Friday, March 21, 2008

US financial crisis - Get ready for a bumpier ride this year

We better steel-lock ourselves and our savings to face another worldwide economic meltdown.

WHILE all of us had our eyes on the general election for the past 30-odd days and the after effects of the shocking results, there was another more important event playing out on the other side of the world.

As I have been working every day since Feb 11 and getting home 1am daily, watching the telly had been my way of winding down.

At that hour, the best thing to watch are the financial channels like CNBC and Bloomberg on Astro.

Tracking the US economy, the decline of the dollar and the rising price of oil became a form of distraction from the campaigning, politicking and accusations going on then.

Just two days before polling day, oil prices went past the US$111 per barrel and the US dollar fell below the 100-yen mark. On top of that gold prices reached US$1,000 per ounce. All were record highs.

It was as if the moon, stars and planets were lined up. It seemed that disaster was beckoning on a global scale.

In 1997, the hedge funds and currency speculators caused the Asian financial crisis and 11 years on, the same financial wizards have caused the US economy to go into a tailspin.

Their speculative bets against the Asian currencies then, caused a crash in all the financial markets in our region.This time they bet on the great American financial institutions and lost.

Asian companies had to come to the rescue of several financial institutions by buying stakes into huge global firms but their investments may not see any returns for a long time.

Among the major investments were:
> State-owned China Investment Corp invested US$3bil (RM9.53bil) last May for a 9% stake of Blackstone Group LP, the world’s biggest buyout fund but its investment value has already shrunk to less than 50%.

> The same Chinese firm spent US$5bil (RM15.89bil) on Morgan Stanley and the shares has lost 30% of its value.

> Government of Singapore Investment Corp and a Middle East investor paid over US$11bil (RM34.96bil) for a stake in the Swiss-based UBS and the stock has fallen 57% since Dec 10.

The Federal Reserve has repeatedly cut interest rates in the United States since December and the latest was a reduction of 75 basis points on Tuesday.
The Fed (as the US central bank is called) is trying to kick-start the stalling economy hoping this will contain damage to the economy and financial system from housing troubles and a credit crisis.

Yes, the stock markets around the world reacted positively to the latest move but listening to many financial commentators, I think that the rebound will be temporary.
The financial turmoil, which I dub the American Financial Crisis (as opposed to the Asian one in 1997), started late last year with the sub-prime (risky) mortgage crisis outbreak.

Speculators lost confidence in investing their money in banks that were lending to people, who technically did not qualify for such big loans, to buy property at a higher interest rate. The banks in turn recalled these loans thus starting a crisis that has led us to where we are today.

All signs are there that the contingent effect is spreading across the world and no country will be spared just like the one 11 years ago.

The collapse of financial supermarket Bear Stearns last weekend was another nail in the world’s economic coffin. A company whose share traded at US$30 per share on a Friday was sold the following Monday for US$2.

It had over US$30bil (RM95.34bil) in cash and assets and yet the 82-year-old Bear Stearns was sold to JP Morgan for only for US$236mil (RM750mil).

There are numerous reasons for the crisis but it is suffice to say that the speculation put paid to the world’s economy. The same speculators lost confidence in what they were doing and sold out thus causing this mess.

It is truly a global crisis, and although not officially called so, the United States is in recession.

But what does it mean for us in Malaysia?

Immediately? Nothing actually. For one thing, the ringgit has appreciated quite a bit against the US dollar and this means that if you are going to the US, you will have more money to spend.

If you got kids studying in the United States then quickly pay the tuition fees now and save a whole load of ringgit.

But our joy will be short-lived. Our exports to the United States (our number one trading partner) will get more expensive and Americans, who already have less in the pockets, will soon shun our goods.

This, of course, means our factories in Penang, Perak and Selangor will have to cut their production and people will eventually lose their jobs if the trend does not change.

Will the huge Chinese market come to our rescue? If the Americans stay in trouble, the Chinese factories will also be in trouble for the same reasons.
The contingent effect will hit us. Malaysia, as the world’s number 24th trading nation, will not and cannot be spared.

This brings me to the point about keeping one eye on the election and the other on the collapsing world economy – whatever that was promised in the manifestos by ALL political parties will not be fulfilled because it is not economically possible.

>PKR will not be able to cut petrol prices because oil prices have climbed higher than Petronas’ profits of last year;

>PAS’ welfare state programme will also be thwarted because unemployment will climb and there will not be enough money to offer help to everyone;

>The DAP’s bonus of RM6,000 per family with an annual income of less than RM6,000 will also not be possible because of Petronas’ problems; and

> The Barisan Nasional will be hard pressed to keep its promises of continued development because the cost of maintaining the subsidies will become too exorbitant. Their total subsidies are about RM81bil if oil prices stayed at US$100 per barrel. There will be no money left for development.

So for us ordinary citizens – get ready for a bumpier ride this year -By WON SAI WAN

This was reported before Election 2008 Makes me wonder whether these reports are written for the Election 2008.
Prime Minister Datuk Seri Abdullah Ahmad Badawi:-

The government's dedicated efforts in eradicating poverty has borne results whereby the per capita income has grown from RM790 in 1957 to RM20,840 in 2006, a whopping 26-fold increase. The poverty rate too has been reduced. In 1957, about 50 percent of the population lived below the poverty line but now they only represent 6 percent. The sustained average growth rate of 6 percent, a surplus in the balance of payment for the last nine years and a savings rate of 37 percent of the Gross Domestic Product will certainly help propel Malaysia to greater heights.


Of late all the economic indicators for the nation's state of economy point to a sterling performance. On Jan 12, 2008, the Kuala Lumpur Composite Index surpassed the 1,500 psychological barrier to finish at 1,516.22 points, the highest since Bursa Saham Kuala Lumpur's inception in 1986. The value of ringgit also recorded a 10-year high with the exchange rate at RM3.33 to an American Dollar. The total trade volume surpassed RM1 trillion in 2006, with the RM1.069 trillion figure being the highest recorded in the nation's trading history representing an increase of 10.5 percent compared to the previous year.

The Foreign Direct Investment (FDI) increased to RM20.2 billion in 2006 while the domestic investment increased to RM28.8 billion. From this total, the manufacturing sector is the biggest benefactor with RM18.5 billion of the total chandelled into the sector. Foreign and local firms are expanding and diversifying their operations in Malaysia that in turn provided more employment opportunities for locals. On the commodity side, the price of crude palm oil surpassed RM3,000 per tonne in late 2007 due to high demand and this provided big returns for the palm oil industry and smallholders. Malaysia's export too is on the rise with the export of electrical goods providing returns worth RM281 billion in 2006. The export of agriculture, mineral, petroleum and others showed also pointed towards an upward trend. The value of Malaysia's capital market also breached the RM1 trillion mark. The nation's capital market is the among the biggest and the most active in Southeast Asia. All these speak favourably on the international financial community's confidence on Malaysia's economy.


More than four million new employment opportunities will be made available for the people throughout the nation through the development of growth corridors with each of the corridors providing between 1 and 2 million new employment opportunities. Malaysia now has five development corridors; the Iskandar Development Region, the Northern Corridor Economic Region (NCER), the East Coast Economic Region (ECER), the Sabah Development Corridor and the Sarawak Corridor of Renewable Energy (SCORE). Though it was a tough road for Malaysian companies in making inroads into the international markets, yet their resilience and the backing of the government has helped them in many ways.

Malaysia is also blessed in that it is rich in natural resources -- tin and rubber were the main sources of revenue on gaining independence. Then came palm oil, which continues to fetch record prices today. Oil and gas were discovered, further fuelling economic development. These resources have been well managed, unlike in some countries where the earnings from resources are not channelled to benefit the population, who remain poor and destitute amid plenty.

To be sure, availability of resources alone does not ensure economic development that benefits a country's people. There are numerous examples around the world of resource-rich countries that are very low in economic development and whose populations continue to live in abject poverty What makes a difference is the administration and pragmatic policies of the government of the day.

In this respect, Malaysia clearly stands out. The domestic policies designed to cater to the needs of the population have yielded results. Malaysia's achievements and progress are admired by many in the developed world and envied by others. The country has registered GDP growth exceeding five per cent for six consecutive years, and is on track to record another healthy growth rate of 6-6.5 per cent this year. Per capita income rose to RM22,345 last year -- and this has been achieved with a growing population and a stable interest-rate regime. Employment opportunities abound with unemployment at 3.1 per cent -- technically "full employment".

The country is host to some two million foreign workers, accounting for some 20 per cent of the labour force. And foreign direct investment into Malaysia jumped 69 per cent to RM13.7 billion last year. The capital market, with increased capitalisation and a wider range of companies listed on Bursa Malaysia, offers investors a wide choice of investment opportunities. New investment opportunities are available in Islamic finance -- Malaysia is a world leader in a number of these products. The banking and financial sector is healthy and strong, having recovered from the financial crisis of 1997-1998.

The public sector companies, the GLCs, have been reformed and have performed well, adding to Malaysia's attractiveness as an investment centre. The government has kept its finger on the pulse and an eye on external developments, adapted the policies and adopted new approaches to cushion the domestic economy. The government has instituted reforms and is targeting development around the country. The launch of the five economic corridors -- the Iskandar Development Region, Northern Corridor Economic Region, East Coast Economic Region, Sabah Development Corridor and Sarawak Corridor of Renewable Energy -- aim to boost economic activity in their areas by wooing investment from the domestic and foreign sectors.

Each corridor has a different focus depending on local needs and the availability of resources in the region. It is a means of focusing on the specific needs of the people in each region and yielding maximum benefits, or providing the "biggest bang for the buck". These corridors will help provide impetus to the local economy and help cushion the Malaysian economy from external shocks. The need for the private sector and domestic consumption to blunt the impact of external shocks has been stressed by the government. The government on its part has provided incentives to assist the private sector.

Even so, there are many who continue to complain. At the end of the day, it is important to note that they are able to go home and sleep with a roof over their head and food in their stomachs. Millions in other developing and developed countries are not that fortunate and do not have the same assurance. They do not know when and from where their next meal will come.

After a slow US$6.1 billion total investment in 2006, Malaysia chalked up US$9.4 billion in FDI last year. China and Hong Kong remained the two largest recipients in the region with US$67.3 billion and US$54.4 billion respectively, although the former’s share dropped 3.1 percent from the previous year while India lies third with US$15.3 billion. Singapore continued to be the biggest FDI receiver in Southeast Asia with a 52.6 percent growth, increasing its share from US$24.2 billion in 2006 to US$36.9 billion last year, followed by Thailand with US$10 billion while Indonesia received US$5.9 billion.

The financial and credit crisis that began in the latter half of 2007 has not affected the overall volume of FDI inflow, according to Unctad economists. Even with a slowdown of the economy in the United States, the depreciation of the US dollar may have helped to maintain high levels of FDI flow into the country, in particular from countries with appreciating currencies, such as Europe and developing Asia,” said the report. FDI flow to developed countries in 2007 grew for the fourth consecutive year, reaching US$1 trillion, with the flow particularly buoyant in Britain (US$171.1 billion), France (US$123.3 billion) and Holland (US$104.2 billion).

The US maintained its position as the largest single FDI recipient with a total of US$192.9 billion while the European Union (EU) as a whole continued to be the largest host region, attracting almost 40 percent of total FDI inflows in 2007. In Africa, FDI inflow in 2007 remained relatively strong, touching an unprecedented level of US$36 billion while inflows to Latin America and the Caribbean rose by 50 percent to a record level of US$126 billion.

In West Asia, overall FDI inflow declined by 12 percent. Turkey and oil-rich Gulf States continued to attract the most, but geopolitical uncertainty in parts of the region affected FDI overall. “High and volatile commodities prices may cause inflationary pressures, and a tightening of financial market conditions cannot be excluded. The increasing probability of a recession in the US and uncertainties about global repercussions if it occurs may lead to a more cautious attitude by investors,” it said. “At the same time, continuing global external imbalances, sharp exchange rate fluctuations, rising interest rates, and increasing inflationary pressures, as well as high and volatile commodity prices, pose risks that may have a chilling effect on global FDI flows,”

Based on reports by International Trade and Industry , Malaysia was second in the Asean FDI ranking, after Singapore. Last year, Singapore recorded 30.7 billion ringgit (Bt312 billion) in FDI, followed by Malaysia at 20.2 billion ringgit, Thailand at 11.4 billion ringgit and Indonesia at 4.7 billion ringgit. (US-based chip-maker Intel's has decided to set up a plant in Vietnam to reduce cost) .Last year, Malaysia ranked 23rd among 61 countries in "The World Competitiveness Book 2006", an improvement from its 28th placing in 2005.