By YAP LENG KUEN
THINGS were going on well for the first three quarters of last year, Then in October, the markets saw the crash of the 120-year-old Lehman Brothers and the snowballing of the US subprime problem.
Other funds have been badly affected too. Calpers, the US’ largest pension fund, has dropped by 28% in value; Khazanah 20% and Temasek 31%.
The Singapore central provident fund has two accounts – ordinary that is paying a dividend of 2.5% while retirement and medisave is paying 4%.
An analysis of the EPF dividend over the last five years, split into equity and fixed income, revealed that without making any provisions, the dividend could be much higher.
Could the timing of the overseas investments be held back in view of red hot prices already at a high in many equity and commodity markets? Was there any advice against this at that time?
“There was no advice internally or externally not to enter these foreign markets at a high,’’ said EPF CEO Datuk Azlan Zainol. In fact, one or two organisations that the EPF met had expressed their support as they also agreed that Malaysia was a small market.
“Every time we go into the market in Malaysia, we end up owning stocks like Maybank where we would be holding a stake of less than 20%. We shouldn’t have such high stakes as 15%-16% in Malaysian companies,’’ he said.
The fund has strategic stakes only in the RHB group, Malaysia Building Society Bhd and Malaysian Resources Corp Bhd.
“For the rest of the companies, we should only be looking at 5%-9% stakes. Because we have no choice, we have to buy into these so-called good counters,’’ he said.
On top of that, each time the EPF goes into the market, it accounts for almost 20% of the volume. “That is not good. By right, a fund should not take more than 5% of the volume especially when the market is so dull,’’ he said.
The fund started going abroad in 2007 and 2008. “If people say the timing was not so good, the answer is ‘yes’ and ‘no’. Suppose the subprime market and Lehman had not collapsed, it would have been good. Did anybody say at the beginning of last year that this was going to happen?’’
No doubt, economists had been voicing their concerns over subprime and high levels of debt. “But nobody could foresee that it would be so terrible.
“Can anyone imagine that a 100-year-old bank can just go down like that, or Citigroup would shrink in value in just 12 months to US$1 from US$100?’’ he asked.
In retrospect, it is very easy to say what should not have been done. But the fund has been selling too. In January alone, it sold RM5bil in domestic equity.
“We were selling and luckily, we sold a 25% stake of RHB Capital to Abu Dhabi Commercial Bank at RM7.20. Today, RHB is only RM2-RM3. But I don’t think that was very clever as I thought I could get RM10. That is luck,’’ he said.
However, the EPF’s performance in equity investments had dropped by less than 20% in both domestic (18.4%) and overseas markets (19.5%). In comparison, the KLCI had dived by 39.3% and the Dow Jones 33.8%.
The Tokyo, Hong Kong and Singapore markets were down by more than 40% last year compared with 2007.
Monday, March 23, 2009
Obama advisers urge restraint on AIG bonus issue
WASHINGTON: The White House said using tax law to pry bonuses from bailed-out company executives is "a dangerous way to go" and a Republican senator on Sunday advised against the mob mentality that has Congress "grabbing its pitchforks and charging up the hill" in pursuit of the cash.
While acknowledging public outrage over $165 million in bonuses paid to a financial firm that just months earlier had turned to taxpayers for aid, the administration's economic advisers said President Barack Obama wouldn't "govern out of anger."
Obama's economic team has to deal with a plan backed by the House of Representatives that would tax American International Group Inc. executives 90 percent of bonuses paid this year.
The president, they added, did not embrace the populist legislation.
Rep. Barney Frank, the Massachusetts Democrat who heads the powerful House banking committee, supported the legislation but said Washington should consider more steps, including suing AIG to recoup the money.
The government has an 80 percent equity stake in the insurance giant, a position Frank said should be used "to assert our rights."
The White House and Senate Democrats, including Senate banking chairman Kent Conrad, urged restraint, instead hoping executives would voluntarily return their bonuses.
Vice President Joe Biden's economic adviser, Jared Bernstein, criticized the AIG tax plan as it headed to the Senate, where it was likely to be modified with bipartisan backing.
"I think the president would be concerned that this bill may have some problems in going too far - the House bill may go too far in terms of some - some legal issues, constitutional validity, using the tax code to surgically punish a small group,"
Bernstein said. "That may be a dangerous way to go."
Populist anger came to a head last week when the Obama administration went on the defensive against AIG's bonuses.
It was a distraction for the administration as it sought support for Obama's ambitious $3.6 trillion budget and a defense for Geithner, for whom Wall Street's woes have become his chief task.
White House economic adviser Austen Goolsbee said Sunday that Obama understands the anger and that the easiest thing would be for AIG executives to return the bonuses.
"The president's also been clear we don't want to govern out of anger. He's going to look at what comes out of the House, what comes out of the Senate, see what ideas we have," Goolsbee said.
Republicans and Senate Democrats seemed to line up with the president's policy team.
"People are disgusted and outraged, as they should be," said Republican Sen. Judd Gregg of New Hampshire.
"But let's not overreact in a way that basically has the Congress grabbing its pitchforks, and charging up the hill, and abusing what is a core authority of a government, which is the authority to tax its people."
The bailed-out insurance giant paid bonuses totaling $165 million to employees, including traders in the Financial Products unit that nearly took the company and the U.S. financial system to the brink of collapse.
AIG has received $182.5 billion in federal bailout money and is now 80 percent government-owned.
Populist anger led the House to pass a bill that would impose a 90 percent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies that have received at least $5 billion in government bailout money.
It would apply to any such bonuses issued since Dec. 31.
On Saturday, a busload of activists representing working- and middle-class families paid visits to the lavish homes of AIG executives in Connecticut to protest the bonuses awarded by the struggling insurance company.
About 40 protesters sought to urge AIG executives who received a portion of the $165 million in bonuses to do more to help families.
American International Group Inc. has said it was contractually obligated to give the retention bonuses, payments designed to keep valued employees from quitting, to people in its financial products unit, based in Wilton, Connecticut.
AIG chairman Edward Liddy has urged any executive who received more than $100,000 in bonus payments to return at least half.
He told a House subcommittee last week that some of the executives have "already stepped forward and returned 100 percent."
AIG has argued that retention bonuses are crucial to pulling the company out of its crisis.
Without the bonuses, the company says, top employees who best understand AIG's business would leave.
"We think $165 million could be used in a more appropriate way to keep people in their homes, create more jobs and health care," said protester Emeline Bravo-Blackport, a gardener.
The company, in response to the protests, said all its employees were "working very hard to pay back the government and help the U.S. economy recover."
"The people working at AIG today are part of the solution, not part of the problem," company spokeswoman Christina Pretto said in an e-mailed statement.
The group also protested at the office of AIG's financial products division in Wilton, where they waved signs and chanted, "Money for the needy, not for the greedy!"
There were no arrests.
Bernstein spoke on ABC television's "This Week." Goolsbee appeared on CBS' "Face the Nation." Gregg appeared on CNN's "State of the Union."
Source: TheStar
While acknowledging public outrage over $165 million in bonuses paid to a financial firm that just months earlier had turned to taxpayers for aid, the administration's economic advisers said President Barack Obama wouldn't "govern out of anger."
Obama's economic team has to deal with a plan backed by the House of Representatives that would tax American International Group Inc. executives 90 percent of bonuses paid this year.
The president, they added, did not embrace the populist legislation.
Rep. Barney Frank, the Massachusetts Democrat who heads the powerful House banking committee, supported the legislation but said Washington should consider more steps, including suing AIG to recoup the money.
The government has an 80 percent equity stake in the insurance giant, a position Frank said should be used "to assert our rights."
The White House and Senate Democrats, including Senate banking chairman Kent Conrad, urged restraint, instead hoping executives would voluntarily return their bonuses.
Vice President Joe Biden's economic adviser, Jared Bernstein, criticized the AIG tax plan as it headed to the Senate, where it was likely to be modified with bipartisan backing.
"I think the president would be concerned that this bill may have some problems in going too far - the House bill may go too far in terms of some - some legal issues, constitutional validity, using the tax code to surgically punish a small group,"
Bernstein said. "That may be a dangerous way to go."
Populist anger came to a head last week when the Obama administration went on the defensive against AIG's bonuses.
It was a distraction for the administration as it sought support for Obama's ambitious $3.6 trillion budget and a defense for Geithner, for whom Wall Street's woes have become his chief task.
White House economic adviser Austen Goolsbee said Sunday that Obama understands the anger and that the easiest thing would be for AIG executives to return the bonuses.
"The president's also been clear we don't want to govern out of anger. He's going to look at what comes out of the House, what comes out of the Senate, see what ideas we have," Goolsbee said.
Republicans and Senate Democrats seemed to line up with the president's policy team.
"People are disgusted and outraged, as they should be," said Republican Sen. Judd Gregg of New Hampshire.
"But let's not overreact in a way that basically has the Congress grabbing its pitchforks, and charging up the hill, and abusing what is a core authority of a government, which is the authority to tax its people."
The bailed-out insurance giant paid bonuses totaling $165 million to employees, including traders in the Financial Products unit that nearly took the company and the U.S. financial system to the brink of collapse.
AIG has received $182.5 billion in federal bailout money and is now 80 percent government-owned.
Populist anger led the House to pass a bill that would impose a 90 percent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies that have received at least $5 billion in government bailout money.
It would apply to any such bonuses issued since Dec. 31.
On Saturday, a busload of activists representing working- and middle-class families paid visits to the lavish homes of AIG executives in Connecticut to protest the bonuses awarded by the struggling insurance company.
About 40 protesters sought to urge AIG executives who received a portion of the $165 million in bonuses to do more to help families.
American International Group Inc. has said it was contractually obligated to give the retention bonuses, payments designed to keep valued employees from quitting, to people in its financial products unit, based in Wilton, Connecticut.
AIG chairman Edward Liddy has urged any executive who received more than $100,000 in bonus payments to return at least half.
He told a House subcommittee last week that some of the executives have "already stepped forward and returned 100 percent."
AIG has argued that retention bonuses are crucial to pulling the company out of its crisis.
Without the bonuses, the company says, top employees who best understand AIG's business would leave.
"We think $165 million could be used in a more appropriate way to keep people in their homes, create more jobs and health care," said protester Emeline Bravo-Blackport, a gardener.
The company, in response to the protests, said all its employees were "working very hard to pay back the government and help the U.S. economy recover."
"The people working at AIG today are part of the solution, not part of the problem," company spokeswoman Christina Pretto said in an e-mailed statement.
The group also protested at the office of AIG's financial products division in Wilton, where they waved signs and chanted, "Money for the needy, not for the greedy!"
There were no arrests.
Bernstein spoke on ABC television's "This Week." Goolsbee appeared on CBS' "Face the Nation." Gregg appeared on CNN's "State of the Union."
Source: TheStar
EPF aims to recover foreign investments when Dow hits 9,000
By YAP LENG KUEN
THE Employees Provident Fund (EPF), the country’s largest investment fund, is targeting to break even on its overseas investments possibly by next year when it can write back the bulk of its provisions.
“The Dow Jones was 14,000 at its highest. Today, it is around 7,000. We expect to recover the bulk of our investments when the Dow Jones goes to 9,000,” said EPF CEO Datuk Azlan Zainol.
The EPF has, so far, invested RM16bil overseas on a staggered basis in the five major financial markets – the US, Britain, Australia, Singapore and Japan.
However, he expects the markets to possibly recover only next year. Yields for Malaysian Government Securities (MGS) have also come off. In 2009, about RM16bil to RM17bil of MGS will mature and be replaced at today’s rate.
Last year, in July-August, it was possible to get 4%-5% for 10-year money, but that has dropped to 3.5%. Companies are also scaling back on dividends.
This year, he said, would continue to be difficult and the fund hopes to be able to maintain its dividend payment of between 4% and 4.5%. “Our policy is to give out everything we earn in the form of dividends. We do not have any reserves,’’ he said.
As far as gross income is concerned, the EPF, which manages RM340bil of funds, performed better than 2007 – gross income was RM19.96bil compared with RM18.24bil.
The big increase is in provisions which was RM515mil in 2007 compared with RM4.69bil last year.
Out of that amount, about RM3bil is provided for overseas investments. “Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan said in response to queries from StarBiz.
In Malaysia, if there is a stock with more than 50% loss, the EPF will provide for 25% of it, spread over a four-year period.
“We are more conservative abroad because that is everybody’s market ... anything can happen. Locally, we roughly know (the local conditions),’’ said Azlan.
He expressed disappointment at some of suggestions posted on the blogs. “There is a blog that says the RM4.6bil provision that we made was because we lent to ValueCap Sdn Bhd. That is a gross accusation ... very, very unfair. That is not the truth,’’ he said.
Last year, the EPF had provided a RM5bil loan to government-controlled ValueCap which was set up to undertake investments on the stock exchange.
“As far as our investments are concerned, we are strong internally. What happens outside is a global issue. Our risk management and people are in place. There will be no major changes this year or the next,’’ he said.
In terms of EPF’s asset allocation, it is based on advice from its consultants and its proportion of investments in equity to fixed income is, according to Azlan, a proven formula.
Currently, Azlan as the CEO, assumes direct oversight of the fund’s investments. He is looking for a new head of investments who would probably be an outsider. The former deputy chief executive of investments, Johari Abdul Muid, has moved on to head the strategic planning unit.
“Johari will be responsible for looking into the second phase of transformation for the EPF,’’ said Azlan. The division also looks into retirement benefits and pension fund reforms in the country.
“The retirement money for Malaysians will not be enough. It has been three weeks since he is at the new position and he has done a very good job,’’ Azlan said in response to queries from StarBiz regarding Johari’s move to strategic planning.
Insiders added that it was part of a reorganisation to strengthen certain divisions that also saw new heads for property, withdrawals and call centre.
The dividend of 5.8% for 2007 has come down to 4.5% for last year.
Due to the large provision made, net income has slipped from RM16.87bil in 2007 to RM14.3bil last year. Costs have also gone up – to pay 1% dividend cost RM2.89bil in 2007 compared with RM3.18bil currently.
Gross income from investments in MGS and equivalents was higher by 5% at RM5.75bil last year. Investments in private debt securities and loans yielded a higher gross income of RM5.59bil or 13%.
With the lowering of fixed deposit rates, gross income from the money market went down by 25% to RM694mil.
Gross income from external managers for both domestic and global equities dropped by 43% to RM767mil and by 254% to a loss of RM194mil respectively. External managers were more prepared to cut loss.
However, income from internal managers showed an increase of 33% to RM6.27bil and 123% to RM439mil respectively.
The EPF is heavily invested in local banks with stakes ranging from 13.6% (Malayan Banking Bhd) to 2.8% (Affin Holdings Bhd).
“In Malaysia, big caps like Sime Darby, IOI Corp and Public Bank have all experienced huge drops in market cap. Tell me, how do we pay 7% or 8% dividend?’’ he asked.
THE Employees Provident Fund (EPF), the country’s largest investment fund, is targeting to break even on its overseas investments possibly by next year when it can write back the bulk of its provisions.
“The Dow Jones was 14,000 at its highest. Today, it is around 7,000. We expect to recover the bulk of our investments when the Dow Jones goes to 9,000,” said EPF CEO Datuk Azlan Zainol.
The EPF has, so far, invested RM16bil overseas on a staggered basis in the five major financial markets – the US, Britain, Australia, Singapore and Japan.
However, he expects the markets to possibly recover only next year. Yields for Malaysian Government Securities (MGS) have also come off. In 2009, about RM16bil to RM17bil of MGS will mature and be replaced at today’s rate.
Last year, in July-August, it was possible to get 4%-5% for 10-year money, but that has dropped to 3.5%. Companies are also scaling back on dividends.
This year, he said, would continue to be difficult and the fund hopes to be able to maintain its dividend payment of between 4% and 4.5%. “Our policy is to give out everything we earn in the form of dividends. We do not have any reserves,’’ he said.
As far as gross income is concerned, the EPF, which manages RM340bil of funds, performed better than 2007 – gross income was RM19.96bil compared with RM18.24bil.
The big increase is in provisions which was RM515mil in 2007 compared with RM4.69bil last year.
Out of that amount, about RM3bil is provided for overseas investments. “Our policy is to provide in full for every diminution in value in our investments overseas,’’ Azlan said in response to queries from StarBiz.
In Malaysia, if there is a stock with more than 50% loss, the EPF will provide for 25% of it, spread over a four-year period.
“We are more conservative abroad because that is everybody’s market ... anything can happen. Locally, we roughly know (the local conditions),’’ said Azlan.
He expressed disappointment at some of suggestions posted on the blogs. “There is a blog that says the RM4.6bil provision that we made was because we lent to ValueCap Sdn Bhd. That is a gross accusation ... very, very unfair. That is not the truth,’’ he said.
Last year, the EPF had provided a RM5bil loan to government-controlled ValueCap which was set up to undertake investments on the stock exchange.
“As far as our investments are concerned, we are strong internally. What happens outside is a global issue. Our risk management and people are in place. There will be no major changes this year or the next,’’ he said.
In terms of EPF’s asset allocation, it is based on advice from its consultants and its proportion of investments in equity to fixed income is, according to Azlan, a proven formula.
Currently, Azlan as the CEO, assumes direct oversight of the fund’s investments. He is looking for a new head of investments who would probably be an outsider. The former deputy chief executive of investments, Johari Abdul Muid, has moved on to head the strategic planning unit.
“Johari will be responsible for looking into the second phase of transformation for the EPF,’’ said Azlan. The division also looks into retirement benefits and pension fund reforms in the country.
“The retirement money for Malaysians will not be enough. It has been three weeks since he is at the new position and he has done a very good job,’’ Azlan said in response to queries from StarBiz regarding Johari’s move to strategic planning.
Insiders added that it was part of a reorganisation to strengthen certain divisions that also saw new heads for property, withdrawals and call centre.
The dividend of 5.8% for 2007 has come down to 4.5% for last year.
Due to the large provision made, net income has slipped from RM16.87bil in 2007 to RM14.3bil last year. Costs have also gone up – to pay 1% dividend cost RM2.89bil in 2007 compared with RM3.18bil currently.
Gross income from investments in MGS and equivalents was higher by 5% at RM5.75bil last year. Investments in private debt securities and loans yielded a higher gross income of RM5.59bil or 13%.
With the lowering of fixed deposit rates, gross income from the money market went down by 25% to RM694mil.
Gross income from external managers for both domestic and global equities dropped by 43% to RM767mil and by 254% to a loss of RM194mil respectively. External managers were more prepared to cut loss.
However, income from internal managers showed an increase of 33% to RM6.27bil and 123% to RM439mil respectively.
The EPF is heavily invested in local banks with stakes ranging from 13.6% (Malayan Banking Bhd) to 2.8% (Affin Holdings Bhd).
“In Malaysia, big caps like Sime Darby, IOI Corp and Public Bank have all experienced huge drops in market cap. Tell me, how do we pay 7% or 8% dividend?’’ he asked.
Balik Pulau’s Online Marketing Bid
By MANJIT KAUR
BALIK PULAU: Housewives have a new reason to be tech-savvy – to buy poultry, fish and vegetables with a click of the mouse. They can soon do their marketing online on a website that’s being set up for them by the Balik Pulau Village Initiative Co-operative Bhd.
Pulau Betong assemblyman Muhamad Farid Saad said the co-operative hoped the website would be up and running in two months.
He said people could order the produce online and pick up their shopping at stalls set up in designated areas.
“The co-operative is currently selling these items, which are especially popular with students, in front of the Universiti Sains Malaysia’s mosque from 4pm to 6.30pm from Tuesdays to Fridays.
“Once the website is up, we hope to capture the market of those staying in apartments and flats around Balik Pulau before venturing to other areas in the state,” said Muhamad Farid, who is also the co-operative’s executive adviser, after launching the Blog Bash ’09 forum yesterday.
Asked what was the purpose of getting people to buy the essential items online when they could go to the nearest market, he said there were many people who had no time to go to the market.
“We are helping vegetable and livestock farmers and fishermen in Balik Pulau as well, as the co-operative purchases the items from them direct and sells to the public.
“There will be no extra charge, and the items will be sold according to the market price. We want to make things convenient in this Information, Communications and Technology era,” he added.
Muhamad Farid also said the forum was a good initiative to educate people in rural areas on ICT.
The event was organised by the Balik Pulau Social Entrepreneurs Club with the support of the Balik Pulau Rural Internet Centre (under the Energy, Water and Communications Ministry).
The programme themed “Community Media for Local Socio-Economic Development” was held to acculturate the local community with entrepreneurship skills and ICT knowledge in order to generate more progressive entrepreneurs.
-------------------------------------------------------------------------------------
I think this is a good initiative and makes life more convenient. Thumbs up !!! (",)
BALIK PULAU: Housewives have a new reason to be tech-savvy – to buy poultry, fish and vegetables with a click of the mouse. They can soon do their marketing online on a website that’s being set up for them by the Balik Pulau Village Initiative Co-operative Bhd.
Pulau Betong assemblyman Muhamad Farid Saad said the co-operative hoped the website would be up and running in two months.
He said people could order the produce online and pick up their shopping at stalls set up in designated areas.
“The co-operative is currently selling these items, which are especially popular with students, in front of the Universiti Sains Malaysia’s mosque from 4pm to 6.30pm from Tuesdays to Fridays.
“Once the website is up, we hope to capture the market of those staying in apartments and flats around Balik Pulau before venturing to other areas in the state,” said Muhamad Farid, who is also the co-operative’s executive adviser, after launching the Blog Bash ’09 forum yesterday.
Asked what was the purpose of getting people to buy the essential items online when they could go to the nearest market, he said there were many people who had no time to go to the market.
“We are helping vegetable and livestock farmers and fishermen in Balik Pulau as well, as the co-operative purchases the items from them direct and sells to the public.
“There will be no extra charge, and the items will be sold according to the market price. We want to make things convenient in this Information, Communications and Technology era,” he added.
Muhamad Farid also said the forum was a good initiative to educate people in rural areas on ICT.
The event was organised by the Balik Pulau Social Entrepreneurs Club with the support of the Balik Pulau Rural Internet Centre (under the Energy, Water and Communications Ministry).
The programme themed “Community Media for Local Socio-Economic Development” was held to acculturate the local community with entrepreneurship skills and ICT knowledge in order to generate more progressive entrepreneurs.
-------------------------------------------------------------------------------------
I think this is a good initiative and makes life more convenient. Thumbs up !!! (",)
Thursday, March 19, 2009
A shrinking economy
The Real Matter - By Pankaj Jumar
A good stimulus package should restore confidence and reflate a sluggish financial system
IN the 1989 hit movie, Honey, I Shrunk The Kids, Rick Moranis plays a nutty inventor who perfects a machine capable of shrinking objects down to a hundredth of their size.
The plot made a good family comedy and the end result was Moranis was finally able to reverse the machine’s capability and bring his children back to normal size.
Incidentally, there were two sequels to this movie: Honey, I Blew Up The Kids and Honey, We Shrunk Ourselves.
No need to get into the details of these movies as their titles would allow us to imagine what would have happened in the sequels.
Now, how do we relate the “experience” of the above three movies to the predicament that we are all in now? While some readers may not agree with my analogy, I will attempt to relate the movie’s plot to the current crisis of confidence.
While we may not have deliberately shrunk our economy by using a machine, we caused it to shrink due to the housing market bubble, the huge inflated size of the US financial institutions’ balance sheets, as well as the easy lending in both the credit market and derivatives activities.
As troubles mounted in these financial institutions, governments globally had to provide a lifeline to them to ensure that they remain afloat.
Except for Lehman Brothers, which was allowed to fail, companies like AIG, Citigroup and others were deemed to be “too big to fail”, and failure itself could lead to further destruction of wealth of investors.
While the US government, and to a certain extent other governments in Europe, rescued these financial institutions from collapse by recapitalising them, most of these institutions took in new money in the form of capital to de-leverage their balance sheets and not entirely lend again.
Hence, there was a huge hue and cry among corporates and individuals as new borrowings were hard to come by.
In addition, due to the destruction of wealth of US consumers as a result of lower home prices and job losses (which have reached 4.38 million since January 2008), consumers simply halted consumption, resulting in drastic reduction in demand for goods and services.
With financial institutions unwilling to lend, some economists thought that perhaps the government should step in and provide financing to consumers. Hence, the US government instead becomes the lender of last resort as financial institutions have failed to act to stimulate demand.
There is empirical evidence that suggests banks’ willingness to lend to consumers/corporates is indeed instrumental to economic growth, as the lending activity itself has a multiplier effect on the economy.
Recent Bank Negara statistics which show loan applications and approvals in January 2009 fell 21% and 35.6% respectively, compared with 18.8% and 23.7% in December 2008, suggest that not only consumers/corporates are not encouraged by the current low interest rate environment to borrow or invest, banks too have been reluctant to lend.
To re-ignite the global economic engine, countries like the United States, Britain, Australia and Austria have unveiled massive stimulus packages.
Based on available data, the relief programmes now amount to about US$4.5 trillion or RM16.6 trillion. While these programmes are meant to stimulate the economies of the nations, some may not be able to create the multiplier effect because many of the programmes are meant to shore up the balance sheets of financial institutions.
In Malaysia’s case, it is a RM60bil question whether the stimulus package announced last week can have the right impact on the economy, as some have argued that it is not directed at the right target group.
My personal opinion is that the Government should have tackled the epicentre of the current crisis: consumer spending, which makes up half the economy.
Perhaps one way to “force” consumers to spend is to provide them with shopping vouchers to the tune of perhaps up to RM1,000 per household. This would cost the Government not more than RM10bil.
To ensure that the money is spent, perhaps the vouchers can come with an expiry date that says: “This voucher will self-destruct in three months.”
This way, retailers will be able to see their sales rise by the same amount in a shorter period, while creating a direct multiplier impact on the economy as a whole.
Just like the banking sector, where the central bank may end up as the lender of last resort, governments across the globe too need to step up spending, and even turn spender of the last resort, to restore economic activities.
A good stimulus package should be able to restore confidence and reflate a sluggish economy, as a shrinking economy is not going to get us anywhere. As in the movie, we need a good ending to the current sequel, Honey, I Shrunk the Economy.
A good stimulus package should restore confidence and reflate a sluggish financial system
IN the 1989 hit movie, Honey, I Shrunk The Kids, Rick Moranis plays a nutty inventor who perfects a machine capable of shrinking objects down to a hundredth of their size.
The plot made a good family comedy and the end result was Moranis was finally able to reverse the machine’s capability and bring his children back to normal size.
Incidentally, there were two sequels to this movie: Honey, I Blew Up The Kids and Honey, We Shrunk Ourselves.
No need to get into the details of these movies as their titles would allow us to imagine what would have happened in the sequels.
Now, how do we relate the “experience” of the above three movies to the predicament that we are all in now? While some readers may not agree with my analogy, I will attempt to relate the movie’s plot to the current crisis of confidence.
While we may not have deliberately shrunk our economy by using a machine, we caused it to shrink due to the housing market bubble, the huge inflated size of the US financial institutions’ balance sheets, as well as the easy lending in both the credit market and derivatives activities.
As troubles mounted in these financial institutions, governments globally had to provide a lifeline to them to ensure that they remain afloat.
Except for Lehman Brothers, which was allowed to fail, companies like AIG, Citigroup and others were deemed to be “too big to fail”, and failure itself could lead to further destruction of wealth of investors.
While the US government, and to a certain extent other governments in Europe, rescued these financial institutions from collapse by recapitalising them, most of these institutions took in new money in the form of capital to de-leverage their balance sheets and not entirely lend again.
Hence, there was a huge hue and cry among corporates and individuals as new borrowings were hard to come by.
In addition, due to the destruction of wealth of US consumers as a result of lower home prices and job losses (which have reached 4.38 million since January 2008), consumers simply halted consumption, resulting in drastic reduction in demand for goods and services.
With financial institutions unwilling to lend, some economists thought that perhaps the government should step in and provide financing to consumers. Hence, the US government instead becomes the lender of last resort as financial institutions have failed to act to stimulate demand.
There is empirical evidence that suggests banks’ willingness to lend to consumers/corporates is indeed instrumental to economic growth, as the lending activity itself has a multiplier effect on the economy.
Recent Bank Negara statistics which show loan applications and approvals in January 2009 fell 21% and 35.6% respectively, compared with 18.8% and 23.7% in December 2008, suggest that not only consumers/corporates are not encouraged by the current low interest rate environment to borrow or invest, banks too have been reluctant to lend.
To re-ignite the global economic engine, countries like the United States, Britain, Australia and Austria have unveiled massive stimulus packages.
Based on available data, the relief programmes now amount to about US$4.5 trillion or RM16.6 trillion. While these programmes are meant to stimulate the economies of the nations, some may not be able to create the multiplier effect because many of the programmes are meant to shore up the balance sheets of financial institutions.
In Malaysia’s case, it is a RM60bil question whether the stimulus package announced last week can have the right impact on the economy, as some have argued that it is not directed at the right target group.
My personal opinion is that the Government should have tackled the epicentre of the current crisis: consumer spending, which makes up half the economy.
Perhaps one way to “force” consumers to spend is to provide them with shopping vouchers to the tune of perhaps up to RM1,000 per household. This would cost the Government not more than RM10bil.
To ensure that the money is spent, perhaps the vouchers can come with an expiry date that says: “This voucher will self-destruct in three months.”
This way, retailers will be able to see their sales rise by the same amount in a shorter period, while creating a direct multiplier impact on the economy as a whole.
Just like the banking sector, where the central bank may end up as the lender of last resort, governments across the globe too need to step up spending, and even turn spender of the last resort, to restore economic activities.
A good stimulus package should be able to restore confidence and reflate a sluggish economy, as a shrinking economy is not going to get us anywhere. As in the movie, we need a good ending to the current sequel, Honey, I Shrunk the Economy.
Recovery, Malaysia-style
By NAJIB RAZAK
Boosted by a historic RM60bil second stimulus package, Malaysia is ready to confront challenges in a sharply declining global economy by tapping the talent, energy and drive of its people, writes the Deputy Prime Minister in his op-ed which appeared in the Wall Street Journal Wednesday.
AS Group of 20 leaders prepare to meet in London early next month, they face an unprecedented challenge. The global economy is likely to shrink this year for the first time since the Second World War. The World Bank predicts that during 2009, world trade is likely to record its largest decline in 80 years, with the sharpest losses in East Asia.
My country, Malaysia, is one of the most trade-based economies in the world. Our ratio of foreign trade to gross domestic product exceeds 200%, the highest of any economy except Hong Kong and Singapore. We have prospered by recognising the power of trade and the value of markets. But this embrace has been pragmatic, not ideological. It has always been complemented by our recognition that government, too, has a critical role to play.
The global economic crisis has demonstrated anew that relying on the behaviour of markets alone is insufficient to promote stable, long-term economic development.
When economic crises hit, one has a choice. Those steering national economies can either stand aside, or use public capital to take the place of private capital that has gone into hiding, thereby investing in the country’s human capital.
In the short term, this kind of action provides jobs and opportunity. In the long run, it provides the foundations for recovery.
Stimulus packages should not be about resorting to popular policies or handing out cash. And they should not target one group or area, but benefit the whole country. It is about achieving maximum impact.
Progress: A building under construction in Kuala Lumpur. Malaysia is fortunate to have good national infrastructure and quality workforce.
With the global economic crisis still unfolding, we have focused on boosting investments and credit flows while providing government guarantees and infrastructure expansion.
Foreign investment in Malaysia is expected to fall by 50% to RM26bil (US$7.22 bil) in 2009. That means we must either respond domestically, or allow our country to waste precious years during which we should be working to build a better society.
That is why on Nov 4 last year, I announced a first stimulus package of RM7bil. And why on March 10, I announced a historic second stimulus and mini-budget of RM60bil.
Accounting for 9% of Malaysia’s gross domestic product, the RM60bil alone is the biggest stimulus package in our history.
Some may say this is too much. But with our low foreign debt, large international reserves and ample banking sector liquidity, we have the capacity to fund it. Given the magnitude of the still evolving global crisis, I am convinced the risk isn’t that we do too much, but that we don’t do enough.
We know that ultimately, the world will recover, and normal trade levels will resume. When it does, we want Malaysia to be best positioned to take advantage of that recovery.
That is why we have decided to balance short-term requirements with building for the future. The mini-budget is designed to provide a quarter of the stimulus funds as a boost to meet people’s immediate needs, with the remaining 75% for medium- and long-term development goals.
It is vital for countries to remain competitive. Malaysia’s corporate tax of 25% is comparable with others in the region. However, taking into account the many incentives offered to investors, the country’s effective tax rate is between 3% and 7%.
Efficient implementation is vital in the success of any country’s stimulus package.
We have set up a technical committee to monitor the implementation of ours. It will meet regularly and report to a steering committee that I will personally chair. I will then report to the ultimate beneficiaries of the effort, the Malaysian people. They are the appropriate judges of the mini-budget’s success.
In Malaysia we learned fundamental lessons from the 1997 financial crisis. Our financial sector and corporations realigned as a result. We are fortunate today to have good national infrastructure, technical know-how, a diversified economy and a quality workforce. Overall, post-1997 we are far better placed to weather this new storm.
Yet in the long run, further transformation of the Malaysian economy is needed. We will use the current downturn to forge a new economic model that puts knowledge first. We will invest in education and technology, further strengthening Malaysia’s capacity to lead in information technologies, renewable energy and emerging sectors of the new economy.
Our goal is to harness the talent, energy and drive of all of our people. We will be aided in our efforts to provide lasting prosperity by working to spread mutual tolerance and respect between genders, cultures, races, religions and nations. We will champion inclusiveness not just because it is a foundation for political stability and economic growth, but because it is right.
As a nation in a hurry, with millions dependent on its development and progress, Malaysia is picking itself up and moving on. We are remaking Malaysia once again.
When G20 leaders meet next month, I hope others will take similar positions. It is time to turn words into deeds. The world’s economic recovery will depend on concerted and coordinated efforts by economies large and small, and we in Malaysia will play our part.
> Datuk Seri Najib Tun Razak is Deputy Prime Minister and Finance Minister of Malaysia.
Boosted by a historic RM60bil second stimulus package, Malaysia is ready to confront challenges in a sharply declining global economy by tapping the talent, energy and drive of its people, writes the Deputy Prime Minister in his op-ed which appeared in the Wall Street Journal Wednesday.
AS Group of 20 leaders prepare to meet in London early next month, they face an unprecedented challenge. The global economy is likely to shrink this year for the first time since the Second World War. The World Bank predicts that during 2009, world trade is likely to record its largest decline in 80 years, with the sharpest losses in East Asia.
My country, Malaysia, is one of the most trade-based economies in the world. Our ratio of foreign trade to gross domestic product exceeds 200%, the highest of any economy except Hong Kong and Singapore. We have prospered by recognising the power of trade and the value of markets. But this embrace has been pragmatic, not ideological. It has always been complemented by our recognition that government, too, has a critical role to play.
The global economic crisis has demonstrated anew that relying on the behaviour of markets alone is insufficient to promote stable, long-term economic development.
When economic crises hit, one has a choice. Those steering national economies can either stand aside, or use public capital to take the place of private capital that has gone into hiding, thereby investing in the country’s human capital.
In the short term, this kind of action provides jobs and opportunity. In the long run, it provides the foundations for recovery.
Stimulus packages should not be about resorting to popular policies or handing out cash. And they should not target one group or area, but benefit the whole country. It is about achieving maximum impact.
Progress: A building under construction in Kuala Lumpur. Malaysia is fortunate to have good national infrastructure and quality workforce.
With the global economic crisis still unfolding, we have focused on boosting investments and credit flows while providing government guarantees and infrastructure expansion.
Foreign investment in Malaysia is expected to fall by 50% to RM26bil (US$7.22 bil) in 2009. That means we must either respond domestically, or allow our country to waste precious years during which we should be working to build a better society.
That is why on Nov 4 last year, I announced a first stimulus package of RM7bil. And why on March 10, I announced a historic second stimulus and mini-budget of RM60bil.
Accounting for 9% of Malaysia’s gross domestic product, the RM60bil alone is the biggest stimulus package in our history.
Some may say this is too much. But with our low foreign debt, large international reserves and ample banking sector liquidity, we have the capacity to fund it. Given the magnitude of the still evolving global crisis, I am convinced the risk isn’t that we do too much, but that we don’t do enough.
We know that ultimately, the world will recover, and normal trade levels will resume. When it does, we want Malaysia to be best positioned to take advantage of that recovery.
That is why we have decided to balance short-term requirements with building for the future. The mini-budget is designed to provide a quarter of the stimulus funds as a boost to meet people’s immediate needs, with the remaining 75% for medium- and long-term development goals.
It is vital for countries to remain competitive. Malaysia’s corporate tax of 25% is comparable with others in the region. However, taking into account the many incentives offered to investors, the country’s effective tax rate is between 3% and 7%.
Efficient implementation is vital in the success of any country’s stimulus package.
We have set up a technical committee to monitor the implementation of ours. It will meet regularly and report to a steering committee that I will personally chair. I will then report to the ultimate beneficiaries of the effort, the Malaysian people. They are the appropriate judges of the mini-budget’s success.
In Malaysia we learned fundamental lessons from the 1997 financial crisis. Our financial sector and corporations realigned as a result. We are fortunate today to have good national infrastructure, technical know-how, a diversified economy and a quality workforce. Overall, post-1997 we are far better placed to weather this new storm.
Yet in the long run, further transformation of the Malaysian economy is needed. We will use the current downturn to forge a new economic model that puts knowledge first. We will invest in education and technology, further strengthening Malaysia’s capacity to lead in information technologies, renewable energy and emerging sectors of the new economy.
Our goal is to harness the talent, energy and drive of all of our people. We will be aided in our efforts to provide lasting prosperity by working to spread mutual tolerance and respect between genders, cultures, races, religions and nations. We will champion inclusiveness not just because it is a foundation for political stability and economic growth, but because it is right.
As a nation in a hurry, with millions dependent on its development and progress, Malaysia is picking itself up and moving on. We are remaking Malaysia once again.
When G20 leaders meet next month, I hope others will take similar positions. It is time to turn words into deeds. The world’s economic recovery will depend on concerted and coordinated efforts by economies large and small, and we in Malaysia will play our part.
> Datuk Seri Najib Tun Razak is Deputy Prime Minister and Finance Minister of Malaysia.
US Fed starts bold US$1.2 trillion effort to revive US economy
WASHINGTON: With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy.
To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent.
Economists predict the Fed will hold the rate in that zone for the rest of this year and for most - if not all - of next year.
The decision to hold rates near zero was widely expected.
But the Fed's plan to buy government bonds and the sheer amount - $1.2 trillion - of the extra money to be pumped into the U.S. economy was a surprise.
"The Fed is clearly ready, willing and able to be the ATM for the credit markets," said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco.
Wall Street was buoyed.
The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.
And government bond prices soared.
Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent - the biggest daily drop in percentage points since 1981.
The dollar, meanwhile, fell against other major currencies.
In part, that signaled concern that the Fed's intervention might spur inflation over the long run.
If the credit and financial markets can be stabilized, the recession could end this year, setting the stage for a recovery next year, Bernanke has said in recent weeks.
The Fed chief and his colleagues again pledged to use all available tools to make that happen, and economists expect further steps in the months ahead.
Since the Fed last met in late January, "the economy continues to contract," Fed policymakers observed in a statement they issued Wednesday.
"Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending," they said.
The Fed's announcement that it will spend up to $300 billion over the next six months to buy long-term government bonds was something that in January it had hinted it would do.
But some officials had seemed to back off from the idea in recent weeks.
Such action is designed to boost Treasury prices and drive down their rates, as it did Wednesday.
Rates on other kinds of debt are likely to fall as well.
"This is going to help everybody," said Sung Won Sohn, economist at the Martin Smith School of Business at California State University.
"This might help the Fed put Humpty Dumpty back together again."
The last time the Fed set out to influence long-term interest rates was during the 1960s.
The Fed's decision to buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie and Freddie comes on top of $500 billion in such securities it's already buying.
It also will double its purchases of Fannie and Freddie debt to $200 billion.
Since the initial Fannie-Freddie program was announced late last year, mortgage rates have fallen. Rates on 30-year mortgages now average 5.03 percent, down from 6.13 percent a year ago, according to Freddie Mac.
The Fed's decision to expand the program could further reduce rates, analysts said.
"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com.
"The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."
The goal behind all the Fed's moves is to spur lending.
More lending would boost spending by consumers and businesses, which would revive the economy.
The Fed also said it would consider expanding another $1 trillion program that's being rolled out this week.
That program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses.
Where does the Fed get all the money? It prints it.
The Fed's series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion - from just under $900 billion in September.
Sohn believes the Fed's balance sheet could grow to $5 trillion over the next two years.
The Fed has said it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long.
There's the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage "moral hazard."
That's when companies make high-stakes gambles knowing the government stands ready to rescue them.
The Bank of England last week began buying government bonds from financial institutions as it turned to new ways to help revive Britain's moribund economy.
The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.
Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.
The Fed is taking the new steps as the U.S. economy sinks deeper into recession.
Businesses are facing weaker sales prospects as customers in the United States and abroad cut back, the policymakers said.
Still, the Fed said it hoped its actions, the government's bank rescue effort and President Barack Obama's $787 billion stimulus of increased government spending and tax cuts eventually will help revive the economy.
"Although the near-term economic outlook is weak, the committee anticipates that policy actions .... will contribute to a gradual resumption of sustainable economic growth," the Fed said.
But even in this best-case scenario, the nation's unemployment rate - now at quarter-century peak of 8.1 percent - will keep climbing. Some economists think it will hit 10 percent by the end of this year.
The recession, which began in December 2007, already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work.
Source: TheStar
To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent.
Economists predict the Fed will hold the rate in that zone for the rest of this year and for most - if not all - of next year.
The decision to hold rates near zero was widely expected.
But the Fed's plan to buy government bonds and the sheer amount - $1.2 trillion - of the extra money to be pumped into the U.S. economy was a surprise.
"The Fed is clearly ready, willing and able to be the ATM for the credit markets," said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco.
Wall Street was buoyed.
The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.
And government bond prices soared.
Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent - the biggest daily drop in percentage points since 1981.
The dollar, meanwhile, fell against other major currencies.
In part, that signaled concern that the Fed's intervention might spur inflation over the long run.
If the credit and financial markets can be stabilized, the recession could end this year, setting the stage for a recovery next year, Bernanke has said in recent weeks.
The Fed chief and his colleagues again pledged to use all available tools to make that happen, and economists expect further steps in the months ahead.
Since the Fed last met in late January, "the economy continues to contract," Fed policymakers observed in a statement they issued Wednesday.
"Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending," they said.
The Fed's announcement that it will spend up to $300 billion over the next six months to buy long-term government bonds was something that in January it had hinted it would do.
But some officials had seemed to back off from the idea in recent weeks.
Such action is designed to boost Treasury prices and drive down their rates, as it did Wednesday.
Rates on other kinds of debt are likely to fall as well.
"This is going to help everybody," said Sung Won Sohn, economist at the Martin Smith School of Business at California State University.
"This might help the Fed put Humpty Dumpty back together again."
The last time the Fed set out to influence long-term interest rates was during the 1960s.
The Fed's decision to buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie and Freddie comes on top of $500 billion in such securities it's already buying.
It also will double its purchases of Fannie and Freddie debt to $200 billion.
Since the initial Fannie-Freddie program was announced late last year, mortgage rates have fallen. Rates on 30-year mortgages now average 5.03 percent, down from 6.13 percent a year ago, according to Freddie Mac.
The Fed's decision to expand the program could further reduce rates, analysts said.
"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com.
"The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."
The goal behind all the Fed's moves is to spur lending.
More lending would boost spending by consumers and businesses, which would revive the economy.
The Fed also said it would consider expanding another $1 trillion program that's being rolled out this week.
That program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses.
Where does the Fed get all the money? It prints it.
The Fed's series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion - from just under $900 billion in September.
Sohn believes the Fed's balance sheet could grow to $5 trillion over the next two years.
The Fed has said it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long.
There's the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage "moral hazard."
That's when companies make high-stakes gambles knowing the government stands ready to rescue them.
The Bank of England last week began buying government bonds from financial institutions as it turned to new ways to help revive Britain's moribund economy.
The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.
Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.
The Fed is taking the new steps as the U.S. economy sinks deeper into recession.
Businesses are facing weaker sales prospects as customers in the United States and abroad cut back, the policymakers said.
Still, the Fed said it hoped its actions, the government's bank rescue effort and President Barack Obama's $787 billion stimulus of increased government spending and tax cuts eventually will help revive the economy.
"Although the near-term economic outlook is weak, the committee anticipates that policy actions .... will contribute to a gradual resumption of sustainable economic growth," the Fed said.
But even in this best-case scenario, the nation's unemployment rate - now at quarter-century peak of 8.1 percent - will keep climbing. Some economists think it will hit 10 percent by the end of this year.
The recession, which began in December 2007, already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work.
Source: TheStar
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