest at 146% in 2014, way above the level of the United States (99%) and Indonesia (32%).

When we break down the household debt, 45.7% of it is for the purpose of financing purchase of residential properties. Hire purchase financing (16.6% of total household debt) and personal financing (15.7%) made up the remaining major components.

Even though Malaysia’s household financial asset to total household debt ratio is relatively high at 214% in 2014, the associated risks of high household indebtedness cannot be taken lightly.

The IMF, in its financial sector assessment on Malaysia in April 2014, cautioned that in the event of a sharp fall in housing property prices coupled with a recession in the economy, the burst of the housing asset bubble would have dire consequences on the real economy.

The Government and Bank Negara have in recent years attempted to rein in the growth in housing loans and also put a check on the property market through various macro-prudential tools.

For instance, the last Overnight Policy Rate hike in July 2014 by 25 basis points was primarily to mitigate the financial imbalances within the economy.

In January 2015, the growth of household outstanding loans from the banking institutions has slowed to 9.7%, down from the peak of 13.9% in November 2010.

Although it is a sign of improvement in domestic financial stability, a continued assessment of household loans would be a prudent measure.

Responsible use of leverage

Bad indebtedness is often described as how an overleveraged economy collapses on its own pile of toxic debts when triggered by an overlooked external event – the subprime mortgage crisis in the United States is a classic example.

On the other hand, good debts are those that are used to finance productive and sustainable purposes.

A government manoeuvering an economy out of recession could issue bonds to fund its fiscal stimulus programme while a company could maximise its true potential through the proper use of leverage.

In fact, given a youthful population and a stable work force in Malaysia, rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

Therefore, regulators and policy makers should not, in their fear of “indebtedness”, stifle the credit lines and the channels to expand present consumption for future capacity of growth.

Unfortunately, with a lack of hindsight, it can be difficult at times to ascertain if a debt is good or bad, A-tier quality or just a default waiting to happen.

In the end, it is not only the viability in repaying the loans but also the realised output and gains from entering a debt contract that should be examined to determine the sustainability in taking up debts.

In short, indebtedness is not necessarily bad. A responsible debtor should have a clear and comprehensive business or personal financial planning and ultimately transparency in dealing with all parties. After all, a good debt is a good customer for the other end.

My point By Mandkaran Mottain

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.

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Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for ...

Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for market share and interest rates may be kept low, house buyers are ultimately at the mercy of banks when it comes to the detailed terms and conditions of the housing loan. (Banks in this context refers to commercial banks, Islamic banks and other financial institutions).

Unfair legal fees

When a borrower takes a housing loan, the borrower is required to execute a loan and other related agreements. This entails the borrower having to pay legal fees, the amount of which varies, depending on the loan amount – the higher the loan amount, the higher the legal fees although the complicity and level of work does not necessarily commensurate directly with the loan amount.

Although it is the borrower paying the loan lawyers’ fees, the said loan lawyer is actually acting for and on behalf of the bank. As such, the loan lawyer is not in the best position to advise the borrower if there are clauses in the loan agreement which are not in the best interest of the borrower.

In addition, in the event of any dispute between the borrower and the bank, the borrower cannot ask the loan lawyer for advice as the loan lawyer is acting for the banks.

If this is the case, then is it “fair or equitable” for the borrower to pay such legal fees when it is clear that the lawyer is actually acting for the banks? Obviously not. Hence, the bank should absorb the legal fees as the lawyers are clearly there to act for the bank and protect its interest.

Exorbitant fees for simple letters

The banking sector in Malaysia is a very tightly regulated industry. Any fees that banks intend to charge must be approved by Bank Negara. It is disheartening to note that borrowers continue to be charged exorbitant fees which seem to have the explicit blessings and consent of Bank Negara. Instances of borrowers being charged unreasonable fees for copies of redemption statement, EPF statement letter etc are common.

Allocation of monthly repayment to principal and interest

This is a story about three friends who took a housing loan (HL) of RM500,000 ten years ago. They were offered the same HL interest rate of 4.2% (base lending rate of 6.60% less 2.40%) but took different loan tenures as follows:

Albert took a 20-year HL. Eric took a 25-year HL and Jamie took a 30-year HL.

After servicing their monthly loan instalments diligently for the past 10 years, they decided to fully settle their housing loan using a combination of their EPF monies and own savings. When they asked for a redemption statement to find out what was the principal sum outstanding, they received a shock of their lives.

Albert, Eric and Jamie were under the impression as they had served 50%, 40% and 33.3% of the loan tenure, their principal sum outstanding would be RM250,000, RM300,0000 and RM333,333 respectively.

So, when their respective redemption statement showed that Albert, Eric and Jamie still owed respectively RM301,654, RM359,415 and RM396,652, they got a big shock.

So, why did they still owe so much more than what they had thought? The answer lies in the allocation of the monthly instalment towards covering the principal sum and interest charged by the bank.

In an equitable world, the monthly instalments would be allocated on a “straight line basis” to cover the principle and interest charged. Thus, a borrower who served 10 out of a 20-year HL would only owe 50% of the original loan amount.

However, the reality is that the borrower still owes 60.3% of the original loan amount.

The typical borrower will always be “penalised” for settling his loan before the maturity date. Even in the penultimate year of the original loan tenure, the actual amount outstanding is still higher than the theoretical amount, which should be the amount outstanding had the allocation of monthly instalments been done on a straight line basis.  

Is it fair and equitable?

Most borrowers do not know or even understand how this allocation is calculated. Is such an allocation “fair and equitable” to the borrower? Under such circumstances, are borrowers supposed to accept that the bank’s own generated computer system has calculated the interest correctly and allocated the payments in the correct manner?

To the borrower, they have paid 10 out of a 20-year loan, he should only owe balance 50% and not 60.3%. Is this manner of allocation not just another unjust way for the bank to generate higher profits, after all the bank did receive the payments on time and in full every month. It is the dream of every borrower to be debt-free as soon as possible and it is not fair to the borrower to be penalised in such a manner when he wants to settle his loan early.

That said, borrowers have no choice but to accept the calculation of the bank as correct and final. If the borrower were to reject and not pay the required sum, the loan will not be considered as repaid in full. The borrower could even be blacklisted and even have his property auctioned off by the bank to recover the remaining sum outstanding if the borrower refuses to pay up.

It would be more transparent and equitable if the monthly payments made by the borrower are allocated in a “straight line basis” to interest and principal equally over thetenure of the housing loan. Short of that, borrowers are at the mercy of banks.

Some banks operate like a “cartel” and standardise their fees to be charged to customers. One wonder whether such unfair practices are condoned by the regulators like Bank Negara.

It is also interesting to note that banks are exempted by the Malaysia Competition Commission allowing banks to agree and collude on unfair fees, penalties and practices to be charged to borrowers.

Unnecessary expenses

Loan agreement “printing charges” – sold between RM150 and RM350. The banks’ solicitors need to purchase a standard loan agreement from the bank (via soft copy) and adds the borrowers’ details in order to complete the loan agreement. The banks charge the lawyer and the lawyer charges the borrowers.

Standard loan agreements are now downloaded from the bank’s website or from soft copy. The bank no longer need to print them and should not charge for such documents. Alas, this has been continuing till to date. Lopsided terms and conditions

Lopsided terms and “add-on” products are aplenty, if the borrower wants to identify with them. It would be good practice to remove or qualify the banks’ arbitrary powers.

Conclusion

The National House Buyers Association (HBA) had on Sept 4, 2014 made representation to the Finance Ministry (MOF), Bank Negara. Housing and Local Government Ministry in the presence of Association of Banks Malaysia and Islamic Banks of Malaysia in the form of slides presentation on some observations and unethical practices of some banks.

HBA is looking to work closely with MOF, Bank Negar and all related stakeholders to level the playing field for housing loan borrowers in the long-term interest of the banking industry. We had proposed to set up a working committee to resolve all unfair practices. MOF and Bank Negara have a legitimate interest in the final shape of the banking industry into operating a principled and towards a “customer friendly arena”.


Buyers Beware By Chang Kim Loong

Chang Kim Loong is the honorary secretary-general of the national House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation manned purely by volunteers.

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Is the weakening Malysian ringgit a similar to 1997/98 crisis?

Economic troubles ahead but most don’t think it will be as bad as back then

We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed. Despite some portfolio outflows, we believe there is still sufficient liquidity in the market for some trading ideas

The weakening ringgit has caused anxiety. But is the economy in a similar situation to Malaysia’s worst ever crisis 16 years ago?

MANY Malaysians will still remember the Asian financial crisis of 1997/98. Nearly 20 years ago, the then crisis was responsible for the greatest capital market crash in the country and forced many structural changes we see today in the financial markets.

It was a time of great turmoil, with people losing their investments on a scale never seen since. Companies for years bankrolled on easy credit were leveraged to the hilt and crumbled under the weight of their debts as business evaporated and the cost of credit soared.

Shares traded on the stock exchange mirrored the scale of the troubles. The benchmark stock market index plunged from a high of 1,271 points in February 1997 to 262 on Sept 1, 1998. Words such as tailspin and panic were common in the financial section of newspapers and the chatter among market players as people scrambled to take action.

“More people are talking about it with the fall in the ringgit,” says a fund manager who experienced the difficult times in the late 1990s.

Triggering the crisis back then was the fall in the regional currencies, starting with the Thai baht. Speculators then zeroed in on other countries in Asia and Russia as the waves of attack on the currencies back then saw many central banks spending vast amount of foreign exchange reserves to defend their currencies.

Exhausting their reserves, those central banks requested for credit help from the International Monetary Fund to replenish their coffers.

Attacks on the ringgit and many other currencies in Asia sent the ringgit into freefall as the currency capitulated from a previously overvalued zone against the US dollar.

The ringgit dived into uncharted territory to around RM4.20 to the dollar before capital controls were imposed and the ringgit was pegged at RM3.80 to the dollar. The ensuing troubles were seen from the capital market to the property sector. Corporate Malaysia was swimming in red ink and huge drops in profit.

The shock from that period was different than what the country had seen in previous recessions. The last economic recession prior to that was caused by a collapse in global commodity prices and during that pre-industrialisation period before factories mushroomed throughout the major centres of the country, unemployment soared. Unemployment was not a major issue in 1997/98 like it was in the prior recession but the crunch on company earnings meant wage cuts and employment freezes.

With the drop in crude oil and now with the resurgence of the US economy, the flight of money from the capital market has began.

Deja vu?

Most would argue that no two shocks or crisis are the same. There is always a trigger that is different from before. From the Asian financial crisis, the world has seen the collapse of the dotcom boom which crushed demand for IT products and services. Then there was the severe acute respiratory syndrome (SARS) crisis and the global financial crisis in 2008/09. There were periods of intermittent volatility in between those periods but there was nothing in Malaysia to suggest trouble ahead.

Shades of 1998 though have emerged in this latest wave of turmoil but the situation now is not the same as it was back then.

“We don’t see a crisis brewing in emerging Asia. But that is not to say there aren’t risks. We believe those risks are going to be mitigated and managed,” says World Bank country director for South-East Asia, Ulrich Zachau.

The fall in crude oil prices, which has been the trigger for Malaysia, has sent the currencies of oil-producing countries lower, affecting their revenues and budgets. In South-East Asia, pressure has been telling on the ringgit and the Indonesian rupiah.

Reminiscent of the gloom and doom of 1997/98, the Indonesian rupiah tanked against the dollar to levels last seen during that period.

Intervention by the Indonesian central bank addressed the decline, but the situation is also different today then it was back nearly two decades ago.

“Bank Negara is still mopping up liquidity today,” says another fund manager who started work in Malaysia in the early 1990s.

Although liquidity is plentiful in Malaysia, money has been coming out of the stock market. Foreign selling has been pronounced this year and the wave of selling has seen more money flow out of the stock market this year than what was put in to buy stocks last year.

Equities is just an aspect of it as the bigger worry is in Government bonds where foreigners hold more than 40% of issued government debt.

“The fear is capital flight and people are looking to lock in their gains,” says the fund manager.

“The worry will start when people get irrational.”

Times are different

While the selling that is taking place in the capital markets is a concern, Malaysia of today is vastly different than it was during the 1997/98 period.

For one, corporates in Malaysia are not as leveraged as they were back then. Corporate debt-to-gross domestic product (GDP) ratio is below 100% but it was above 130% in 1998. Furthermore, corporate profits are still steady although general expectations have been missed in the last earnings season.

Secondly, fund managers point out that the banking system is in far better health today, better capitalised and seeing the average loan-to-deposit ratio below 100%. That loan-to-deposit ratio was much higher than 100% during the 1997/98 period and and as loans turned bad, the banks got into trouble.

“Fundamentally, we are much stronger now. That was not the case back then,” says a corporate lawyer.

“The worry though is on perception and denials that there is no trouble.”

The one big worry, though, is household debt. That ratio to GDP is crawling towards the 90% level while it was not even an issue back in 1997/98.

Sensitivity analysis by Bank Negara which looks at several adverse scenarios, such as a 40% decline in the stock market and bad loans from corporates and households shooting up, indicate that the banking system can withstand a major shock.

“The scenario-based solvency stress test for the period 2014 to 2016 incorporated simultaneous shocks on revenue, funding, credit, market and insurance risk exposures, taking into account a series of tail-risk events and downside risks to the global economic outlook.

“The simulated spillovers on the domestic economy were used to assess the compounding year-on-year impact on income and operating expenses, balance sheet growth and capitalisation of financial institutions, disregarding any loss mitigation responses by financial institutions or policy intervention by the authorities,” says Bank Negara in its Financial Stability and Payment Systems Report.

“Even under the adverse scenario, the post-shock aggregate TCR (total capital ratio) and CET1 (common equity tier 1) capital ratio of the banking system were sustained at 10% and 7% respectively, remaining above the minimum regulatory requirement under Basel III based on the phase-in arrangements which are consistent with the global timeline,” it says in the report.

Government finances and the current account

The line in the sand for Government finances seems to be at the US$60 per barrel level for crude oil prices. A number of economists feel the Government will miss its fiscal target of a 3% deficit next year should the price of crude oil drop below that level.

With oil and gas being such a big component of the economy than what it was in 1997/98, the drop in the price of crude oil could also spell trouble for the current account and cause a deficit in the trade account.

Those concerns have been highlighted by local economists and yesterday, Fitch Ratings echoed that worry.

“Cheaper oil is positive for the terms of trade of most major Asian economies. But for Malaysia, which is the only net oil exporter among Fitch-rated emerging Asian sovereigns, the fall increases the risk of missing fiscal targets.

“The risk of a twin fiscal and external deficit, which could spark greater volatility in capital flows, has increased. Malaysia’s deep local capital markets have a downside in that they leave the country exposed to shifts in investor risk appetite. Malaysia’s foreign reserves dropped 6.8% between end-2013 and end-November 2014, the biggest decline in Fitch-rated emerging Asia,” it says in a statement yesterday.

Despite the softness in the property market and corporates getting worried about their profits, the general feeling is that Malaysia will not see a repeat of 1997/98. The drop in the ringgit and revenue for crude oil will mean a period of adjustment but the cheaper ringgit will make exports more competitive.

The difference between then and now

The ringgit vs the dollar ...

The ringgit’s steep decline against the dollar has made it one of the worst performing currencies of late. That decline, although steep and having caught the attention of the central bank, is more down to the link with the decline in crude oil than structural issues to be worried about.

Capital ratios of banks ...

Banks today are far better capitalised then they were during the 1997/98 crisis, which forced the local banking industry to consolidate for their own good. Stress tests by the central bank suggests then even under adverse conditions, banks in Malaysia wil be able to withstand the shock associated with it.

Loans-to-deposit ratio ...

The ratio of loans against the deposit of banks have been rising but it is no where at the level before the Asian financial crisis in 1997/98. Banks too are aware of making sure it does not cross 100% and the development of the bond market means leverage risk has been diversified from the banking sector.

Businesses not as leveraged ...

One of the reasons corporate Malaysia was in trouble in 1997/98 was down to its leverage, or debt levels. Today. corporates are not as geared as they were back then and although that level is rising, their financial position and better cash balances and generation means they are able to better withstand a shock to the economy.

Household debt to GDP ...

This is the biggest worry. As households are leveraged despite the financial assets backing it, that means any economic weakness or shock will affect the ability to service loans taken to buy those assets. As consumer demand has been a big driver to the economy, any changes the affects the ability of consumers to continue spending will impact on economy growth and have an impact on non-performing loans in the banking sector.

Dropping current account surplus ...

The decline in the current account surplus means that the domestic economy has been growing strongly. There were concerns earlier and the prioritisation of projects was able to smoothen imports to ensure a positive balance of trade. The drop in crude oil prices could mean a deficit in the current account in the first quarter of next year but the weaker ringgit should translate to better exports and a better current account balance thereafter.

By JAGDEV SINGH SIDHU Starbizweek

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• Managing the downside risk of low oil prices is crucial for Malaysia, says World Bank

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