Malaysia May Raise Growth Forecast, Reducing Need for Stimulus

March 22, 2010, 1:22 PM EDT
By Stephanie Phang and Michael Munoz
March 23 (Bloomberg) -- Malaysia’s central bank may raise its 2010 growth forecast amid an economic rebound that’s reduced the need for emergency stimulus measures, as the government prepares to unveil its long-term strategy.
“It is almost certain Bank Negara will raise the official GDP growth forecasts,” said Azrul Azwar Ahmad Tajudin, chief economist at Bank Islam Malaysia Bhd. This provides “increased latitude to unwind further the unprecedented stimulus measures, both monetary and fiscal, which were undertaken to minimize the impact of the global recession,” he said.
Central bank Governor Zeti Akhtar Aziz raised interest rates for the first time in almost four years on March 4, joining nations from Australia to India in withdrawing monetary stimulus as Asia leads a recovery from the global slump. Prime Minister Najib Razak, who boosted government spending and eased investment rules last year to revive growth, is due to unveil policies next week to help Malaysia become a high-income economy.
Malaysia emerged from its first recession in a decade last quarter as exports such as Sime Darby Bhd. palm oil and Unisem (M) Bhd. semiconductors recovered. Najib said last week the economy can expand as much as 6 percent this year and his trade minister said March 2 overseas sales may increase as much as 7 percent, more than a previous forecast of 3.5 percent.
Ringgit Gains
The ringgit has climbed 2.7 percent this year, the third- best performer among 10 Asian currencies outside Japan, as Asia’s recovery drew funds to the region and Malaysia moved ahead of most of its neighbors in raising borrowing costs.
Malaysia may increase interest rates further to avert asset bubbles and discourage risky investments, even as inflation will likely remain “modest” this year, Zeti said in a March 12 Bloomberg Television interview.
Bank Negara this month increased the benchmark rate to 2.25 percent from a record-low 2 percent. Consumer prices climbed 1.2 percent in February from a year earlier, accelerating from an average 0.6 percent pace for all of 2009.
Faster growth may help Najib cap the budget deficit this year, forecast by the government to narrow to 5.6 percent of GDP from a 22-year high of 7.4 percent in 2009.
Withdraw Stimulus
“Bank Negara is expected to raise interest rates further,” perhaps to 2.75 percent before the end of the year, said David Cohen, Singapore-based director of Asian forecasting at Action Economics. “Similarly, the government will seek to trim the budget deficit, gradually withdrawing some of the fiscal stimulus implemented last year.”
Najib’s government has said it plans to reduce spending by revamping subsidies on fuel and essential items from sugar to flour. Such goods are sold at below market rates in Malaysia because the state pays suppliers to keep prices low.
Still, a plan to limit fuel subsidies to benefit the nation’s poorest consumers by May has been delayed to later this year, the consumer affairs ministry said this month. The government may also postpone plans to introduce a goods and services tax next year that would have widened its tax net, the Malaysian Insider news Web site said March 18, citing an unidentified government lawmaker. The date for the tax hasn’t been decided, Najib said the same day.
New Economic Model
Those plans may be included in the new economic model, Reuters reported last week, citing an unidentified government official. The government will also review proposals to further pull back Malaysia’s four-decade policy of giving preferential economic benefits to the country’s ethnic Malay majority, Reuters said, citing the official who had seen the plans.
Najib, who already increased the foreign ownership limit in Malaysian banks and stockbrokers and opened up services industries, said March 18 the government is “sparing no efforts” to achieve economic growth of 5 percent to 6 percent this year and “to help Malaysia achieve its goal to become a high-income nation.”
Comments by the government suggest the new economic model will focus on boosting productivity through innovation and research and development, Australia and New Zealand Group Ltd. said in a March 16 report. While that will contribute toward raising labor productivity, “it is unlikely sufficient to elevate Malaysia’s status to a high-income economy by 2020,” said Yeo Han Sia, a strategist at ANZ. “To reach the per capita income target of $15,000 by 2020, Malaysia’s aggregate investment will have to rise substantially in the coming decade. We would look for specific policy thrusts in the new economic model to address the stagnant private investment rates.”

http://www.businessweek.com/news/2010-03-22/malaysia-may-raise-growth-forecast-reducing-need-for-stimulus.html

Should one invest in bonds?

MOST investors in Malaysia may not be familiar with bond investing. We may have come across bond funds in our unit trust funds investment, but, not many really understand why and how to invest in bonds.

A bond is basically a loan to government units or corporations that issue the bond. When you invest in bonds, you become the lender to the issuers. In return, you will periodically be repaid a pre-specified percentage of interest for the use of your money and when the bond reaches the maturity date, the principal that you invested earlier will be paid back to you.

For example, if you have invested in Bank Negara’s Bond Simpanan Merdeka 2009, which has three-year tenure and pays 5% of interest per year, you will receive a stream of interest income on a monthly basis and at the end of the third year, you will also get your principal back.

However, bond funds differ from individual bonds in many ways. While the interest income from the fund changes over time, the interest payments from individual bonds are usually fixed.
As a bond fund is made up from a pool of bonds, it usually does not have a fixed maturity and its yield is based on current income relative to its net asset value (NAV) while individual bonds are quoted in current yield or yield-to-maturity. In addition, bond funds normally make interest distributions monthly or quarterly, whereas individual bonds pay interest semi-annually.
The main purpose of investing in bonds or bond funds is to provide portfolio diversification, which in effect, helps lower your overall investment portfolio risk.

In general, bond funds have lower risk compared with equity investment and normally, bonds have low correlation with equity investment. While equity tends to perform well in high inflation rate and high interest rate environment, bond performance is unsatisfactory under such circumstances.

However, when the economy is bad and equity is not performing well, a lower interest rate tends to spur the economy, and at the same time, benefits bond returns. So, in most periods, it has negative correlation with equity interest.

The price movement of a bond is driven by a few factors. However, the main determinant is the interest rate. When the prevailing interest rate goes up, the price of the outstanding bonds will fall and vice versa. Therefore, the highest risk in bond investing is also the interest rate risk.

Duration is a measure of interest rate risk, which is defined as the weighted-average time it takes for a bond to pay back its interest and principal. By taking the duration of a bond or a bond fund times the change in interest rates, you will get the approximate percentage change in the bond’s price or the bond fund’s net asset value.

For example, if a bond fund’s duration is 10 and interest rates fall (or rise) by 0.5 of 1%, the fund’s NAV will increase (or decrease) by about 5%. As the duration of a bond is its average maturity, it measures interest rate risk.

When the inflation rate of a country increases, it will also result in higher interest rates to counter the inflationary pressure. Due to the recent global financial crisis, countries like China implemented stimulus packages, which in turn caused these countries to face potential inflationary pressure from higher asset prices.

Given that some economists have predicted that our interest rates may go up again, it is safer to buy bond funds with shorter duration because the bond funds will suffer a lower drop in prices with higher interest rates.

Other than interest rate risk, investors must also be aware of any potential credit risk of the bonds held by the bond funds, which is the possibility of the issuer failing to meet its obligations under the indenture or the risk of a bond being reclassified as a riskier security by credit rating agency.

It is a major problem during economic crisis or financial crisis, especially in the case of corporate bonds. However, given that our economy is currently at its recovery stage, credit risk may not a major issue.

As investors, before we invest in any bonds or bond funds, we must at least make the effort to understand the basic characteristics of the bonds that we are going to put our money in. Even though it is said to be safer than equity investments, there are still certain risks inherent in bonds investments that we must be aware of.

The Star, Wednesday February 24, 2010

RHB increase BLR to 5.8%

RHB Bank Bhd and RHB Islamic Bank Bhd will raise its Base Lending Rate and Base Financing Rate respectively to 5.8 per cent from the current 5.5 per cent effective 9 March 2010.

Group Managing Director Datuk Tajuddin Atan said the revision was in line with Bank Negara Malaysia's move to increase the Overnight Policy Rate (OPR) by 25 baiss points to 2.25 per cent." We are committed to doing our part to ensure that viable borrowers will continue to have access to financial products and services to carry out and grow their businesses in everyone's interests," he said in a statement on 8, March, 2010." We will also be balancing the increased borrowing rates by offering more competitive rates for depositors," he added.4, March, 2010, the central bank said the adjustment of OPR was towards normalising monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process.

Maybank increase BLR to 5.8%

KUALA LUMPUR: MALAYAN BANKING BHD
will increase its base lending rate (BLR) by 25 basis points from 5.55% per annum to 5.80% per annum effective Tuesday, March 9.

Maybank said on Monday, the base financing rate (BFR) of Maybank Islamic Berhad would similarly be revised from 5.55% to 5.80% effective the same date. Maybank president and chief executive officer Datuk Seri Abdul Wahid Omar said the interest rate revision was based on the recent adjustment in the overnight policy rate. The OPR was increased by 25 basis to 2.5% last week. "We expect to see better growth from our core business segments, leveraging on the improving economic environment and as more customers take advantage of the diversity of our product and service offerings." he added. The last change in BLR and BFR of Maybank and Maybank Islamic respectively was on March 2, 2009 when the rates were revised from 5.95% to 5.55%.

Bank BLR rate has increased to 5.8

KUALA LUMPUR, March 8 (Bernama) --

Hong Leong Bank Bhd and Hong Leong Islamic Bank Bhd will raise their base lending rate (BLR) and Islamic financing rate (IFR) to 5.8 per cent from 5.5 per cent effective this March 10.

Its group managing director, Datuk Yvonne Chia today said the change supports Bank Negara Malaysia's decision to increase the overnight policy rate (OPR) by 25 basis points.In a statement here, she said the bank would also continue to work closely with its customers to address all their financing needs. Last Thursday, the central bank said the decision to raise the key interest rate was made amid an improved economic outlook. Following its Monetary Policy Committee (MPC) meeting, Bank Negara added that the adjustment to the OPR was towards normalising monetary conditions and preventing the risk of financial imbalances that could undermine the economic recovery process.

Year 2010 Credit card service tax - How are you going to react?

Under the Budget for year 2010, the government would impose an annual RM50 service tax on each principal credit and charge card, including free cards, and RM25 for each supplementary card from January next year.

What might happens will be:

1. The banks decide to implement the service tax waiver for selective or all clients.
2. The cardholders with unused credit cards may decide to cancel them.
3. Credit cards balance transfer to single credit card.
4. Apply for personal loan to terminate credit cards with substantial outstanding.
5. Source for funds to settle credit cards with outstanding balance.

This measure is expected to promote prudent spending with the number of credit cards having increased from more than 2 million in 1997 to 11 million as at August 2009, excluding 285,000 charge cards. Analysts said the impact of the service charge on credit cards was expected to be “mildly negative” for the banking industry. A Kenanga Research analyst who covers the sector said credit card loans in the country’s banking industry made up less than 5% of total loans.

Jupiter Securities head of research Pong Teng Siew said he was expecting about 25% of current cardholders, especially those with more than one card, to cancel their inactive cards following this proposal.

Only those Banks depended on their credit segment to drive growth for these past years will experience substantial impact on their profitabilities. ECM Libra said the service tax could well see the banking system incur up to RM542.5mil in additional expenses arising from this measure should they wish to maintain existing levels of business. Alternatively, they could “lose” as much as 50% of the cards issued but the “subsidy” to potential spenders from the system (on the assumption of the current 21.6% utilisation rate) may be reduced to about RM280mil, the research house said.

http://biz.thestar.com.my/news/story.asp?file=/2009/10/27/business/4981459&sec=business

6.3 sen payout for ASW 2020 - PNB update

Amanah Saham Wawasan 2020 (ASW 2020)

Income distribution of 6.3 sen per unit for the year ending Aug 31, 2009
Equivalent of total payment of RM592.26 million
Fund Size of 11.01 billion (872,322 unit holders)
Income of RM661.28 million up to 17 Aug 2009 (increase of 12.62% from 17 Aug 2008)
1. Profit from the sale of shares contributed RM311.27 million (47.7%)
2. Dividend income from investing companies RM223.69 million ( 33.83%)
3. Other income RM126.32 million (19.10%)

Note:
Unit holders will receive their income statement from the end of October 2009.
Net asset value (NAV) per unit of these funds is fixed at RM1.
Income distribution of 7.0 sen per unit for the year ending Aug 31, 2008.
Income of RM587.18 million up to 17 Aug 2008.