APA YANG PERLU DILAKUKAN UNTUK MENYELESAIKAN MASALAH EKONOMI? - NIK ZAFRI

Bagaimana untuk memuaskan kehendak yang tidak berakhir dengan sumber yang terhad?

• Apa yang baik perlu diutamakan berdasarkan kehendak dan bagaimana pembekalan dan bantuan dapat memuaskan kehendak yang tidak bernoktah

• Kenalpasti jenis dan perbezaan kehendak manusia, utamakan kehendak dan susun produktiviti bagi memuaskan sebanyak mungkin kehendak yang termampu.

• Tentukan apa yang hendak dikeluarkan atau berikan dahulu apa yang patut untuk memuaskan permintaan

• Pastikan ianya selaras dengan belanjawan dan kuasa membeli yang berbeza-beza

• Modal dan barangan adalah sama penting. Selaraskan antara keduanya.

• Pengeluaran akan lebih cekap jika sumber diuruskan dengan baik.

• Maksimumkan gunatenaga kerja tidak kira jawatan, jenis kerja, corak kerja dll.

• Sistem percukaian yang tidak dirancang boleh menjadi penyebab kepada agihan kekayaan yang tidak seimbang.

• Wujudkan suasana untuk sektor pengeluaran menjadi lebih kompetitif dan meraih keuntungan menerusi penstrukturan semula cukai dan subsidi di mana perlu.

• Lindungi ekonomi dari pengaruh luar yang negatif menyusup masuk dengan pengaruh dasar-dasar yang boleh merosakkan ekonomi.

• Strukturkan kembali cukai untuk industri terpilih seperti besi, pengangkutan, simen dsb.

• Penekanan terhadap R & D adalah lebih baik dari pengeluaran produk yang tidak berguna dalam pasaran - dikeluarkan pula dalam keadaan tergesa-gesa.

• Sektor Perbankan dan Kewangan yang tidak teratur akan menjadi sebab inflasi dan kemelesetan. Kawalan terhadap pinjaman/pembiayaan lebih penting dalam saat-saat kritikal dan bukannya menaikkan kadar faedah atau menstrukturkan kembali pinjaman yang sediada.

• Mereka yang menyewa rumah perlu menukar sewa rumah yang banyak dibayar kepada pembelian rumah. Jadikan deposit sebagai pendahuluan. (Mungkin cadangan ini agak keterlaluan tetapi rasanya boleh dipertimbangkan)

• Hentikan atau kurangkan penjualan aset kepada orang atau negara asing.

• Hentikan atau kurangkan liberalisasi kewangan kepada pelabur asing. Terdapat laporan, ada di antara mereka bertanding secara tidak sihat sehingga merugikan industri tempatan.

• Kurangkan perbelanjaan di luar kawalan terutamanya ke atas program dan inisiatif yang dibiaya oleh pinjaman luar.

• Adakan dasar untuk mengurangkan penggunaan barangan impot

• Lihat bagaimana negara lain berjaya membangunkan kekuatan industri dan cuba ambil contoh

• Kawal imbangan defisit perdagangan. Kurangkan aliran keluar wang yang tidak kembali kepada kita. Wang yang tidak kembali boleh menyebabkan negara luar membeli syarikat-syarikat terbaik di negara kita.

• Semak kembali perjanjian-perjanjian perdagangan atau memorandum-memorandum persefahaman kita dengan negara asing. Kadangkala terdapat undang-undang perdagangan luar yang tidak selaras dengan undang-undang kita menyebabkan perdagangan kita tidak konsisten dan tidak begitu adil.

• Perdagangan bebas kadangkala menjadi satu permasalahan. Ianya perlu digantikan dengan perdagangan lebih pintar supaya ekonomi kita tidak mudah dimanipulasikan oleh pihak asing

• Pengeluaran dalam negara kita lebih menguntungkan dari mencari kepakaran pengeluaran dari luar.

• Pastikan kita tidak kehilangan industri percetakan, automotif, hiburan, besi, elektronik, pakaian dll kerana ini sedikit sebanyak boleh mengancam keselamatan negara dan standard kehidupan

• Pastikan syarikat-syarikat yang disenaraikan dalam Bursa Malaysia betul-betul mendatangkan keuntungan kepada pelabur - bukan hanya dalam beberapa hari selepas disenaraikan.

Nik Zafri says :

I like the following article...very honest and very transparent analysis...

Although the article may be the thing of the past (so it seems) but I wish all bankers, investors, newly listed companies, speculators and analysts, economists etc. etc. to read the following article...

Be alert for some strong words but back up with solid facts.

We may take certain reminders so that we shouldn't be over excited of the current market performance but in fact, start working harder to continually improve them (stop sitting in the comfortable zone (not yet)

Also my reminder to all, stop playing the old record by saying that the high quantity of listing/IPOs indicates that the economy is going to be fine...it's the quality that we're talking here NOT quantity.

I think 'designation' of certain stocks by authorities should come in handy - perhaps the right time....but designating stocks should be packaged with clear regulations

Recession-struck Asia to face IPO shortage in 2009

Depressed equity prices, a spreading global recession and increasing risk-aversion among investors are likely to kill the motivation for Asia Pacific companies to be audacious enough to launch IPOs in 2009. The IPO pipeline, which had dried towards the end of 2008, will probably completely shut in the first half of 2009 and the most optimistic are now only hoping that stability will return to stock prices and that a few listings will follow in the second half of the year.

There have been several jumbo IPOs in the Asia Pacific over the past few years through to the first half of 2008. The drivers of this supply were Indian and Chinese companies taking advantage of continued economic growth and investor enthusiasm for exposure in the rising fortunes of the developing world.

This gung-ho mentality was sadly short-lived as these companies’ post-listing performances were disastrous, inflation touched new highs with the advent of recession and the financial sector collapsed under the weight of sub-prime problems.

The pain was particularly felt in the second half of 2008 and IPOs were postponed or completely culled as stock prices and indices plummeted and the probability of raising new money through issuing shares at reasonable valuations completely bit the dust.

A continuation of this surrender to the gloom in global markets is likely to ensure that companies keen on deleveraging will focus on raising equity via secondary placements or private stake sales rather than venture out with IPOs, said bankers.

The outlook for IPOs at least for the first half of 2009 is bleak,” said Simon Cox, head of syndicate at UBS Australia. “Most investors who have cash see enough opportunities in secondary markets every day and are not willing to be tempted to take risk in unknown companies by participating in an IPO unless they are priced very attractively. As a result, companies hardly have any motive to sell into this kind of environment which will kill supply in 2009.”

Signs of a prolonged slowdown in IPO activity are already evident. The Chinese IPO market, the region’s busiest for several years, had a slow start in 2009. The China Securities Regulatory Commission (CSRC) has still kept the domestic A-share market shut and only two tiny companies have listed on the Hong Kong Stock Exchange – the HK$250m (US$32.2m) IPO of mainland oil, petroleum and petrochemical trader Strong Petrochemical and the HK$63m float of China Singyes Solar Technologies.

There is one deal, though, that holds the hopes of all the companies looking to raise new equity. Chinese gold miner Real Gold Mining is braving the market with a US$150m deal and, though the defensive nature of gold could spur some demand, not many are willing to bet on the deal’s success.

Even if it is a success, bankers expect the Chinese IPO market to remain quiet in the first half and to show signs of recovery at best in the second half because of uncertainty about the direction of the global economy. “By that time (mid-year), people should be able to get a more solid view on the global economy and the mere hope of recovery could push up the stock markets and invigorate the IPO market,” said a banker.

When that happens, the infrastructure sector and companies in the retail business segment could be favoured as likely anti-recessionary candidates. “Investors remain picky and they would be only willing to put their money in India or China’s infrastructure and retail which are still considered growth sectors given possibilities demands of their huge populations will continue,” said another banker.

The Chinese government is set to invest Rmb4trn (US$584.4bn) in the country’s infrastructure sector in the next few years and is determined to maintain an 8% GDP growth by supporting domestic demand. India has similar plans to augment its infrastructure and support GDP growth.

The deals that may hit the market, however, would be modestly sized and the super jumbos are likely to be few and far between.

The only known candidate for a jumbo IPO is Agricultural Bank of China, which has plans for a US$20bn–$30bn A/H IPO in 2010. In October last year, Agricultural Bank of China received a US$19bn cash injection from the Chinese government to remove bad debts from its balance sheet and strengthen its capital base before going public. The bank transformed itself into a shareholding company in mid-January and is said to be looking at a Hong Kong and Shanghai IPO.

The Indian market is expected to remain somnolent during the first half as India gears up for its 2009 general elections. The elections are expected in May 2009. Prior to that, the Indian government is unlikely to push forward with any of its privatisations.

What little activity there is now is focused on CB buybacks with Reliance Communications and Jubilant Organosys among those quietly buying back CBs.

“In the Indian context, the market is bound to be turbulent pre-elections. It’s going to be difficult to do any deals. Post elections around June or July, hopefully, the markets will stabilise a bit and we could start seeing companies desperate to raise cash tapping the market in the fourth quarter,” said one Indian ECM banker.

And that is likely to be the trend in the rest of the region. Within South-East Asia, ECM activity will be driven primarily by recapitalisations, particularly within the FIG and real estate sectors, largely through rights issues. South-East Asian issuers tend to be family or major shareholder dominated, and rights issues backed by promoters will continue to be the prevailing trend.

“We are waiting for more rights issues out of Singapore. People are looking at issuers like CapitaLand, CapitaCommercial Trust and CapitaMall Trust to tap the market and we expect more fundraising within the REIT space. Our visibility for IPOs in SEA is minimal, so I definitely think it will be secondary fund raising and recapitalisations,” said another banker.

Although the past few months have been desolate for ECM bankers, there could be a pick-up in equity issuance towards the second half of 2009 as issuers find themselves faced with no funding alternatives.

“The IPO market is dead…The rescue rights or rescue placements in Europe will probably follow through to Asia, but Asian issuers have to swallow their pride first and take the decision to issue equity. If debt markets remain closed, they will have no choice, at some point the penny will drop,” said one Hong Kong-based Southeast Asian banker.

In Korea, the healthy IPO pipeline has imploded with first life insurers and then construction firms falling off the map. A market plunge, where the Kospi drifted below 1,000 for the first time in three years, and a subsequent liquidity squeeze has set a bleak tone for 2009 and bankers are struggling to find candidates to come to the market.

If markets were to improve, bankers think it will be the life insurers that will return first with Tongyang Life Insurance regarded as the most likely candidate. Tongyang Life came close to listing last summer but was forced to pull the deal at the last moment and has since renewed its listing filing twice with the latest deadline extended to August.

Bankers are not confident that Tongyang Life can meet that timetable but they suggested that if the deal could get done this year then other life insurers like Kumho Life and Mirae Asset Life would follow.

Also on bankers’ radars are a string of deals from Hyundai-related companies with Hyundai Motor rumoured to be considering spinning off Hyundai Card and Hyundai Capital while Hyundai Group considers a listing of Hyundai Logistics and Hyundai Home Shopping.

Bankers said that although the Hyundai deals inflated their pipeline, the execution of such deals would depend on whether the Hyundai Group was willing to use its cash piles to support the businesses and avoid a listing.

“The problem with a lot of the listing candidates is that they are backed by Korea’s industry giants and conglomerates. There is no real urgency to get these firms to the market,” one banker noted.

That argument can probably be best applied to the listing plans of Korea’s construction firms, including Posco Engineering and Construction and Lotte Engineering and Construction and Hyundai Engineering and Construction, which were all expected to list in 2008/2009 but have recently reversed those plans. Bankers blamed the cancellation of their listing plans on a strategic decision to lean more heavily on their chaebol relationships than the public markets.

And in Australia it will be difficult to see any IPOs being done in 2009, especially after the few that got done in 2008 were disastrous for investors. BrisConnections which did a huge IPO in 2008 saw its partially paid A$1 shares falling to a record low of A$0.001 post-listing. IvanHoe Mines also did one that was the year’s second largest IPO but are trading way below their issue price.

Against that background, reviving investor confidence for IPOs will be difficult.

“There could be opportunities of IPOs by diversified companies demerging to realise value in specific units or even venture capital/private equity selling off stakes but those deals in this depressed environment will have to be priced relatively cheap. . .we are not recommending our clients to go ahead and do IPOs in this environment,” said one banker.

Shankar Ramakrishnan, Fiona Lau, Denise Wee, Govinda Finn

RUMOURS VS FACTS, SPECULATION VS ANALYSIS

I've heard stories about most major banking and financial Institutions are having special meetings to revise and reformulate monetary policies.

I do agree with these actions as the stock market may rise again PROVIDED the best monetary policies are introduced into the marketplace.

One thing for certain, investors are digesting rumours rather than facts, speculation rather than analysis - people just don't have the patience to wait nowadays. Many have told me that this is going to be short term but that 'short term' are dominating the market with making strange shapes. One news from the US...say unemployment rate, then it would finally affect the whole world.

One thing for certain, there are still investors taking risks waiting for 'the right time to sell' - even minimum gains is good enough but many seem to find strength in weakness (opportunity to buy/profit taking) where efforts to strengthen of holdings in equities are seen. Despite its sluggish performance, surprisingly USD may get better - lowest interest rates offerings, plans of liquidity etc.

Well, as for me, besides than unit trust, I'm also looking into GLC's bonds at the moment. Will be back soon..

How are we doing today? Mr. World Economics?
By Nik Zafri - Oct 7, 2009

Ok..to start with - Oil (Asia)...Source NYME - November benchmark crude up 63 cents - $71.51 by 12.30 pm and contract settled at $70.88 - a rise of 47 cents. For US (Dow Jones gaining 1.4%), it's the best achievement and a good sign for prospects of more corporate profits.

A sign of recovery? Perhaps - Oil markets & equities are being driven by this recovery.

There is another paradox though - if crude inventories fall, oil prices may rise further and price will fall if crude stocks rise. I hope if this happens, the strong financial market will back it up.

Global Economic Stimulus Package - I'm glad that our global economy now can withstand higher borrowing cost - despite there are talks about interest hike yet world Governments spending and offers of low interest rates are now emerging.

Next - Inflation vs interest rate hikes. Some countries in the Asia-Pacific Region expected a building trend of inflation (Australia recently raise their key interest rates (official cash rate by 25 basis points to 3.25%) - which is OK to them) due to recent hike 'Downunder' - there is a possibility that 'everyone else' will follow this trend.

Thus, if there is a plan to raise interest...I can understand why (we must be fair to the Banking and Financial instititutions as well) but please monitor the inflation possibilty..if there is such sign (in Malaysia specifically), please control it.

Bonds - Reports came to me that in some countries - Traders are buying after the fall. Yields are retreating (on the benchmark one decade bond yield now closing lower - During the early deals, it's rising due to lacking of buyback news - something to look at before )

Before I move on : Anyone heard of the so called secret talks between the Gulf states? I heard stories about China and Russia are replacing oil trading with dollar which may have caused the decline is USD?

Next - USD vs Gold vs other currency - I think everyone is noticing that USD is falling against major currency. Thus gold are rallying on the bullion markets and silver surges higher. (Dollar is now the 'arc nemesis' to gold = Gold is used for safe hedge against inflation whenever the Dollar is down)

SO, WHAT ELSE SHOULD WE DO?

Everyone is having their own 'hypotheses' and 'scapegoats to blame' on the economic condition today. Yes, it all started from the US sub-prime mortgage crisis and ultimately like a 'contagious desease' - it 'assaulted' the banking and financial institutions including their instruments.

1) Lawmakers claimed that it's the financial institutions failed to adhere to the BAFIA and latter snarled at lawmakers for inadequate enforcement.

2) Investors hurled allegations at banks for 'wiping out' their money 'riskily' (insurance, pension funds etc) and the latter fought back saying that investors gave them authority to do so.

3) Fund Managers are affected as well - demanding for higher pay and/or higher fees.

Seeing international big 'fat' banks being closed did not make things any better. And they said it's 'management problem' - how can international banks operating successfully for nearly or more than a century old can blame on 'management problem'? It doesn't make sense-does it? Furthermore - they were supposed to be the champions of corporate governance with stringent auditors and audit committees working according to codes of practice..in short - by the book! (or the auditors are the 'Baring', 'Enron', 'Worldcom' and 'AA' type of auditors?)

Or perhaps they hired the wrong people? or the unqualified 'Non-Executive Directors' in the Board?(perhaps those with insufficient experience in making turnarounds) So what happens now? Sack them?

But most significantly - the investors are watching directors and auditors very closely...one small mistake can cause huge amount of 'deadly' criticisms and 'threats' like 'I'm no longer investing with you' and vote of inconfidence in AGM.

Lawmakers say that stricter regulations are required - beefed up 'security' to provide a 'win-win' situation for both the investors and the banking/financial institutions. But I think - this is the question of enforcement - our BAFIA and financial standards are FINE!!

So, banks should be giving more and more lending...it looks good but it may also be risky. So, excessive lending without proper control probably would land the banks into trouble and soon ended up in the bailout long list.

I read a good statement from Chairman of IMA during one FSA's Asset Management conference:

"Investment banks are creating and distributing structured investment products aimed at the retail investor. Deceptively simple in sales pitch but complex in construction, they carry issuer risk, liquidity risk, and a level of costs which the retail buyer may not fully understand. Yet this is an area largely free from regulatory oversight and competes directly with a highly regulated traditional investment industry where agency status is central, transparency of fees and holdings de rigueur and government pressure to raise levels of treating customers fairly foremost. Is someone asleep at the watch?”

So? Lawmakers to be blamed? How's credit rating agencies for a change?

Now - agencies in credit rating (CRA) - should their roles be redefined? I know their roles in the capital market are very relevant but

a) Can we really depend on 'estimation'?
b) or just take it as a guide?
c) Are credit rating really accurate?

I know so much money has been spent based on their findings on bonds, debt instruments etc. And how many corporations shuddered when being rated superficially. (not to mention shares and human disposals)

But of course, I find that CRA's consultation can still be improved - on financial products - CDO for example and of course not forgetting the tranching of asset portfolios etc. Most of all, they need to educate the investors on the rationale of their ratings including the complex variations of many types of bonds.

Investors - I recommend that they too need to carry more responsibility rather than putting the blame on others who have worked so hard to ensure sustainability. So have mercy!!

HOW LONG OR HOW TO MAINTAIN THE 'RECOVERY' - Nik Zafri (2009)

Hello again...today I'm 'blogging' not 'lecturing'...( :-) )

So, the Malaysian Economy has shown signs of survival at last...but the golden question now is for how long? Some say :

“Wait till September, before something will go wrong”

Thinking of September always give me the shudders – not only because it's my birthday month (unfortunately) but many things happen 'coincidentally' during September. So, can we or can we not change our 'destiny'?

Here goes nothing :

We need some good support or some sort of infrastructure – call it politics if you want.

1.We need to lower down the poverty level regardless of background, status, race, religion and political tendency. Yes, this reminds me of the Ninth Malaysian Plan (2006-2010).

But of course, rough ideas can always be 'liberated' further for e.g.

a) What Senator Datuk Seri Sharizat Jalil recommended today that the Welfare Department should also consider assisting those 'owning cars, motorbikes, televisions and refrigerator' – which are now considered no longer 'things that only wealthy people can own'.

b) The 'Lembaga Zakat' wider functions should also be taken into account.

Assisting Poor Kids to School

Besides assisting potential entrepreneurs and donation to the needies, the banking and financial institutions should also come out with some ideas on how they can chip in into this – at least sponsor the poor kids to school (I know some have done this but more programs like these would go far in order to really achieve the status of 'responsible corporate citizen'...hmm that's a good idea...why not we have certs or some sort of certifications' entitled the 'Responsible Corporate Citizen's Award'...perhaps YAB Prime Minister Datuk Seri Najib can do the awarding ceremony – perhaps the award or cert entitle the corporate entities with some 'waivings' apart from tax)

Eat good and healthy food – now this one is really very serious! Diabetes, Hypertension, Heart Attack, Mamak Stall, Nasi Lemak, Smoking/drinkng (whoops) God knows how many more! What kind of food are we Malaysians taking?!!

Perhaps Datuk Seri Liow Tiong Lai should look into this matter as well....just make the food pyramid bigger so that everyone can see it!! Remember, good food gives you good brains and good brains will help you out solve matters.

One more thing....food in school canteen and cafeterias must adhere to strict food regulations – regular checks by authorities etc. No more food poisoning cases please... (remember also to provide or sponsor free healthy food for ALL children and students in school – once a week? - any takers? Nestle?)

For the banking and financial institutions, venture capitalist and grant providers

Only one thing...Show us the MONEY!! How about releasing the ones that are still in your safekeeping now??

Now is the right time...you have good benchmarks, great KPIs, good collaterals, guarantors even, not to mention viability and feasibility...so what are you waiting for? Afterlife? Bailouts?

For the politicians (regardless who you're with)

Stop the nonsense and craps....go help the Prime Minister 1 Malaysia! Go do your jobs in your constituencies...not just gatherings in community halls - go to mamak stalls if you have to (don't worry, if common people swarm you with proposals or asking you money or projects..just give a lending ear and say "I'll see what I can do" but 'must do according to procedures')

Work harder.....

Then if you wish to fight in the course of implementation or for the sake of people's progress, then fight 'lah'....make sure jobs are done!!

For the government

I found out that energy savings attitude should be inculcated further, from the government offices to corporate sectors and finally the 'rakyat' (or the other way round) There are still wastages of electricity, water supply etc...this must stop...

On the other had, those places that still do not have anything at all...be it electricity or water supply, must be assisted NOW!

ICT – another never-ending issue, I think I've said once (which paper was it?), don't focus too much on 'classy places' but the out of town as well...don't depend so much on small time providers such as cybercafes – give a first class infrastructure (plus educate them) just like what you've given to the 'urbanians' (if there's such word)


For the property market

(to be continued) - I think there are articles in here that you guys can make use.

NIK ZAFRI'S (HUMBLE) ASIA/SEA ECONOMICAL FORECAST 2009

Many have forecasted that SEA will be the first to rebound from the current economic crisis by September, 2009.

On the other hand, what saddens me most is that some even forecasted that Asian economy will fall badly in 2009 - such a pathetic statement meant to discourage us.
In the past, we have been known for the reputation of outperforming the US and Europe due to the right planning and eventually become very immune to any credit crunch from the West.

Some countries are not even depending on IMF or World Bank in 1997-1998-remember? Even China has been too much underestimated (not that I disagree but too much 'smart' speculations..come on) by these 'so-called' economic forecasters.

I have always been known as a 'reverse psychological' person. I don't believe in 'too obvious bad news' being reported meant to lure the small investors away but giving great monetary advantages to speculators.

Based on these 'unfounded fears', I feel strongly that the Asian will be one of the key players in the world economy commencing from 2009.

But of course, I have a different theory (especially for Malaysia) - I think it's earlier than that...say April, 2009?

But, I share the agreement that it is likely going to be Singapore then probably followed by Malaysia. There have been a trend of banking and financial institutions in these two neighbouring countries offering new packages to GLCs and MNCs. These efforts would probably contribute to economy recovery in 2009. There has also been a higher demand for exports from Malaysia and Singapore based on the increased spending in the Euro and US.

The banking sectors in Japan are planning to buy securities, stocks and bonds (corporate) etc - and if these plan works, it will help stabilise their financial market. The Government has announce Japan's biggest ever annual budget Y12,000bn.

China however would still have to be put under alert - to grow or not to grow. Since China are trading with other SEA countries, their ability to export surplus stocks financed on credit should be monitored. New policies to boost consumption need to be drawn up to counter this possibility. I do know that China works very-very hard lately not to be bound to 'intelligent economic comments' e.g. decoupling - and I have every confident that they will succeed.

In Indonesia, the President announce the budget of USD200 billion ++ and a 6.2% growth is expected. However, they are not too sure about the outcome of issuance of Government bonds and probably there will be a budget deficit of nearly 2% GDP. Mainly taxes will play a role for the main revenue followed by non-tax sectors. There will also be about 102 trillion rupiah for fuel subsidy.

The only biggest dillema in Indonesia is corruption - if this is not being minimized, I do not think that they can reach the target that they are hoping for. While for the good part that Indonesia has done right is their achievement of regaining self-sufficiency in rice where the production has surpassed the country's rice consumption. This has made them better in terms of food situation and probably would take them out of the current global food crisis.

For Korea, they are not too ambitious; which I find a good thing to do - be cautious. While everyone is hoping and praying for a 2009 turnaround, Korea predicted a 3% growth and the focus is mainly creating new job opportunity. They have also cut taxes here and there.

Korean consumer price is estimated to stabilize to less than 4% and there may also be decreasing service deficitit and rising goods surplus - thus making 2009 account surplus to exceed USD10 billion. I personally think that Korea should now put an effort to minimize their dependency on IMF as what they have done before in 1997.

I will keep you all updated.

Financial Times

Some of the fault lies closer to home - By John Gapper
Published: October 8 2008 19:06 Last updated: October 8 2008 22:37

"Small island, big problem” was the headline in some editions of the Financial Times on Wednesday. It referred to Iceland, which has almost gone bust and had to seek a €4bn loan from Russia. But it could have been about the UK, which has pumped £50bn of equity into its biggest banks.

The previous moment of maximum danger for British banks in my lifetime came in 1973 when, during the secondary banking crisis, National Westminster Bank needed to assure investors that it was solvent. Words would not do this week: public money was required to prop up NatWest’s parent bank RBS.

When in trouble, humans tend to blame others and many British people have blamed Americans for the subprime mortgage mess, which started the global financial crisis. If only the Wall Street banks had not cooked up loans for people who could not afford to repay them, things would have been all right.

The British, Irish, Spanish and others could have carried on enjoying sharply rising property prices and cheap mortgages. European governments would not have spent the week gazumping each other with ever higher guarantees of assistance to their own country's banks.

Americans, meanwhile, are taking it out on Wall Street financiers. Dick Fuld, chairman of Lehman Brothers, and Martin Sullivan, former chief executive of American International Group, were hauled in front of a congressional committee to account for their blunders.

Both were excoriated by politicians for the millions they received in the good times. They looked, as Samuel Pepys wrote in October 1660 of a Puritan soldier who was hanged, drawn and quartered, “as cheerful as any man could do in that condition”.

There is no question that professionals of many nationalities – bankers, financiers, estate agents and regulators – behaved badly. They got paid a lot of money and wilfully loosened credit restrictions to keep house prices rising and bonuses flowing. Many of them, although far from all, were American.

But I would like to propose another culprit for the difficulty that many economies are in: you and I. We home buyers and mortgage borrowers share the blame, whether we are American, British or Icelandic.

Take nationality first. A year ago, when the US subprime mortgage debacle was evident but the British housing market was still doing well, I took a trip to London from my home in New York. On a visit to friends in west London, I was struck by the number of houses in their street with “To Let” boards outside.

At the time, there was a lot of talk about how the UK housing market differed from that of the US because it was a small island with a limited housing stock, there was no equivalent of subprime lending and so on. But those “To Let” boards said something different to me.

They showed that cheap debt and rising asset prices had led to housing speculation all over the world; it just took different forms. In wide, flat Florida it created sprawls of condominium apartments; in densely packed UK cities it generated a rush into buy-to-let properties. For subprime mortgages in the US, read “self-certified” UK loans.

The US housing market had unique flaws: the outsized role of Fannie Mae and Freddie Mac, the home loan agencies; low interest rates set by the Federal Reserve after September 11, 2001; high fees that gave estate agents and loan appraisers incentives to pump out mortgages.

But the housing bubble was global. It was financed by securities that were constructed and sold as much in London as New York and people from many nations borrowed to buy homes. Wednesday’s co-ordinated interest rate cuts, and part-nationalisation of UK banks, illustrate that.

Then there is our tendency to blame everything on bankers and other financial professionals. Here too, we are kidding ourselves. Bankers did many foolish – and, in some cases, unethical – things during the boom. But they did not force people to buy houses or take out mortgages; they mostly provided enough rope for borrowers to hang themselves.

In the past, people used to rely on bankers to guard themselves from their own worst financial instincts. They might have wanted to borrow 100 per cent (or 125 per cent) of the value of a home without the need to demonstrate thrift and reliability by making a down-payment. But they were shown the door.

Without bankers saying “no”, many people borrowed to the hilt, assuming that rising asset prices had eliminated all risk. Some confined themselves to buying bigger houses for themselves, while others bought second and third homes to rent them out while their capital appreciated.

We know why this occurred because we all lived through it, and financial bubbles are peculiarly intoxicating. When you are surrounded by people constantly talking about how much money they have made (on paper) by buying a house, you end up wanting to get a piece of the action and fearing being left behind.

It was the madness of crowds and, unlike some bouts, it crossed borders. Even countries with comparatively low rates of home ownership, such as Germany and Belgium, were caught up in the speculative rush.

Human nature is not going to change so public policy cannot focus – beyond the need for more financial education – on eliminating our urge to get rich quick. It is more practical to sharpen up regulation and reduce the incentives for bankers to finance our foolishness in future.

But, if for no other reason than to increase our chances of doing better next time, we must beware of blaming bankers and foreigners for everything. The fault lies closer to home.

http://www.ft.com/comment/columnists/johngapper
Copyright The Financial Times Limited 2008

Hi everyone!!

It's been a while...dropping by to share a very good article which has caused me some delay in submitting a very important document to the client.

Luckily my client called me up to remind me...

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Speeches, Testimony, Papers
Global Economic Prospects 2008/2009: Hoping for a Global Slowdown and a US Recession
by Michael Mussa, Peterson Institute

Paper presented at the thirteenth semiannual meeting on Global Economic Prospects
April 3, 2008

© Peterson institute for International Economics. All rights reserved.

Overview

After four years of average annual global real GDP growth of better than 4 1/2 percent, recent data indicate that the pace of advance is slowing in the major industrial countries, with the US economy on the verge of, and perhaps already in, outright recession. So far, the evidence points to less of a slowdown in other industrial countries, while most emerging-market economies appear likely to maintain quite strong, albeit somewhat slower, growth.

Meanwhile, world consumer price inflation (on a 12-month basis) is up from barely 2 percent seven years ago to nearly 5 percent as of February 2008. Among both industrial (except for Japan) and major emerging-market countries, inflation is now running at, or in most cases somewhat above, rates consistent with policy objectives. Driven by persistently rising global demand, commodity prices continue to surge upward across the board, especially measured in US dollars but also in terms of the rapidly appreciating euro.

In this situation, the world economy really needs what is now forecast for 2008/2009: a significant slowing of economic growth, down to 3.8 percent (year over year) in 2008 from 4.7 percent in 2007.1 This slowdown will be led by a decline of demand growth in the US economy, which is both pronounced and extends over a considerable period. Indeed, in view of the exceptionally aggressive easing of macroeconomic policies already in place in the United States and the likelihood of monetary policy remaining highly accommodative so long as US financial markets remain under stress, it is now desirable that real GDP growth for 2008 fall to a forecasted rate of barely more than 1 percent (year over year)—an outcome consistent with a very mild and brief recession. Reflecting some risk of a somewhat deeper and more prolonged recession in the United States, the growth forecast for 2009 (year over year) is set at 2 percent.

For the rest of the world, a mild US recession in 2008 will have a modest negative effect on real GDP growth, with more significant impacts in Mexico and Canada. In countries where the slowdown threatens to become excessive and inflation is under control, some easing of monetary and perhaps fiscal policy is both likely and appropriate. More generally, however, it is too soon to call for a general and significant easing of macroeconomic policies. A general slowdown in global economic growth is needed to cool the clearly apparent upsurge in worldwide inflation.

Some countries, including Australia, China, and Sweden, have recently tightened monetary policies in efforts to forestall inflation. Other countries, including Canada and the United Kingdom, have eased monetary policies modestly in response to weakening economic growth. Quite appropriately, however, no country has so far followed the lead of the Federal Reserve in aggressive monetary easing.

As the custodian of the world's second most important currency, the policy of the European Central Bank (ECB) is particularly noteworthy. Inflation in the euro area is running more than a percentage point above the ECB's announced objective. The euro area economy has recently been growing significantly more rapidly than its potential rate of about 1 1/2 percent. The unemployment rate has fallen half a percentage point below the minimum reached in the last expansion. Key monetary aggregates are surging at rates well above their desired target ranges. In this situation, one would normally have expected the ECB to have raised its key policy interest rate a further 100 basis points since last summer.

Instead, with financial turbulence spreading to some extent from the United States to euro area financial markets and institutions, with evidence that euro area economies are beginning to slow, and with a sharp appreciation of the euro against the dollar, which is likely to slow growth and impede inflation, the ECB has wisely held back from further interest rate increases. With the euro area economy now expected to expand by about 1 1/2 percent this year (in line with potential), the timing and direction of future adjustments in ECB interest rates remain—appropriately—dependent upon the evolving balance of risks for inflation and economic growth.

For Japan, the strengthening of the yen against the dollar in recent months and weakening of exports to the United States, together with likely weakness in domestic demand growth, suggest a further write-down in the forecast for real GDP growth for 2008 to 1.2 percent (from 1¾ percent forecast last October). This reflects the assumption that the surprising upsurge of GDP growth in the final quarter of 2007 will be partly offset in the first half of this year.

For the industrial countries as a group, real GDP growth this year is now forecast to be 1.5 percent, and growth for 2009 is projected to be moderately stronger at about 1.9 percent.

In emerging-market economies, circumstances vary and so do appropriate policies, but the general prospect is for continued quite strong economic growth, despite the slowdown in the industrial countries.

Is this "decoupling?" Not really. Mexico, Caribbean and Central American countries, and Asian economies that are particularly dependent on exports to the United States are already feeling and will continue to feel the effects of the US economic slowdown. More broadly, however, strong growth of domestic demand in many emerging-market economies will sustain reasonably strong GDP growth, and rising demand for raw materials by key emerging-market economies, most importantly China, will help keep commodity prices strong and aid growth in other emerging-market economies.

Overall, I forecast that growth for developing and emerging-market economies as a group this year will be about 6 1/2 percent, down from almost a 7 1/2 percent advance in 2007. For 2009, I now project slightly slower growth. The slowdown will be more severe, however, if growth in the industrial countries, especially the United States, turns out to be meaningfully below the present forecast. Exports from emerging-market countries would then be hit in volume terms, and prices of commodity exports could take a serious tumble. Some developing countries, especially among the primary commodity exporters, could face serious economic challenges and potential crises.

On this occasion, Arvind Subramanian is available to share his expertise on emerging-market economies, particularly in Asia and especially India. Accordingly, I will limit my remarks on these economies to selected observations on some key emerging-market countries. Then, in view of the departure from the Institute of my colleague Martin Baily and the (at least) temporary absence of Douglas Holtz-Eakin, I will turn to discuss growth prospects in the industrial countries, especially the United States. This should provide background for Morris Goldstein's more in-depth observations on the present financial crisis and proposals for reform.

Sustained Growth in Emerging Markets

China's economy continues to surge forward, so much so that the authorities are tightening policies to cool down inflation. Growth will likely slow from 11 1/2 percent last year to about 10 percent this year and next. On the policy front, the key action that should be taken—but that the Chinese authorities have so far refused—is a significant step appreciation of the renminbi against the dollar and in real effective terms, combined with policies to stimulate domestic demand.

In the rest of emerging Asia, growth will likely moderate somewhat in 2008 and 2009 but stay above 6 percent, with India continuing to grow at nearly 8 percent.

In Latin America, Mexico will suffer spillover effects from the slowing US economy, and growth this year is likely to fall to about 2 1/2 percent before recovering modestly in 2009. In contrast, Brazil should be able to sustain growth of nearly 5 percent, despite the strong appreciation of the real against the dollar. Growth in Argentina and Venezuela is expected to slow from the high rates of recent years, bringing down the growth rate for all of Latin America to about 4 1/2 percent this year and slightly less in 2009.

For Central and Eastern Europe, weak growth in Hungary and Turkey hurt regional performance in 2007 and partly offset strong results in Bulgaria, the Czech Republic, Poland, and Slovakia. For 2008 and 2009, regional growth will likely run about 4 percent, reflecting partly the impact of slower growth in Western Europe.

In the Commonwealth of Independent States, the dominant Russian economy should continue to grow at about 7 percent, and growth rates will likely remain somewhat higher (on average) in the smaller economies.

For the Middle East, high oil prices will help keep growth strong in the energy-exporting countries. The larger and more diversified economies of Egypt and Israel should also maintain growth rates in the 5 percent range.

High commodity prices will continue to benefit many African countries, and growth in the region appears likely to continue at least at a 5 percent rate.

Slowing in Other Industrial Countries

Among the industrial countries other than the United States, growth will slow significantly from the 2 3/4 percent advance of 2007 to barely more than 1 1/2 percent this year. However, aside from the United States, I see significant risk of recession this year only in Japan and possibly Italy. The impact of the yen's recent appreciation and weakening of exports to the United States, together with deteriorating sentiment among Japanese businesses and consumers, could push GDP into a couple of quarters of negative growth, even if year-over-year growth remains slightly positive. And the Japanese policy authorities have little room to provide offsetting stimulus.

In Canada, growth this year will likely fall a little below 2 percent, under the impact of slowing US growth and a strong Canadian dollar. However, solid income growth from strong export revenues should keep domestic demand relatively robust, and the Canadian authorities have considerable room to ease policy should that appear needed to forestall very weak growth or recession.

In the United Kingdom, growth this year is also likely to slow to slightly less than 2 percent. But this is not entirely unwelcome in view of the need to curb inflationary pressures, and the Bank of England has plenty of room to ease further should that appear warranted. The Reserve Bank of Australia has continued to tighten in recent months and would surely welcome the forecasted slowing of growth to 3 percent this year.

In the euro area, as previously noted, the projected slowing of growth this year to 1.6 percent from 2.6 percent last year involves nothing more than slowing to the potential growth rate. The slowdown will affect all countries in the area. The Italian economy looks likely to be extremely sluggish and is at some risk of falling into recession. Growth should remain stronger in Germany, sustained by good export performance in the face of weaker consumer demand. France will lag slightly behind Germany, while Spain will slow considerably due to a sharp downturn in home building. The slowdown will probably be reflected in a small uptick in unemployment and will be unpopular with most politicians. However, with inflation running well above the ECB's tolerance rate of 2 percent, the central bank is likely to see the slowing of growth more as a solution than as a problem.

A Mild US Recession

Despite signs of increasing financial strains, the US economy achieved almost 5 percent annualized growth in the third quarter of last year. Economic data that became available through Christmas indicated that the economy was still expanding through November. The data since late December, however, suggest that economic activity has been no better than flat and probably modestly declining since very late last year. The economic data do not indicate an economy that is crashing into steep recession.

The three most recent monthly employment reports have shown small declines in private-sector jobs. Weekly initial unemployment claims have risen from around 300,000 to slightly over 350,000. Residential investment continues to decline. The boom in nonresidential construction appears to have peaked. Data on durable goods orders and shipments suggest weak or even declining business equipment investment. As should be expected in the face of falling home prices and household wealth, sharp increases in energy and food prices, and stagnating employment, real consumer spending has not increased since November—but it has not declined.

Net exports are probably continuing to improve, but this will not be enough to offset weakness in the other components of final demand. Annualized real GDP growth in the first quarter will likely be modestly negative—probably between minus one-half and minus one percent in the first quarter. (And, if there is a modestly positive result, it will probably reflect an upsurge in inventory investment, which is not a positive sign for future growth.)

The second quarter may see moderation in the pace of decline of residential investment, but the other elements of domestic demand are likely to remain weak. Another quarter of modestly negative real GDP growth now seems to be the most likely outcome. Whether this will be enough to persuade the National Bureau of Economic Research (NBER) to proclaim an official recession is not clear, but I would now put the likelihood of such a recession at over 50 percent.

By June, the tax cuts from the recently passed fiscal package will be flowing into consumers pockets, bumping up consumer spending mainly in the third quarter. Some, not unreasonable, forecasts suggest that the stimulus could induce as much as a 5 percent annualized gain of real consumer spending in the third quarter, implying a considerable temporary boost to GDP growth. My view is more restrained, partly because I expect that businesses will absorb some of any surge in consumption spending (particularly for durables) into reductions in inventories.

On the other hand, businesses have kept inventories quite lean for the past three years, and there is no indication of a general inventory overhang (aside from the stockpile of unsold homes, which is not counted in business inventories). Sharp declines of inventory investment into negative territory have been a feature of all ten postwar recessions. It is a positive sign that the magnitude of any inventory correction in the present episode appears likely to be limited.

In sum, the prospect is that with the benefit of the fiscal stimulus, the US economy will bounce back to moderately positive growth this summer. By then the massive contraction of residential investment, which began two years ago, should be complete—with new home building running just below one million units, less than half of its recent peak level. Growth of consumer spending is likely to be weak after the effects of the stimulus are spent, but inventory investment should bounce back, and net exports may be expected to continue to make positive contributions to GDP growth. During the second half of 2008, it is reasonable to expect growth to rebound to 2 to 3 percent.

The suggested pattern of modestly falling GDP in the first half and moderate rebound in the second half implies that real GDP will show a very meager advance of about one-half percent on a fourth-quarter-to-fourth-quarter basis. Year-over-year real GDP growth would be barely more than 1 percent. In comparison, in the 2001 recession—the mildest of the postwar era—fourth-quarter-to-fourth-quarter growth was 0.4 percent and year-over-year growth was 0.8 percent.

The 2001 recession was followed by an initially weak recovery, with real GDP growing at only a 1.7 percent rate during the six quarters after the official end of recession, and with the unemployment rate continuing to rise to a peak of 6.3 percent in May 2003. On this occasion, I expect that the economy will remain quite sluggish through 2009, with growth proceeding at about a 2 percent annual rate. Weak growth of consumer spending in the face of significant losses of household net worth associated with lower real home values will be the key reason for this sluggishness.

Partly offsetting weak consumer spending growth will be continued improvement in US net exports, reflecting both slow import growth and continued rapid export growth. With the usual lag, the substantial depreciation of the dollar over the past year will contribute to the improvement in US net exports in 2009 and beyond.

We see here what I earlier called "reverse coupling." From 1995 through 2004, relatively strong growth of domestic demand in the United States and the effects of a strong dollar (with lags extending this effect) led to persistent deterioration in US real net exports. Thus, the United States was exporting demand to the rest of the world at a time when domestic demand growth in the rest of the world was relatively sluggish.

This process has been operating in reverse since the summer of 2006. Slower domestic demand growth in the United States, combined with stronger demand growth abroad and the effects of a significantly weaker dollar, have begun to significantly improve US real net exports. Thus, during the past year and a half, the rest of the world economy has been helping to pull the US economy along. This process may continue for several years as consumer spending growth in the United States remains restrained by the effects of lower household wealth, making room for expanding the supply of US net exports without contributing to inflationary pressures in the United States. For this process to continue relatively smoothly, however, the rest of the world needs to sustain reasonably robust demand growth and the United States needs to avoid too sharp a decline in domestic demand. The adjustment of the foreign exchange value of the dollar, which is essential for this process, is now largely complete, except for the needed appreciations of some Asian currencies, most notably the Chinese renminbi.

Turmoil in Global Financial Markets

A key feature and source of uncertainty in the present economic situation is the continuing turmoil in financial markets, especially in the United States but with spillovers to Europe and to a limited extent (so far) to Japan and emerging markets. Global equity markets have sold off amidst the turmoil, but markets for credit instruments and financial institutions dealing in such instruments have been most affected.

Three issues concerning this financial-market turmoil deserve special attention:

(1) What has caused this financial turmoil, notwithstanding strenuous efforts by the Federal Reserve and other central banks to contain it?

(2) What risks does it pose to the global economy?

(3) Have the policy responses been adequate and appropriate?

Regarding the causes of the turmoil, it is noteworthy that it has been most severe in US financial markets and institutions. Europe and, to a lesser extent, Canada and Japan have also been affected. In these other countries, a few institutions (such as the mortgage lender Northern Rock in the United Kingdom) have gotten into trouble on their own, related to their domestic activities. But most of the problems faced by non-US institutions have arisen because of their involvement with financial instruments originating in the United States.

In the United States, the initial underlying difficulties arose from subprime mortgages and financial instruments involving such mortgages. However, the crisis is much broader and deeper and has gone on longer than can plausibly be explained by this underlying cause. Across quite a broad spectrum, credit markets have become illiquid and dysfunctional. Interest rate spreads relative to US Treasury obligations have shot up and remained high and volatile even for higher-quality credits. Markets for important classes of bundled instruments have frozen up, and values for some of these instruments—to the extent that they can be determined—have plummeted. All this turmoil, well beyond what can plausibly be explained by developments in the real economy, indicates that financial markets and institutions themselves are mainly responsible for the crisis.

The extent of this crisis in credit markets is even more remarkable in view of the exceedingly aggressive actions taken by the Federal Reserve and the important but less aggressive actions of other leading central banks. Contrary to the nonsense spoken by many financial-market commentators, the Federal Reserve has not been "behind the curve" in its policy response. In fact, the easing of US monetary policy in the present possible recession has far outstripped the pace of easing in past actual recessions. On top of this, the Federal Reserve has recently taken truly extraordinary actions to extend specific liquidity support to a wide range of US financial institutions.

The official explanation for these extraordinary actions is not that they are motivated primarily by the desire to protect financial institutions from losses but rather to head off the risk of major damage to the general economy spreading from difficulties in the financial sector. So far, however, there is little indication that the general economy is suffering much damage from the credit market turmoil—beyond some deepening of the downturn in US residential investment. In particular, the present slowdown in the US economy and around the world is not much more than what we would normally have expected in view of falling home values, higher food and energy prices, and other developments aside from the turmoil in credit markets.

Does this imply that the Federal Reserve, in its efforts to protect the financial sector, has overreacted to the credit market turmoil? Has it eased too aggressively, unduly raising the risk of inflation down the road? Has its rescue of the financial sector by cutting massively the cost of funds and the provision of specific liquidity support generated far too much moral hazard relative to the value of the protective effect of these actions against real hazards faced by the general economy?

At this point, the answers to these questions are not entirely clear, but two conclusions can be reached with high confidence. First, given the massive easing already undertaken by the Federal Reserve and the likelihood of some modest further easing, the US economy now needs to undergo at least a near recession if the Federal Reserve's easing is not to be excessive. Second, if the Federal Reserve's highly aggressive actions have really been warranted to protect the economy from substantial harm, then deep reforms of the financial system, including the Federal Reserve's policies and practices, are clearly needed to reduce the likelihood of such problems in the future. The Federal Reserve cannot pose only as the hero riding to the rescue of the economy and the financial system. Its role as one of the villains whose earlier actions and inactions contributed to the present crisis needs to be fully and carefully assessed.


Table 1 Real GDP growth projections as of April 3, 2008 (percent change, year over year)




Note

1. The figures for global GDP growth are aggregated from the growth rates for individual countries using purchasing power parity (PPP)–based measures of exchange rates employed by the International Monetary Fund (IMF) in its World Economic Outlook (WEO). Based on a major study supported by the World Bank, estimates of PPP exchange rates have recently been substantially revised, with the general result that the weights in world GDP of the industrial countries have been somewhat increased while those of emerging-market economies have been correspondingly reduced. Because emerging-market economies, most notably China and India, have been growing far more rapidly than most industrial countries in recent years, the effect of the revision in PPP exchange rates is to lower the figure for global growth (without changing growth rates for individual countries) by about 1/2 percentage point. Thus the present estimate for global growth of 4 3/4 percent in 2007 under the new PPP-based exchange rates corresponds to an estimate of 5 1/4 percent growth under the old weights. The weights used in table 1 are estimates of the weights that the IMF will use for the forecast to be reported in the current WEO.
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RESPONSE FROM MELBOURNIAN AND COUNTER-RESPONSE FROM NIK ZAFRI - IN GLOBAL MALAYSIAN FORUM

Melbournian : A very lengthy analysis that echos familiar cliche from "soft-landers". My only comment is that there are two important factors that seems to be absent from his presentation: ie the component of human emotion and the lack of accountability in the derivative instruments that are prevalent in recent years. The health of credit market depends un-surprisingly on market "credibility". Quite akin to the railroad stock bubble and the (in)famous tulip futures fiascos in the past , the total sum of global derivatives todays seems to have exceeded the true intrinsic values of the actual goods and services that these instruments are supposed to underpin. Laws of conservation and Newton's principle of inertia are no longer relevant. No longer can one confidently say for sure that one man's gains equal in exactitude to another's losses. Containment ? Lets hope and pray.

Nik Zafri :

Hi Melbournian, I must say that I'm impressed!

This research seem to miss out "CCI" (Consumer Confidence Index) which I think suitably describes what you meant by 'human emotion' in the context of economics. (it's obvious isn't it....the article is touching on 'purchasing power', 'manpower', business surroundings - which are all linked to the CCI)

Surprisingly I have also discovered that the Global CCI have always been missing (in fact seldom being measured) But; in US; it will suddenly 'appear' during proposal to hike interest rates by the Feds - hence one of the main indicators to the performance of the stock market worldwide.

I can understand why the CCI is sometimes there and sometimes not there...it's because of the big variance between one country to another. CCI is suppose to be the consumption indicator for GDP.

Lack of accountability on derivative instruments

What you have said - coincidentally reminding me of the core of Management - it is said that :

"Responsibility is a derivative of authority and accountability is a derivative of responsibility"

It's a paradox - I do not know if there is any connection.

Anyway, in this case, the derivative instrument (to the accounting standards esp. balance sheet) becomes a concern when it involve hedging and embedded derivatives (contract) - to determine of whether they (derivatives) are liabilities or asset. Otherwise positioning of finance and determining the derivatives value cannot be accurately achieved.

I'm not a qualified accountant but I do know the affects of hedging either the normal fair value, cashflow or currency. Now? As you said and I would to agree to it that most accounting (and auditing) bodies (even in Malaysia) are 'shouting' demanding accountability but again, it is easier said than done unless further education to include hedging activities and the volatility behind them in the context of derivatives are developed further.

Yes, breaking every rule in the book is now trendy!! It is also the reason why I am really interested in the concept of Knowledge-Based Economy and Knowledge Management but of course these two terms are moulded according to my style of intepretation - in short my experience. At times, I never trust figures, data and statistics but I use my instincts to make decisions.

Finally quoting you : "Let's Pray and Hope"

The Star Global Malaysians Forum - Posted: 24 August 2006 at 11:46pm

Nik Zafri Posted :

Someone has asked me to define what is PFI in the construction industry. I know that this question is very much related to the previous 9MP. So here's what wikipedia says:

The Private Finance Initiative specifies a method, developed initially by the United Kingdom government, to provides financial support for "Public Private Partnerships" (PPPs) between the public and private sectors. This has now been adopted by parts of Canada, France, the Netherlands, Portugal, Ireland, Norway, Finland, Australia, Japan and Singapore amongst others) as part of a wider reform program for the delivery of public services. en.wikipedia.org/wiki/PFI

Besides than PFI, I'm sure you all have heard of these :

a) Design and Build, b) Turnkey, c) EPCC, d) Conventional,

Thus, PFI is an additional to these..
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anonymous wrote:
hi, i juz read your post on PFI. Is there any pros and cons in PFI? From wut i've read, PFI don't really works in UK. the article is as follows:

The Confederation of British Industry (CBI) reported that the PFI procurement

process wastes an average of £2.45m per hospital scheme worth £60m or more since 1994. This represents 1.05% of a project's capital value. Ifthe trend continues, the CBI believes the waste could end up reaching at least £122m on upcoming hospitals. The procurement process was found to typically take 39 months when 18 months is recommended . (Source: Building, 21 April 2006)

What about Malaysia?

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Posted: 24 August 2006 at 11:46pm

Nik Zafri's Response

Good observations. One tiny thing…the PFI definition is not mine..it’s wikipedia’s (of course I reserve my comments..for now) Pros and cons…what doesn’t? If I read the statement you’ve inserted here carefully, there’s something along the line saying about ‘process wastes.’ Now if I’m not far too mistaken, in the thread – construction quality management, I did talk about ‘cost of quality’. And if I read it right again, the statement sounds like it’s taken from some audit report (intergrated financial and process audit – the accenture way)…yeah…they cover ‘cost of quality’ too – defects, system NCRs, logistics, and so on (even has years of projections on 'waste' alone) Well buddy, not only PFI, ‘waste’ issue is happening everywhere – even in Turnkey/Design & Build /EPCC /conventional…But again, this does not mean in any way that I’m with or not with PFI. Let's wait and see first. It's not really fair to pass a judgement in such a short time.
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Posted: 15 November 2006 at 2:14pm

Azlin_Rahim wrote:

hello there.. hurm..finally i can write something here.. im so busy with my examination..heheheyup..still with the PFI.. as far as i concern PFI is one of the extension of privatison..however i am really confused with the PFI accordance with 9MP..its kinda looks like PFI have the similarities with the BOT, i guess..correct me if im wrong..thank you...


azlin_rahim wrote:
Hello back. In theory, I would agree with you that PFI could be the 'upgrade version' of privatisation and even not too wrong to say that PFI has the elements of 'Turnkey' & D & B as well, but according to this link,* there is a difference.


* Excerpt :

Those who say that PFI is privatisation have got it wrong because, while the private sector is rightly helping in public service delivery, the public interest is paramount.

PFI is thus quite distinct from privatisation – where for example in privatised health or education it would be the market and the price mechanism, not the public (sector), that defined and provided the service directly to those customers that can afford it and thus where the public sector can end up sacrificing both fairness and efficiency in the delivery of these core services.

So there should be no principled objection against PFI expanding into new areas where the public sector can procure a defined product adequately and at no risk to its integrity. The private sector may have a core skill the public sector can benefit and learn from, such as in the provision of employment and training services, the renovation of schools and colleges, major projects of urban regeneration and social housing, and the management of prisons. In each of these areas we can show that the use of private contractors is not at the expense of the public interest or need be at the expense of terms and conditions of employees. If we can secure greater efficiency in the provision of the service, it is one means by which the public interest is advanced.
-------------------------
BOT is the mechanism of PFI and they are not independent but rather complementary in a sense that PFI uses BOT method to move. Here's another good link:*

* Excerpt :

The Private Finance Initiative, or PFI hereafter, is a new initiative to construct and operate public facilities by the private sector. It is designed to make high quality and cost effective projects possible through utilizing the strength of the private sector and through business competition. It can use the private sector’s various financing method, good services, technologies, know-how, and marketing capability. In PFI, most popular schemes are BOT and BOO.

In the BOT scheme, a government grants the private sector to finance, build and operate a public facility. The private sector builds and operates the facility mainly at their own risk for certain period (say 10 to 50 years). After a certain concession period, the facility is transferred to the government.

In the BOO scheme, the difference from BOT is that the ownership of the project remains in the private sector.

PFI are used in a rather large projects, such as railways, highways, ports, airports, water supply, waste water treatment, telecommunication, power plants and pipeline gas distribution.

The roles of the governments in a host country and the private sector are as the follow:

-Grant of concession
-Tax incentives
-Appropriate land and space
-Subsidies or any assistance if necessary
-Minimum operating income guarantees
-Support loan and standby financing, and
- Risks which private sector can not bear, such as political
risk, environmental risk and so forth.

The role of the private sector is to do the following:

- High quality and cost effective public service
- Low cost finance arrangements
- Technology and skill transfer
- Contractual schedule control
- Management of four risks, namely
--Facility completion risk
--Operating risk
--Proceeds collecting risk, and
--Investor’s risk
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Again, I'm neither saying nor commenting on PFI or RMK 9 in Malaysia due to (again) 'it's too early to tell' and unfair to theorize before seeing end-results...

Good luck in your studies.
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Posted: 18 December 2006 at 10:07am

Response by Su_Za

I did my PhD reseach on PFI in the UK. So, just to share with everyone some info on PFI.
...............................................
Types of PFI Projects

Basically, there are three types of projects that the government encourages within the PFI; services sold to the public sector, financially free-standing projects and joint ventures (Treasury Taskforce, 1997a: para. 1.05-1.06; Akintoye et. al, 1998; and Allen, 2003). At present, the major focus of PFI activity has been on the first of these, i.e. services sold to the public sector (Treasury Taskforce, 1997a: para. 1.05)

a. Services sold to the public sector

The provision of public services using assets that are financed, designed, built and operated by a private sector consortium and are paid for by a public body through service charges (Armstrong, 1996 and The Scottish Parliament, 1999). These are normally referred to as Design, Build, Finance and Operate (DBFO) schemes. Under the scheme, the public sector purchaser needs to be assured that services provided will give greater value for money (VFM) than the conventional procurement. Examples of the DBFO projects are:

· the provision of prison places by the private sector through designing, building, financing and operating new prisons

· hospitals where the private sector will meet the costs of the building and take on the responsibility for the provision and management of ancillary services such as cleaning, catering and maintenance (Illidge and Cicmil, 2000)

In other words, at the heart of the DBFO approach the focus is changed away from the procurement of assets to the purchase of services associated with those assets (Dick and Akintoye, 1996).

b. Financially free-standing project

This is where the project is entirely financed and managed by the private sector. The revenues for the services supplied are mainly from payment by the end users. This type of project does not require a VFM test but does require government approval (Owen and Merna, 1997). In other words, public sector involvement is limited to enabling the project to go ahead through assistance with planning, licensing and other statutory procedures. The Second Severn Bridge and the Dartford River Crossing are the examples of projects under this category (Treasury Taskforce, 1997a: para. 1.06).

c. Joint ventures

For this type of project, the public and private sector work as a partnership but the private sector retains control. The public sector investment could be in the form of grant, guarantee or subordinated debt. In return, the public sector will receive a proportional share of any profit (Illidge and Cicmil, 2000). This type of project requires a VFM test and needs to conform to these criteria:

· Private sector partners in a joint venture should be chosen through competition
· Joint venture control held by private sector
· A clear definition of the government’s contribution and its limitations
· Clear agreement of risk and reward allocation, defined and agreed in advance, ensuring that the private sector is genuinely assuming some of the risk.

The Channel Tunnel rail link, Croydon Tramlink, Manchester’s Metrolink and urban regeneration schemes are examples of joint venture projects.

Posted on The Star Global Malaysians Forum: 08 October 2007 at 9:06pm

preferred anonymous by e-mail wrote:
Hi Nik, I saw your comments in Global Malaysians and got quite interested in them. I google and found your name in the internet which has led me to your website and how I got this e-mail address.

I am thinking of expanding my construction business and I thought of seeking funds from the financial institutions. I've done a business plan reflecting all the necessary items to qualify for financial assistance. Some of the important contents are (apart from the opening/executive summary & company background):

Construction Service & Product Description, Target Market & Analysis for both Product & Service, Competition, Marketing Strategy, Financial Projections - P & L, Cashflow & Balance Sheet.

Is there anything more I should add?


Dear Madam

At one glance, I think your business plan has all the necessary elements (in the context of business plan format). If I may say something - I noticed that you didn't really mention in what capacity your construction firm is in. Or what type of financial assistance you're looking for - Loans? Venture Capital? P.O Financing? Factoring?

This is the typical problem when it comes to e-mail query - a bit of limited space.

The reasons I asked:

a) since I saw the word "Product" (or for BOTH Product and Services - you are implying that you have two not one)....you see "Product" can mean many things when it comes to construction...it can mean that you are manufacturing and installing construction materials as well e.g. cement for concreting? Steel for reinforced concrete? (Which also serves to make you a supplier & sub-contractor for concreting works as well...)

b) The construction service is also not clear - Civil & Building Engineering? M & E?

All the two aforesaid examples are categorized within the trade "Construction".

So, I'm assuming you are in both sectors but I'm unsure of the weight between the two (which one your company focus on e.g. 60% - construction services and 40% Product/Construction Materials)

Based on my experience assisting construction companies doing business plan, if a company has something to do with construction materials manufacturing, then it should be a wise move to first separate the financial projections between the two before consolidating them both (or you can have both separated..that wouldn't be a problem).

In the Product Description - if your company is a specialized trade contractor i.e. Cement & Concreting, then you should be including the quality and safety of your products for construction application for various structures such as residential, commercial - hi/low rise building etc.

One of the most difficult part in the 'Target Market and Analysis' section, is finding the statistical figures (I sure hope you have included statistics as well) based on the different category of construction (let's say concreting) e.g. you should estimate the number of establishments in a particular geographical area vs no. of people being employed vs total annual sales.

You should also take into account, your current and past performances - say..a cut off period of 3 years (depending your financial projection) - meaning you will have to include audited accounts alongside with some accounting records for support. (e.g. how much sales you have made for your 'product' in the past 3 years. When you have these intact, you can make a better forecast for 3 years ahead based on the current trends.

Another part that is posing many problems to construction business plan is to include the business ratio (usually immediately after the financial projections) - this is about your industry profile statistics - comparison of industry standards and the key ratios for this business plan.

It's also good if you can include graphs for each projection - where applicable - besides than tabular explanation.

One important point to note, you must be able to convince the 'financiers' that your company and your project venture have the 'viability' and can 'sustain'/'survive' in the market for quite sometime. In order to do this, you need a separate analysis on the current construction trend...which is quite volatile..sorry to tell. (which is why business ratio is recommended to be included)

Overall, in this limited space, I would recommend you to first split between 'construction services' and 'construction product' - in short, make two business plans first then consolidate them together. Otherwise, you may potentially face confusion here and there if you mix both together. (Trust me)

Okay, that would be all for now....I wish you the best in everything you do.

BANTUAN GERAN/PEMBIAYAAN/PINJAMAN DI MALAYSIA

Oleh : Nik Zafri (Mei, 2007)

Atas permintaan ramai peminat dan pembaca, berikut adalah antara pautan-pautan penting bagi usahawan-usahawan memerlukan bantuan kewangan dalam bentuk geran atau pinjaman/pembiayaan.

Pautan-pautan URL yang saya letakkan di sini adalah antara agensi-agensi/institusi-institusi kewangan (kerajaan/swasta) yang jarang diketahui oleh bakal-bakal usahawan terutamanya golongan muda.

Kebanyakan isi kandungan pautan-pautan ini adalah dalam Bahasa Inggeris.

Walaubagaimanapun, masih terdapat lain-lain pilihan permohonan pinjaman/pembiayaan seperti MARA, TEKUN, PROSPER dan sebagainya (atau terus menghubungi bank-bank/institusi-institusi kewangan) yang tidak saya letakkan di sini kerana umumnya ramai yang telah mengetahui akan kewujudan agensi-agensi/skim-skim ini.

Sebelum pembaca melawat pautan-pautan ini, suka saya mengingatkan pembaca/bakal usahawan akan perkara-perkara berikut :

a) Pastikan pembaca/bakal usahawan menentukan apakah jenis perniagaan atau industri dan saiz (SMI/IKS dll). perniagaan selaras dengan jumlah geran atau pinjaman/pembiayaan yang bakal dipohon. Kesilapan yang sering berlaku ialah memohon jumlah yang tidak selaras dengan saiz atau jenis industri yang bakal diceburi.

b) Pastikan pembaca/bakal usahawan mempunyai pengetahuan, kelayakan dan pengalaman yang secukupnya sebelum menceburi apa-apa jenis perniagaan dan industri. Dapatkan input daripada perunding atau pakar atau rakan-rakan yang mempunyai pengalaman yang lebih lama dalam perniagaan/industri berkenaan. Kesilapan yang sering berlaku ialah kegagalan perniagaan/industri disebabkan kurang pengetahuan mengenai sistem, operasi dan pelaksanaan.

c) Kepentingan/Objektif utama permohonan geran atau pinjaman/pembiayaan adalah untuk perniagaan dan industri yang bakal diceburi. Kesilapan yang sering berlaku ialah apabila kelulusan diberikan, wang terus digunakan untuk 'menutup lubang' (hutang) yang besar. Jika ini berlaku maka aliran tunai perniagaan/industri akan mengalami kegagalan dalam tempoh yang pendek. Apatah lagi, jika wang itu tidak digunakan untuk perniagaan/industri sebagaimana permohonan asal.

d) Dalam membuat kertas kerja, pastikan pembaca/bakal usahawan memberikan keterangan yang benar dengan data, analisa atau bukti yang mencukupi. Kesilapan yang sering berlaku ialah apabila terlalu banyak haipotesis (kumpulan teori-teori) digunakan terutamanya pada bahagian 'Pemasaran'. Trend kini menunjukkan bahawa kebolehupayaan perniagaan/industri (business viability) merupakan satu bentuk 'cagaran' yang penting dan akan dinilai oleh panel pemberi pinjaman/pembiayaan atau geran. Kesilapan yang sering berlaku ialah meletakkan cagaran berbentuk aset semata-mata tanpa mengambilkira kebolehupayaan/jangkahayat perniagaan berkenaan. Atau memasukkan sejumlah wang dalam akaun bank syarikat bagi menunjukkan 'penyata bank yang baik' kepada pihak pemberi pinjam. Kemudian, wang itu dikeluarkan selepas menerima penyata. Perkara ini perlu dielakkan kerana trend menunjukkan bahawa bukanlah jumlah wang yang ada dalam bank yang diambilkira tetapi corak pergerakan 'turnover' (keluar masuk) wang berkenaan bagi tempoh tertentu.

'Turnover' ini perlu dibuktikan dengan data yang mencukupi seperti terdapatnya Pesanan Belian (PO), Invois dsb. Pembaca/bakal usahawan juga perlu cuba mendapatkan surat-surat sokongan/surat niat dari bakal pembekal, bakal pelanggan, institusi kewangan (surat niat kemudahan kredit) dsb. bagi menggambarkan viabiliti dan jangkahayat perniagaan berkenaan.

Setidak-tidaknya cubalah buat tinjauan dan penyelidikan yang mencukupi dalam perniagaan/industri yang bakal diceburi.

Banyak di antara pautan-pautan berikut juga memberikan sampel atau contoh kertas kerja atau pelan perniagaan termasuk proses-proses/kriteria-kriteria yang perlu difahami dan diperlukan oleh agensi pemberi pinjaman/pembiayaan atau geran.

Walaubagaimanapun, perlu saya nyatakan bahawa saya tidak ada sebarang kepentingan atau kaitan secara professional dan peribadi dengan agensi-agensi yang disebutkan di bawah ini. Tetapi, sekiranya pembaca/bakal usahawan memerlukan panduan-panduan lain/info. lain, sila e-mel kepada saya.

MALAYSIAN VENTURE CAPITAL (MAVCAP) - CRADLE INVESTMENT PROGRAM

Geran diberikan untuk perniagaan ICT, bioteknologi dan lain-lain industri yang berkaitan. Program ini juga membuka peluang kepada idea-idea baru untuk diperuntukkan geran. Usahawan juga dikehendaki mendaftar secara talian selain digalakkan/diwajibkan menyertai kursus-kursus yang disediakan.





http://www.cradle.com.my/cms/index.jsp
Artikel/Bahan Menarik Panduan Penulisan Ringkasan Eksekutif Panduan Pemerosesan Permohonan Carta Alir Proses Permohonan

MALAYSIAN DEBT VENTURES

Objektif Pinjaman/Pembiayaan diberikan adalah hampir sama dengan apa yang diperuntukkan oleh MAVCAP

http://www.debtventures.com
Dokumen-Dokumen Carta Alir Proses Permohonan

SMIDEC

Objektif Geran dan Pinjaman/Pembiayaan diberikan untuk IKS yang berpotensi. Usahawan juga dikehendaki mendaftar secara talian.

http://www.smidec.gov.my/checkgrantdataservlet?hdAction=grant

CREDIT GUARANTEE CORPORATION (CGC)

CGC mempunyai 6 Skim Utama iaitu Laluan Terus, Usahawan Kecil, Perbankan Islam, Anjal, Francais dan ENHANCER. Ianya berbentuk pinjaman/pembiayaan di mana CGC adalah badan yang memberikan jaminan kewangan dan syor kepada pihak bank bagi meluluskan pinjaman/pembiayaan berdasarkan kertas kerja/pelan perniagaan yang dinilai. Usahawan
juga dikehendaki mendaftar secara talian selain digalakkan/diwajibkan menyertai kursus-kursus yang disediakan.



http://www.iguarantee.com.my/iguarantee/index.htm


TECHNOPRENEUR

Technopreneur adalah satu inisiatif MDeC/MSC (Perbadanan Multimedia (Cyberjaya) - Koridor Raya Multimedia) untuk meluluskan geran khusus kepada usahawan ICT yang berpotensi. Terdapat juga maklumat berkenaan permohonan status MSC.


http://www.technopreneurdevelopment.net.my/cms/AllProduct.asp?CatID=122

The Star Global Malaysian Forum

The Star Business - Wednesday November 7, 2007

Construction assets draw foreign interest - Infrastructure and development projects a boon to sector

PETALING JAYA: Local construction assets seem to be attracting the interest of foreign investors of late.

Last month, Putrajaya Perdana Bhd saw the entry of a new controlling shareholder, Swan Symphony Sdn Bhd, which bought over Eastern & Oriental Bhd¡¦s stake in the former. Swan Symphony is jointly owned by Abu Dhabi-Kuwait-Malaysia Investment Corp (ADKM) and Autron Investment. With the support of the new shareholders, Putrajaya Perdana is anticipated to expand its presence to the Middle East.

Meanwhile, PJBumi Bhd told Bursa Malaysia on Monday that its substantial shareholder, PJS Industries Sdn Bhd, planned to sell a 10.2% stake to Al-Saudia for RM3.1mil. This was on top of the 25% that PJS disposed of to Metro Utilities Sdn Bhd in September. PJBumi, which is trying to return to profitability, is involved in the design, trading, installation and maintenance of fibre-reinforced plastic, reinforced concrete sewage treatment plants and underground petrol cum storage tanks.


It also manages wastewater treatment, solid waste and garbage collection.

The Government¡¦s efforts to improve the quality of water in the country by rolling out various projects look set to benefit PJBumi. Another company that is going to see a new shareholder is low-profile water player Loh & Loh Corp Bhd. The shares, which are usually thinly traded, seemed to have sprung to life, having appreciated more than 30% over the one week period. The counter was last traded at RM4.12 before being suspended in afternoon trade yesterday.

Loh & Loh told the exchange that its substantial shareholder, Vital Achievement Sdn Bhd, intended to dispose of its shares. An analyst at AmResearch said Loh & Loh was well known as a dam builder in the water sector, having completed several jobs as a sub-contractor for Gamuda Bhd. The company also has experience in bulk earthworks and rail track construction, having built bridges for the Ipoh-Rawang double-track project.

Aseambankers in a report said the domestic construction scene could be seeing another boom, given that at least RM165bil worth of infrastructure and development projects identified by the Government and the private sector were likely to kick off by the turn of the decade. Government spending should pick up since it had to date only spent 25.4% of the RM200bil in development allocation under the Ninth Malaysia Plan, it said.

¡§We foresee high impact and chunkier projects in the rail, water, and oil and gas sectors, and the government¡¦s regional development efforts, to be the key drivers,¡¨ the brokerage added.

---------------------------------

The way I see it this is a good tonic for the local construction industry. Of course, this has something to do with IDR, ECER, NCER just being launched, It is also related to the relatively competitive project management costs that Malaysia has to offer. With various crisis happening almost everywhere in the world, Malaysia is drawing construction FDI interests and possibly JV, smart partnership, strategic alliance and even merging possibilities would be happening. Despite my worries about uncontrolled construction materials cost; come to think of it; the FDI may help the local construction firms in terms of long term financing - thus may help in the long run to ensure the construction industry sustains.

There are somehow other concerns:

a. Shareholding in terms of JV or smart partnerships? Will our construction firms be too strict and not embarking on a 'win-win' situation?

b. Is the local construction firms ready with

i) all the necessary expertise,

ii) possible mixed work cultures influence,

iii) more than enough 'quality' services to provide - in terms of system/process/workmanship, the necessary infrastructures/machinery/ICT capabilities, corporate governance good practices etc.?

c) Will (more and more) our financial institutions be willing to cooperate - help out the local construction industry or just hope that the foreign construction firms come out with majority of financial backups and in the end, we promise them a big amount of concessions, contra with finished properties, or share the future profit reaped from the finished projects? etc? in order to cover the financial backups that are rendered by the foreign construction firms? (via foreign financial institutions e.g. soft loan or long terms bonds or any other financial instruments)

Thus, while we are happy almost seeing big money coming in, I think the local construction firms should also think of what I've said herein. Based on history (and my experience working with the local JV partners) many mega projects management appear to love doing things 'last minute' - I hope this is not the example we're going to show them.

Let's welcome construction FDI with wide hands..WELCOME..but please...let's local construction firms be ready to show a very professional ethics in terms of our personal traits, business, technical, system etc.