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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More Malaysians are being declared bankrupt!

JOHOR BARU: Young Malaysians are being declared bankrupt because they spend more than they earn, says Minister in the Prime Minister’s Department Nancy Shukri (pic).

This trend was worrying because most of them had just started working but already had debt problems, she added.

“This younger generation are supposed to be the next leaders. Instead, we have those who are already facing financial difficulties at a very young age,’’ she told a press conference after opening an information programme for young people at the Home Ministry complex at Setia Tropika here yesterday.

Quoting figures from the Insolvency Department, she said there was an increase in the number of young Malaysians being declared bankrupts in the past five years.

She said there were nearly 22,000 cases last year, an increase from about 13,200 in 2007.

Within the first six months of this year, more than 12,300 young Malaysians had been declared bankrupt. They include 3,680 women.

“On the average, 70.22% of the cases are men,” said Nancy, adding that most of them have outstanding debts of RM30,000 or more and could not afford to settle their dues.

She said the high bankruptcy rate among Malaysians at a young age mainly resulted from defaulting on instalment payments on car, housing and personal loans.

Nancy said there had been celebrities who were also declared bankrupt but most of them declined to seek assistance from the Insolvency Department.

She added that aside from the department, those who have problems managing their finances could seek advice from the Credit Counselling and Debt Management Agency.

The Star/Asia News Network

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Making Malaysia’s Base Lending Rate more relevant

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

BANK Negara is moving ahead with the times by replacing the outdated base lending rate (BLR) with a more relevant interest rate benchmark.

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

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

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

The current BLR reflects other costs such as overhead costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The mind-set: how the rich get richer, the poor get poorer? You need more money ...

The rich may get richer while the poor may get poorer, but it doesn't have to be that way. It requires a change of mind-set.

I ONCE overheard someone lament that “the rich get richer and the poor get poorer”, which made me think if indeed that statement is true.

The rich do get richer only because they have sound financial concepts required to stay rich. They focus on their net worth, working on their appreciating rather than depreciating assets.

They know how much is required to keep their lifestyle. They don’t necessarily need to be debt-free because they know what good leveraging can do to enhance their wealth. They employ financial strategies which are contrarian to common ones - taking on investment opportunities when others would stay away and having the purpose driven portfolios.

They consciously inject capital into their portfolios rather than on an ad hoc or timing basis. They know the impact of inflation on their money and insurance coverage because they review their financial life regularly. Their financial data is maintained and accessible anytime they want.

The poor do get poorer only because they continue to adopt a poverty mind-set. They focus on their expenses too much either being overly frugal or overly spendthrift.

Frugality means overprotective of your money which prevents risk-taking while overspending means financial leakages and unnecessary bad debts.

Their financial life has no planning and they have never taken a conscious effort to straighten it out. Their finances are all lumped into a “pot” which is meant to be used for everything.

They do invest but usually due to either lack of knowledge or fear of losing their capital, the amount is too small to be financially significant. Their insurance coverage depletes as medical costs rise, unsure what and for how much they are insured for.

It really doesn’t have to be this way. There is a way to change your financial situation. The first step is to decide to be financially responsible yourself. Acquire the right financial knowledge and make that change. Find a financial buddy to help you get started.

- Financial Snacks by Joyce Chuah, CEO of Success Concepts Life Planners

So you need more money ... 

The problem always starts when you owe more than what you can earn, financial experts say.

When it comes to money, Adrienne Wong (not her real name) believes she is a reasonable spender.

An assistant communications manager, Wong, 31, earns about RM8,000 a month, but says her debts take up a sizeable chunk of her monthly income.

The two biggest items in her list, her housing and car loans, amount to about RM3,000.

“My credit card bills usually come up to another RM1,000 plus, so that’s more than half of my salary gone. With utility bills, that’s another RM600. The rest goes into savings, pocket money for my parents and a bit of shopping.

“With property and car prices as high as they are now, it’s no wonder our loan amounts are so big. But what choice do we have?” Wong asks.

Indeed, the rising rate of household debts is a pressing concern – as of March, this year, the Malaysian household debt ratio against the GDP reached an all-time high of 83%.

Last week, Bank Negara Malaysia (BNM) announced a three-prong approach to curb the rising trend of household debts:

> Maximum tenure of property financing is now fixed at 35 years;

> Maximum tenure of personal loans is fixed at 10 years;

> Prohibition on the offering of pre-approved personal financing products.

BNM Governor Tan Sri Dr Zeti Akhtar Aziz had said that Malaysia currently has the highest household debt to GDP for a developing country in the region. In comparison, Thailand’s household debt ratio stands at 30%, Indonesia at 15.8%, Hong Kong at 58%, Taiwan at 82%, Japan at 75% and Singapore at 67%.

Countries that have higher household debt to GDP are the United States at 91.7%, United Kingdom at 114%, Australia at 113%, New Zealand at 91%, and South Korea at 91%.

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng says BNM’s move is a “prudent one”.

“A financial crisis can always be traced back to excessive borrowing or leveraging, and the problem is that we never know we are in a credit bubble until that bubble bursts.

“The higher this figure is, the more vulnerable the household sector will be to economic shocks, which can come in the form of an economic downturn,” he says.

The concern, he says, is when people owe more than what they can earn, which is not sustainable.

According to BNM figures, the three biggest contributors to Malaysian household debt are the housing, car and personal loans (refer to chart).

Personal loans can be used for a variety of reasons.

Teacher Siti Norsharmi Fateh Mohamad, 28, says she took a RM35,000 personal loan three years ago to fund her wedding.

“We wanted our wedding to be special, with everything done up nicely. It didn’t feel like much then, but now that we have more commitments (a daughter and a housing loan), it’s definitely an additional burden for us.

“On hindsight, we shouldn’t have taken the personal loan ... it wasn’t a necessity,” she says.

But personal loans are popular lately and there’s a reason for it.

“Banks aggressively push personal loans because it’s one of the most profitable products for them. Interest rates for personal loans can be anywhere from 3% to 12%,” says a former local bank manager who declined to be named.

Spending trends have also changed, says Dr Yeah.

“Previously, people only spend what they can afford, but practices have changed. Today, many people don’t mind spending money they don’t have.

“Taking a personal loan is not necessarily a bad thing, but it depends on why you’re doing it. Taking a personal loan for education, for example, is fine, because you’re improving your skills ... or for medical purposes to enhance one’s health. But to take a loan for conspicuous consumption, or to make speculative ‘investments’... I think that should be discouraged,” he says.

Credit Counselling and Debt Management Agency (AKPK) chief executive officer Koid Swee Lian agrees.

“It is quite common now for people to take personal loans prior to a festivity because they want to buy new furniture, change their curtains, do a bit of renovation.

“Consumers must be discerning and responsible in their borrowings, just as credit providers must be responsible in their lending. Earn before you spend, not spend then earn! Use the debit card and not the credit card if you cannot pay in full each month,” she says.

Before taking a loan, Koid says consumers should ask themselves:

> Do you really need the personal loan?

> Is it for a productive purpose or can you forgo it?

> Can you afford to pay the loan instalments? If the interest rate increases, can you still pay the increased loan instalments?

> If the loan is for a productive purpose, would you generate enough income to repay the loan and leave some income for yourself?

If taking up a personal loan is absolutely necessary, Koid advises potential borrowers to do their homework and compare the different bank rates.

“Go to bankinginfo.com.my where you can make a comparison of all the rates. Don’t take a loan just because it’s offered. Also, understand what you’re signing up for. Find out whether the bank is charging you a flat rate, a reducing rate or a floating rate,” she says.

Koid gives an example of a loan with these terms – a RM10,000 loan to be paid over five years at 4% interest rate per annum.

“A flat rate of 4% for a five years may not sound like a lot, but what it actually means is that you’re essentially paying 20% interest for the five-year loan. The amount of interest you pay doesn’t change regardless of how much you’ve repaid,” she says.

“Compare this to a reducing rate. If you’ve paid RM1,000, that means the interest should only be on the remaining RM9,000.”

Those who have trouble managing their cashflow can also seek help at AKPK or call its toll-free line at 1800-88-2575.

“People who have a debt problem often feel very embarrassed, but I think they need to be realistic. You’re in that situation, you have to solve it. Come to us, we will do our best to help you,” Koid says.

BY LISA GOH  lisagoh@thestar.com.my

Taking a loan is fine, but if you can’t pay back your loans ...

HAVING gone through a few recessions and occasional global financial crisis in my lifetime, I have seen enough suffering by genuine business owners and their families.

When the going gets tough, the banks call in the loans and their cash-strapped business just fold up. The bank will then sell their pledged collateral and sue them till they are declared bankrupt. Standard operating procedures (SOP) for the bank and sobbing by the poor chap.

Then you have property speculators and big-time stock market manipulators bankrolled by greedy bankers until the bubble burst and the market crash. All hell will break loose as all parties scramble to damage control mode. The cash rich speculators will survive but the bankers always end up with having to take an unwanted haircut. High margins come with high risks. Fair game.

To get a loan, small businessmen have to charge to the bank whatever properties they have as collateral. At all times, they have to sign a personal guarantee too, just in case the bank cannot fully recover their loan sum from the forced sale of the property.

Unless you are someone special with VVIP status, the bank will come after you. Trust me, bankers are sticklers to SOP and they will make sure your name appear in the classified pages for bankruptcies if you don't pay up.

So, I am sure everyone is watching with great interest the latest promise in parliament by our Agriculture and Agro-based Industries Minister on the full recovery of the RM250mil loan from the National Feedlot Corp.

It looks like there were no properties charged to the Government as the 600ha in Gemas was leased from the Negri Sembilan government for RM200,000 a year and the condominiums were bought with the loan money. Did the borrowers provide the Government with any personal guarantees?

As with all loans, recovery of the loan sum will start with a demand letter saying that the bank/government is recalling the loan and you are given three months to pay back in full, principal sum with interest. Or else they will take you to court and sue you. Once they get judgement against you, the court will appoint a liquidator to salvage whatever assets you have and sell whatever cows and bells left to any interested cowherd with a big haircut. If you have signed a personal guarantee, you will be a bankrupt. Nothing personal, just SOP.

Now you are really on your own, with nobody to turn to. All your so-called friends are avoiding you like the plague. What can you do?

As an experienced restructuring expert and part-time lipstick salesman, my advice to you is not to hire sleazy advisors to solve your problems or you will end up suing him for unsatisfactory service levels filled with lies and empty promises.

There is no bypassing the SOPs. When the shit hits the fan, it is every man for himself. You still have to pay back... in full. Stay calm and meditate and God will show you the way.

First step is to look for a friendly tycoon who can buy over the cow business for RM250mil in the name of national interest. It is only petty cash to the tycoon but it will blend in nicely into his portfolio of staple food businesses.

Do not worry if nobody wants to talk to you now because the concerned ministry is already talking to a few parties for a friendly takeover. Maybe an attractive haircut might work.

If the first step doesn't work, I suggest you take the next step with caution. You can borrow RM250mil from Ah Longs but make sure you pay the high interest rates or your house will be splashed with red paint and your neighbours will know about your non-payment. That would really be embarrassing.

Ok, maybe that was a wrong step to recommend. As a last resort, when in court, plead ignorance, blame everybody else for your ills. Be a man like William Hung, admit you have no experience and you did not know a bull from a cow. Since you have not signed any personal guarantees, they will only take whatever is left in the company which should be fine with you. It was never yours in the first place.

My simple advice to entrepreneurs who need bank loans to expand the business, make sure you treat the approved loans with utmost respect. The loan officers have put their heads on the chopping block when they recommended your loan application.

If you failed them due to mismanagement and misinformation, you can bet your last dollar they will come after you and make sure your next four generations will continue to pay your debt.

Oh yeah, another piece of an advice. Do not wear V neck pink t-shirts when you meet your bankers. Just play it straight.

There are just too many issues raining down on our heads nowadays and we do not need another downpour.

ON YOUR OWN
By TAN THIAM HOCK

To access earlier articles of On Your Own, log on to www.thiamhock.com. Honest comments welcomed and approved.

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