Monday, May 26, 2008

Smelling More Blood - 23 May 2008

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The sell-offs in the bond market continued as crude oil kept hitting another record high. News on the government’s fuel subsidy arrangement to reduce the subsidy bill spooked the market and players were seen reducing their position in anticipation of higher inflation for the year. Although MYR recovered from last week’s sell-offs, offshore activities were confined to the short term bills market and failed to damper the bearish sentiment in the bond market.

Out in the news, CPI inflation jumped to 3.0% in April, up from the 2.8% in February and in line with consensus estimates. This was the fastest increase in 14 months and largely reflects the higher food and energy prices. Although the year-to-date average inflation of 2.7% is still within Bank Negara’s forecast range of 2.5-3.0%, the Domestic and Trade Minister commented that the Government may have to revise its CPI forecast for the year in line with the rising global prices. With global food prices likely to stay elevated in the near term, we expect headline inflation to stay above the 3% mark over the next 3-4 months.

Government Securities

Despite the holiday shortened week, trading volume in the MGS market increased to RM727 million compared to RM692 million registered last week. Higher inflation outlook drove the trading sentiment and yields were generally higher across the benchmarks. The 3-year MN09/11 saw some buying activities at the start of the week in tandem with stronger MYR. The stock was bought to the low of 3.47% before Friday’s sell-offs pushed the closing yield higher to 3.53%. Details of the re-opening of the current 5-year benchmark, MJ07/13 were announced on Friday. The When Issued for the RM3.5 billion issue was sold to the high of 3.70% before easing at 3.68%, 12bps higher than last week’s level. The 10-year MS02/18 closed 12bps higher to 3.95% in heavy trade.

In terms of sovereign spreads, the 3/5s widened by 10bps to 15bps. The 5/10s remained unchanged at 27bps while the 10/20s narrowed by 13bps to 32bps.

The Week Ahead

Focus this week will be on the outcome of the MPC meeting. With inflation presently largely supply side driven, and with downside growth risks in the horizon, we expect Bank Negara will keep policy rates unchanged. However, should stronger evidence of demand side or wage-push inflation pressure start to emerge, or if growth surprises on the upside, a rate hike later in the year cannot be ruled out completely.

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Thursday, May 22, 2008

Anwar Speech at CLSA Forum

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Keynote address by Anwar Ibrahim on 20th May 2008 at the CLSA Corporate Access Forum in Singapore, a high-profile gathering of corporate decision makers of the region's most interesting companies and investment bodies.

Ladies and Gentleman.
On the eighth of March, with fortitude and conviction the people of Malaysia sent a clear message to the powers that be they would not continue to tolerate a corrupt and incompetent government. With resoluteness hitherto unseen they voted the Barisan Nasional out of office in four states and terminated their stranglehold two-third majority in Parliament. In the final toll, the Pakatan Rakyat, that is, the People's Alliance, now controls five states accounting for about 60% of the nation's GDP. Additionally, the Federal Territory of Kuala Lumpur is almost entirely represented by Pakatan representatives in Parliament. After being in power for five decades, the Barisan Nasional meanwhile is still in comatose under this knockout defeat while its dominant and dominating anchor party Umno is in utter turmoil.

In this defining moment of Malaysia's history, the courage and singularity of purpose of the people has been extraordinary. Having suffered the slings and arrows of an outrageous regime that had become very cozy with the culture of corruption, wastage and misuse of power, the people marched headlong into the battlefield and took the bull by the horns. To my mind, the eighth of March, 2008 is the metaphor for the birth of a new era where the mill stone of race and religion which had been our burden to bear for the last fifty years has finally been shattered. With one stroke of the mighty pen, notwithstanding the overwhelming forces of electoral fraud and collusion of the organs of state, the people transformed the political landscape of the nation.

This will be a new chapter indeed for Malaysia indeed as it was for Indonesia not too long ago when the waves of reformasi swept the country taking it out of dictatorship to democracy. In a way, it was also for Myanmar though tragically the iron hand of military oppression proved far stronger than the earnest cries for justice and liberty. A New Economic Agenda has been crafted borne of a long-term strategic vision to develop Malaysia into a prosperous and dynamic society competitive not just in the region, but in the world. We are not talking about knee-jerk reactions or strategies calculated to gain political mileage. This Agenda is a comprehensive programme that we earnestly believe is sustainable in the long run.

According to a recent survey, young Malaysians are now open to more multi-racial socio-economic policies as opposed to race-based ones. The general consensus is that affirmative action should be given to the poor and the marginalised regardless of race or religion. Notions of social dominance and racial superiority find no resonance among the people except for those diehards still bigoted over ancient and archaic forms of political ideology.

That is why our New Agenda is not purely economic. Its viability depends very much on observing the principles of democracy, socio-economic justice, equal economic opportunities and religious freedom. There is no contradiction in talking about affirmative action while waving the banner of equal opportunity because a level playing field can never be level unless and until the poor and the marginalised are taken out of the vicious cycle. The broadest platform that forms the bedrock of this New Malaysian Agenda rests on policies formulated to bring maximum benefit to the people across as broad a spectrum as possible in order to uplift the living standards of the ordinary Malaysian.

Ostentatious projects will be shelved. Public expenditure will be focused on infrastructure such as transportation, health and education. There is no doubt that we will be pro-business but the New Agenda will redress the social inequities unleashed by the forces of the free market. Rent-seeking activities, for example, must be kept at bay. Predatory marketing will be outlawed. A more comprehensive regulatory structure will be crafted with the bulk of the input from people actually in the business. All this may raise the alarm that this is populist agenda which encroaches upon free market principles. On the contrary, the New Agenda aims at taking Malaysia to the status of a developed nation that is built on the people's trust with accountability, transparency and good governance.

Let us first of all answer the question: What is Malaysia's status today? We hear for example politicians talking about how rich Malaysia is compared to some of her neighbours and how we have recovered so well since the Asian financial crisis of 1997. The truth, however, says otherwise: South Korea and Taiwan were much poorer than us in the 1970s but today their per capita income is US$19,200 and US$15,270 respectively. Our per capita income is only US$6,240. And we haven't begun to talk about Singapore, a city-state of four million inhabitants. At US$30,810, it is five times that of Malaysia's. The enormous difference becomes all the more glaring if we consider that just 30 years ago, Malaysia was neck-and-neck with Singapore. If we analyse deeper we will realise how even more troubling the numbers are. The per capita income scenario paints only a partial picture. What we don't see is the gross inequality in income distribution. In 2005, Malaysia registered the most glaring GINI coefficient in Southeast Asia, worse than Indonesia and Thailand. As you know, being the most effective measure of income disparity, at 0.47, Malaysia was number two in Asia losing only to Papua New Guinea.

This is a devastating indictment of the failure of the New Economic Policy, crafted almost four decades ago. In the area of the urban-rural gap, this policy has also been a complete fiasco. In 1999, income in rural homes was 55% that of urban homes with the highest poverty in mostly Bumiputera majority states such as Kelantan, Terengganu, Kedah, Perlis, Sabah and Sarawak. Of course there has been some development in the country but we do not see anything impressive in the numbers unless we still want to compare ourselves with African countries.

Incidentally, Malaysia's poverty reduction statistics are unreliable because our base rate is unrealistic. By far the most damning case against the NEP is that it has been hijacked by the ruling elite to satisfy their lust for wealth and power. No doubt this was a multi-racial rip-off of the most systematic kind: the leaders of the component parties of the ruling coalition working hand in glove with Umno to deprive the deserving Malays, Chinese, Indians, Ibans and Kadazans of the benefits that were to be derived from the NEP.

Tender procedures, transparency and independent evaluation in privatisation issues, equity distribution, all these were swept aside in the name of the NEP on the sacred ground that this was all for the benefit of the Bumiputeras. But the numbers stack hard against the hype. Just compare the money spent on scholarships with say the tens of billions expropriated by the select few in equity awards, Approved Permits, contracts to companies controlled by families and cronies, and the billions in profit reaped on account of privatisation projects and schemes.

There is also a high economic cost to this gross abuse of the policy. The people have to pay higher costs for energy, water, highway tolls. The people's protest falls on deaf ears. The decline in FDI as well as private domestic investment is serious. This collapse has led to serious underperforming by Malaysia in the region. India in the last five years saw its investment/GDP ratio rise from 22% to 34% and Brazil's ratio shot up from 15% to 27%. Malaysia's ratio, on the other hand, plunged to 9% last year from 30% in 1996. In terms of FDI over GDP, Malaysia plummeted from 8% to 4% for the same period. This is one of the steepest declines anywhere in the world.

What these numbers signify is the plunge in the level of competitiveness and the degree of profitability of companies and there is no reason to imagine things will improve for the better barring a drastic change in circumstances. As a matter of fact, for the World Competitiveness Index for 2007/08, Malaysia dropped two notches from last year's standing.

Yet the authorities are touting Malaysia's so-called impressive current account surplus which increased from 8% in 2002 to 14% in 2007. But what it means really is that investments have fallen and hence a decline in the import of capital goods. Even Malaysia's growth rates for the last five years will show that private consumption is the main driver for the increase. What has not been highlighted, however, is the fact that our economic growth is essentially fuelled by borrowings to such an extent that individual indebtedness is now the highest in the region.

Just last year, I spoke about the lessons of the 1997 Asian financial crisis. Once again, the question is: have the Malaysian authorities learned anything? Malaysia lags behind other emerging economies in spite of a diversified economy with commodities and manufacturing and a relatively good physical infrastructure. Our competitiveness suffers because of the failure to develop and keep innovative human capital. Our brain drain problem is legendary. This reflects foundational weaknesses in our educational infrastructure as well as a policy of mismanaging the vast human resources. The traditional mindset of bolstering the manufacturing sector as a key driver for economic growth must also be changed in an age where information and knowledge provide the bedrock for growth and competitiveness.

We suffer also because of the high cost of doing business, a cost which is reflective of the failure to observe the basic standards of good governance and to fulfill the demands of accountability. At the end of the day, these principles will continue to be compromised when those who hold the trust of the people succumb to the temptations of power and fall victim to the cancer of corruption.

The report of the Royal Commission of Inquiry into the V.K. Lingam scandal has fully vindicated our earnest efforts to expose the corruption that has beset the highest institutions of power. The Malaysian judiciary once touted as one of the best in the world has been severely compromised. Judge fixing, ghost written judgments, horse trading in judicial appointments, these are the symptoms of a judiciary ravaged by executive influence and interference and corruption by the rich and the powerful.

We cannot overemphasise the importance of an independent and competent judiciary to realise the objectives of the New Agenda because bereft of such an institution, the rule of law itself hangs in the balance. When justice can be bought and sold, the economic implications are extremely far reaching. Foreign investors want impartial and fair hearings in trade and commercial disputes. The fact that most international contracts executed in the region choose Hong Kong or Singapore rather than Kuala Lumpur as the forum for arbitration speaks volumes about the level of confidence of the international business community
in Malaysia's judiciary.

From one corridor to another, with pledges of billions of ringgit to be poured into infrastructure and other projects, the Federal government is still trying to foist on the people undertakings of such a gargantuan scale that make the mega projects of the previous administration look rather tame. This lavishness in spending is symptomatic of the Barisan's conventional responses to the economic woes of the nation. They have given supply-side economics a new meaning, predicated on the assumption that the supply of money has no limits. History has already shown what dire consequences such a philosophy can bring. Forged on the anvil of greed and self-interest, these projects can only see the light of day if and only if the main beneficiaries are cronies, family members and conglomerates connected with the ruling elite.

Hence, projects which were in the pipeline before the elections suddenly become unviable now that they would be in the States governed by the Pakatan. Perhaps this is the silver lining to the clouds that hang over the Pakatan-controlled states because we want no part in the plundering of the people's wealth by the Umno-controlled Federal government. They must be held accountable. In spite of these concerns we will honour commitments already made, excepting for gross abuse and corruption, and will seek new ways of engaging with the international investor community under the principle of responsible competitiveness that would encompass conservation, sustainability and fair labour practices.

The New Economic Agenda recognises the multi-ethnic composition of Malaysia and therefore is fortified with a policy to foster and nurture a plural and tolerant society. After all, that was the catalyst for the formation of our nation pursuant to a social contract to build a nation that is harmonious, just and fair. That cannot be realised without a New Agenda relevant and just to all. The Bumiputera community is ready for this change because it will continue to be firmly grounded on affirmative action to help the poor and the marginalised. The fear that such an agenda will erode the rights of the Bumiputera is but the consequence of the racist chanting of some Umno leaders who will stand to be the biggest losers in the new agenda. So, fearing the prospect of their corrupt sources of income being reduced if not altogether eliminated they resort to stoking the fires of racist sentiments through the mainstream media controlled by them.

Our policy is simple and straightforward enough. We do not intend to do away with the affirmative action principles outlined in the NEP, but we will apply them across the board making them available for all races on a needs basis.

The question is: Should we condone the abuses of a policy which make the rich richer and the poor poorer or should we not support a policy that provides equitable assistance to all needy Malaysians? Again, to the detractors who will continue to distort the new agenda as an anti-Bumiputera policy, let me reiterate that the interests of the Bumiputeras will never be compromised because we are committed to building a new system that is just and fair. In this new order, no one will be left behind on account of race or religion. Unlike the current scheme of things, the New Agenda will put in place mechanisms to ensure that economic aid goes to those who most need it.

For example, small traders who form the bulk of the Bumiputera community in business enterprises will therefore be better off than they ever were under the NEP. Certain detractors have pointed out the road to a more deregulated free market economy will lead to the abandonment of social instruments. We would answer this by saying that we have no intention of abandoning of our electoral promises among which is the promotion of social justice.

We advocate no doubt Hayekian free enterprise but we don't think Adam Smith's invisible hand will be that responsive to the changing times. Hence, whenever necessary, to paraphrase John Kenneth Galbraith, we temper free market with an appropriate dose of state intervention to rectify the social inequities attendant on the interplay of pure market forces. We don't think that we need to apologise for advocating a policy on fuel, health care and education which is calculated to ease the burden of the rising cost of living. We call this humane economics. Bearing in mind our diagnosis of the Malaysian economy and the state of our nation, the New Agenda will set in place the drivers that will take the country out of the doldrums to greater heights.

In other words, measures will be in place to ensure that private investment as well as FDI will return with a vengeance. The conditions precedent for Malaysia to regain its status as an attractive destination for investors must include the rule of law, a regulatory framework, and incentives to develop our human capital. At the same time, with the implementation of more prudent macroeconomic management, growth will be stimulated without getting out of hand.

The State economies under the control of Pakatan Rakyat will become more robust and vibrant. In spite of the efforts of the Federal government to derail development projects, we are confident that these state economies will be able to forge ahead. The SMEs too will benefit from a policy that recognises the role that they play in an economy that will be increasingly more globalised. Take care of the head and the tail will take care of itself. With transparency and accountability in place, cronyism and corruption will die a natural death thus immediately lowering transaction costs while enhancing improvements in service delivery.

If I may conclude with an apology to Shakespeare: Now is the winter of our discontent made glorious summer by the sun of Pakatan's New Economic Agenda. Victory lies in courage and conviction to replace the old with the new, the obsolete with the functional. Without this paradigm change, Malaysia will be adrift in an ocean of uncertainty at the risk of being marooned on the island of oblivion. We must take the current when it serves or forever lose our venture.

Thank you.

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Monday, May 19, 2008

Smelling The Blood - 16 May 2008

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The bond market was under heavy selling pressure throughout last week as offshore investors were seen liquidating their position in tandem with weaker MYR. The bearish sentiment was also underpinned by the heightened concerns over the local inflation outlook in view of the spiraling food prices. Standard and Poor’s Rating Services revised its outlook on Malaysia’s foreign currency sovereign credit rating on Thursday to stable from positive. The revision reflects the uncertainty brought about the drastic change to the political landscape after the recent general election. The market recovered slightly on Friday as local players took cue from the overnight rally in US Treasuries. However, in the absence of any offshore presence, we expect the recovery to be short-lived as inflation risk will continue to drive market sentiment.

Out in the news, industrial production moderated in March, gaining 3%yoy, down from a revised 6.5% in February but lower than consensus estimates (+4.2%). The slowdown in production numbers came on the back of weaker than expected March exports, which more than halved to 5.3% in March, from over 14% in February.

Government Securities

Trading volume in the MGS market dropped to RM692 million compared to RM1.1 billion registered last week. The short end of the curve was under heavy selling pressure as USD/MYR surged to high of 3.2770 on Thursday. The short dated MN04/10 was the hardest hit, rising 15bps to 3.53% in heavy trade. The sell-offs also spilled over to the other part of the curves. The 3-year MN09/11 was traded to a high of 3.54% before some late buying by local institutions saw the stock recovered to 3.51%, still 5bps higher than last week’s closing level. The soon to be re-opened 5-year MJ07/13 rose 6bps to 3.56%. The longer end of the curve was lightly traded as players turned cautious towards the local inflation outlook. The 10-year MS02/18 closed 4bps higher to 3.83% while the 20-year MX05/27 remained unchanged at 4.28%. In the bills market, the weaker MYR saw the bills across all tenors surpassed the 3.50% level.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 4bps. The 5/10s widened by 3bps to 29bps whilst the 10/20s added 2bps to 49bps

The Week Ahead

The movement in spot USD/MYR will continue to influence trading sentiment at the short end of the curve. The market will be focusing on April CPI data to be released this Wednesday. We expect the longer end of the curve to be traded sideways ahead of the CPI numbers and the MPC meeting to be held next week.

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Monday, May 12, 2008

Bond Market Weekly Commentary - 09 May 2008

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Not much activity was seen at the start of the week as players continued to stay sideline in the absence of any firm conviction on future direction of interest rates. Trading interest slowly picked up during the middle of the week, much due to the buying interest in bills and short dated securities by the offshore investors. Sentiment however changed dramatically on Thursday as USD/MYR was aggressively bought to a high of 3.2350, leading to some unwinding of bond position by the offshore players. The short end of the curve was the hardest hit, with rates on the bills rose up to 15bps higher. The market ended with some technical recovery from the sell offs but volume remained thin, signifying the uncertain outlook to the market.

Exports disappointed in March, following a surprisingly strong performance in the first two months of the year. March export growth came in at 5.3%, significantly lower than market expectations of 10.2%. Import growth slowed sharply to 2.6% from 10.9% in December, disappointing market expectations for 6% growth. Although domestic demand likely remained resilient, the moderation in imports likely reflected a slowdown in imports of intermediate goods used in the production of exports. Given the slowdown in exports and stronger imports, the trade balance shrank to RM7.98bn from RM9.17bn in February. While 1Q08 GDP growth will likely be sustained at above 6% given strong performance in January and February, a slowdown in real GDP growth to below 6% is likely to happen in 2Q08 onwards

Government Securities

Trading volume in the MGS market improved to RM1.1 billion compared to RM724 million registered last week. Activities were confined to the short end of the curve with focus primarily on the 2010-2011 maturities. Offshore interest on the 3-year MN09/11 was apparent at the beginning of the week. The stock was bought to a low of 3.44% before Thursday’s sell-off saw it traded to a 4-month high of 3.50%. Week-on-week, the stock closed unchanged at 3.46%. Muted reaction to the move in FX at the longer end of the curve but dealing prices were skewed lower. The 5-year MJ07/13 closed 3bps lower to 3.50% on the back of some short covering activities while the 10-year MS02/18 was thinly traded and closed unchanged at 3.79%. The 20-year MX05/27 inched 2 bps higher to 4.28%. In the bills market, the weaker MYR saw the 3-month bills traded to a high of 3.46% before late buying interest on Friday pushed the closing level to 3.39%.

In terms of sovereign spreads, the 3/5s narrowed by 3bps to 4bps. The 5/10s widened by 3bps to 29bps whilst the 10/20s added 2bps to 49bps

The Week Ahead

Trading at the short end of the curve will be closely aligned against the spot movement in USD/MYR.
Players will trade cautiously on the longer sector of the yield curve in view of the growing concerns over rising regional inflation.

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Sunday, May 04, 2008

Bond Market Weekly Commentary - 02 May 2008

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Activities in the bond market were lackluster last week as players stayed sideline ahead of the MPC and FOMC meeting. The holiday shortened week also contributed to the lack of volume in the market. As expected, the Fed lowered the FFR by 25bps to 2.00%. The accompanying statement however mentioned the risk of recession is gradually reducing, thus signaling the end to the rate cuts. Overall the local bond market was traded in a tight range in the absence of any fresh leads to the market. Offshore support on the bills market seemed to dwindle in tandem with weaker MYR last week.

The Central Bank decided to leave the Overnight Policy Rate (OPR) unchanged at 3.50% for the 16th consecutive meeting. The Monetary Policy Statement (MPS) was slightly hawkish towards the upside risks to local inflation due to the impact of global price increases. Muted reaction from the market but it was interesting to note that the local bond market remained well supported although the rest of Asian rates have risen for the past 3 weeks.

Government Securities

The MGS market was relatively quiet as trading volume dropped to RM724 million compared to RM2.1 billion registered last week. A rather flat week saw focused was still on the 3-year benchmark M09/11. The stock closed 3bps lower to 3.46%. Only a single lot was traded on the 5-year MJ07/13 where it closed 1bp higher to 3.53%. Likewise, the 10-year MS02/18 and 20-year MX05/27 also received poor attention last week. The 10-year remained unchanged at 3.79% while the 20-year closed 1bp higher to 4.26%. In the bills market, the weaker MYR saw the bills closed much higher last week. The 3-month and 6-month bills were last traded at 3.35% and 3.34% respectively.

In terms of sovereign spreads, the 3/5s widened by 4bps to 7bps. The 5/10s narrowed by 1bp to 26bps whilst the 10/20s added 1bp to 47bps

The Week Ahead

In the absence of any major economic data, we expect the market to be range traded this week. Trading will also be closely aligned with the movement in USD/MYR.

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